Companies specialising in direct shares are in the minority at the moment, but there may be a movement that way very soon. Peter Trounce, owner of Lifeplan Financial Pty Ltd says he lost confidence in the funds management industry during the financial crisis because of frozen funds which still charged fees.
He has just joined the Omniwealth dealer group, which he says is also attuned to the direct share/property path, and will provide him with the tools to manage his clients’ portfolios.
“My approach to investing my clients funds is to use direct securities (shares, trusts and fixed interest) listed on the stock exchanges. I do use some managed funds but only for the international component and some fixed interest to get the client’s balance right,” he says.
Although the process saves clients about 1% per annum in fees, Trounce says it takes a lot of work, and that’s probably why more advisers aren’t doing it at the moment.
“…There’s more work involved. It’s very easy for an adviser to put clients into a balanced or a growth fund with a fund manager and then let it go, and many of them get quite good results.”
Direct share investment involves a lot of research on behalf of the adviser, and the ability to analyse companies. Trounce has a team of three behind him, as well as a background in accounting. He says it’s not something every adviser could do, and it’s not something many want to do.
The misunderstanding around the share market doesn’t help, he says. Many people believe it to be very risky, but it consists of many components; some areas are risky, but there are some that are quite conservative. He says fund managers tend not to identify that spectrum and “just go across the board”.
Benefits you could expect to offer your clients, according to Trounce, include:
I can target their needs better. For example, a retiree will have a larger component of Blue Chip Industrial High Yielding shares which I have returning a gross dividend of close to 10% including franking. Whereas a younger wealth accumulator will have more growth stocks.
I save my clients about 1% pa in fees which is about what fund managers charge. I also don’t use wraps or master trusts which cost an additional 0.5% to 0.9% pa.
In the longer term I am getting better results than most fund managers and getting them consistently.
John on 28 Feb 2013 10:45 AM
Here here Pat - Your comments echo my experience of such 'advice' in the industry. Cost savings does not equal good advice.
Rob Pyne on 28 Feb 2013 11:43 AM
I doubt that Peter has turned to direct shares because of ego. The article states that he lost confidence in fund managers during the financial crisis. Owning assets directly does provide more transparency and this can help clients feel more in touch with their investments, particularly if they own household names in their share portfolio. I suspect however that whilst Peter is saving his clients some money in fees, he is absorbing the extra work that comes with direct share advice without increasing his ongoing service charge. It is also likely that Peter will be, over time, humbled by the returns from the index compared to his direct asset portfolio. This is a precarious position to be in with clients when your value proposition is picking good investments.
GAB on 28 Feb 2013 11:53 AM
Pat, seriously...you pick on one comment from Peter and suggest it's about ego. I don't think Peter should have put that last comment on there either, but the rest of his points are true. I use direct equities alot for my clients and i'm telling you, I have more faith in the CEO and board of Woolworths and other top companies in Australia than i do in alot of our fund managers. I use ETFs also and some active managed funds. An adviser uses direct shares and they instantly get accused of stock picking. I suggest you're the one with ego issues.
Pat on 28 Feb 2013 12:31 PM
GAB, where does my ego come into it?
Also, I suggest you re-read my last comment that refers to ego. I stated that it was from my experience. I know and have worked with advisers who stock pick. They do not beat the market.
Finally, how can an adviser use direct shares and not stock pick? Don't they have to pick the shares?
Trust me, I have no faith in active management in this country. Active fund managers have, generally, shown little reason to believe they will beat the market consistently.
Paul Hodson on 28 Feb 2013 02:22 PM
I too have been questioning the value of fund managers versus direct investing. There are pros and cons with each. Working (as I have) as a Stock Broker, I saw very little evidence of the brokers around me being able to consistently deliver performance better than the market. They either make claims, which they can or do not back up with evidence, or they trumpet their returns success where they have invested in a much riskier strategy or class of shares and compare their (non risk-adjusted) returns to that of the market. Direct shares make sense for some clients, but ETFs and/or managed funds make sense for others. David Swensen, arguably the best portfolio manager alive today believes that investors should use an index fund or ETF in efficiently priced investments and use active managers in non-efficiently priced markets. I look forward to the time all managed investments are listed. Good debate though.
GAB on 28 Feb 2013 02:24 PM
Pat, I'm am adviser who sits on the frontline. Perhaps advisers aren't trying to outperform the market, perhaps they're main concern for their client is meeting their objectives? Reliable cashflow, franked dividends, knowing where their money is, capital longevity etc... Too much focus in this industry on comparisons and whether one is outperforming a benchmark. Most of my clients love seeing CBA WES ANZ TLS and the like in their portfolios. Extra work?...depends on the strategy. Not all will be winners every year, don't expect they will be...but i know we won't have to worry if Lonsec or Zenith downgrades XYZ fund, or a fund manager emails a notice about another fund they're shutting down due to non-performance (got one of those just the other day in fact)
Tax effective, low cost, minimal switching, reliable cashflow....all in line with working in the client's best interest.
I go back to your stock picking comment. If that is the case, then advisers who pick managed funds must be fund pickers.
Pat on 28 Feb 2013 03:38 PM
GAB, I still posit that, rather than run a concentrated portfolio of 10-15 stocks (yes, I am making an assumption), an ETF will deliver a more constistent approach, allowing a market or high-yield exposure (plus other sectors), without the hassle of managing corporate actions. They provide, therefore, "Tax effective, low cost, minimal switching, reliable cashflow....all in line with working in the client's best interest."
Regarding fund pickers - I wholeheartedly agree with you. I suggest many advisers pick funds based on: past performance; research house ratings; the most recent golf days.
GAB on 01 Mar 2013 10:04 AM
Pat, ETFs are good if you want a sector approach. Direct equities are good if you want that particular company at that price that pays that dividend. It's just a more specific selection. Corporate actions are great....especially takeover premiums, corporate bond issues, discounted capital raisings etc. As long as you don't end up managing the whole ASX200, in which case you're better off in an ETF. If you look at the top 10 holdings in most funds, they're pretty close. May as well hold them direct.I use ETFs, funds and direct equities. Anyway, thanks for the debate. We agree there is more to managing people's money than sticking them all in expensive managed funds. I think the advice industry is evolving. Direct shares as part of the proposition is still being worked out by dealer groups who have been somewhat firmly attached by the umbilical chord to their fund manager partners.
Let's Get Real on 01 Mar 2013 11:09 AM
Further to Robs comments above another issue for Peter will be succession. Who runs the portfolios if he moves on or tries to sell. May not be able to readily find someone willing or able to replicate his efforts.......or may do but at a lower price, especially if as Rob states the current ongoing service fees do not accurately reflect the involvement. Otherwise no real problem with this approach if used wisely and in combination with other methods. One last question, does Omniwealth have WP on a retainer, its seems to have commentary daily?