The COVID-19 pandemic bump took the value of retail money invested in the Australian sharemarket to above $250 billion, the highest in 20 years, having touched that level briefly in 2007 – the age of margin loans and Babcock & Brown. While the absolute level and share of adults invested in the market has grown, households’ share of ownership in the Australian market is down from about 17 per cent in 2000 to just over 10 per cent, according to Reserve Bank data.
Meanwhile, superannuation funds, which in 2000 owned the same dollar value as households of Australian shares, have tripled the value of holdings to $750 billion – accounting for more than 25 per cent of total ownership.
Tight on trust
What the ASX research, unveiled at the Stockbrokers and Investment Adviser Association event last week, revealed is that Australia is a nation of DIY investors.
Just 26 per cent of adults who do dabble in the market actually hire an adviser to help them with their decisions.
There are two big reasons for the aversion to hiring advisers or brokers. One is cost. The ASX survey showed more than a third of Australians say they would use an adviser if it wasn’t so “expensive”, while the average amount Australians will pay for advice is about $1200 a year – well below the $3710 median fee actually paid.
The median fee is up about 48 per cent since the Hayne royal commission, which relates to the other reason why advisers are being shunned: a lingering mistrust exacerbated by the horror stories that probe.
As has been well documented, the number of financial advisers and stockbrokers is dwindling, largely due to the fallout from the commission and the policy responses. How to reverse this trend is the subject of intense policy debate as more Australians are likely to require advice.
Financial planners have also been culling the tail of clients who have balances that are too small to economically service, while there has been another trend to transition to service only wholesale investors to reduce the burden of red tape.
The outcome is that more Australians are likely to go it alone for longer when managing their investment portfolio.
For many younger investors, social media and online resources are providing the guidance. The rise of the influencer has already prompted regulators to remind these stars of the rules around providing personal and general advice, prompting many to get licensed up.
But in the world of influencers, one stands out. Scott Pape, the author of Barefoot Investor fame, holds remarkable sway over Australians who have chosen to look after their own finances, according to the head of research at Investment Trends, Irene Guiamatsia.
What is it about Pape that resonates with the novice investor? National Australia Bank’s Daley told the SIAA event that Pape is so trusted, particularly by women investors, because he’s personable, relatable and, most of all, prescriptive.
For those of us who don’t want to overthink their personal finances, and want a step-by-step approach, Pape provides a solution, she says.
But why are more Australians not engaging with an adviser? If it’s because of a lack of trust, that’s somewhat paradoxical given those who use an adviser tend to trust them wholeheartedly. If it’s based on cost, that also may be unjustified as one good piece of financial or investment advice can make an extraordinary difference.
“As an old stockbroker myself, putting people into CSL back in 1992 has changed lives,” JBWere’s Andrew Bird told the audience at the SIAA event.
Guiamatsia says her firm’s research has found it might not be cost, but rather the preferred way that the next generation engages that is holding them back.
She says there are three types of clients out there – the DIY investor, the delegator who wants the adviser to take full control, and the largest cohort, the validator, who wants an adviser to screen their decisions.
Whether Australians go it alone from here, one thing is clear. The decisions they make will have profound consequences for their long-term financial wellbeing, perhaps more so than in many a year.
To demonstrate, one of the more compelling pieces of personal finance was provided by a planner who goes by the social media moniker Mr Quick.
High opportunity cost
In February, he posed an intriguing question. If you had $200,000 to invest, what was the highest return you could achieve with the greatest certainty? The answer is north of 10 per cent, but there is a caveat.
The condition is that the individual has a mortgage over the family home. If that’s the case and that person is in the top 45 per cent tax bracket, based on current interest rates, any investment has to return more than 10.5 per cent after tax, to beat paying off your home loan. If one adjusts for risk premiums, that figure might be about 16 per cent.
The point is that there’s now extremely high opportunity cost to doing anything with your money – including adding to your share portfolio – if you’re carrying debt. This will have implications for household balance sheets and equity markets. We’re now undeniably in an environment of higher interest rates, which few Australians have experienced.
And over the past week, the data, rhetoric and policy choices are guiding us to prepare for a cash rate that may very well reach the 5 per cent setting that prevailed in late 1997 when Commonwealth Bank floated.
The one positive is that the 67 per cent of investors surveyed by the ASX who prefer stable guaranteed returns will do better as risk-free rates go up. But financial decisions will surely have to adjust – in some cases significantly. That may very well test our enthusiasm for playing the stock market.