Stock picking beyond most AFAs
Many Authorised Financial Advisers are constructing portfolios with individual stocks and bonds despite not being qualified to do so, a finance academic says.
Thursday, January 10th 2013, 8:00AM 29 Comments
by Niko Kloeten
Massey University senior lecturer Mike Naylor said portfolio construction is outside the scope of regular adviser training and requires at least a degree in business and finance if not a master’s degree.
“I don’t mean they can’t put clients in a portfolio; I mean they can’t construct what’s in the portfolio. They should be using products from suppliers, not choosing individual stocks,” he said.
“They can do investment advice for clients but they can’t make the products; that’s the job of a CFA not a CFP.”
Naylor said “knowing what you don’t know” is part of being a professional and advisers who exceed their level of competence by engaging in stock picking could find themselves in hot water.
“If they work outside areas they are competent in they could be sued by clients and prosecuted by regulators.”
Diversified adviser Vicki Watson agreed there are some advisers out of their depth stock picking but described Naylor’s comment as “a bit too much of a generalisation”.
She said a lack of suitable qualifications or experience isn’t the only issue when it comes to advisers stock picking; for many sole practitioners time is also a constraint.
“I don’t know with very small companies how they have time to do all the research required,” she said.
“Those that have got to do the accounts, the GST, the financial planning, some do insurance as well… I literally don’t know how they get the time to do the job.”
Private Asset Management adviser Brent Sheather said he agreed with Naylor’s view when it came to international stocks, bonds and property.
However, he said in the New Zealand context there are practical difficulties such as the relatively high cost of index funds compared to overseas.
“For example if you said to an adviser you can’t buy individual bonds you’re going to be forced to buy bond funds,” he said.
“Who in their right mind would pay a 1% fee to invest in a quality bond fund that yields 4%?”
Niko Kloeten can be contacted at firstname.lastname@example.org
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