Some financial planners in the dark on research models

A significant proportion of advisers are unaware of the business model of their research providers, a Money Management survey suggests.

Almost a quarter of the nearly 100 planners responding to an online survey were unsure whether or not their research provider accepted payments from fund managers, but the survey also showed that planners overall were confident of the quality of investment research across the industry.

Asked to select all research providers they used, half said they used van Eyk in some capacity, a third used Lonsec, one quarter used Morningstar, one fifth used Standard & Poor's, and one fifth used Zenith. One in six also used internal research and a smaller number used Mercer and other providers.

Lonsec head of research Amanda Gillespie said it wasn't necessarily surprising that many weren't aware of their research provider's business model. 

"It suggests to me that they're focusing on other aspects of the service that their research provides rather than necessarily focusing on the business model," she said.

"To some degree the decision about research providers is made at the head office level in many instances. In that regard the advisers are less involved in that process," she added.

Standard & Poor's head of research, fund services Leanne Milton said it may also indicate that these decisions are taken at the dealer group level. Zenith national sales manager John Nicoll agreed that dealers' lack of awareness wasn't surprising, but added it was vital that advisers really query researchers on their payment methods.

However Mark Thomas, chief executive of van Eyk Research, said the situation may indicate a lack of disclosure, because planners do not have to disclose to clients the business model of their research provider.

If planners had to disclose to clients when research was paid for by the funds that were being researched, the clients may have an issue with it, he said. van Eyk, which also derives income from an in-house funds management arm, has to disclose in its reports whether it has holdings in the funds it recommends, he added. 

Morningstar co-head of funds research Tim Murphy said he was not surprised that one in five planners were unaware of their research providers' business model. He said he would have expected the figure to be higher, but added that more and more people are taking notice of business models as there is a growing focus on conflicts of interest within the industry.

The survey also found 60 per cent of advisers rated investment research overall as either four or five out of five, and close to 90 per cent either somewhat relied on it or heavily relied on it when recommending products.

Lonsec's Gillespie said the result was a good outcome, and suggested planners were not only finding research relevant but were also using it in the right way. "It's an important input but not the only input," she said.

Zenith's Nicoll said the outcome showed an element of confidence in the research, given there has recently been a lot of concern about the viability of strategic asset allocation (SAA) and the traditional way the research houses construct model portfolios.

In the early stages of the global financial crisis SAA didn't really work, but in Zenith's view it wasn't really being used properly. With all the markets going up people weren't diversified to the degree they should have been and they weren't rebalancing back, he said.

"I think research houses lost a bit of the faith because of that. Maybe we need to get out there and make sure the model and the research we're offering is being used in the best possible way," he said.