The research houses have long held an important position in the Australian retail advice industry. There are more of them and they have more influence than similar agencies in most other countries. Whether that continues, however, in the face of the structural changes which are occurring is a moot point.
ASIC fired a shot across the bows of the research firms last December when it updated a Regulatory Guide first published in 2004. A further consultation paper, CP 171, was issued in 2011 where the regulator looked at the researchers’ business models.
The new one, RG 79, is called “Research report providers: Improving the quality of investment research”. In the new guide, ASIC said that it had accepted the long-standing business model whereby researchers were remunerated, one way or another and to varying degrees, by product providers – and had not banned this practice – but it would monitor the situation closely as FoFA played out.
ASIC most recently said: “A key focus of our updated guidance is on how conflicts of interest are managed, and where necessary, avoided, so as to ensure the resultant research has credibility and integrity and can reasonably be relied upon directly or indirectly by Australian investors.
“We will conduct targeted surveillance of research report providers to ensure compliance with our guidance and, if necessary, we will revisit our regulation of this sector if we find evidence that standards are not improving.
“In CP 171, we specifically consulted about whether research report providers should accept payment from product issuers to produce research about the issuer’s own products. We asked whether this conflict of interest can be effectively and robustly managed or should be avoided entirely. Our updated guidance does not require avoidance of this conflict at this time. However, if an outcome of our surveillance activity is that this conflict is not being robustly and effectively managed, we will revisit the need for avoidance…”
So what’s new? The new Government may well amend FoFA by at least deleting the opt-in requirement for clients of financial planners to review their arrangements every two years and also revisit the “best interests” clauses to improve clarity. But the trend to eliminate potential conflict by banning certain practices, rather than relying on disclosure, remains.
Perhaps more importantly for researchers, the numbers of SMSFs and their combined assets continue to swell. As we all know, SMSF trustees are less likely to invest in managed funds than other, planner-advised, retail investors. And SMSF trustees are less likely to seek advice from financial planners in the first place. This puts added financial pressure on the fund managers, planners and, subsequently, researchers.
A related wild-card factor is the potential new distribution stream available through the proposed ASX “AQUA II” project, due to start in the first quarter next year (although this has been delayed a number of times before, so this timing should be taken as a rough guide only). This will allow managed fund applications and redemptions to be performed daily through CHESS and the broking system, effectively bypassing platforms and research houses. Whether or not brokers will also rely on the established research houses for their selection process, given managed funds do not make up a big part of their business, will be interesting to watch. And many SMSF trustees who choose to invest in managed funds via the ASX will probably use online or discount broking firms.
On the other hand, the larger research firms have all been around for a long time. van Eyk Research, Morningstar and its predecessor, Graham Rich’s FPG, and Lonsec, through various owners, for instance, have been operating in Australia for more than 25 years and have therefore weathered many changes before. They may well sail through the current stormy patch as well.
Greg Bright is publisher of InvestorStrategyNews.com. He is also a director of Pyne Gould Corporation, which has a minority economic interest in van Eyk Research.
