Need investment advice? Don’t ask a stockbroker

Posted by Robin Powell on October 13, 2015


It’s impossible not to feel extremely sorry for James and Julia Bagot. The pensioners from Essex thought they were doing the right thing by paying a prestigious City of London stockbroking firm to invest their life savings on their behalf.

Over a six-year period, WH Ireland, founded in 1872, invested hundreds of thousands of pounds of the Bagots’ money in companies listed on the Alternative Investment Market.

According to analysis by the Daily Telegraph of figures compiled by the couple’s representative, the Bagots made a loss of £473,159, or 52.9%.

When Mr and Mrs Bagot complained to the company’s compliance officer they received little sympathy. “(He) was horrible to deal with,” Mr Bagot told the Telegraph. “He spoke to us as if we were idiots and just told us to take our complaint to the ombudsman.”

Initially the Financial Ombudsman Service rejected the Bagots’ complaint. But eventually it accepted that WH Ireland had chosen inappropriate investments and had failed to carry out the required checks on the couple’s capacity for risk. The broker was ordered to pay the couple £150,000, which is the maximum compensation allowed and less than a third of the money they lost.

Mr Bagot continues to stage regular protests outside the broker’s offices in the City, and says people have been coming up to him to wish him luck. But it seems unlikely that he and his wife will receive the full compensation they’re pressing for.

There are so many lessons to learn from this story that it’s hard to know where to start. The bottom line is that investing in individual stocks is inherently risky. Stocks listed on a lightly regulated market like the AIM are even more so.

You could spread your risk by investing in an actively managed fund. But then you would still be relying on the fund’s manager to make the right picks for you. An active manager can only win at another active manager’s expense. Who’s to say that your manager will make the right moves and mine the wrong ones?

A far more sensible strategy is to trust the market — the collective wisdom of millions of investors all over the world — and invest in a widely diversified portfolio of index funds. That way you’re guaranteed to capture more or less the market return very much more cheaply.

But the most important lesson of all is to be very careful where you seek advice. In short, a stockbroker is about the last person an investor should be asking for guidance. Brokers aren’t going to recommend index funds. They make their money through active trading.

A particularly worrying aspect of the Bagot case is the allegation that at least seven of the firms whose shares WH Ireland bought for the couple were corporate customers of the broker; it was WH Ireland’s job to find buyers for their shares. If it’s true, that would clearly represent a glaring conflict of interest.

So, if you need an adviser — and most people do eventually need one — make sure that he or she is genuinely unconflicted and will always put your interests ahead of their own.

Those who choose to manage without an adviser need to tread carefully. Other than The Evidence-Based Investor, there are very few websites based in the UK that provide conflict-free investor education. Sensible Investing and Monevator are among the best and will equip you with the basic knowledge you need.

Finally, well done to the Telegraph and to the Daily Mail for bringing this sorry story to the public’s attention. Let it serve as a warning.


Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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