Retail investors need better understanding of direct equities – Instreet

Australians are continuing the push into self-managed superannuation funds, but most financial advisers have not thought about the risks associated with a direct equity portfolio.

While institutional investors use managed funds to manage their investment risk, independent financial planners are now demanding tools to determine the risk of a share portfolio and explain it to clients in a way that they understand.

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That's according to Instreet Investment Limited managing director George Lucas, who believes that the issue of managing a client's portfolio has often been overlooked by financial planners, who have traditionally relied on fund managers to develop a risk-weighted portfolio.

In an effort to stem this trend, Instreet has developed a portfolio 'checkup' service targeted at retail investors.

The service provides a summary of stock and sector weightings in order to determine whether the client's portfolio is meeting their investment strategy.

It also compares an investor's portfolio with the ASX 200 and calculates how a portfolio is expected to react to movements in the Australian share market.

"We've tried to keep it simple because financial advisers will have to explain the potential risks to their client," Lucas said.

"At the moment, the risks of investing in equities are not being communicated to financial advisers correctly."

While he concedes that the service only provides a snapshot of portfolio risk, Lucas said that by taking into account market movements and sector breakdowns, financial advisers would be able to provide clients with a forecast on their direct equity allocation over a three-month, six month-and 12-month period.

Referring to the Future of Financial Advice (FOFA) draft legislation, Lucas said that the best interest duty is demanding that planners become "experts in the products they recommend".

"It (the portfolio checkup) is something that an adviser could show to the Australian Securities and Investments Commission to show that they are taking reasonable steps to meet aspects of the best interest duty," he said.