For Peace of Mind: Volume 7 - Memories

Implementing direct investments in a financial planning environment

When asked by Publisher Craig Davies if I would contribute to this edition of Peace of Mind I instantly thought of an article I had written for the publication Direct Investing, a specialist journal for investment professionals. The editor, Dr Tony Rumble, who is also a long-time friend, was interested to know my opinions as to how my peers and colleagues approach constructing investment portfolios and particularly, the inclusion of direct (listed) investments. I am sure that many readers retain the services of a licensed financial planner and as such this article will, I hope, prompt you to think about the advice you are currently receiving.

We are often asked by our financial planning colleagues about the benefits of including direct investments into our client portfolios. Many planners harbour concerns about direct investments, such as:

• The consuming of time and effort both administratively and from an ongoing management perspective;
• The over complication of portfolios if not used wisely;
• The additional skill levels and the appropriate accreditation (PS146).

In our view, the benefits to the client far out weigh the concerns mentioned above, which are adviser centric.

The most important benefits we are to provide our clients by offering direct investments are:

Cost

Allows us to significantly minimise total cost to our client which in our view MUST be reported in the following breakdown:

• Portfolio administration fee
• Advice fee
• Investment Manager Fee (MERs)
• Stockbroking costs
• Other

Genuine Control

This is particularly relevant from a tax planning perspective. Controlling the dividends, franking credits and realised capital gains is crucial. Investors ‘love’ to receive a cheque from the ATO and refundable franking credits are certainly appreciated by our pension phase clients.

Perceived Control

Sophisticated and high net worth investors tend to dislike managed investments and perceive that direct investments offer greater return potential. This may not necessarily be the case, however, invariably these investors will not tolerate the exclusion of direct investments.

Status

Most investors would own direct shares in some form. They are transparent and easy to follow. Generally, investors are avid readers of the various print media business sections and watch business shows to track their investments. They like to discuss their portfolio outcomes with colleagues and friends. On the other hand, Managed Funds simply do not have this status or attraction. They are harder to track, and less transparent, which means they do not motivate or turn on these investors.

Differentiation

To be able to offer clients listed securities (including: hybrids, infrastructure, property, structured products) allows us to better tailor investment solutions AND reliable and predictable outcomes for our clients. This has assisted our practice in retaining clients in all market cycles and economic conditions.

Education and communication

The inclusion of direct investments in client portfolios invariably involves a far closer and more proactive relationship with the client/s. The benefits to both the client and adviser are obvious and dovetail with the above point.

We suspect that every adviser has a view as to how to charge their clients for the services they provide. There is probably no perfect answer, however, we have very definite views within our practice.

In our view, a fee should not be derived from making a recommendation to a client. That is, the fee should not be biased to selling/buying investments (or potential ‘churning’), where a commission is paid by the product provider/issuer to the adviser. It is far better for a client to be on an annual retainer ONLY with an adviser. In that way, there can be no conflict (real or perceived) when an adviser makes recommendations to sell/buy investments.

In conclusion, the provision of direct investmnets to clients requires up-skilling of advisers, plus changes in practice management and processes. These are not easy tasks to grapple with. Those advisers who heed the call will undoubtedly reap the rewards, and as a consequence, should have a very happy and loyal client base.

• Tel: +61 2 9403 7774
• Fax: +61 2 9403 7776
• Email: info@forpeaceofmind.com.au