Direct Equities

HNW investors to favour direct equities

Advisers focus resources on shares

Victoria Papandrea

By Victoria Papandrea
Tue 16 Jun 2009

High net worth investors are likely to have the strongest product demand for shares over the next two years.

Australia's high net worth (HNW) investors will have the majority of their money invested in direct equities over the next two years, according to a new survey by Datamonitor.

HNW investors are expected to have up to a quarter of their total investment portfolio in shares by 2011, the survey found.

Wealth managers servicing the financial needs of HNW individuals expect more than 90 per cent of their clients will demand direct equity investments over the period.

While many investors have lost money in shares over the last 18 months, the demand for equities from HNW clients is set to increase as signs of a market recovery begin to emerge, Datamonitor wealth analyst David Lalich said.

"If the stock market continues to rally this year we should see a wave of new investment from HNW individuals, and while many will have learnt lessons from the equity crash, ultimately this will not discourage them," he said.

"These are typically opportunistic individuals that want exposure to the best opportunities for growth in the market."

With client demand expected to be so strong in the area of direct equities, the survey found 44 per cent of wealth managers expect to focus their resources into these investment products over the next two years.

A smaller percentage of wealth managers surveyed said they would focus on developing other investment areas such as property funds, capital-protected funds, exchange-traded funds and currency trading.

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Financial Planners Facing Crisis of Confidence

Financial planners need to decide if now is the time to face their industry’s poor perception, according to the Australian Securities and Investments Commission (ASIC) senior executive leader, financial advisers, Deborah Koromilas.

Speaking at a Financial Planning Association (FPA) update, Koromilas acknowledged that the planner has become linked to the performance of the investment.

The industry is being hit by a perception that “you’re all bad, you’re all crooked and you all have conflicts of interest”, Koromilas said.

The industry needs to question how much of an influence that conflict should have, Koromilas said.

“How much do you want that to affect the entire industry as a whole?”

She also questioned whether there was more of a focus on obtaining good performance at the expense of good advice.

“Was advice just given off the back of a rising market? Should there be more products collapsing. Will the industry survive?”

Koromilas painted the picture of an industry where it was too hard to get new clients and too hard to retain them.

Financial Planners Feel Under Attack

Planners feel under attack

29 April 2009 | by Amal Awad and Lucinda Beaman

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Some financial planners are feeling increasingly despondent, and some are feeling let down by their dealer groups and the industry in general – a situation which is leading planners to reassess their business models.

Wealth Insights managing director Vanessa McMahon said her latest research shows that planner sentiment has fallen to new lows, with 38 per cent of planners having a negative outlook compared to 12 per cent last year. This is on the back of most practices reporting a “serious drop in revenue and profit”, McMahon said.

“Some are running at a loss, and most smaller practices don’t have much fat to cut out of their businesses but have the same expenses, including dealer group costs."

At the same time, some financial planners are expressing disappointment with dealer groups, feeling that they are not receiving additional help, McMahon said.

McMahon said planners are “doing it tough”, facing the pressures of lost income, dealing with clients who have lost money and a sense of being over-regulated. Some planners also feel they have no back-up from the industry and feel under attack, McMahon said.

Financial Planning Association chief Jo-Anne Bloch said adviser sentiment in the US is also very low, while countries such as Japan and Ireland face serious problems.

“If you think things are bad here, [it’s nothing] compared to what's happening around the world,” Bloch said.

“Our research is echoing what Vanessa McMahon is saying: [there is] real anxiety among our membership,” Bloch said.

“There are some real issues and certainly we need to acknowledge that.”

Bloch said financial planners seem to be “fair game” and “under attack” by self-interested, sectional groups.

Bloch said some planners are now looking at different business models and how they might better manage their costs and run their businesses.

However, McMahon did note that well-established practices and those with strong referral services were generally doing well.

Platform fees trim dividends from investors' portfolios

Platform fees trim dividends from investors' portfolios

29 April 2009 | by Benjamin Levy

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Platform fees that are charged by platform providers are taking too much out of advisers’ clients, and clients don’t realise how platform fees can impact on their dividend income over time, according to the director of Capel and Associates, Rick Capel.

While there is proper disclosure in terms of external platform fees, clients don’t understand whether the fees are reasonable or not. Advisers who forgo investing their clients’ money through an external platform and invest their clients’ shares directly with their own internal platform can save clients up to 80 basis points in fees, Capel said.

Capel said that in a normal market environment when an asset class does particularly well, when the profits are realised in rebalancing the portfolio, part of those profits will go towards paying platform fees. That practice was questionable in the current market turmoil.

“In this period where most of the asset classes have gone south, I question the practice of rebalancing a client’s portfolio, which may crystallise losses simply to refloat the cash account in order to pay the adviser or dealer fees.

“This rebalancing exercise creates an unethical bias, which any professional adviser should avoid because their fees have to be paid out of asset sales,” Capel said.

Portfolios should be modelled around cash flows so that clients can tell how much of their investment dividend is going towards the cost of operating the platform, he said.

UK consumers embrace online comparison tools

UK consumers embrace online comparison tools

Thursday, 9 April 2009 10:15am

New research on UK consumers shows they are rapidly embracing online finance price comparisons, with big implications for how firms market their products.

According to the Datamonitor research, online price comparison websites are now the most trusted source of information for consumers regarding wealth management products.

"Consumers have embraced online channels for advice and are increasingly depending on technology to compare products in their search for transparent and competitive policies," noted Datamonitor.

Datamonitor said consumers becoming more self-directed means financial services firms need to enhance the way they interact with their clients.

"Providers should consider the implications of these changes that will increase the likelihood that existing clients will seek and find viable alternatives," they said.

Part of this is to dramatically increase avenues for engagement and segmenting clients or prospects into those representing high long term value in contrast to those offering firms lower value.

"Providers need to put the most retention effort towards existing customers who have the highest lifetime value against the cost of servicing them," said Mya Myat Moe, analyst at Datamonitor and author of the report.

Segmenting strategies however require firms to think differently regarding their marketing strategies, she said.

For example, life insurance and pension companies need to understand changing consumer attitudes towards long-term savings while also realising they are becoming more risk-averse, preferring products which offer safer or guaranteed returns over those which offer the highest

Masterfund market plummets

Drops 15 per cent

By Alice Uribe
Wed 04 Mar 2009

All three Masterfund sub-markets report falls in FUM.

The total Masterfund market, comprising platforms, wraps and master trusts, dropped nearly 15 per cent for the year to 30 September 2008, according to the latest statistics from Plan for Life Actuaries and Researchers.

The research firm reported that wraps, which make up 29.7 per cent of the market, fell by 15.8 per cent. Platforms, which make up 53.4 per cent of the market, fell by 15.2 per cent.

Master trusts, which comprise 16.9 per cent of the market, dropped 11.7 per cent.

The total Masterfund market is now worth $386.8 billion, a fall of $67.4 billion from 30 September 2007.

The biggest loser was Macquarie Investment Management, which saw its funds under management (FUM) fall by a whopping 23 per cent from the previous year.

Large falls were also felt by Asgard, whose FUM fell 16.6 per cent. MLC Ltd saw its FUM fall by 18.4 per cent.

Even AMP Financial Services, which took pole position for the total Masterfund market, reported a drop in FUM of 11.9 per cent to $41.1 billion.

Inflows for the market were also down to $110.9 billion from a record $145.7 billion in the previous year.

The research firm said all major companies reported small to medium negative growth over the year.

Are More Practices Going Independent

Paragem tips scales for small planners

Friday, 20 February 2009 12:55pm

Small-size planning groups keen to cut their licensing and admin costs without sacrificing their independence and quality of service are driving the demand for the ‘shared services' model, said Paragem's managing director Ian Knox.

Knox said some planning groups are taking a different approach to stay ahead of the pack even as the market continues to bite.

For example, Paragem has set up a new service, Paragem Wholesale AFSL, which allows advisers the option to share a ‘non-aligned licence'.

This means that they don't have to shoulder the full cost of keeping the business compliant but, more importantly, they can tap into Paragem's business, which allows them to provide advice without potential conflicts-of-interest normally associated with planning groups that are part of bigger firms that also manufacture investment products.

An additional feature of the group's licensing facility is that, as part of the planning firm's contractual agreement with Paragem, all volume-based bonuses provided by select platform groups go directly to the clients.

"We've undertaken agreements with a couple of platforms, Macquarie and Avanteos, where all volume rebates attributable to Paragem has to go to the client. This is about fostering and developing steps towards where the market is heading, which is advice-based activities," he said.

Knox added that the scale advantage they provide also extends to Professional Indemnity (PI) insurance costs for each licensee. By negotiating PI insurance for one or more licensees, provided they are all high-quality businesses, the annual PI costs would come down too, he said.

In separate news, Knox said that in contrast to the doom-and-gloom stories about planning groups struggling in the current climate, Paragem saw a spike in business activity in the two months to January, when they lodged more than 20 new AFSL applications.

"This implies these practices are leaving networks to establish and run their own affairs, in many instances they actually receive a financial boost as their running costs are lower," he said.

The regulators fiddled while we got burnt

The regulators fiddled while we got burnt
Ian Verrender
January 8, 2009
Forget the 1980s. That was just a warm-up for the main act. These are the dying days of the real decade of greed. And there is no greater example than in the recent trading in Babcock & Brown shares.

The past couple of days has seen some wild gyrations in the share price of a company that clearly has no future. Even John Cleese at his Monty Pythonesque best would have difficulty arguing that it was just resting or "pining for the fiords".

This is a dead company, gone to meet its maker. So who in their right mind would bother buying shares in a company that was a dead cert to collapse? And particularly on the very day the corporation announced it had "negative net assets"?

The answer? A hedge fund that finally was calling in a short selling position. A what position, I hear you ask.
About a year ago, an unnamed international hedge fund sold shares in Babcock & Brown around the $18 mark. In fact, it sold about $400 million worth of Babcock & Brown shares. That's right, it banked $400 million.

The slight technical hitch is that it didn't actually own the shares it sold. Instead, it borrowed them, presumably from some dumb insurance company or superannuation fund for a nominal fee.

This week, that very same hedge fund figured it would maximise its gain by closing out its position. That means it had to buy them back. And it is that buying that has pushed up the share price.

The shares it sold for $18 - which it didn't even own - this week were bought back for an average price of 40c, delivering an enormous profit to the hedge fund. And it relieved its debt by delivering back those shares it borrowed. Forget the fact they are almost worthless.

Due to the appalling lack of disclosure rules on our sharemarket, we will never know the identity of the hedge fund.
More importantly, for those people who have their money tied up in the super fund or insurance group that lent this stock out a year ago, we will never discover the identity of the schmuck who earnt a couple of thousand dollars commission while he watched close to half a billion dollars of his clients' investment almost totally evaporate.

Like just about everyone in businesss these days, managed investment funds have discovered new and interesting ways of masking these types of transactions. A mixing pot suddenly emerges in which the very bad deals become blended with great ones. And if the overall result is negative, this year we have the best example ever as to why your super funds have shrunk. Haven't you heard of the global financial crisis and the global recession?

The meltdown in stock and debt markets has provided an easy excuse behind which almost every incompetent player now can hide.

Take a look at Babcock's recent trading. On New Year's Eve, Babcock shares were trading at 15.5c. Yesterday they hit a 46c peak before closing 15 per cent lower at 32.5c.

The official line from the company is that the price spike followed a decision by its banking syndicate to give the company enough leeway to conduct its own liquidation rather than have administrators or receivers appointed.

That means no forced sales. That means creditors will end up with a bigger proportion of the bad debts repaid, which is terrific news for creditors.

But has everyone overlooked the basics? If there is not enough cash to repay the secured creditors in full, the share price should be, at best, zero because as we all know, shareholders stand last in line.

Share prices can't really go any lower than 0.1c (just look at the Macquarie-backed tollroad company Brisconnect) but B&B keeps on bouncing around even though it is in unofficial liquidation.

It is a year since it became obvious that something was horribly amiss on our sharemarkets. The dearth of information, the arrogance of the bullmarket high-flyers have been overshadowed only by the stupendous incompetence of our market regulators.

Where has the Australian Securities and Investment Commission been during the past year? Just think of the accounting irregularities, conflicts of interest, insider trading, fraud on a grand scale with stock lending and undisclosed short selling, the total absence of rigour in terms of enforcing disclosure. Even those involved are stunned that there has been precious little in the way of prosecutions or even investigation of their activities.

Maybe this year will be different. But don't bet on it.