In today’s increasingly sophisticated investment environment, it is more important than ever for financial advisers to keep up with new types of investment products on the market.
Just as doctors need to keep up with new cures for diseases, financial advisers must be up to scratch with the latest developments in the financial services industry or they run the risk of shortchanging their clients.
Financial advisers are now working with far more sophisticated products and more demanding clients than their predecessors of 10 years ago. Investors generally, and high-net worth investors in particular, are now better educated, possess a much greater understanding of the financial services industry and are more sophisticated in terms of their investments.
Product developers are bringing more sophisticated products on to the market and are spending vast amounts of money advertising these products to the public.
In this environment, it is no longer good enough for advisers to take the easy option of simply putting clients into a managed fund. Advisers must be able to offer added value, and this means understanding each new product which comes on to the market and knowing where it fits into the client’s portfolio.
Largely as a result of the recent flux of stockmarket floats, there are now 5.5 million shareholders in Australia and, according to statistics from the Australian Stock Exchange, 32.4 per cent of these shareholders are direct investors.
Some investors are now confident enough to look at an advertisement for an investment product, obtain a prospectus and make a decision on their own about whether and how much to invest. Most investors, however, will go back to their financial adviser for a comforting second opinion.
What should be of real concern to advisers is that, in many cases, it is now the client rather than the adviser who is driving the choice of investment product. For example, of the applications for the first tranche of Challenger’s recently released PIES warrants, which we launched last month in conjunction with Merrill Lynch, 11.9 per cent have come through brokers, 29.7 per cent through financial planners and 58.4 per cent direct.
Past experience with previous Challenger products such as the Endowment Warrants shows, however, that as advisers become more familiar with the PIES warrants, the percentage of direct applications should drop back to around 10 per cent.
This strongly suggests that if advisers are to capture a larger percentage of today’s educated investors, they need to become quicker off the mark when it comes to understanding and recommending new products.
It was not until the 1980s that banks began lending for investment properties and not until the 1990s that they began lending to facilitate investment in shares.
During the 1990s, a range of new retail geared and leveraged products hit the market including margin lending, protected loans and warrants, all of which can add value to a client’s portfolio.
Margin lending, which offers the opportunity to leverage into the sharemarket but at the price of full recourse lending, was the first of these new products to hit the market. Next out were protected loans, which again offer leverage into the sharemarket but limit capital losses.
In January 1996, Challenger introduced warrants to the investing public with the launch of the Endowment Warrant, which was the first derivative product to provide investors with long term leverage into the sharemarket. Today, there are 79 Endowment Warrants listed on the ASX.
According to statistics from the ASX, the value of the warrants market in Australia has grown from just over $990 million in 1996 to $3.3 billion in 1998.
To understand the impact that derivatives have had on the market one simply has to look at the markets tables in the Financial Review to see how these pages have grown to accommodate derivatives.
Variations of the original derivative products are coming out all the time, and it is vital for advisers to keep up with these variations as many have been developed to meet the needs of specific investors or economic environments.
Depending on risk profile and expectations on retirement, each client requires a different combination of products to make up their overall portfolio, and it is up to advisers to remain constantly on the lookout for products which fit these needs.
<I>Sandy Morgan is the Associate Director of Challenger International.
