When to settle for nominees: Tight settlement periods make a case for others handling your share deals. But is it worth it?

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The Independent Online
ROLLING settlement gives shareholders 10 days to settle deals, but this is a dress rehearsal for squeezing the interval between deal and settlement to five and eventually three days.

Stockbrokers are working hard to sell clients their nominee services, which hold share certificates in the broker's nominee company for safe- keeping and administrative efficiency.

Some in the industry think that rolling settlement has been used as an excuse to muscle clients into the nominee services. 'There is no such thing as a free nominee. If you don't deal regularly, do it yourself. Don't get hoodwinked,' says Justin Urquhart Stewart, of Barclays Stockbrokers.

The Stock Exchange is believed to have taken a dim view of high-pressure selling of nominee services, though no formal comment has been made. However, a spokesman said quite firmly that 'rolling settlement doesn't necessitate a nominee account'.

Other practitioners beg to differ. ''Once we have five-day, then three-day settlement, it will be virtually impossible to do it any other way,' according to Capel-Cure Myers, the brokers.

When you sell shares, you have to sign the certificates and send them to your broker before he can settle the deal. If you buy, your cheque will take three days to clear. With five- day settlement this might be all right if you are efficient, well organised, and easily contacted by your broker.

If you give instructions for a bargain and then disappear on a business trip, there could be problems.

Your broker will not relish financing an unsettled deal, and under the new system, there will be fines for late settlement. David Langshaw, of the private- client brokers' association, Apcims, quotes the old Stock Exchange saying: 'Money made in good deals is lost in bad settlement.'

Whether or not you should use a nominee service seems to be mainly a question of how often you deal. Those who trade more than two or three times a year should consider it, Mr Stewart says.

Fred Carr, of Carr Sheppards, sees no point in it for those with, say, a static portfolio of blue chips, who do not like making changes. He recommends it if you are an active trader, frequently away or bad at answering your post. It is specially useful for the elderly who may become forgetful and, on a sombre note, using a nominee service can make it much easier to wind up an estate.

Both Carr Sheppards and Brewin Dolphin offer nominee services with no separate charge. Like many other brokers they recoup costs by paying out dividends only quarterly, keeping hold of the money in the interim, though they may give a discount on dealing costs to compensate. The commission for Carr Sheppards, for instance is 1.85 per cent on the first pounds 10,000. Other private client brokers, do the same.

Nominee services are not just a matter of safe custody. They may reinvest dividends, give portfolio valuations and statements of income, provide a link to a bank account, and prepare schedules of income and capital gains that can be handed to the Revenue. This last function alone could save you hundreds of pounds in accountancy fees, says Mr Langshaw.

Some clients are reluctant to use nominee services because it means handing your assets over to the nominee company. Since the nominee company becomes the legally registered owner, the investor may lose the power to receive the annual report and accounts and the ability to attend and vote at AGMs. Shareholder perks may also be lost, though Barclays Stockbrokers claim to retain the majority.

The shareholders' association, Proshare, is doing research on whether or not these features matter to investors and plans to publish a code of practice for nominee services, which is likely to mention clarity of charges and passing on annual reports.

'We are not promoting nominees. We are looking for brokers to offer choice in the matter,' says Stuart Valentine of Proshare, though he admits that some firms nowadays will only deal on a nominee basis.

Another worry for investors is the security of the nominee service. Nominee companies are not formally regulated, though in practice they are closely scrutinised by the stockbrokers' regulator, the FSA. Stockbrokers are heavily insured against loss and are liable to make restitution to clients if they sell stock that turns out to be stolen. In Mr Carr's opinion 'the chance of someone being ripped off through having stock in their own name is greater than if the certificates are held by a nominee company'.

Where nominee services are not 'free', there may be a welter of costs: a percentage of portfolio value, a fixed charge per holding, or a fee for each of a number of attached services.

We compared the costs between Barclays execution only plus nominee service and those offered by ShareLink and The Share Centre.

Our client has a pounds 50,000 portfolio with 15 holdings, and receives pounds 1,000 a year in 20 dividend payments. He trades six times a year, each deal being worth pounds 3,000. With ShareLink's new Market Master service his annual costs would be pounds 202.50, plus pounds 10 for reinvestment of dividends. Barclays would charge pounds 281.25. The Share Centre comes out worst among them at pounds 466.50 because it has a penalty charge if you don't deal at least once a month.

The Share Centre's charges would be less if our client dealt 12 times a year, at pounds 435. Barclays would charge pounds 551.25 on the same basis and ShareLink is still the lowest-priced service at pounds 375.

For new-style execution- only services, costs clearly vary a lot, while it is hard to quantify the cost of a traditional 'free' service. Smaller, inactive investors need not worry about nominee services, though even they might appreciate the safe-custody aspect.

Among more active shareholders, all but obsessively efficient stay-at-home market watchers intent on doing their own thing should be looking around for the best value nominee service available.