Project Reach Financial Planners

1
April 2003
Non Broker Financial Planners
Creative Catalyst Insights
2
Contents
Page No

• Introduction 3
• Our Financial Planning Landscape 8
• Sample characteristics 9
• Client profiles 21
• Financial Planning Tools and Fee Structure 31
• Sources of research 32
• Administration platforms 41
• Fees 47
• Interface with ASX World 53
• Use of listed investments 54
• Share usage and attitudes 69
• Brokers 92
• Information and education 111
• Summary and Implications 126

3
Introduction

• Background
• Research objectives
• Methodology

4
Background

• In 2000, ASX undertook quantitative research to
  assess the role of FPs in ASX markets but it was
  suspected that much had changed since then.
• New research was commissioned in 2002/3 a two
  stage project
• Stage One Qualitative research
• 24 in-depth interviews (phone and face-to-face)
• Conducted in July/August 2002
• Purpose
• to explore relevant issues prior to quantitative
  research
• to understand appropriate language/framing when
  talking to FP industry
• to address specific qualitative objectives eg
  educational and marketing feedback
• Stage Two Quantitative research
• Detailed findings contained in this report

5
Research objectives

• To understand the extent to which financial
  planners are recommending listed investments to
  clients
• To ascertain the main research sources currently
  used by financial planners and the financial
  planning industry
• To investigate current platforms used by the
  financial planning industry - in general and
  specifically in regard to listed investments
• To measure the key triggers and barriers to
  involvement in regard to shares specifically
• To gauge understanding of currently available
  listed securities and interest in learning more
• To evaluate the current relationship between
  financial planners and brokers
• To gain insight into current and future fee
  structures of financial planners

6
Methodology

• A total of n201 interviews were conducted with
  financial planners and senior managers within the
  financial planning industry.
• Interviews were conducted by telephone (CATI).
• Sample drawn from electronic yellow pages using
  ANSIC codes.
• Fieldwork
• 21st February to 28th March
• Sample/sample control
• Detailed filtering to ensure correct respondents
  including presence of PA holders specific
  requirements re job title/job description size
  tiedness DIY super specialty high net worth
• Specific level of seniority required no support
  staff, paraplanners
• Validation of respondents on key qualification
  questions
• 15 min Questionnaire

7
Our Financial Planning Landscape
8
Industry tenure
Base n201
9
Memberships qualifications
Base n201
10
Client profiles lifestage groups
Base n201

• Most financial planners have a mix of client
  types, including on average
• Around half aged under 50 years of age
• Around one quarter aged over 50 years and not
  retired
• Around one quarter aged over 50 years and retired

11
Client profiles portfolio value

• On average 22 of FP clients have a portfolio
  valued at 500K or more.
• One in 10 (11) have no clients with a portfolio
  valued at 500K or more and a further 53 only
  have 25 or less of clients fitting this
  description.
• Advisers with a client base skewed toward high
  net worth clients are more likely to
• Be located in Sydney or Melbourne - 26 of
  clients have a portfolio worth 500K
• Be small/medium independent advisers - 31
• Specialise in DIY super accounts 51 of the
  clients of DIY super specialists have a portfolio
  worth 500K

Mean 22
High net worth skew
Base n201
12
Client profiles self managed super

• A self managed super skew is defined as having
  31 or more of clients with a self managed super
  or other DIY super fund on average, 15 of
  clients.
• Financial planners with a self managed super skew
  are more likely to be
• Melbourne based (20)
• From a small/medium independent firm (20)
• Logically, strongly skewed toward high net worth
  clients (26)
• Similar levels of SMS clients are seen
  irrespective of industry tenure. This may
  reflect that while self managed super advice can
  be the domain of longer term, established
  relationships, it may also be an area of
  competence for younger/newer advisers with
  specialist knowledge in this area.

Mean 15
Self managed super (SMSF) skew
Base n201
13
Financial Planning Tools Fee Structure
14
Sources of research

• General research use
• Research sources for listed investment products
• Use of IRESS/Web IRESS

15
Research sources for listed products
Base n187 (Use listed products and/or listed
products on recommended list)
16
Research sources for listed products (cont)

• In house research (42) and broker research (41)
  lead the list of research sources for listed
  products.
• In house research is likely to incorporate key
  information from a number of the other sources
  listed
• In terms of broker research, JB Were (15), SSB
  (10) and Macquarie (9) are used by the largest
  numbers
• Information specialists are mentioned by 52.
• VanEyk (35) significantly outperforms
  competitors Morning Star (21), Assirt (19),
  InvestorWeb (9) and Lonsdale (9)
• Twelve percent use another source for listed
  product research the list of others includes
  Mercer, MLC 360 and Aegis
• On average, 2 sources are being used to research
  listed investments. This average is fairly
  consistent across analysis groups. A wide
  variety of combinations are used, with no one
  pair really dominating. These include
• In house research department and Van Eyk 19
• VanEyk and Morning Star 15
• In house research department and broker research
  11
• In house research department and Morning Star 11
• VanEyk and broker research 11

17
Administration platforms

• General platform type usage
• Platforms for listed investments

18
Platform types used for client investments
Base n201
19
Platform used for listed investments
Base n180 (Use platform/s, use listed
investment and/or listed investments included on
recommended list)
20
Platform types used (cont)

• The vast majority, 96, are using an
  administration platform to administer and hold
  client investments (although not necessarily for
  all clients).
• The most popular platform type is a master trust
  (83), followed by self managed super funds
  platforms (58), wraps and IDPSs (57) and then
  separately or individually managed accounts
  (SMAs or IMAs) at 37.
• Multiple platform use is common, with most using
  two or three. The most common combinations are
• Master trust and SMSF 52
• Master trust and wrap 51
• Wrap and SMSF 41
• Use of wraps (70) and SMSF (67) platforms is
  higher among industry newcomers (5 years or less)
  than those who have been in the industry for 11
  years or more (46 and 49 respectively). This
  may reflect new learning/training among those who
  have entered the industry more recently.
• The range of platforms used for listed
  investments is diverse, with ASGARD (11) and BT
  Portfolio Service (10) as the top ranking.
• Of interest 27 of those using a platform and
  with involvement in listed investments do not
  manage their listed investments within any
  platform.

21
Fees

• Current fee methods
• Current versus anticipated future fee methods

22
Current fee methods
Base n201
23
Current fee methods (cont)

• Within the financial planning industry, the most
  popular fee methods are
• Trail commission 69, and the third ranked main
  source 17
• Up front commissions 67, and the first ranked
  main source 29
• Fee for service 65, and the second ranked main
  source 21
• Following this
• Plan preparation fees are used by 55
• Ongoing review fees 52
• Asset based fees 41
• Initial consultation fees 32
• On average, 4 sources of fees are likely to be
  used. The most common combinations are
• Up front and trail commissions 56
• Fee for service and trail commissions 49
• Plan preparation fees and trail commissions 47
• Plan preparation fees and ongoing review fees
  44
• Plan preparation fees and fee for service 44

24
Current fee methods (cont)

• When looking at main source of fees, there is a
  high level of similarity between analysis groups,
  but with some skews of interest
• Fee for service is very much a characteristic of
  small/medium independents (31) rather than large
  institutions (16) or small/medium tied (13)
• Fee for service is also a more common main fee
  method for those with a skew toward high net
  worth clients (34 v 15) while those not
  specialising in this type of client are more
  inclined toward up front fees (35 v 18) and
  trail commissions (22 v 9)
• Melbourne main source is more likely to be asset
  based than Bris/Adel/Perth (16 v 3)

25
Current v future fee methods
Base n201
26
Current v future fee methods (cont)

• Stated future intentions are unlikely to play out
  to the full in the coming two year period. These
  findings are much better used to gain insight
  into the trend in fee methods, rather than the
  magnitude of change.
• It appears that the role of the lesser used fee
  methods (ongoing fees, asset based fees, initial
  consultation fees, plan preparation fees) is
  unlikely to change much in the next two years
• Trail will also continue to be the main source of
  fees for around 2 in 10
• The biggest anticipated change in behaviour is
  likely to be a move
• Away from up front commission (currently the main
  source of fees for 29, anticipated to fall to be
  14 in two years time)
• Toward fee for service (currently the main source
  of fees for 21, anticipated to increase to 36
  in two years time)

27
Interface with ASX World
28
Use of listed investments

• Use of recommended/approved lists
• Recommended/approved list inclusions
• Listed investments used in client portfolios

29
Use of recommended/approved list

• As suggested in the qualitative research stage,
  the vast majority of planners/planning
  organisations (89) make client recommendations
  from recommended or approved list.
• Large institutions (98) have significantly
  higher usage than small/medium independents (78)
  

Base n201
30
Recommended list inclusions
Net Derivatives 46
Net Warrants 44
Net (excl. Listed Property Trust) 78
Net Shares 62
Base n178 (With recommended/approved list)
31
Recommended list inclusions (cont)

• Listed investments are included on the vast
  majority of recommended/approved lists.
• Not surprisingly, the most often included listed
  investment is listed property trusts (88), with
  shares the next ranked inclusion (62)
• Following this
• listed investment companies are included on the
  recommended lists of 46
• warrant products are included in 44 (instalments
  39 and other warrants 29), while other
  derivatives are much less common (13 options and
  7 futures).
• interest rate products such as listed corporate
  bonds and convertible notes are included in
  around 3 in 10 cases (35 and 33 respectively)
• On average, 4 listed investments are included on
  any recommended list. The most common
  combinations are
• Australian shares and LPTs included on 64 of
  recommended lists
• LPTs and LICs included on 48
• Australian shares and LICs included on 40
• LPTs and instalments included on 39
• High Net Worth advisers significantly higher
  mentions of listed corporate bonds or floating
  rate notes (53 v 27), listed investment
  companies (64 v 37) and convertible notes or
  preference shares (48 v 26). It is suggested
  that this additional diversity is required in
  order to satisfy the needs of a wealthier, more
  sophisticated client base.

32
Listed investments used in client portfolios
Net Derivatives 29
Net Warrants 26
Net (excl. Listed Property Trust) 74
Net Shares 65
Base n201
33
Listed investments used (cont)

• Almost 9 in 10 (89) of financial planners use
  some kind of listed investment product in their
  client portfolios.
• Listed property trusts are the most popular
  listed investment for client portfolios used by
  80.
• Following this
• Australian shares are used by 65 and overseas
  shares by 13
• Listed investment companies 31
• Convertible notes/preference shares 27 and
  Listed corporate bonds/floating rate notes 26
• Warrants 26 - instalments 22 and some reported
  usage of other warrant products 16
• Options, futures and exchange traded funds are
  all used in client portfolios by less than 1 in
  10
• On average, 3 or 4 listed products are used, the
  most popular combinations being
• LPTs and Australian shares 66
• Australian shares and LICs 32
• LPTs and LICs - 31
• LPTs and convertible notes/preference shares
  30
• Australian shares and convertible
  notes/preference shares 29
• High Net Worth advisers use an average of 4
  listed investment products in client portfolios.
  Those not specialising in this area use 3. This
  average includes significantly higher use of
• listed corporate bonds or floating rate notes
  (38 v 20)
• listed investment companies (46 v 23)
• convertible notes or preference shares (44 v 19)

34
Share usage and attitudes

• Incidence of share usage
• Sources of client advice
• Proportion of assets invested in shares
• Minimum funds for shares
• Reasons for recommending/not recommending

35
Main source of client advice for shares

• As previously noted, 65 are using shares in
  client portfolios. This includes both active
  management and acquired management ie client came
  to the planner already holding shares.
• Only for one third (32) is the adviser/planner
  the main source of advice for the share
  investments of a client
• For a similar proportion (38) the adviser refers
  the client to a broker where there is an
  established relationship
• However, for 1 in 4 (27), although clients have
  shares in the portfolio being managed by the
  adviser, the main source of advice is via a
  broker relationship outside the control of the
  adviser

Base n130 (Use Australian shares)
36
Main source of client advice (cont)

• An adviser serving as the main source of share
  advice is much more likely in
• Small/medium independent organisations (43)
• Advisers specialising in high net worth clients
  (50)

37
Minimum funds to recommend shares
Average 81,000 (excl. No minimum and DK)
The proportion of respondents that use
shares in client portfolio but dont advise AND
are unable to nominate a minimum.
Base n130 (Use Australian shares)
38
Minimum funds (cont)

• Context - respondents were asked to indicate if
  there was a minimum level of funds under
  management that a client must have before direct
  investment in shares would be recommended.
• More than one-third (36) do not require a
  specific level of funds to consider shares
  appropriate
• A further 18 set a minimum that is quite low
  less than 100,000
• For 35, there are more stringent guidelines
• 21 - Shares only appropriate for clients with
  more than 100,000 funds invested

39
Reasons for recommending shares
Spontaneous
Base n130 (Use Australian shares)
40
Reasons for recommending shares (cont)

• Financial planner involvement in direct shares is
  strongly influenced by client demand
• 46 give this as their reason for recommending
  shares
• Client demand is mentioned at levels two times
  higher than the next ranking reason
• Other key reasons for recommending shares
  include
• Diversification (21)
• Makes sense in a balanced portfolio (12)
• Suits client risk profile (12)
• Accelerated growth (11)

41
Reasons not recommending shares
Base n71 (Do not use Australian shares)
42
Brokers

• Incidence of broker use
• Brokers used
• Broker services used

43
Incidence of broker usage

• Of the total sample
• 81 use and can name their broker/s
• 10 claim to not use a broker
• 9 dont know or are unsure ? note that this
  could be interpreted in two ways 1) dont
  know/unsure if have a broker OR 2) dont
  know/unsure of broker name

Base n201
44
Details of brokers used
Base n180 (Use a broker)
45
Details of brokers used (cont)

• On average, only one or two brokers are being
  used by any planner/organisation.
• It is clear that for the financial planning
  industry a handful of brokers dominate
• 33 are using JB Were including 22 as a main
  broker this corresponds with JB Were also being
  the dominant broker research source
• 27 are using SSB, 15 as a main broker
• 22 are using Macquarie Bank, 11 as a main
  broker
• 11 are using Sanford, 6 as a main broker
• The above are the four main players
• All other brokers are mentioned by 5 or fewer.

46
Broker services used
Base n180 (Use a broker)
47
Broker services used (cont)

• Brokers are being used by the financial planning
  industry for
• Execution and advice 64
• Execution only 23
• Research 59
• Model portfolios 33
• Administration of client share portfolios 27
• Thus, a wide range of services and interestingly,
  only 1 in 4 will use a broker for execution
  without also receiving advice/input from the
  broker.
• On average, 2 brokers services are used with the
  most likely combination being research plus
  execution and advice 52.
• However, model portfolios are also a popular
  broker offering. Of those using broker services
• Model portfolios plus research 32
• Model portfolios plus execution and advice - 31
• The use of broker services is quite uniform
  across analysis groups.

48
Information and education

• Current knowledge levels
• Interest in learning more

49
Knowledge of investment types
84
73
79
71
87
55
66
82
76
16
30
Base n201
50
Knowledge of investment types (cont)

• Direct Australian shares (84) and listed
  property trusts (70) are the only two listed
  investments that a reasonable share of people
  feel they have a good understanding of.
• Beyond this, less than half have a good
  understanding of
• Listed investment companies 45
• Convertible notes/preference shares 33
• Instalments 29
• Options 26
• Direct overseas shares 23
• Warrants (other than instalments) 21
• Listed corporate bonds/floating rate notes 18
• Futures 16
• Exchange traded funds 13
• The general inclination is planners claiming to
  know a little about most listed investments.
• The products that financial planners know least
  about are
• Exchange traded funds
• Direct overseas shares
• Futures
• Listed corporate bonds/floating rate notes
• Warrants (other than instalments)

51
Knowledge of investment types (cont)

• Convertible notes or preference shares
• highest levels of good understanding among
  small/medium independent organisation (46)
  compared to large institutions or small/medium
  tied organisations (26 and 23 respectively)
• those with a high net worth skew are more
  inclined to say they have a good understanding
  (46) compared to those not specialising in high
  net worth clients (27)
• Exchange traded funds
• while the majority of those who have been in the
  industry 11 years or more (54) know nothing
  about exchange traded funds, the majority of
  newer market entrants (5 years or less) know a
  little (57)

52
Interest in learning more about investment
50
59
63
63
54
66
59
55
53
70
63
Base n201
53
Interest in learning more (cont)

• Levels of interest in learning more about listed
  investments are encouragingly high. When the net
  of very interested and somewhat interested
  are considered
• 70 - Direct Australian shares
• 60-69
• listed investment companies 66
• instalments 63
• other warrant products 63
• listed property trusts 63
• 50-59
• options 59
• convertible notes/preference shares 59
• listed corporate bonds/floating rate notes 55
• exchange traded funds 54
• direct overseas shares 53
• futures 50
• Direct Australian shares
• very interested also higher among those with a
  high net worth skew in their client base (56 v
  38)
• Listed corporate bonds/floating rate notes
• very interested higher among those with a high
  net worth skew in their client base (28 v 13)
• Convertible notes/preference shares

54
Interest in learning more (cont)

• Listed investment companies
• very interested higher among those with high
  net worth skew (38) and DIY skew (54) than
  those without (20 and 22 respectively)
• Exchange traded funds
• very interested higher among those with high
  net worth skew (35 v 15)
• Instalments
• very interested higher in Sydney (30) than
  Bris/Adel/Perth (15)

55
Summary and Implications
56
Client profiles

• Portfolio value
• On average, 22 of clients have a portfolio of
  500K or more.
• High Sydney Melbourne small/medium
  independent advisers advisers using Australian
  shares
• Self managed superannuation
• On average, 15 of clients have self managed
  superannuation funds.
• High Melbourne small/medium independent
  FP/Management high net worth

57
Fees

• While up front commission followed by fee for
  service are the current predominant fee methods,
  it is anticipated that in the future there will
  be a strong move from up front commission
  toward fee for service.
• Currently fee for service more likely among
  small/medium independents and high net worth.

58
Listed investment usage and attitude

• The most common listed investments used in client
  portfolios are
• listed property trusts - 80
• Australian shares - 65
• Listed investment companies 31
• Convertible notes/preference shares (hybrids)
  27
• Corporate bonds/floating rate notes 26
• Instalment warrants 22
• The two core reasons for recommending shares in
  client portfolios are
• Client demand/interest (46)
• Diversification (21)
• The main reasons cited for not recommending
  shares are
• Not licensed (55)
• Not in recommended/approved list (11)
• Prefer to refer clients to the experts (11)
• Dont have time to track shares (10)

Financial planner share recommendations likely to
be closely aligned to general investor sentiment
? reactive to client demand rather than proactive
in encouraging client exposure
59
Share advice and brokers

• Among the total sample, 81 are aware of broker/s
  relationships with their organisation. On
  average, those with a broker have one or two
  broker relationships, with the main 4 players
  being
• JB Were
• SSB
• Macquarie Bank
• Sanford
• A variety of broker services are used. These
  are, in priority
• Execution and advice
• Research
• Model portfolios
• Administration of client share portfolios
• Execution only (no advice)

60
Knowledge and interest
Good understanding among only small proportions
for most listed investment products BUT
reasonable to high interest in learning more
61
Knowledge and interest (cont)

• As corroborated in the qualitative research, it
  would appear that financial planners have a good
  understanding of
• a) listed property trusts, and
• b) direct shares
• This knowledge is supported in terms of usage of
  these two product types, while usage and/or
  understanding of other listed investment
  instruments is at a lower level.
• Current use of listed investments generally is
  perhaps predictably higher among those with more
  specialist knowledge ? a skew toward high net
  worth clients and those with more of a focus on
  DIY clients.
• Small/medium independent organisations have a
  higher degree of involvement with high net worth
  clients specialist DIY and those aged 50 years
  plus. Small/medium independent advisers are also
  more likely to be the main source of share advice
  for their clients.

62
Knowledge and interest (cont)

• There is high interest in learning more about all
  listed investment products and qualitative
  research has identified ASX as an appropriate
  provider of information/education services.
• As outlined in the qualitative report this is
  likely to be more beneficial if communicated
  within the FP world constructs rather than
  product focused.