| Research houses facing the heat
THEY are a crucial link in the chain of financial advice, wielding great influence over the products Australian retail investors sink money into. How well those conflicts are disclosed and managed is a matter of debate within the $PRIMARYCATEGORY$ services industry and out. It's not just the most overt and talked-about conflict in the sector, when fund managers pay research firms to rate their products, that has ASIC concerned. ''As people have debated this one a bit more over the last few months there have been more coming to the surface, which is the valuable part of having a consultation process,'' the ASIC spokesman says. We do not have a set hierarchy of severity at this stage. There is also the plethora of other payments that flow from fund managers to research houses - licence fees to use logos and ratings on promotional products, sponsorships for conferences and ads for magazines, database fees, and payments for various other services rendered by the research houses. Then there are those research houses that operate their own fund management arms, touting for business in competition with those they rate. ''The market self-regulates,'' says Lonsec's Richard Everingham. ''There are conflicts in any business that you have, but we think those conflicts are heightened in an [issuer] paid model,'' says Anthony Serhan from Morningstar. Stephen Roberts, head of investment management for Mercer Asia Pacific, says that by not accepting such fees, Mercer can be ''completely at arm's length'' in rating a product, while Van Eyk chief executive Mark Thomas says those who do charge for ratings are simply in a different ''headspace''. ''The most important conflict that one needs to manage in this process is, who do you represent, and who is your customer? In our case, we always represent the investor. Indeed, Wright questions whether the most obvious potential conflict is the most problematic. But I think it's whether that is disclosed and it's the way in which it is managed. At the moment there isn't a level playing field on the disclosure of other manager or product provider payments. But this is because, Serhan says, ''most of the stuff being sold into the retail market is on our database''. Research houses wield significant influence. ''We're saying to ASIC though, that if you are going to look at this potential conflict, then look at the whole spectrum of potential conflicts inherent in each research house's business model. ''It's a case of be careful what you wish for - such payments underpin the research produced for more than 50 per cent of the financial planning market,'' he says. ''It's concerning more from the point of view of overall industry competition and research quality than from the point of view of our own viability - these payments only account for about 25 per cent of our aggregated group revenue,'' he says. ASIC's aim of wanting retail investors to be better educated, better informed and making better investment decisions won't benefit from an outcome like that. Submissions to ASIC's consultation paper were due in February. ''We were aware of a number of them, but more have come to light. ABIG question is what would happen if fund manager payments for research were banned, as ASIC has recommended. As ASIC is discovering, the research house sector has a large range of real and potential conflicts of interest, with myriad payments passing between issuers - the fund managers that make and sell investment products - and the research firms that review and rate them for the eventual benefit of investors. But BusinessDay understands this timeline is likely to be extended, partly because a parliamentary report on the collapse of Trio, which is examining the role of ''gatekeepers'' including research houses, was due in February but is now expected next month. Morningstar also runs a widely used industry database for which funds must pay to be listed in - and it only rates funds listed on this database. Van Eyk, which trumpets the fact that it does not accept fees from product issuers, has a partnership with property and agribusiness researchers Advisor Edge, which does. The firms that do not charge for research insist that their other operations don't ''subsidise'' their research, as Lonsec suggests. They include the licence fees that Morningstar charges for fund managers to use its logo and ratings on promotional materials. This year's Morningstar Investment Conference is sponsored by fund managers including Zurich and Dexia. |
Wednesday 2 May 2012
Research houses facing the heat
