Disclose pay-for-ratings in FOFA: van Eyk

Investment research firm van Eyk has called for disclosure of the pay-for-ratings research model to be included under fiduciary duty requirements in the Government’s Future of Financial Advice (FOFA) reform package.

Related payments for product ratings listed in a Statement of Advice should also be disclosed within annual disclosure statements required as part of a two year opt-in process, according to van Eyk chief executive Mark Thomas (pictured).

“This would be akin to a wealth warning to unsuspecting investors whose default assumption is independence between product promoter/manufacturer and the adviser providing recommendations under the Statement of Advice,” he said.

Thomas said a research house could not philosophically be selective and discerning throughout the research process and look to achieve the best returns for advisers and their clients if a product manufacturer is the paying client and not the adviser.

It is important to be selective and recommend less than half the funds on offer, Thomas said.

“Above average returns cannot be achieved when the majority of strategies are reviewed and receive an investment grade rating,” he said.

“In most cases, no more than one-third of the talent on offer is good enough to be recommended.” 

The Australian Securities and Investments Commission has publicly questioned the pay-for-ratings research model and suggested that a user-pays model may improve the quality of research used by advisers, van Eyk stated.