The days of a planner’s investment proposition offering only managed funds are long gone. While these traditional investment vehicles still receive the majority of funds placed by planners, that status is clearly being challenged.
“The move to both direct equities and ETFs [exchange-traded funds] – they look very similar – is quite a significant move,” says Pete Steel, general manager of Core Equity Services.
“If you look at some of the evidence to date, we’ve seen 10 per cent annual growth in flows going into those products over the last 12 to 24 months, into both direct equities and ETFs, and that’s declared by the planners and tracked by ourselves.
Please CLICK HERE to download a PDF of this Special Report “And also if you look at the 24-month, 36-month horizon of planners declaring their intent, they continue to grow by 10 per cent a year in their usage of direct equities and ETFs – and, to be fair, cash products as well, fixed and at-call.
“Some of the funds, the active and passive managed funds that have traditionally been mainstays, are declining quite significantly – more than 5 per cent per annum from their current base.
“It’s a bit of a structural change.” Steel says the shift is down to “a few things”, but says it is “first and foremost client sentiment”. “I think it’s harder for a planner
now to have a conversation purely about funds,” Steel says.
“Direct equities and ETFs are somewhat out in the media, and clients themselves are challenging the value proposition of funds: are they fair value; is there transparency in what I’m getting charged?
“Direct equities [and ETFs] are both seen as potentially a good value proposition in terms of fees. It’s pretty transparent and pretty transactional, and also a very good way to get strong returns. I think some of the myths around funds – that they’ll give you highly diversified but strong returns – are being challenged at the moment, again, by the end client.
“I think planners certainly haven’t driven the trend to direct equities; but again, particularly with FoFA [the Future of Financial Advice] in mind, very much planners are thinking about how they demonstrate value to their end clients. Sticking money straight into a fund and charging a fee for very little effort really isn’t going to cut it in the world going for- ward, or that’s a much harder conversation to have about demonstrating value.”
Craig Keary, executive director and
head of distribution and sales, equities
and retail markets at Westpac, says the impetus for the shift is being driven by client demand for transparent, cost-effective investment solutions.
“What’s driving advisers to do direct equities? I think the first one is transparency,” Keary says.
“There’s been a big move following the GFC for advisers to move towards having investments that are transparent, and certainly investments that are liquid.
“The second thing is direct equities are giving them a far greater control over the tax outcomes. They allow [advisers] to be more nimble when it comes to having a very defined tax outcome, and that’s very important.
“The third one is really coming down to what we’re seeing, as well as the demand for direct equities, is the demand for self-managed super, the growth in the self-managed super funds [SMSF] sector. And when you’ve got that growth in the self-managed super fund sector, as a result of that, you’re seeing clients moving to direct equities, or to demand direct equities; and therefore advisers, as a direct response to trying to service the SMSF sector, are having to service those clients with direct equities.
“Another one, I think, is that one of the things that happened in the GFC was there’s been an over-arching desire for people, and clients, to be in more control. And as a result of that, direct equities gives them that control. They understand what the company is; they understand who it is; they know what the share price is every day – it’s simple. And I think that is something that has really driven investors to look at direct equities – and ultimately driven advisers, as well.
“And the last one is, you do have the option with direct equities to have strategies around protection [and] gearing, and all those allow you to play at a different approach to portfolio construction.”
Steel says portfolio administration is at least as big an attraction for advisers.
“A lot of planners are on the front foot, from their own point of view, saying, ‘Look, I can competently, confidently help you administer your direct equities and make sure that’s part of your strategy as well’,” he says.
“That’s a clear value proposition, and when you get into fee for service it’s easier to make a connection with what those planners are doing for the end client.”
Arnie Selvarajah, chief executive of Bell Direct, agrees that pressure is being put on planners by clients, and that more planners are being driven into the direct equities space. Selvarajah says some planners have been reluctant to offer direct equities as part of their value proposition because they’ve lacked the confidence to research and advise on specific stocks. But that is changing as product providers step in to help.
“Clients have seen a lot of the press that’s out there around FoFA and com- missions on managed funds, and now they’re saying,‘I’m more interested in direct equities, because I know what I have got; it’s clean and there’s no hidden costs in there’,” Selvarajah says.
