Planners expect too much, say researchers

Some sections of the financial planning industry do not have a full understanding of what research houses do and to what extent their ratings can be relied upon. 

This is the view of two research houses - Lonsec and Zenith Investment Partners - who have raised concerns about a so-called 'expectations gap’ which exists between ratings houses and financial planners. 

In its submission to the Parliamentary Joint Committee (PJC) on Financial Services and Corporations, Lonsec said it believed financial planners overly relied on ratings without conducting any 'supporting research’ about how a given product should be used and who it is appropriate for. 

“This can lead to a 'one rating fits all’ mentality. It is akin to a doctor (GP) prescribing an 'approved’ drug without knowing what type of people and conditions it is designed for, what type of people and conditions it isn’t suitable for, what its dosage should be, what its side effects are, and how the drug may react with other drugs already being taken,” Lonsec said. 

National sales manager of Zenith Investment Partners, John Nicoll, agreed some financial planners had the misguided belief that research houses have the potential - and responsibility - to detect fraud. 

In reality, he said, research houses could never do that. 

“Our aim is to determine whether a product will deliver what it says will deliver,” Nicoll said. 

“We can never be accountable for failings if the wrong fund is presented to the wrong client. 

“We’re really looking at an individual product at a particular point in time.” 

Lonsec said the Future of Financial Advice reforms - especially the best interests duty - and increased adviser education standards would significantly improve this situation, but suggested the Australian Securities and Investments Commission (ASIC) should provide a statement to the marketplace explaining what ratings are and what they can and cannot be relied upon for. 

Nicoll added research houses needed to be more transparent about their revenue models, adding that advisers did not fully understand the rigour around it. 

“What advisers don’t realise is that the cost of producing research is quite extensive; by charging fund managers for research we’re effectively subsidising the cost of research to the advisers,” Nicoll said. 

“If we weren’t paid by fund managers either directly or indirectly, research would be more expensive for financial advisers.” 

He added research houses were approached for ratings by various product providers on a weekly basis, with many failing to meet the ratings process in the first place.  

“If the research houses didn’t operate in the way they do, you’d have so many unscrupulous product providers out there - we are keeping poor managers out of the marketplace.”