Australia's love of direct investing continues unabated. In 2006, about 7.3 million people or 46 per cent of the Australian population owned shares either directly via shares or indirectly via a managed fund or self-managed superannuation fund (SMSF), according to research by the Australian Securities Exchange (ASX). In terms of direct share ownership, 6 million people or 38 per cent of the Australian population were direct investors.
The new millennium has seen the rise of the SMSF, of individually managed and separately managed accounts (IMA and SMA) and most recently the rise of direct access securities derivatives, such as the contracts for difference (CFD), which gives the direct investor access to leverage and an ability to short the market directly. The question for the adviser seems to be, how well do you know your client and what they are up to?
The dealer groups
Some dealer groups have recognised this and are attempting to offer clients a mechanism through which they can use direct investing as part of a wider investment offering. "It is an area we have highlighted for growth," FSP group chief executive Geoff Rimmer says. "Australian direct equities we particularly see as a continuously expanding area." Rimmer estimates that of the $2.5 billion in FSP's funds under management, about $500 million is in direct equities, which necessitates the continuing development of strategies that work in concert with direct investing.
Firstly, FSP is looking to provide a model portfolio of direct equities to its client base. "Traditionally clients liked equities and asked for them to be included within the portfolio, but this is more challenging than if you want to have a direct equities capability within your wrap," he says. "If you want to have a model portfolio you really have to go to a broker and ask them to create an IMA or an SMA and then try and get that on a platform for reasons of administration. But these things take some time to develop." Secondly, he says a number of clients are requesting support in terms of market analysis. "This necessitates building towards a private client-style business, with the ability to manage potential downside risks of clients by recognising when the market may change direction and staying on top of volatile markets like the one we are currently seeing," Rimmer says. Recognising that economies of scale make it hard for dealer groups such as FSP to have analyst teams like the big fund managers, he says it doesn't mean you can't acquire resources that network at that level, monitoring shifts in sentiment among the major analysts. "The information exists, but it is a question of who you listen to, corralling the market intelligence and making a call. That is a good idea because advisers should not be stock pickers,' he says.
"It's a matter of just trying to get a jump on how the market is behaving, something an individual client may find hard to do. That is not always going to be easy so we what we need to do as a business is to ensure that our approved product list is up to scratch." Rimmer and Centric Wealth head of equity research Paul Zwi recognise direct holdings can increase flexibility and customisation of a portfolio. According to Zwi, there are a number of powerful advantages to this: you can customise the portfolio for investors and offset some disadvantages of managed funds, such as large capital gains tax and distributions pitfalls, brought about by high turnover within the funds. "Managed funds don't have the ability to take into account the individual investor's requirements, whether they are ethical requirements, income verses capital requirements and most particularly tax requirements," he says.
"It's about offering the investor control without forcing them into decision-making processes they don't want." Recognising the complexity of investors' portfolios, he says a more holistic path needs to be taken. "Maybe a couple of decades ago those investors would have used a stockbroker, but as Australia is in its 15th or 16th year of continual growth, many more Australians have benefited so that the form of expert advice has markedly changed," he says. "Stockbrokers are really good at managing shares but the general way a stockbroker is renumerated is by transactions and that means they are driven to trade the shares to make money.
"We would regard turnover and the crystallisation of tax as probably the biggest single leakage from portfolio value. "Stockbrokers view the world through a particular lens of buying and selling, while financial advisers tend to see the clients' needs a great deal more holistically. Advisers see a client direct share portfolio as part of a multi-faceted profile." The fund manager
Russell managing director of retail investor services Chris Corneil says: "We are obviously in the camp that says a professional full-time investment management organisation should outperform individual investors over time across numerous asset classes. "For many investors that trade shares themselves, it is about the passion of investing direct and control which they like versus the idea of risk that nobody appreciates until things go pear shaped."
Many investors simply do not have the financial ability to successfully diversify their portfolio across bonds, property and equities, Corneil says. "A fund manager that runs say a 25-stock portfolio is deemed punchy, yet the average do-it-yourself investor may not own anywhere near that number, making it very susceptible to market volatility," he says. "Obviously buying into managed funds allows investors to diversify into hundreds of stock and property positions and literally thousands of bond positions."
An alternative
Rivkin Report chief executive Nigel Littlewood says: "I think some financial planners may be threatened by what we offer, but others, that are a bit broader in focus, think it is fantastic what we offer helps to keep our customers out of trouble." First published in 1997, the Rivkin Report weekly stock market newsletter looks for market events that provide anomalies or value opportunities for investors. "The space has grown a great deal since we first published in April 1997. At that time we really only had one main competitor. Since then the space has grown a great deal and there are probably around 25 competitors," Littlewood says.
"We've also seen the growth of discount brokers trying to move in and offer advisory-type services. We've tried to keep the basic crux of business, which is trying to find compelling value-type opportunities in the market that stand out. "The Rivkin Report appeals to an investor who wants to manage some or all of their money directly in the stock market and wants an excellent advisory tool to help with that process. We provide very specific advice, providing a clear entry and exit price. "We don't give tips. That is what taxi drivers do. Our well considered ideas have a track record of being roughly 80 per cent correct, regardless of the market conditions. We expect this to improve in the future due to the constant finetuning of our process and increasing disciplines. Experience is a valuable asset and we are constantly accumulating it."
He says word of mouth helped the business grow and while as yet the company doesn't have distribution through a financial planning network, it has recommendations from financial planners and accountants. "Making money is important but keeping investors out of trouble keeps us in business for longer," he says. "I see myself as a bit of a sniper in the market, looking for areas where the market is mis-pricing and advising our clients of it. Bull markets are very frustrating for people like us . volatility is something we can trade on."
The investors
The advising community still has a long way to go in winning the hearts and minds of investors. In research carried out by brandmanagement, of those direct investors surveyed, 58 per cent trusted their own judgment over external advice. This number jumped to 70 per cent for those who described themselves as professional investors. Only 1 per cent of respondents indicated they would rather pay someone else to do it. "Overall there was little affection for advisers, planners and other professional consultants such as accountants and stockbrokers as the primary source of advice," brandmanagement head of market intelligence Craig Phillips said.
This view was also borne out among direct investors when the respondents were asked how much they participate in the general financial planning process. Seventy nine per cent indicated they made most of their financial planning decisions, with only 8 per cent saying their adviser makes most of the decisions, but of those the majority felt they derived some benefit. "While the direct investors were generally not keen on advisers, when they were utilised, most, 65 per cent, felt they provided some kind of positive effect," Phillips said.
New kid on the block
Contracts for difference (CFD) have been around in Australia since 2001, but this month the Australian Securities Exchange (ASX) roles out its own CFD product. Developed in London in the late 1990s, a CFD is a contract between two parties to exchange the difference between the price of a security when the contract opens and when it closes. The difference is determined by reference to an 'underlying' instrument - a share, index, foreign exchange rate or commodity. A benefit of CFDs over options is that CFDs have no fixed expiry date and so do not suffer from time decay or a falling in price as they close in on maturity.
CFDs allow a trader to go short or long on any position with a variable margin, so allowing for an outlay of 5 per cent of the market price of a parcel of shares, an investor stands to gain as much as if they had bought the actual shares. In the four years since their introduction to Australia, CFDs have grown to about 5 per cent of the market, with some providers declaring the figure as great as 20 per cent. Brandmanagment's recent research on direct investing showed that close to 30 per cent of those surveyed used CFDs for trading, with that number rising to 47 per cent for professional investors. Of the estimated 20 CFD providers in Australia, the top 11 claim more than 95 per cent of all trades, with highest market share belonging to CMC Markets.
There have been issues though and understanding of the potential risk involved in trading CFDs is always crucial. While greater profits can be achieved so can greater losses as a negative movement in the market will also be multiplied and therefore the risks involved are increased significantly. The other point investors must keep in mind is that CFDs can result in loses that exceed your initial deposit as it is a leveraged product. Until the ASX unveiled its plan, the traditional over-the-counter market offered very little market transparency. According to the ASX, its new CFD market will offer price transparency, exchange independence and greater investor protection, although it will not be the first listed CFD. That honour goes to ABN Amro, whose mini CFD listed in July.
This product currently trades on the ASX warrant platform, with ABNAmro the CFD issuer and market-maker. "The ASX are great at getting products on the market and know not every product will suit every investor," ABN Amro executive director Aaron Stambulich says. "We are going to target the adviser groups and anyone that touches the retail investor. The important thing will be education, so investors understand what they are getting into." ASX CFDs will be listed on the market operated by the Sydney Futures Exchange (SFE). Access to this market will be possible through a large network of both full service and discount brokers.
