What is an 'execution-only' investment service?

The City regulator last week banned and fined an independent financial adviser in West Yorkshire after he tried to deceive his customers by telling them he had only provided an 'execution-only' service that did not include any advice.

In doing so Adrian Mosley of Mosley & Co aimed to ensure his clients could not ever make compensation claims against him. The Financial Services Authority said Mosley had misled his customers over their rights.

What is an execution-only service?

The level of interaction you have with a financial services professional when investing your money is up to you. You can pay for the services of an independent financial adviser (IFA) who will invest your money as part of a financial plan or you can employ a discretionary fund manager (DFM) who is focused purely on the investment of your money, not whether it fits into a bigger picture around your life.

But if you want to invest your money yourself, then you need to find a company that will 'execute' or carry out your instructions.

Stockbrokers and discount brokers that offer execution-only services do not provide investment advice. They will not tell you if a particular fund or share is a good buy or whether it is suitable for you.

All they do is implement the trade – the buying or selling of the fund or share that you have requested.

The Financial Services Authority (FSA) describes execution-only as: ‘A transaction executed by a firm upon the specific instruction of a client where the firm does not give advice on investments relating to the merits of the transaction and in relation to which the rules on assessment of appropriateness.’

In other words, the company executing the trade will not have an opinion on whether the trade is a good idea or whether it is right for you, so all the onus and risk of the trade is on your shoulders.

How does it work?

Execution-only services are predominantly telephone or internet-based. Once you have registered an account with an execution-only service you either phone to place your trade or make your trade online. 

Through these services you can buy and sell a number of things, including:

• Stocks and shares
• Funds
• Unit trusts
• Open-ended investment companies (Oeics)
• Contracts for difference
• Spread betting

If you wish you can buy and sell investments inside an investment wrapper such as an individual savings account (ISA) or self-invested personal pension (Sipp). These wrappers are tax efficient as any profits you make within them are tax free.

Once you have bought your investment it is held in a nominee account by the execution-only service on your behalf. Although you own the shares all documentation goes to the company with which you executed the trade, which handles all the paperwork. You will only receive paperwork if you need to take action on something.