Advisers deterred by strict APLs at large licensees

A risk-averse nature by licensees to alternative funds is driving advisers to opt to carry out investment selection themselves.

Last month, Money Management wrote how there had been a rise in insourcers, or those advisers who fully select investments themselves, which sat at 35 per cent. 

Advisers who describe themselves as insourcers view product selection as essential to their client value proposition, and many have set up their own firms to do so.

High modifiers, who have a high involvement in the investment selection, accounted for 29 per cent of advisers and manage $75.7 million in average FUM.

One reason that advisers may opt for this option is that licensees are “becoming more risk-averse” and may be unwilling to allow advisers to choose riskier products. This can be frustrating if clients are asking their advisers for products they are seeing in the media, such as cryptocurrency or private credit, that don’t sit on approved product lists (APLs).

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This ties into the rise of alternative funds, such as cryptocurrency, private markets, hedge funds and commercial property – all of which can be opaque, riskier and have high fees. 

Money Management previously looked into how the boom in private credit fund launches was “ringing alarm bells” for industry experts who were hesitant to recommend them because of their illiquidity. 

For example, Fiducian prefers its advisers to use its own internal “manage the manager” investment system, which contains 15 managed investment schemes and nine managed accounts, rather than allowing them to stock pick themselves. In its FY24 results, the firm said the majority of retail funds placed with Fiducian went there.

Meanwhile, Centrepoint Alliance has 1,100 investment options on its APL, but says it “restricts access to high risk investment options” in order to protect clients and risk management. 

How are APLs constructed?

Licensees tend to build their approved product lists with the help of internal research and external research house ratings, whereby they include funds which have received a “recommended” rating or above. 

A rating is based on a fund’s track record, manager experience, available investment resources and research process among others. For this reason, research houses are typically reluctant to rank a fund that has a track record shorter than three years, as is the case for many newly launched alternative funds. 

In its first-half results last week, GQG Partners reported net inflows of US$11.1 billion which it attributed to its funds reaching a longer track record, which meant they were more attractive to advisers and platforms.

While APLs used to be monitored on an annual basis, they are typically now monitored on an ongoing basis and if a rating is changed to the downside by the research house, then the fund is usually removed from the APL. 

But this can be frustrating for advisers if the newer alternative funds they are seeking are not available on their licensee’s APL because of their lack of rating.

Research house reaction

Louis Christopher, managing director at SQM Research, said the research house will occasionally take exception and consider funds with a track record of less than three years but this would only be if the management had previous experience running a similar product and had sufficient resources to do the job.

He said around 40 per cent of funds the research house is asked to rate would be classified as 'up and coming' funds and these would be unlikely to get a high rating due to their short history.

“Licensees are definitely cautious of newer funds on their APL because they can be higher risk, they haven’t been tested, and the manager may not understand fund management or the regulatory requirements. Caution needs to be required.

“All it takes is one bad apple to create problems."

Marc Hraiki, executive director of adviser sales and services at Lonsec, said: “Licensees are developing a deep aversion to risk and what types of funds advisers are accessing. That is just the slow-moving nature of how things get approved.

“There has been a broadening out of APLs though, licensees used to be quite limited because of the revenue structure, but that has changed now and they can negotiate with platforms on fees which reduces the fees.”

With this in mind, Irene Guiamatsia, head of research at Investment Trends, said: “[In larger licensees], there’s pressure on the APLs and on those gatekeepers to really diversify the product range that they’re offering because advisers will be wanting to have a lot more choice at that level.”

For those advisers who do opt to do the product selection themselves, Christopher said it is critical for them to document their investment decision in case they need to show ASIC. 

"They need an independent investment committee and they need to show they understand the regulation, they have to be able to demonstrate to ASIC that their investment decisions are truly independent and have been made with the clients' interest in mind."