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Is there a place for advisers in a crypto world? Editor's Note

Emma Rapaport  |  13 Nov 2021Text size  Decrease  Increase  |  
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A Wall Street Journal article made the rounds on social media this week. It details how ultra-wealthy twenty-somethings investors are shunning financial advice in favour of do-it-yourself investment platforms. They say advisers are failing to articulate what value they bring when it comes to investing in alternative asset classes like pre-IPO companies and cryptocurrencies.

"It’s easy to manage $500,000, $1 million yourself," Michael Martocci, a 26-year-old start-up founder told the Journal. He funnels 90% of his assets into cryptocurrencies and uses Robinhood to check his stocks.

It doesn't surprise me that traditional financial advisers hold limited appeal for self-directed crypto investors. Try pitching CPI+5% to someone riding Dogelon Mars to the moon – a memecoin named after Elon Musk which shot up 3,780% last month. Having met a lot of financial advisers, I can't even imagine them in a room together. It would make for a good comedy sketch. But there's more than a generational divide going on here.

Traditional advice businesses in Australia just aren't set up to cater for this type of investor. The business model seeks to grow funds under advice - engage wealthy middle-aged investors, get their super accounts on the books, invest them into stock and bond funds via a wrap platform, and provide ongoing portfolio management. Fees are charged on an 'assets under management' basis, meaning the more a client has, the better. That's not to say advisers aren't knowledgeable about topics like crypto or early-stage companies. But there's less value in handling a client with complex investment needs that don't fit the mould.

There's also an issue of regulation. Cryptocurrencies aren't recognised by ASIC as a financial product, and as such, advisers can't formally provide a recommendation (and be insured). Their hands are tied. They can talk about the asset class in general terms, but you'd be hard-pressed to find an adviser willing to recommend a shitcoin. For that, you need to go on TikTok.

While I do believe these young, hot-shot investors are out there, I do wish the Journal featured some young cashed-up DIYers doing sane things with their money. A line in the piece about a 33-year year putting "$1 million into a hedge fund run by his business partner's neighbour" smacked of privilege. James Gerrard, a Sydney-based financial adviser who caters for millennials, says the demand for advice this year from "wealthy millennials" has been huge. This type of investor makes up just 10% of his business, but he says half of all new clients over the last year are new investors. Many of them have received massive windfalls from crypto-investments, the property boom, selling out of their own early-stage business or cashing in on employee share options from tech success stories like Atlassian or Salesforce. These investors are looking for an advice partner, not a parent.

Gerrard says demonstrating his value proposition to younger clients is a totally different ball game. First, they demand a 'fee for service' based fee structure, stripping away conflicts inherent in percentage-based fees. They’re also seek more holistic advice - things like guidance on asset structuring and protection, cash flow management under flexible working arrangements and vetting and providing access to early-stage Australian businesses. Tax is another big one, particularly as investors start to take gains from their crypto and NFT investments.

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As was noted in the article, among the established advice community, there's a sense that this is just the way things go. Clients seek out advice once they move into the retirement phase and leave high-risk strategies behind them. However, there is a very real risk for the industry if this anti-advice attitude persists and wealth is achieved at much younger ages, particularly as the next wave of advisers are there to engage with clients early. Gerrard says more advisers are beginning to shift their practices in favour of holistic, goals-based advice, but they are still in the minority.

I write for Morningstar, a company that championed the rights of DIY investors information typically reserved for professional investors 35-years ago, so I'm not about to say that all investors need to be guided by an adviser. However, it's clear the game has changed since then. Everyday investors have access to investment products and asset classes far beyond what was ever imagined in the mid-80s. The prohibitive cost of regulated financial advice makes it beyond the reach of many Australians, let alone first-time investors. But for those that can afford it, the right adviser can play an important role in challenging worldviews and preventing investors from making rash decisions.

******

Rate hike frenzy

We got a clear signal this week that US inflation is here and increasing much faster than many predicted. As Lauren Solberg writes, the Consumer Price Index rose to 6.2% in October year-on-year, the largest such increase since 1990. The latest boost extends a months-long trend and added to the chatter about the surprising scope and staying power of rising prices. Energy, shelter, food and vehicles drove the bulk of the increase. Atlanta residents are experiencing the worst inflation with October prices up 7.9% from a year ago. Can you imagine that? Going to the gas station and prices being 8% more expensive than last year? Anyone buying petrol in Sydney lately can.

While local inflation numbers have been relatively steady, hovering around 3%, Australian banks are already responding writes Lewis Jackson, hiking fixed rates on mortgage products. Australia's largest bank now has no advertised home loan rates under 2% for the first time in almost a year, having raised 1-to 5-year fixed rates twice over the last month. As RateCity.com.au research director Sally Tindall rightly says, “anyone who is in the process of fixing their rate with Australia’s largest bank and didn’t pay a rate lock fee, will be kicking themselves".

The implications of this rate hike frenzy will play out over the next few months but we can make some educated guesses. Borrowers are already rushing to lock in low rates amid expectations of an RBA rate rise. For those on the sidelines, cheap money and FOMO incentivised people to get into the property market via massive loans. Higher rates may make them think twice.

For those worried rising rates will sink highly indebted homeowners (and the property market), it's worth remembering that borrowers are assessed at their capacity to pay off a much higher rate. However, it could leave to behavioural spending changes. Swapping rent for interest payments last year changed how I juggled my finances, but not that much. If interest rates got back to a more reasonable level, as a first homeowner, I might have to come back to reality on what I can afford. Economists expect the large debt carried by Australians means the RBA won't have to increase the cash rate much to slow growth.

Inflation affects investors differently. For those with concerns, Morningstar's chief market strategist Dave Sekera highlights six inflation-tough stocks for global investors.

A good start

Two weeks ago I wrote about the letters sent to 1 million Australians informing them their fund was underperforming. I anticipated that member rotation would be slow as 1. who opens mail anymore and 2. funds are including explanations for their underperformance which will satisfy most. This week we finally got some numbers.

The effort seems to be working, but more needs to be done. Data from the regulator shows 7% of people in underperforming funds have closed their accounts since the performance test was released. Analysis by Super Consumers Australia found this is more than double the rate of closures for these same funds compared to last year. However, director Xavier O'Halloran simiarly points out some of the letters read like the fund was "up for a reward, rather than revealing they'd just failed a basic fitness test". He also called out references to industry awards, self-serving performance metrics, and offers like discounts to theme parks. The better news is the underperforming funds are being spurred into action - merging with other funds, overhauling their investment management teams and dropping fees.

This week, Firstlinks guest editor Harry Chemay looks at why Australia has slipped down the global super ranks.

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is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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