With a managed fund background, it is noteworthy to hear John Pritchett, a Perth-based branch manager with Paterson Securities, report an expanding relationship between financial advisers and stockbrokers. Pritchett says as the number of Australians holding or expressing interest in direct equities increases, financial advisers can no longer risk abrogating portfolio management to managed funds. Not surprisingly, he says, many financial advisers recognise that having a good relationship with broking firms helps them better service their client’s portfolio.
Along with the resources boom and mega floats, such as AMP and Telstra, the other driving force in share ownership at the retail level is the rise in DIY retirement schemes, says Pritchett. This is reflected by the 300,000-plus self managed super funds (SMSFs) now in existence.
Another reason financial advisers no longer have eyes solely for managed funds, says Russell McKimm, a director with Melbourne-based Shaw Stockbroking, are tax considerations. According to McKimm, more advisers are looking to managed portfolio products, comprised of direct shares, offered by some brokers to avoid tax issues managed funds can’t control. McKimm says that Shaw is witnessing a growing number of financial advisers referring their high net worth clients to individually managed accounts over other equities platforms like wrap accounts and managed funds.
John Pritchett finds that there’s a lot more to adviser/broker relationships than processing shares transactions. “Having relationships with stockbrokers also gives financial advisers the opportunity to participate in floats and capital raisings at a discounted rate, pre-listing activity and quality issues (like the Commonwealth Bank preference share issue),” says Pritchett.
Obviously, the type of relationship a financial adviser is allowed to have with a broker will be determined by the licenses held by the individual or group.
Along with basic advice, stockbrokers can also provide advisers with: an equity portfolio review and recommendation service; access to their clients holdings via the Internet; comprehensive and short form research reports on leading companies; regular economic and market reviews; access to derivatives and government bonds; access to international shares and detailed research information; 24-hour on-line access to worldwide indices and share quote information.
“This is the beauty of broking,” Pritchett says, “backed by research and other data that’s not available to most financial advisers.”
While there’s no industry benchmark, Pritchett says it is not uncommon for stockbrokers to pass on a percentage of their fee to the financial adviser. For example, an individual broker who receives a 1.5 percent fee may choose to share it with a financial adviser. “The financial adviser, in turn, may choose to rebate it back to the end client,” says Pritchett. “The key is to disclose these arrangements to clients wherever these practices exist.”
In recognition of their growing importance to the overall business, some of the larger stockbroking firms have established dedicated wholesale desks exclusively for financial advisers needs. For example, Shaw Stockbroking has Adviser Online, and Citi Smith Barney operates a subsidiary, Adviser Services.
Partners in Profits
When Citi Smith Barney opened Adviser Services, Perth-based client adviser Bevin Sturgess-Smith admits to spending the first two years doing nothing but buying and selling shares for financial advisers. Fast forward 10 years and much of his time is now spent making recommendations and fielding questions from advisers on a range of issues.
“This might mean recommending stocks that put the right investment bias on an end-client’s portfolio strategy,” says Sturgess-Smith.
Shaw Stockbroking offers advisers a range of stock models, through its product, Your Portfolio, which clients typically buy and hold over the longer term. Russell McKimm claims that the breakdown in traditional demarcations of stockbrokers as purely stock-pickers and financial advisers as singularly managed fund-driven means both parties now have a vested interest in delivering end solutions to clients.
As banks have taken a significant chunk of private client business away from traditional brokers, financial advisers have become a growing part of the broking business. On the flipside, McKimm says financial advisers are concerned about the fees clients pay and brokers can help maximise value by extending their distribution methods.
“Both financial advisers and stockbrokers want more ongoing as opposed to transaction-based income,” says McKimm. “The big dilemma under the transaction-based model (which usually charges a fee relative to the size of the portfolio or share purchase) is how to help people who haven’t got a lot of money to invest.”