Introduction – Why Dover Advisers Should Recommend Direct Shares
In essence, there are three types of asset in which a client can invest: cash, property or shares. Of these, property and shares are known as ‘growth assets.’
There are thousands of avenues by which a client’s money can find its way into the share market. The BT Approved Managed Funds list for margin lending – which Dover uses as the base of its approved products list – is 14 pages long. But these many avenues all lead to the same place, because in Australia there is really only one share market in which the clients of financial advisers are likely to want to invest in. This is the Australian Securities Exchange, or ASX. There are other smaller markets such as the National Stock Exchange, but client investment money does not typically find its way to these markets.
As a general proposition, investing in the share market makes sense. History shows that the average market return has been a good one. In the 20 years to December 2014, the average annual return on the ASX was 9.4%. This was slightly less than the average annual return on residential property of 9.8%. Both of these are good returns well in advance of the inflation rate over the same period.
9.4% is, of course, the average return. But, in the share market, making use of average return figures is fine. This is because, while there will be variation around the mean, both theory and experience tell us that, over time, most investors into the share market will achieve an investment return around the long-term market average.
At least, they will before fees are taken into account. Fees can and do have a huge impact on the eventual return experienced by investors in the share market.
Historically, investment management fees have been unavoidable, as many retail investors have needed to use fund managers to gain easy access to the market. Not any more. These days, technology is sufficiently-developed that it is usually easier for clients to invest directly than it is to make use of a fund manager. And, as you will see in these pages, it is far cheaper for the client to enter the market directly, as well.
This means, of course, that the client saves on fees that do not need to be paid to the fund manager. This increases their return – which is only fair, given that it has always been the client who takes all of the risk. What’s more, avoiding the fund manager also creates the need for greater reliance on the adviser, which allows that adviser to legitimately increase his or her fees.
Again, this is only fair, as it has always been the adviser who does all of the work.
Put simply, avoiding a fund manager allows the fees that are saved to be distributed between the client and the adviser. We call this the financial advice ‘sweet spot,’ which has no room for the institutional fund manager:
What this section of the Dover Way is about
There are two broad ways to invest directly into the share market. The first is to buy shares in a portfolio of companies constructed by or for the investor. The second is to buy shares in an Exchange Traded Fund or a Listed Investment Company which has constructed its own portfolio. (The difference between LICs and ETFs is explained here).
This module will show advisers how to make use of either or both of these options. Specifically, it will give advisers:
- An understanding of why investing directly makes sense;
- An understanding of the benefit of using the market average as an easily-achievable benchmark;
- A solid knowledge of how share market investing works; and
- the knowledge and skills to assist their clients to directly invest in representative share market assets.