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Vol.25 No.21 | June 9, 2011 | $6.95 INC GST
The publication for the personal investment professional
www.moneymanagement.com.au
PRESSURE GROWING ON SALARIES: Page 4 | QUESTIONING US INFLATION FEARS: Page 24
ASIC canvasses opinions on research By Lucinda Beaman T HE Australian Securities and Investments Commission (ASIC) has turned its attention to the inner workings of the investment research industry, including research houses’ remuneration relationships with fund managers and the quality of research being produced. Treasury has confirmed to Money Management that ASIC has recently been in discussions with research houses and a number of their ‘user groups’, including financial advisers. Treasury said ASIC had looked into “key issues such as business models, conflicts of interest, disclosure/transparency and the quality of research”. The regulator is now considering “what measures (if any) it should put in place as a result of this work”. ASIC has expressed its concerns about pay-for-ratings research
Rick Di Cristoforo models in the past. During the Ripoll Inquiry, ASIC recommended the Government consider whether fees paid by product manufacturers to research houses should be reviewed. This practice “creates an obvious conflict of interest and has the potential to distort the quality of research
reports often used by advisers in making product recommendations to clients”, ASIC said. The regulator suggested a “userpays model for research house remuneration might help improve the quality of the research used by advisers”. ASIC is likely to have encountered a wide range of opinions on this topic during its recent investigations. At one end of the spectrum are research clients such as DKN chief executive Phil Butterworth and Professional Investment Holdings (PIH) managing director Grahame Evans, who firmly believe any conflicts of interest in a pay-for-ratings model can and are being adequately managed – at least by the nowmarket-leading research house Lonsec. Neither Butterworth nor Evans would like to see fund manager subsidisation of the research process legislated against. Evans
believes this would unnecessarily place more financial pressure on advisers’ businesses and, ultimately, consumers. Butterworth argued that product manufacturers should share the cost of the research process with advisers. “From a commercial point of view, fund managers are as much a user of research as a dealer group, so they have a responsibility for paying for their role in that,” Butterworth said. At the other end of the spectrum are those including Matrix Planning Solutions managing director Rick Di Cristoforo and Australian Unity head of financial planning Craig Meldrum. They believe it’s time for the industry to move to a purely subscriber-pays model, a move which would remove any real or perceived conflict of interest and increase the confidence of both advisers and clients. Both Di Cristoforo and Meldrum believe advisers should be willing
Advisers shun capital protection By Mike Taylor
CAPITAL protected products, which received a boost amid the uncertainty of the global financial crisis, are now being shunned by financial planners as too expensive and inappropriate for their clients. New research undertaken by Wealth Insights into the market for capital protected products has found nearly threequarters of advisers do not use capital protected products and most are unlikely to do so any time soon. According to Wealth Insights managing director Vanessa McMahon, the main reason respondents cited for not using capital protected products was that they were too expensive. Indeed, the research revealed that 46 per cent of respondents said they were not using capital protected products due to cost, while 32 per cent said they were not doing so because they were not suitable for their clients. A further 29 per cent of respondents said they were not confident in the capital protected products, while 27 per cent said such products were two complicated. McMahon said the research painted a grim picture for the manufacturers of capital protected products because the number of advisers using them had not grown in two years, and seemed unlikely
73% 3%
Likely use in next 6 months
Reasons Advisers Do Not Use Capital Protected Products 46%
Too expensive
32%
Not suitable for my clients
70%
Unlikely use in next 6 months
Not confident in capital protected products
29% 27%
Too complicated
27%
25%
Not on APL
15%
Wrong time in the market cycle
Use CPP
Do not use CPP
Other
6%
Source: Wealth Insights 2011
to grow in the future. She pointed to the fact that at the same time in 2009, 37 per cent of advisers were using capital protected products – compared to 27 per cent today. What is more, McMahon said few of the planners who used capital protected products recommended them to significant numbers of clients. “Half the planners that use capital protected products use them for fewer than 10 per cent of their clients,” she said. “And those planners place less than 20 per cent of a client’s portfolio in them,” she said. The Wealth Insights research detected some differences between the attitudes
For more on the research houses, see the Rate the Raters feature on page 14.
Industry lashes potential opt-in penalties
Graph Capital Protected Products (CPP) Use of Capital Protected Products (CPP)
to pay for a service their recommendations lean so heavily on. “It is intellectual property – if you want it, you should pay for it,” Di Cristoforo said. RI Advice Group chief executive, Paul Campbell, said while he doesn’t believe the pay-for-ratings model necessarily leads to conflicts of interest or a poorer quality of research, committing to a subscriber-pays model removes any question of those concerns. “I think it does raise questions when you see where the research is being paid from. We’ve removed that conflict,” Campbell said. “I wouldn’t stand here and say the research is unequivocally better as a result. But I think advisers need to know that the researcher is acting in their best interests and not anyone else’s.”
of aligned and non-aligned advisers when it came to the use of capital protected products, with 21 per cent of non-aligned advisers more likely to be concerned about it being the wrong time for their clients – compared to 8 per cent of aligned advisers. Similarly, non-aligned advisers (36 per cent) were likely to be less confident in using capital protected products than aligned advisers (22 per cent). McMahon said there appeared to have been little change in attitude on the part of advisers towards capital protected products over the last two years, with just 1 per cent of market flows going to such products.
By Chris Kennedy THE mooted penalties that could apply to breaches of components of the Government’s Future of Financial Advice (FOFA) reforms have drawn criticism from across the industry. There have been suggestions that the maximum penalties that apply to serious breaches, such as an adviser’s fiduciary responsibilities, could also apply to administrative breaches such as those pertaining to new opt-in requirements. Financial Planning Association chief executive Mark Rantall said that the penalties should match the crime, and some of the maximum penalties already in place would not be appropriate for optin breaches. “Opt-in should not be law and this is why,” he said. Much of the recent debate has been pushed by the Industry Super Network and consumer group CHOICE, but Professional Investment Services group managing director Graham Evans said he wasn’t too concerned with the threats and heavy handedness coming from that side of the debate. “A lot of this noise can go on – let’s deal with the facts and consider what the real issues are,” he said. He questioned the benefit of opt-in to consumers Continued on page 3