Ratings houses must remain relevant

The criticisms increasingly levelled against ratings houses are often unfair and symptomatic of failings in the way their research is interpreted and applied, writes Mike Taylor.

Money Management last week joined with the PortfolioConstruction Forum to name Lonsec as the inaugural Funds Ratings House of the Year — a product of combining the results of Money Management’s Rate the Raters surveys across the funds management and financial planning sectors.

It proved fitting that the award should be presented during the PortfolioConstruction Forum last week, because a number of speakers at the forum were harshly critical of the role of ratings houses and what they actually deliver to their clients.

The criticism of the ratings houses came as little surprise to Money Management. In the course of conducting the surveys across the funds management companies and the financial planners, we received plenty of unsolicited comments about ratings houses that could best be described as ‘angry’.

The most common criticism, and not one reflected at the PortfolioConstruction Forum, was that the manner in which ratings houses were remunerated simply made them a ‘rubber stamp’ for the funds, which were paying to be rated.

While it may be true that a majority of the ratings houses do, indeed, operate under a commercial structure that sees them getting paid for undertaking their ratings, the suggestion that this makes any of them a ‘rubber stamp’ is plainly wrong and very unfair.

What Money Management’s survey found was that, by and large, the respondents who actually dealt with the ratings houses found them to be highly professional and totally objective in their research.

The fact that Lonsec was named Funds Ratings House of the Year was a product of it being judged more positively across all the criteria.

While remuneration models cannot be ignored as an issue, the greater issue confronting the ratings houses and their clients is how their research is ultimately disseminated and interpreted. Recent history has shown that all too often there have been inherent failures in the food chain.

Among the failures which need to be addressed is the absence of a commonly accepted ‘use-by date’ on research, enabling planners to understand the timeframes within which ratings house assessments remain relevant.

As well, there is the question of how appropriate it is for dealer groups to be filtering the research actually received by their advisers.

Not only should advisers be aware of how current the research they are utilising to provide advice is, they should be capable of measuring the assessments of multiple ratings houses on any given product.

Around two years ago there was the threat of legal action over the ratings provided to a financial product which had failed, costing investors large sums of money.

That litigation did not eventuate, but the ratings houses and their clients would do well to consider the degree to which their structures and commercial agreements leave them exposed.