Tax-Free Savings Survey: Cash or questions

You have some money to invest and you feel that UK equities could be a wise addition to your portfolio, either through an Individual Savings Account or through a unit trust.

But should you go to an independent financial adviser (IFA) or to a discount broker? And if you do go to a discount broker, does the difference between them come down to just a matter of price, or do some discount brokers offer more than an execution-only service?

Janice Thomson, the managing director of Chelsea Financial Services, says: "Most of the time, for straightforward investment decisions, people don't need advice. All that they need is some help and some information. Buying something like an Individual Savings Account (ISA) has now become a lifestyle decision. You can go into a building society, a bank or even a supermarket and buy an ISA. For something simple like that, it would be nonsense to pay very much for it.

"Sometimes, however, you need thorough financial advice. For example if you are made redundant, if you retire, or if you come into an inheritance. A decision at that point will have an impact on your future. You should then sit down with an IFA to get expert advice and you should expect to pay for that advice."

An IFA will either charge a fee per hour, usually between pounds 100 and pounds 200, or a commission of at least 3 per cent of your investment.

Amanda Davidson, a partner at Holden Meehan, a firm of London-based IFAs, often charges fees. She says: "We do not see ourselves in competition with discount brokers. It's all to do with the sort of service the client wants. If a client comes to us and asks which European ISA to buy, we will not simply suggest the best one but we will ask if they really need a European ISA."

Because discount brokers do not generally give advice, their fees are lower. They tend to refund all or part of the initial charge of up to 6 per cent - up to half of it commission - to the client. The remaining rebate, however, will only be paid if the fund manager agrees to discount its product further when it is sold through the broker.

Brokers do make money - through the renewal commission, typically of around 0.5 per cent per year, paid by the fund manager for as long as the client keeps the investment going.

If the fund manager does not pay a renewal commission, and this is usually the case for unit trusts, the discount broker will usually retain part of the commission and quote a lower discount.

Of course, not all discount brokers give the same discounts and neither do they do it in the same way, as the fund examples in the table show.

Tom McPhail is a director at Torquil Clark, a Wolverhampton-based financial advice firm that also operates a discount broking service, TQ Direct. He admits that his company is not the cheapest, charging pounds 25 per ISA transaction, but he adds: "We do not want to get involved in a price war. The reason that we have built up a strong client base is not just because of our discounts but also because of the quality of our service. We have a reputation for not making mistakes and for being able to process large volumes of business efficiently."

Increasingly, discount brokers provide their clients with much more than an execution-only service. "We try to bridge the gap between execution- only brokers and those that give full financial advice," Julian Penniston, the investment marketing manager at Willis Owen, a firm offering cheap products, says. "We produce guides that recommend various products depending on the type of client."

Anthony Yadgaroff, a director of Allenbridge, another broking firm, adds: "Discounts are important but what really matters is selecting the right fund and monitoring it properly. We spend a lot of money on research and we go to interview the managers. It's not enough just to look at past performance, it is also important to look at the risks that were taken to generate that performance.

"Anybody who buys an ISA through us gets an aftercare service. Their funds are monitored on a monthly basis for signs of danger, and once a year they get a full review of their investment."

Although most of the other brokers also provide fund information and evaluations, one discount broker is claiming to be offering a service similar to that of an IFA, giving a full advisory service but without the fees.

Jason Hollands, the deputy managing director of Best Investment, says: "We are the only company offering personalised advice and savings comparable to those of the execution-only discount brokers."

The advice takes the form of a telephone conversation, in which one of the 14 qualified advisers asks the client questions about his or her tax status, attitude towards risk and existing investments.

Based on this, Hollands says, Best is able to give "personalised bespoke recommendations, covering not just ISAs and unit trusts but also investment trusts, pensions, tax sheltering and venture capital".

"I don't see why anyone should go for execution-only brokers who do not provide the same level of investment protection and who cannot monitor the funds effectively. As far as the fee-charging financial advisers are concerned, a lot of them have justified taking a lot of money from their clients just by waffling in their living rooms. We find that most of our clients lead busy lives and they would rather deal over the phone."

Some rivals in the industry are wondering how Best can afford to give advice and yet charge rates more akin to discount brokers. They mutter darkly about computer-generated advice letters and loss-leading tactics aimed at driving them out of the market. Holland explains that Best already has a very large stream of ongoing commission, meeting its existing business costs.

Whatever the quality of the advice from Best, it is certain to be monitored by City watchdogs: one slip and the firm will face tough sanctions. Until then, the least that can be said is that it has opened a new stage in the price war between advisers.