Do You Own Your Investments?

By Jason Fittler

The GFC has certainly shaken up the Financial Services Industry; one of the big shocks to many investors was that they did not have control of their investments. Most found this out too late and were left out of pocket.

This article will walk you through the different ways Financial Advisers hold investments on behalf of clients and give you some tips on what to look out for.

First I will start with how we hold investments for our clients.

Grow Your Wealth has a structure so that firstly our office is financially independent from our Head Office. This means if something happens to our Head office we are not affected.

Next we make sure that all of our client’s investments are held directly in the name of the client. This means that if something was to happen to us, our clients would not be financially worse off.

Call me old fashion but I believe that protection of client’s wealth is the first rule for Financial Advisers.

Under our structure clients hold their shares on CHESS directly in their own name, their name is also recorded at the registries as the beneficial owner. Next any action we take on the client’s investments being a buy, sell or corporate action, the client’s approval needs to be given either in writing or verbally. Diary notes are kept of all emails and conversations to make sure we have a record. This way the client is always informed about what is going on but more importantly own and control their money.

If you think this is the case for all investments and Financial Advisers then you are wrong. Below I will go through a list of different structures in which investments are held.

Managed funds – under this structure you own units in a unit trust, as such your investments are safe if the manager goes broke. Though this is a safe structure it does have a few draw backs. First, all the investment decisions are made by the manager so you have less control. The manager is limited in his scope by the trust deed. It is important that you understand the scope of the trust deed.  Second, if the manager does fail there will be a delay in you being able to get your fund back. You will get your money but there will be a wait while the issues are sorted.

Managed Discretionary Accounts (MDA) – under this arrangement your shares are held in your name on CHESS but the manager has discretion to act on the account without discussing the issue with you. The real issue here is trust - Is the adviser doing the right thing for you? Unfortunately if they are not, you will find out to late. You can move your shares whenever you like but this will normally be after the losses are incurred. The ASIC is not a big fan of these types of arrangements.

Separately Managed Accounts (SMA) – these are similar to MDA but your funds are held on trust by a Responsible Entity (RE). This structure is similar to a managed fund except you have direct choice of the shares you buy and hold. The manager has the ability to buy and sell on your behalf with inside the mandate for the SMA. You have the ability to lock in and hold any shares you do not wish to sell. You will receive ongoing repost on how your portfolio is performing. Overall this structure will mean lower ongoing fees and transaction fees. What you need to look out for is the gearing level of the shares. If the SMA has any sort of gearing approved or the ability to lend the shares I strongly recommend avoiding them. However, if they have a sensible mandate and the manager has a good track record this is a very cost effective way to invest.

Wrap Platforms – these are very similar to managed funds, you do own the investment but you have the same issues as a managed fund. The Wrap platform will provide you with a large choice of funds but as there is now an extra layer of administration therefore your fees are much higher - normally around 2%. These platforms are very good for large investors who do not want to invest directly in the share market and are comfortable to pay the higher fees for the convenience.

Unlisted Investments – these were popular with property trusts and agricultural investments. You do have clear title to the investment but trying to get your money back is always the problem. As they are unlisted you need to find someone to buy your holding. This is not an easy task. I personally do not invest in anything which is unlisted, you have little control and no ability to exit, I would avoid.

There are also a few more very complicated structures but I will leave these alone for now.

I like to keep things simple as such the safest way to invest is directly in your name.  Have your shares on CHESS so you don’t lose track of them and make sure your adviser needs to contact you before making any changes to your portfolio. This give you control and portability, making your investment safe and you know you cannot suffer financial loss due to the mistakes of another.

Do you have any questions on the above? Please give me a call I am happy to discuss.  Call (07) 4771 4577.