Going it alone: share trading and direct investments

While ‘surf’s up’ may be a good way to describe equity markets at the moment, beach conditions are definitely not back to normal.

Far from checking for guidance from a lifeguard in the form of their friendly adviser, some clients are deciding to brave the waves alone this time around.

Investor optimism is definitely returning, and while this may be a ray of sunshine for hard pressed financial advisers, whether it translates into additional funds under advice (FUA) is another matter.

The Investment and Financial Services Association (IFSA) CoreData Investor Sentiment Index for quarter two 2009 has returned to positive territory for the first time since the global financial crisis began.

Investor sentiment is now at 2.3, up from -22.3 in the first quarter, but assets are not all flowing back into investment markets via the advice channel.

As E*Trade managing director Stuart Sayers explained: “We have seen a strong increase in interest in direct investing”.

He believes clients have taken a long, hard look at their investments and the advice they have received.

“People have reassessed what they are doing and how they are going to the market.”

Sayers feels there is a belief among some investors that they can do it better themselves rather than paying someone else money to lose money for them.

IG Markets director and head of sales David Skilton agreed there had been a shift by some investors towards the direct route.

“The times have evolved and people are now willing to invest themselves.”

He believes the market is heading into new terrain.

“Some clients are happy to stay with a broker and some are happy to leave it to the pros, but not everyone.

“It is right that there should be a reassessment,” Skilton said.

An example of this new attitude was the finding in the IFSA-CoreData survey that investors were more likely to purchase new investment products or make a direct investment (53.5 per cent) than top up an existing investment product (31.6 per cent).

Another recent report by CoreData on the impact of the financial downturn bolsters the view that there are some very unhappy clients out there.

The research found Australian planners lost approximately 215,000 clients over the past 12 months, with more than one-third of clients in active ongoing advice relationships indicating they were very likely to stop using an adviser.

The CoreData study, Financial Planning Affection, found that since November 2008, there had been a doubling in the numbers of advice clients considering ending their relationship with their advisers. This tallies with the results of the IFSA-CoreData survey, which found 24 per cent of respondents were likely or very likely to stop using a planner.

Craig Phillips, head of market intelligence for market research firm Brandmanagement, which produces the CoreData survey, acknowledged many clients have been lost.

“The challenge now is where they go or what they do, and this can lead to investment paralysis,” he said.

Events such as the collapse of Timbercorp, Great Southern and Westpoint have not helped.

“There has been heightened regulatory interest and this has led to a major shift in the industry,” Sayers said.

While he does not have hard data to support it, Sayers believes there are significant groups of clients who are disillusioned with the advice process.

“Anecdotally, people are disappointed with financial planning advice, particularly in the mass affluent segment,” he said.

Phillips believes the trends are not clear cut.

“We are not necessarily seeing a shift away from advice. The notion of having a planner is still very attractive to many people and many are quite content with their adviser.”

However, he acknowledged that things have changed and believes there are several trends occurring at the same time across the market.

There is a “big split in consumer land at the moment”. Some clients are staying with their adviser, others are keen on direct investing and the remainder are sitting on their hands uncertain about what to do, Phillips said.

“As the tide recedes, a lot of people are being left on the beach.”

Giles Craig, managing director of private client firm Cameron Stockbrokers, agreed the picture is unclear.

“People are moving in both directions — both to and from advice. It is a two-way push. Some clients are moving away from advice, but some still want to get advice if they have not succeeded by themselves,” he said.

Craig believes many organisations in the financial services industry need to think hard about what these changes mean for their business and try to discern what clients are looking for in this new environment.

“Over the past four years people mostly just surfed along the wave, but now everything is up for grabs,” he said.

Although trading volumes have risen, Craig believes many questions remain unresolved.

“A bigger issue is what will happen to investors and how will they position themselves? How much risk will they be willing to take on?”

Based on his research, Phillips believes there has been “a huge reduction in the propensity to take on risk”, rather than a move away from seeking advice. In fact, volatile markets may encourage more interest in advice.

“People who thought they were able to match professional investors now realise they can’t and this could drive more people to seek advice,” he said.

Lower returns are also helping foster interest in cheaper alternatives.

“When you receive lower returns, the costs stand out more. This leads people to reassess things and look at how to do it more cost effectively,” Sayers said.

“People have got a lot more diligent about where they are paying their money.”

From Craig’s viewpoint, he is seeing greater interest in both costs and issues around the investment process.

“In a bull market there is less interest in fees, transparency and conflicts of interest issues, but in the past nine months we have seen greater interest by dealers, investors and financial planners,” he said.

“Fees will come under increasing scrutiny.”

For Skilton’s clients, expenses are now a significant issue. He said IG Markets’ fees of only 0.1 per cent dramatically highlighted the “prohibitively expensive” 2.5 per cent of either side of a trade charged by traditional brokers.

“Cost is a really big issue,” Skilton said. “In a bull market cost is not an issue, but when recommendations have gone south, clients focus much more on expenses.”

Tax issues are also starting to play a bigger role.

“In a bull market tax efficiencies are not that much of a concern, but in a bear market they are a big issue and clients want to be able to handle their tax efficiently,” Craig said.

Another key factor fostering the interest in direct investment is the ready availability of information previously only available through intermediaries such as stockbrokers, financial planners, investment managers and real estate professionals.

As intermediaries in industries such as travel have found out, once clients start down the path of ‘disintermediation’ their privileged position — and ability to charge fees — is significantly undermined.

Travel agents, for example, have discovered what happens when clients can access previously difficult to obtain information via Internet tools.

“Now there is almost as much information available as a professional investor would have access to,” Skilton said.

“Previously, clients were completely in the dark, but now almost anything available to a broker can be obtained online — even if you have to pay for it.”

A similar situation has occurred in the property market, according to Resi Home Loans head of consumer advocacy Lisa Montgomery.

She believes the huge volume of information now available to individuals is making it much easier to try direct investment.

“Some investors are doing it direct as there is so much more information and advice available these days and it allows people to make informed decisions,” Montgomery said.

“Independent investors are doing their own research and then acting.”

In an uncertain world, this gives bruised and battered investors a much needed sense of control.

“People are more interested now in greater transparency and greater control and better value for money,” Craig said.

“In the past, people only read the front-end of the PDS [Product Disclosure Statement], but in the past year they have focused on the back-end.”

Montgomery agreed doing the research themselves before making an investment gives some clients a greater sense of control.

“The best research is the research you do yourself and Australian consumers want to take back that control,” she said.

While advisers may be losing clients, the trend towards direct investment may also come at the expense of managed funds, with some clients now choosing direct shares or property rather than pooled structures.

The recent report on the asset management industry by US-based Boston Consulting Group, Conquering the Crisis: Global Asset Management 2009, made this point. It highlighted how “the subpar performance of many products that were recommended by investment advisers has led some investors to question both their advisers’ judgement and the products themselves”.

Skilton believes cheaper, more transparent products such as exchange-traded funds (ETFs) enable investors to go direct and represent a real threat to managed funds.

“The biggest threat to managed funds is ETFs. They may sound the death knell [for them],” he said.

The greater transparency of direct investment products is also attractive to investors with money frozen in managed funds for extended periods or facing big losses from structured investments that have gone sour.

“A lot of people are feeling a long way from their assets,” Craig said.

In particular, he points to clients who have seen both their capital decline and their assets locked up in managed fund structures. This in turn has boosted interest in products such as individually-managed discretionary funds.

“There is a hundred-fold increase in demand for control and access to assets and this is going to continue,” Craig said.

He claimed the key question for clients now is, ‘Can I get my hands on what I own and liquidate it into cash easily?’.

After a traumatic event it is human nature to move away from existing behaviours, but whether the losses of the past year are enough to see people shift towards direct investment on a lasting basis is another matter.

As Craig noted: “People have very short memories. In March everyone wanted fixed interest securities and there was a high degree of nervousness, but since then risk appetites have come back and the conversations now are very different”.

Sayers, on the other hand, is convinced that for many clients the change will be long lasting.

“I think a good portion of the change will be permanent. Once you start doing it direct it is quite empowering — especially if you can get the same outcome at a cheaper cost,” he said.

Skilton agreed it is not a temporary shift.

“I think it is a permanent change and if we go back to a bull market, I can’t see people going back to retail brokers etcetera, as all the tools are now available online,” he said.

“Services are even available to show what stocks the major managers are buying both here and overseas.”

The growing push towards fee-for-service advice is likely to further the process.

“We are seeing a shift in financial planning towards fee-for-service advice and not ongoing trails,” Sayers said.

“There is an unbundling of advice and execution. We are seeing a shift to where customers are prepared to pay for advice and pay for execution, but the days of one opaque fee are over.”

While a few good years of market returns may see some investors return to their previous ways, Sayers believes the trend to disintermediation is too strong.

“This is a structural change moment and it is not likely to reverse.”

Skilton agreed for some clients — particularly those previously using stockbrokers — there will be no way back and their advisers will lose out.

“There will always be a place for conventional advisory stockbrokers, but for some people it will be tough,” he said.

“Planners are less likely to be cut out, but for planners who have been recommending strategies that have backfired spectacularly — such as margin loans and loans against property — they are likely to lose clients.”

While clients are moving in different directions, there are some indications of where the money is heading at the moment.

A big chunk remains sitting in bank accounts, with a recent Investment Trends report noting planners estimated clients have around $58 billion sitting in cash.

Although the upturn in equities has encouraged some investors to venture back into the share market, a good proportion has gone in via direct investment.

According to Sayers, many investors have been dipping their toes into the water via online trading platforms.

“We have seen strong growth in customer numbers — particular over the past four or five months,” he said.

In fact, E*Trade customer numbers in June were up 30 per cent on the January figure.

Direct share trading has also benefitted from the introduction of a growing suite of online tools.

E*Trade recently launched a new client tool providing free basic tax reporting. Clients seeking a more sophisticated service pay a one-off fee, which is not based on funds under management.

“This is a major change in this channel and will help make it easier to use,” Sayers said.

The emergence of these online tools also helps counter many of the arguments for using more expensive wrap and administration services.

One area really benefitting from the trend towards direct investment is ETFs.

According to Sayers, these products are rapidly gaining in popularity.

“Active traders have stayed in equities, but we are seeing very large growth in ETFs.”

He said E*Trade’s ETF volumes have gone up 100 per cent since January.

“In June there was a 27 per cent increase over May. There is an increasing scrutiny of costs and this is leading to increased interest in ETFs at the expense of managed funds.”

The November 2008 Investment Trends ETF Report pointed to strong growth in the product, noting ETF use in Australia had almost doubled in recent years.

It is also a market dominated by direct investors.

The Investment Trends research found financial planners played a role in the investment decision for only a small percentage of ETF investors, with 79 per cent saying they invested without consulting an adviser.

While ETFs are flourishing, contracts for difference (CFDs) are also benefitting from the trend towards self-directed investing.

According to Skilton, IG Markets has experienced record numbers of new clients joining, although he put much of this down to CFDs being a new product in Australia.

“The growth we have seen has been exponential, but it is more to do with product availability than market conditions,” he said.

Skilton also pointed to the availability of tools, such as stop loss and gearing facilities, that give individual investors greater confidence to take the plunge.

“But no less a reason is disillusionment with advisory stockbrokers and, to a lesser extent, financial advisory services.”