The Markets Jaques Magliolo
WILL investors never learn that an extra percentage point is not worth the risk of losing all one’s hard earned savings? The problem, say the experts, is that most South African investors do not understand or believe they can protect their investment better than anyone else can.
“Stockbrokers, analysts and portfolio managers do not have the same vested interest as the investor,” says the head of research of a stockbroking firm. “Experts use their ability and skills to manage a portfolio efficiently, but cannot and never will provide a guarantee of success.”
So how do investors protect themselves against unscrupulous and unethical financial advisers? In fact, who are these financial con artists and how can investors identify them?
A good starting point is not to be fooled into believing that someone is an expert because they are proficient in the use of financial and technical jargon. Understanding finance and the ability to accurately buy and sell shares is very different
Being impressed by someone wearing a power suit, who is using a number of visually pleasing computer graphics to illustrate expertise, is also a danger which can leave the unsuspecting investor with a worthless or rapidly depreciating share portfolio.
More importantly, though, is for investors to be aware that not all portfolio managers are skilled in the profession of share management. In 1991 I joined a small portfolio firm in Cape Town called Prospur Portfolio Managers. Before signing the standard contract, MD Peter du Toit assured me that: “Your task will be to acquire new portfolios and to manage them.”
But I quickly discovered that “acquire and manage” meant to only find new business. The problem lay in salary being inextricably linked to the number of clients I brought into the firm and, more importantly, to the value of their portfolios. In effect, to earn about R5 000 a month, I would have to sign new monthly clients with share portfolios amounting to over R1-million.
These portfolio managers have no incentive in managing the portfolios once the client had handed over control of his shares. Not surprisingly, the firm has since being acquired by Dolphin Financial Services.
Quick access to information is always a trade mark of such firms. A registered portfolio firm can legally buy the names, addresses and telephone numbers of any shareholder registered in South Africa. In addition to shareholder registers, stockbrokers send portfolio management firms all their research in the hope that trading would be conducted through them and they would thus obtain brokerage commissions.
For instance, if ABC Portfolio managers received six stockbrokers’ analytical reports recommending that investors buy South African Breweries shares at present prices, the firm could easily use this information to advise existing clients to buy this share.
But they can also use this information when approaching new shareholders. An example would be to buy the register of all SAB shareholders and send a selected number of these investors a summary of the stockbrokers’ SAB analysis and, as claimed in a Prospur letter, “we can do similar analysis on all your shares”. The next step is to wait a reasonable period and then to contact the client and, as salesmen do so well, persuade the investor to “come and see our operations. It will cost you nothing”.
There is an understanding among these managers that, once a client is impressed by the individual’s stock market knowledge (which he obtained from stockbrokers’ research) and the firm’s computer setup, it is only a matter of time before the investor hands over his total share portfolio.
Not all portfolio firms use this method of operation and it would be wise for investors to scrutinise them before selecting a portfolio manager.
The main areas to investigate, before choosing someone to manage a portfolio, are not complicated. Firstly, always keep share certificates in your name. In this manner the portfolio manager cannot sell your shares.
Secondly, investigate the company’s reputation in the marketplace. Telephone stockbrokers and major financial institutions and ask whether the company you are considering has a proven track record.
Thirdly, find out who the company’s major shareholders are. If the firm’s shareholders are major institutions, banks or listed companies, there is less likelihood of portfolio managers being salesmen.