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27SHARES INVESTMENT PLANNING: DIFFICULTIES FOR RETAIL
INVESTORS IN RUSSIA
ПЛАНИРОВАНИЕ ИНВЕСТИЦИЙ В АКЦИИ: ТРУДНОСТИ ДЛЯ ЧАСТНЫХ ИНВЕСТОРОВ В РОССИИ
УДК-34
DOI: 10.24411/2658-4964-2020-10017 Lipitskaya Elizaveta Vladimirovna, Student, Financial University under the Government of the Russian Federation, Russia, Moscow Липицкая Елизавета Владимировна, lipickaya1@icloud.com
Annotation
The subject of this article is the difficulties that retail (private) investors face when planning investments in shares. There are certain features in Russian legislation and practice that affect the investment planning process, such as the prevalence and purpose of a particular type of shares. The conducted analysis of the recent research publications and statistics has shown that the main difficulties are the inaccessibility of information, unwillingness to plan long-term investments, and insufficient development of professional assistance from investment advisors.
Аннотация
Предметом данной статьи являются трудности, с которыми сталкиваются частные инвесторы при планировании инвестиций в акции. В российском законодательстве и практике имеются особенности, влияющие на процесс планирования инвестиций, такие как распространенность и назначение того или иного вида акций. Проведенный анализ последних научных публикаций и статистических данных показал, что основными трудностями являются недоступность информации, нежелание планировать долгосрочные инвестиции, а также недостаточное развитие института инвестиционных советников.
Keywords: investment planning, shares, retail investor, joint-stock company, investment advisor.
Ключевые слова: инвестиционное планирование, акции, частный инвестор, акционерное общество, инвестиционный консультант.
There is a well-known saying in business that if you fail to plan you plan to fail. However, for retail investors (members of the public who make investments [1]; individual investors that invest their own money for their own benefit, as opposite to the institutional investors) planning of securities investments is not an easy matter.
It is not just choosing a few stocks to put money in but defining timelines and assets, assessing risks, searching information and so on. There are a few difficulties, especially in Russia.
Before investing in shares a future investor needs to consider some important facts. The first one is financial status, how much money is affordable to invest. This can be done by drawing up a budget to evaluate monthly disposable income after all of the expenses and emergency savings (if there are any). The next step is to define goals: corporate control over some private company, or regular medium income, or short-term large income. It is also important to determine the risk tolerance. Riskier investments have the potential for significant returns - but also major losses. Usually the focus of retail investors is shifted towards the liquidity (they would like their investments to be easily withdrawn in the case of emergency) and lower risks (because of the absence of a back-up plan) at the cost of potential for high profit [2, p.94].
Securities investment in one of the most popular type of investments. It is a negotiable financial instrument that holds monetary value and can be traded between parties. The two most common types of securities are equity securities and debt securities. A debt security represents money that is borrowed and must be repaid. Debt securities like government and corporate bonds generally entitle their holder to the regular payment of interest (regardless of the issuer's performance), along with any other stipulated contractual rights (which do not include voting rights). They are typically issued for a fixed term. An equity security represents ownership in an entity (a company, partnership or trust). In Russia the common equity securities are shares.
According to Russian legislation [3], there are several types of shares. If the goal is earning a permanent income, retail investors can purchase preferred shares. This type of shares grants the right to receive dividends before other shareholders, but does not grant voting rights. For an investor who wants to gain corporate control over the company, become a CEO or a member of the board of directors and earn income (through dividends if the company is successful and there is a net profit that can be distributed among shareholders; or through rewards and bonuses for chief officers), ordinary shares are the best decision. This type of shares grants voting rights, the right to nominate candidates to the company's management bodies, the right to receive dividends, etc.
Moreover, there are two types of joint-stock companies in Russia. Shares of public joint-stock companies (formerly known as open joint-stock companies) are traded on the stock exchanges. Preferred shares or a small number of ordinary shares are the shares that are usually traded there. There is no chance of gaining corporate control over any company. Buyers of such shares can only get some income: through
dividends or by reselling shares at a higher price. And it is important to remember that it is best to diversify the portfolio in order to maximize the income and stability. To build a diversified portfolio, investors need to look for securities that have not historically moved in the same direction at the same time. That way, if one portion of the portfolio is in decline, other portions are growing or maintaining wealth. Since retail investors do not have the necessary skills, qualifications and access to stock exchanges, they resort to the help of brokers and dealers.
Shares of non-public joint-stock companies (formerly known as closed joint-stock companies) should not be distributed among an open circle of persons. These companies usually do not have many shareholders. By purchasing a majority stake in ordinary shares of a non-public joint-stock company, investor actually becomes the owner of the business. The investor decides the future of the company and receives many benefits from its activities. To purchase shares there is no need to seek help from traders, but interaction with a special company that keeps records of shareholders (the registrar) is mandatory.
In the process of planning investments in securities, investors usually conduct investment research. Some websites provide investors with a vast array of free stock information such as company financial statements, key earnings ratios, and recent company news. This is mainly true only for public joint-stock companies, which are required by law to disclose information about themselves. However, in Russia there are several times fewer public joint-stock companies than non-public joint-stock companies (fig. 1). Before purchasing shares of non-public joint-stock companies, an investor can only find out certain financial indicators. In addition, retail investor can try to find out whether there is a corporate conflict in the company based on the judicial practice where this company was mentioned. However, it is very difficult to get information about whether there is a pre-emptive right of other shareholders to buy available shares, or additional obligations for shareholders, or corporate agreement between shareholders that affects corporate control, etc. This data, however, is only useful if the investor is knowledgeable in what the information is conveying. If the investor does not have any experience in investing, or does not know what to invest in, it is better to turn to an investment advisor.
Fig. 1
Number of joint-stock companies in Russia [4]
non-public joint-stock companies closed joint-stock companies public joint-stock companies open joint-stock companies
28 232 24 361 957 9 465
Total: 52 593 Total: 10 422
An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return for a fee. The most accurate description of the term is given in U.S. Investment Advisers Act of 1940 (Advisers Act). According to this act, an investment advisor is any person or firm that for compensation is engaged in the business of providing advice to others or issuing reports or analyses regarding securities. Factors used to evaluate whether a person is engaged in business are: 1) whether the person holds himself out as an investment advisor; 2) whether the person receives compensation that represents a clearly definable charge for providing investment advice; and 3) the frequency and specificity of the investment recommendations provided [5].
The investment recommendation should include a characteristic of the security and derivative financial instrument, a description of planned transactions and risks. Investment recommendation is personalized; it should take into account the client's investment profile, which includes information on the profitability of transactions with financial instruments on which the client expects, the period of time for which such profitability is determined, as well as the risk of losses from such transactions acceptable to the client.
The relationship between investment advisor and investor is fiduciary, so the investor needs to choose the advisor wisely: get opinions from other clients of the advisor; check the advisor's background and experience, if there is any disciplinary action the advisor has received and so on. Normally, an investment advisor is subject to increased requirements, such as the need to register as an investment advisor with a state body (in almost all countries) and to be a member of a self-regulatory organization (for example, in Russia). However, it should be remembered that this is not a guarantee of success. Investment advisor is responsible for violation of the requirements of the law and obligations under the contract with a client, but not for his investment recommendations. That is, it will not be possible to hold the advisor accountable for the fact that the asset recommended by him fell in price.
Investment advisors are common in all countries. In Russia, investment advisors have also existed for a long time, but their activities, rights and obligations were legislated only at the end of 2017. In this regard, they are not as popular as in other countries. However, this is not a serious problem for this field of activity, because usually investment advisors in Russia are banks and other large financial companies [6]. Investment consulting is not their main line of business, but they have a lot of experience and enough resources (including information) to give high-quality advice.
An inexperienced retail investor who wants to buy shares of public joint-stock companies can directly turn to a «full-service» broker who does not only place buy
and sell orders of stock for their clients but offer investor education and research, personalized information about financial products and services. However, there are some differences between brokers and investment advisors. Investment advisors have a fiduciary duty to their clients that requires them to put their clients' interests ahead of their own. Advisors who have a conflict of interest must fully disclose the conflict or eliminate it. Moreover, investment advisors often charge an annual fee based on the assets under their management regardless of the number of transactions. By contrast, brokers get paid a commission from the products they sell and do not charge a separate fee for consulting services. Brokers are held to what is referred to as a suitability standard (advice must be suitable for the client's needs at that particular time) rather than a fiduciary standard, so their obligations to disclose information and behave in client's interests are less strict. [7]
Thus, there are several difficulties for retail investors in Russia in the investment planning process. First, there is the lack of any back-up plan, and therefore the lack of available funds that could be invested in the long term. Secondly, it is difficult to obtain enough information about a joint-stock company and its shares. Finally, in Russia the institution of investment advisors is not sufficiently developed, so investors have to act on their own. All this makes shares a high-risk investment.
REFERENCES
1. Cambridge Business English Dictionary. Available at: https://dictionary.cambridge.org/dictionary/english/retail-investor (accessed: 13.04.2020).
2. Konar A. Direct vs Indirect Investments: The Implications of a Choice for a Short-Term Private Investor. Bulletin of the South Ural State University. Ser. Economics and Management, 2019, vol. 13, no. 1, pp. 93-97.
3. Federal Law 208-FZ, dated 26 Dec. 1995 (changed from 07 Apr. 2020), "On joint-stock companies".
4. Statistics on state registration (information from the Federal tax service). Available at: URL: https://www.nalog.ru Accessed: 13.04.2020).
5. Regulation of Investment Advisers by the U.S. Securities and Exchange Commission (2013). Available at: https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf Accessed: 13.02.2020).
6. Register of investment advisors (information from the Bank of Russia). Available at: http://www.cbr.ru Accessed: 13.04.2020).
7. Stanley Morgan (2020). Understanding Your Brokerage and Investment Advisory Relationships. Available at: https://www.morganstanley.com/wealth-
relationshipwithms/pdfs/understandingyourrelationship.pdf Accessed:
13.04.2020).
Литература
1. Cambridge Business English Dictionary [Электронный ресурс] URL: https://dictionary.cambridge.org/dictionary/english/retail-investor (дата обращения: 13.04.2020)
2. Konar, A. Direct vs Indirect Investments: The Implications of a Choice for a Short-Term Private Investor // Вестник ЮУрГУ. Серия «Экономика и менеджмент». - 2019. - Т. 13, № 1. - С. 93-97.
3. Федеральный закон от 26.12.1995 № 208-ФЗ (ред. от 04.11.2019, с изм. от 07.04.2020) «Об акционерных обществах» // Собрание законодательства РФ. 1996. № 1. Ст. 1.
4. ФНС России. Статистика по государственной регистрации [Электронный ресурс] URL: https://www.nalog.ru (дата обращения: 13.04.2020)
5. Regulation of Investment Advisers by the U.S. Securities and Exchange Commission, 2013 [Электронный ресурс] URL: https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf (access date: 13.02.2020).
6. Банк России. Реестр инвестиционных советников // [Электронный ресурс] URL: http://www.cbr.ru (дата обращения: 13.04.2020)
7. Stanley, Morgan (2020). Understanding Your Brokerage and Investment Advisory Relationships // [Электронный ресурс] URL: https : //www. morganstanley.com/wealth-
relationshipwithms/pdfs/understandingyourrelationship.pdf (дата обращения: 13.04.2020)
