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Leading research house Zenith believes it may have to eventually change its pricing model.
“I think with the focus on research house remuneration structures, there is no doubt we will need to reposition our subscriber pricing going forward and educate our clients as to the rationale for this and the fact that it is being driven by possible regulatory change,” said Zenith Investment Partners director David Wright.
Responding to the Australian Securities and Investments Commission’s (ASIC’s) concerns of “an obvious conflict of interest” where product issuers pay for ratings, Wright said while a user-pays model offered a “cleaner” structure, research houses and asset consultants may struggle to remain commercially viable given the majority either charge for ratings or operate a multi-manager product. Also, to maintain such viability on a pure user-pays model, research houses would have to charge more.
“Even if dealer groups and advisers were prepared to accept the real cost of research (which they are currently not), these costs would be passed on to the end consumer, making the cost of financial advice more expensive,” Wright said. “By the pay-for-ratings model, you’re subsidising the cost to the underlying investor.”
Lonsec general manager, research, Grant Kennaway said the company currently had “no plans to materially change its subscriber pricing”, however, he pointed out that no research house in Australia operates with a subscription-only model.
“The realities of the Australian market are that research houses need to supplement their subscription income with other sources to enable them to hire and maintain the number and quality of people necessary to operate a professional research house,” he said.
Dominic McCormick, chief investment officer, Select Asset Management, questioned whether the “pay-for-ratings” model would survive regulatory changes.
“If regulators say you can’t pay for ratings, the research will be better, but the cost to advisers will be more expensive,” McCormick said. “Their revenue will depend on the quality of the research, not how many products they rate.”
ASIC called for a review of fees to research houses in its submission to the Parliamentary Joint Committee on financial services and corporations, saying the current model “has the potential to distort the quality of research reports often used by advisers in making product recommendations to clients”.
Wright said he didn’t believe ASIC’s statement was accurate.
“The reality is if we provide poor quality research or rate products that are not sound and ultimately fail, we compromise both our [Australian Financial Services Licence] and the viability of our overall business.”
Kennaway said a move to a user-pays model did not guarantee improved quality of research, arguing that while there was potential for conflicts of interest, it was manageable.
“Everyone in the process (from the investment managers to the subscribers) knows how the research is funded,” he said.
