Adviser action required on manager conflicts

In the absence of regulatory support, advisers must take action to address conflicts of interest in troubled managed investment schemes (MISs).

That is the view of Melbourne adviser Chris Garnaut, who was recently successful in removing Becton Group as the responsible entity (RE) of two unlisted property trusts, of which the financially troubled group was also manager. Garnaut believes there is a “permanent, irreconcilable conflict” present when a company acts as both RE and manager of MISs, a conflict that becomes evident when either the parent company or the underlying scheme hits troubled waters.

Supreme Court judge Justice J. Judd recently supported this view in a case brought by Becton against Garnaut.

The answer, Garnaut believes, is a return to the requirement for MISs to have an independent trustee, a rule overturned in 1998. The existing regulations were tested and found wanting during the global financial crisis (GFC), with Garnaut pointing to Centro, Great Southern and Timbercorp as examples of joint manager/REs placing their own and shareholders’ interests before those of unitholders.

Professional Investment Holdings (PIH) managing director Grahame Evans also supports a return to the independent RE model for non-mark to market investments.

“How do we ensure that organisations, where they’ve got deterioration in their product, are going to act in the interest of unitholders in the first instance and not shareholders? It’s a big challenge for us. If there’s a separation between the two, it’s easy.”

Garnaut and property group ADPIA have been lobbying the Government on this point for many years, but no amendment to the law has been forthcoming. Correspondence from then Financial Services Minister Nick Sherry confirmed there would be no change, and his successor, Chris Bowen, maintained that position. Garnaut is doubtful any legislative change will occur under recently appointed Financial Services Minister Bill Shorten.

“I think the lobby against it is too strong and too big,” Garnaut said.

“The whole industry is sitting on this platform. They’d have to go back to the trustee system — and that means [managers] have got to pay 10 or 15 points away to a trustee company.”

The only course of action in the current environment is for advisers to address the issue by gathering investor support to replace a conflicted responsible entity, Garnaut said. In doing so, in a number of recent cases Garnaut has salvaged “what would definitely have been lost” for his clients.

“If somebody places an investment with you and a manager [messes] it up, then it’s your responsibility to do whatever you can to try and help that out at the other side,” Garnaut said.

“I accept the GFC has caused myriad problems, but what I don’t think financial advisers have done is come up with myriad solutions. I think there’s been too much acceptance that ‘that’s the way it is’, rather than scratching the surface, digging holes, looking for solutions. I’m saying that’s not the way it is — but someone has to advocate for change.”