A handful of private client and wealth managers are offering contracts for difference (CFDs) to their clients to complement their main services. Wealth managers who currently offer these instruments include UBS, Barclays, and Dawnay Day.

However offering these instruments is not straightforward and there are hurdles that wealth or private client managers must overcome.

Duncan Gwyther, chief investment officer at Morgan Stanley Quilter, says with many of these different breeds of assets, to offer them to clients would mean moving into a new regulatory environment and establishing new capital requirements.

"If offering CFDs for instance, the company would have to have specialist back up and support to follow through. Not only would research be required to make recommendations, and those recommendations would have to be constantly monitored. It would be necessary to have a whole army of people to do the risk control and compliance." Gwyther adds therefore, while these are good products in their own right, in reality putting these into practice is onerous and could be impractical.

Alexis Webster, head of commercial development at City Index, agrees that in terms of establishing a CFD desk in house and offering the service to retail investors, this is difficult due to capital and regulatory requirements.

However, wealth managers can form a partnership arrangement with a specialist provider such as City Index, IG Index or CMC Markets. This means the wealth manager becomes an introducing broker or a white label arrangement with the CFD provider can be established.

For instance, City Index holds relationships with several wealth managers under white labeled arrangements, including Barclays Stockbrokers (under the Gerrard Advisory division) and Dawnay Day.

"In this situation it is the CFD provider that is regulated and is taking the credit risk with the client. In our case, we either take on their brand so that it is completely hidden, or if they are not concerned about the branding, then City Index is fully exposed. From the wealth manager's point of view, they do not have to go through the pain of meeting capital requirements, because they are not technically providing the product," Webster says.

In the case of City Index's relationship with Gerrards the service is white labeled, therefore clients open an account with City Index, but this is branded Gerrard Advisory. Gerrards would deal with the client direct. City Index would make any margin calls to Gerrard Advisory, which in turn would pass it on to their clients. The clients deal with Gerrard Advisory which then would pass those trades on to City Index.

Webster says: "So Gerrards sits in the middle and has the client relationship, but we take the credit risk and we provide all the trading. Therefore, this is actually a very low cost way for Gerrards to establish a product that its clients want."

He adds that there are alternative relationships with other groups which are prepared to meet the capital side but do not want to go through the issues of building the systems.

"So with these firms, they take the credit risk with the client, but then effectively insource our trading technology. In other words, we provide them with everything they need and they effectively use us as an execution ramp," he says. Groups which have adopted this model include Barclays Stockbrokers, Halifax, TD Waterhouse, Self Trade and Hargreaves Lansdown.

In terms of establishing partnerships with wealth managers, Webster says the biggest concern from potential users is the question of who then actually owns the client, given these clients are opening an account with the CFD provider.

"We are accustomed to this being an issue and have fairly strong commercial agreements in place. In terms of the provision of CFDs, it is technically our client. However commercially we recognise that it is actually a client of the wealth manager, such as Gerrards, and we would never deal with them outside of the provision of this service."

When a while labeling arrangement is in place, the commission is generally split 60% 40% in favour of the wealth manager, according to Webster. If the client was trading direct with a CFD provider, the price of the equity would be the same but the commission charged would be less as this is an execution only, rather than advisory, service.

Webster says amongst wealth managers the most popular use of CFDs is for speculation, although they are also ideal for hedging out longer-term positions.

"The advantage of the product as a speculative tool is obviously the gearing and the price transparency. From one account, the client can gain access to UK, European, US stocks, currencies, commodities and indices. So for the broker with one relationship, they certainly get access to a whole range of investment opportunities."

A minority of groups use these to hedge out positions, but this is slowly changing.

Webster adds: "Currently groups like Gerrards and Dawnay Day use these because a section of their clients are keen on speculation, for which CFDs are perfect instruments. However, in terms of the next breed of partner we are talking to, they tend to be more conservative organisations. They are looking partially reactively, as their clients are coming to them saying they would be able to access. However, they are also keen on using these as a hedging tool so that they can avoid an unpleasant conversation with clients over why their long term recommendation has declined." wealth