Please read the attached e-mail chain. It covers some compliance Q & As and some practice value creating strategies. It helps explain why Dover is big on direct shares rather than managed funds. Why pass your future profits to an institution? Why not do the work and get the fees yourself?
Sometimes sharing real compliance Q & As are the best way to help cultivate our compliance culture. And, separately, you may be interested in hearing about a business development strategy that has worked well for one adviser.
This is an almost unedited exchange between an adviser and me on the need to document client requests to act without advice. She also sets out some extra thoughts on what has made the direct shares part of her practice so successful.
To clarify: Dover encourages direct share strategies, focussing on blue chip Australian shares owned through tax efficient structures, with a ten year plus time horizon. Regular meetings to discuss recalibrations. Dover prefers clients to execute the transactions… but accepts that some advisers will execute the transactions. SOAs and ROAs must record every transaction.
Share trading type activities are not allowed. The minimum holding period must be expressed to be ten years. (As per the Client Protection Policy). Obviously this does not mean all shares must be held for at least ten years… but it does mean they have to be viewed as long term investments and you have to have good reasons to change tack.
Individually managed accounts are not permitted under our licence and are not covered by insurance. An adviser ran an MDA in 2008 and he ended up being banned by ASIC. It’s that serious an offence.
In summary, direct shares in tax efficient structures are a great way to build a sustainable and valuable practice, particularly with drastic commission cuts kicking in between 1 July 2016 and 1 July 2018.
The email read:
I really enjoyed the PD days last week and the different approaches taken by Dover than what I am used to on some issues.
In reading through Dover’s website, I read the section titled “Securities Trading On Behalf of Clients” wherein it seems to expressly forbid a situation that was allowed at Guardian and other dealer groups I have been at. I have no intention of rocking the boat, so to speak, if this is how it is. In this email I’ll outline the circumstances that I have encountered, how I have dealt with them and request direction going forward.
I have no interest in trading shares for my clients at all however very occasionally a client will ask me to purchase a stock through their Macquarie Online Trading account that I operate and, where it isn’t ASX 200 and was outside my authority under my Guardian licence, Guardian would accept the situation where the client signed a no advice waiver. The same process can be followed where the client wanted the stock purchased through their superannuation platforms where the stock is ASX 200 but not recommended by me..
I’ve also used no advice waivers where clients have requested that I buy a stock for their SMSF immediately where no advice was given.
These situations are rare but often reflect the financial literacy of the client rather than any trading or gambling mentality that they may be assumed to have. And none are driven or endorsed by me.
Transactions made in the past year are:
- Pilbara Minerals (PLS) – Requested by a client for his SMSF specifically as he had a strong belief and some knowledge of the future demand for lithium and Pilbara’s place in this market. He bought the stock at 14 cents and 26 cents. Now 50 cents last night.
- FAR Ltd (FAR) – FAR is a junior oil explorer who have come across the largest and most exciting oil find of the past thirty years off Senegal and have farmed out chunks of their holdings to Cairns Energy and Conoco Phillips to cover drilling and costs in the run up to production. I and a number of my friends were alerted to FAR’s finds a few years ago and some of us invested in the stock at 3 cents based upon information that was in the marketplace but strengthened by a geophysicist who stayed for some R & R at our friends resort in Vietnam. Some of these investors are also clients of mine who have requested that I buy the stock on their accounts or within their superannuation. It is ASX300 about to become ASX300. Currently valued at 9.7 cents.
- Pacific Brands (PBG) – Pacific Brand’s push into Asian markets was common knowledge to a couple of my clients who deal with them commercially. It was a stock I had amongst my core recommendations around four years ago before I moved clients out as its balance sheet became a bit distressed. This move was before a significant collapse in the share price and based solely on what was appearing to be declining markets and was fortuitous. In the past five years, I’ve only made three changes to my core stocks I use. The recent push to buy back into PBG by a couple of clients saw them discuss the stock with golf friends (also clients) who also bought the stock at around 70 cents. It’s now 94 cents after just paying a 1.5 cent dividend.
These are not situations I promote and I actually tried hard to talk the Pilbara guy out of proceeding with his purchases. Arguing blindly against buying such a stock is a very dangerous practice I’ve discovered over the years as invariably it backfires on the adviser. Almost in the same proportion to the bad adviser who recommends penny-dreadfuls. But all were proceeded with on a no advice basis with written instructions.
With the other stocks (FAR & PBG), these are situations that can occur and multiply through mutual friendship groups (mainly golf friends) whose work I do. Saying no to these requests would see me lose clients over time.
Am I able to make “no advice” purchases on the odd occasions they arise in these situations if I get no advice waivers signed? And if not, how do Dover advisers get around these situations which at best would create bad blood between me and the client if I wasn’t to assist him or her? Especially where the stock purchase is successful.
Happy to comply with whatever direction comes back here.
It was an expensive day: too many goats!
One comment: for the life of me I cannot see why advisers want to handle their client’s share portfolios. It’s just a big risk… I often wonder how many clients they lose because of this model. But anyway. Some advisers do this. Its allowed under our licence, but we do not allow managed discretionary accounts: the last Dover adviser who did this back in 2008 got banned. BTW his clients loved him until the market crashed… then they ran to the solicitors… and they stopped loving him. It cost the adviser over $200,000 in damages. He was banned for life by ASIC.
We much prefer clients execute the buy and sell transactions themselves, with the adviser coaching/recommending changes at regular 6 month meetings. I do not see why advisers want access to client share trading accounts, or the responsibilities and risks that come with that. Clients react better when they know advisers cannot access their stuff… Helps build trust and confidence.
But some advisers do this. I think they would have more clients, more net cash flow and more CGT free goodwill value if they did not.
You need to have an SOA and a record of further advice for every subsequent transaction. And don’t go near conduct like a managed discretionary account where you decide what happens, not the client.
Be aware of our ten year holding rule. It’s a very protective rule. Every share or property recommendation has to be for at least ten years.
Don’t forget “what structure?”. It can add 2 to 3% extra return a year due to tax efficiencies and this reduces risk (ie the risk of a negative net after tax return) which protects you further.
We would be happy to proceed with the methods you have developed here, ie a no advice purchase or a record of further advice saying “you have asked me to do this. I did not recommend it.”, which is the same thing really.
I hope this is a help.
Thanks for that.
I have handled share portfolios and record keeping for my clients for over twenty five years and commenced doing so as I saw it (record keeping) as the biggest barrier to entry for many clients to invest in direct equities. And it has borne fruit in that I have loyal clients who still hold the original shares they bought in the early to mid-nineties. Technology has made the management of corporate actions easier over the journey and I charge a fixed fee for this type of service. Any advice on corporate actions is additional as these RoAs aren’t included in the fixed fees. But having this relationship has seen the natural link to their superannuation as the baby boomers amongst them now need an advice solution in their fifties and early sixties.
I can honestly say that I have never lost a client due to any sort of inefficiencies here and have actually saved the bacon of some who needed funds for business or private purchases who had significant portfolios that they would not otherwise have had to fall back on. ANZ @ $4…CSL @ $2…WPL @ $9.50….and many more all producing great dividends over the journey.
That said, I have no interest at all in trading for my clients and make this clear from their first meetings. I charge fixed fees for the majority of my ongoing clients which covers the cost of record keeping, monthly reports and any additional SoAs or RoAs for additional share purchases as funds accumulate. I don’t charge any additional brokerage above Macquarie’s minimums when buying their initial shares or any recommended top ups during the year. I do charge for advices on new strategies or significant new funds that are to be invested.
Whilst I have a number with $1.5-2.5 million under management, my sweet spot client is that person or family with between $300-$700K. I offer them the choice of SMSFs or Asgard’s eWrap platforms and use different model portfolios for different risk profiles. I don’t use a proliferation of stocks but rather keep a core of nine stocks, all income producing blue chips that make up around 30% of my portfolios. I top up the Australian equity component with either managed funds or ETFs. Likewise, other asset classes are a combination of managed funds and ETFs. This client will pay me typically $330 per month including GST. In return they get monthly emailed reports with a specific drilling down into their equity holdings and comment. I don’t provide advice in the emails but a commentary on what has gone on economically in the past month with emphasis on the particular levers that seem to be driving particular markets. I’ve been doing this for three years and have seen the calming effect it has on clients who, during their first four or five reports, were prepared to bail due to volatility. Talking them through the volatility in the early days is the key, and the combination of this communication and visible equities (as opposed to just nebulous managed funds) actually serves to connect them to their superannuation and see it as an asset that they want to grow.
I have had a number of adviser colleagues turn their noses up at my advice model and stick to their “1% fee of funds under management” model and do nothing for it other than see the client for their annual review. I know whose business will be around in five years’ time. I have just on eighty clients on this model now and my target is two hundred before I need to put on another adviser. My para planner’s package is around $90K. I pay a peppercorn rent within the walls of the accounting practice I sold three years ago and I have negligible other costs. And I really enjoy what I do.
So as I see it, Dover’s model of ensuring compliance is the final piece in my puzzle where I can provide quality advice and service, whilst at the same time building a robust business model that will allow me to retire when I want (probably post 65) comfortably.
Sorry to waffle but I thought you may like to have an idea of my business model and why I do what I do.