Dover encourages advisers to recommend clients invest directly into the share market where it is appropriate to the client and in the client’s best interests.
The first step in creating a fee for service based practice is to actually provide the service, and not merely refer the client to a fund manager who then provides the service. We think it is a much better idea for you to provide the service and get the profit for doing so.
Your SOA needs to explain why the strategy is suited to your client having regard to age, income, wealth, occupation, training and prior investment experience and any other relevant facts. It is important the explanation is genuine and unique to the client, and not a template response.
Dover’s ground-rules for direct share investments
Some helpful ground-rules include:
- Dover’s AFSL does not allow discretionary managed accounts: this is where the advisor decides what should be bought, held or sold without reference to the client. DMAs are just not allowed
- each share acquisition or disposal must be preceded by a record of further advice in the required form, which includes a reference to the original SOA, a statement that the client’s circumstances have not changed and the theme of the original SOA continues
- no trading of shares. Shares must be bought with the expectation they will be held for the mandatory minimum holding period of ten years
- advisers are strongly counseled to not handle the share sales and purchases themselves, but to instead have their client conduct all transactions. There is no need for an advisor to be involved in the actual transactions (and if the client cannot transact for himself or herself they should not be investing in shares)
- it makes sense to not go outside the top 20 or so ASX companies: it’s virtually impossible be negligent if you follow this rule
- there should be a strong bias to Australian shares paying franked dividends. International shares are riskier and foreign taxes do not generate franking credits, meaning in the long term non-Australian shares are unlikely to do as well as Australian shares
- have regular client meetings to review the portfolio. At least once every 6 months, and more frequently for larger clients. Reviews are more like “fine-tunings” and there should be no radical changes. It is critical to stay in close touch with your clients
- always state that equity investments are long term and need to be assessed over at least a ten year period, being Dover’s minimum holding period
- don’t make aggressive forecasts about expected future returns. Dover is comfortable with sentences like this “It is probable but not certain that this strategy will generate better net returns over a 20 year period than alternative strategies”
- stress other advantages, including control over your money, the absence of intermediaries and knowing where and how your money is invested at all times, and the flexibility to change/reverse the strategy if circumstances or preferences change and
- no more than 12 to 15 shares should be held to avoid averaging. If more shares are held the client will probably be better off with an index fund.
It’s better to not execute transactions for clients
Dover strongly prefers advisors to not execute transactions for clients.
If am adviser does execute a transaction for a client they must make sure:
- there is a current SOA in place which contemplates the transaction, and the adviser’s role in it
- they record their further advice to their client in a written “Record of Further Advice” and
- the client confirms the instruction in writing.
Minimum holding period of ten years
Studies show investors who trade shares, in the sense of buying and selling shares quickly, with a short holding period, with a view to making quick profits, usually do not do so, at least relative to the buy and hold model. Buying and holding blue chip shares for the long term, ie at least ten years, is definitely the better investment strategy for your clients.