Broker interest shave is a nice little earner they keep quiet about

At a time when the stock market is so uncertain, and fund managers are under a cloud, stockbrokers are the usual source of advice and solace for investors, particularly if they want to buy their own stocks and shares.

London stockbrokers have had their scandals, dating back to the share-pushers of the South Sea Bubble nearly 300 years ago, but they were well regulated by the Stock Exchange for many years before the Financial Services Authority (FSA) took responsibility for them. That does not mean clients need not watch out for scams.

"The good news is that investors have never had more choice," Justin Urquhart Stewart of the financial adviser Seven Investment Management, says. "The bad news is that investors have never had more choice. Generally speaking, you tend to get what you pay for. Don't just go with whoever is offering the lowest dealing charges."

One of the most contentious areas is the interest brokers pay on the money you have to lodge with them to pay for your share dealings. Brokers usually take their cut, known as the "interest shave." Richard Bethell of the research group Compeer estimates that interest shave made up more than 10 per cent of revenues among execution-only UK brokers last year. Brokers know most investors do not take notice of the rate they earn on the cash in their trading accounts.

Although interest shave might not seem fair, it is not illegal. Karin Laudan of the FSA, says: "We do not tell brokers what interest rates to pay customers. From our point of view, it is important that customers are clearly informed about the firm's policy so they can make up their minds whether they are happy with it."

Neil Jamieson, marketing head at the online broker comdirect, part of Germany's Commerzbank, says his firm does not offer a competitive rate on cash deposits. He said: "We're not trying to cover anything up and we're not trying to compete with other brokers that offer better rates. Chances are, those brokers are meeting their costs by charging fees or paying less competitive rates of interest elsewhere."

Tim Pinnington, TD Waterhouse's UK chief, says: "Our research shows clients want an all-in-one account that allows them access to their cash and also provides them with a range of options on the risk-return spectrum."

While most brokers admit their rates are unattractive, they argue that they are only a small piece of the package.

Experts say you should not leave large sums in your trading account. "Keep the minimum necessary in your broker account, and hold all cash for investment purposes separately," Philippa Gee, an independent financial adviser with Torquil Clark, says.

One private investor, Terry Yearsley, 56, is a retired bank manager in Congresbury, north Somerset. He switched his share-dealing account to Hargreaves Lansdown, a discount broker that pays 2 per cent on cash balances under £10,000, after being disillusioned with the rate paid by his previous broker.

He said: "My son told me about the Hargreaves account because it pays a better rate of interest than many sterling-reserve accounts, plus you get a cheque book. I initially traded through an account with my old bank but it paid little interest and it was a hassle to transfer money each time I wanted to make a trade. Since I switched brokers, it's given me peace of mind that my money is working while I decide what I want to do with it."

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