Lonsec named Research House of the Year for 2012

Lonsec has once again snatched the Money Management Research House of the Year title. However, Morningstar and Mercer are catching up.

Strong client support services, a focus on increasing resources and fund research, and providing value for money were some of the key reasons Lonsec has again come out at the top of Money Management’s Rate the Raters survey of dealer group and adviser attitudes.

Lonsec’s overall ratings for 2012 have remained the same from last year’s survey results, scoring positive ratings of 95 per cent, including 15 per cent of the respondents rating the researcher as excellent.

The stellar rating from advisers comes off the back of significant improvements in adviser services. In the survey 72.2 per cent of respondents rated Lonsec as good, and 27.8 per cent as excellent, a clear jump from last year when 9 per cent rated its client services as poor, 42.9 per cent as good, and 47.6 per cent as excellent.

However, while Lonsec has managed to hold on to its lead, the survey also reveals that research houses Mercer and Morningstar are creeping up in the ratings.

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Mercer’s support among advisers is consolidating, with a ‘good’ satisfaction rating of 92.9 per cent, while 7.1 per cent rated its overall offering as poor.

Last year, 75 per cent of respondents rated Mercer as good, while 12.5 per cent gave it a rating of excellent, and 12.5 per cent rated it as poor.

Part of the reason for Mercer’s rating may be the incredibly high rating of its staff strength, which, at 92.3 per cent in the good category, makes it second only to Lonsec, and the most consolidated of all six research houses in one of the main ratings categories.

Its fund research also appears to be consolidating, with more than 83 per cent of respondents rating its offering as good, compared to 66.7 per cent last year.

However, the number of respondents who are dissatisfied with its research has risen since last year from 11.1 per cent to 16.7 per cent. 

Morningstar is also gaining ground, with the amount of financial advisers rating its offering as ‘poor’ halving compared to last year.

The survey found 62.5 per cent now rate their offering as good, compared to 30 per cent last year.

Lonsec head of research Amanda Gillespie said she was pleased that the company’s focus on client service was acknowledged as an area of strength in the survey results.

Lonsec’s client services team was dedicated to servicing advisers over the phone, and travelling to see them face-to-face as well, Gillespie says.

“We provide access to the analysts as well, so the users of our research can talk to an analyst and further understand the research, or drill deeper on the research opinion, which I think is a positive,” she says.

Keeping financial advisers happy

Other than Lonsec, this year has seen a marked decline in satisfaction levels with client services.

Morningstar and Standard and Poor's (S&P) have suffered the biggest declines in satisfaction with client services, with Morningstar recording the number of advisers dissatisfied with their services at 35.3 per cent, compared to last year when 100 per cent of advisers rated their offering as good or above.

A third of respondents also rated S&P as poor or worse, while all respondents gave the researcher a rating of good in 2011.

Zenith Investments is now split evenly between poor, good, and excellent ratings for client services, compared to last year when more than 71 per cent of users rated the researcher as good and 28.6 per cent rated them as excellent.

Investors’ fatigue with low returns is flowing through to financial advisers as well, leading them to be more demanding with the services they receive from research houses, according to Zenith Investment Partners director David Wright. 

Advisers are looking for more information, more tools, greater detail and more transparency, so they can build a story for clients which is different to what they’ve been able to say in the last couple of years, Wright says.

“As a result of this, advisers are more demanding of research houses and fund managers for further servicing and information, because there hasn’t been a lot of good news that they’ve been able to provide clients,” Wright says.

Those demands have also led to client services beginning to slide at Mercer. Around 84 per cent of respondents rated their offering as good, and 15.4 per cent as poor in 2012, while in 2011 one in four respondents rated their offering as excellent, with the other 75 per cent rated them as good.

Van Eyk has suffered a marked drop.

More than 61 per cent rated their client services offering as poor or worse this year, while last year only 36.4 per cent rated them as poor and more than 61 per cent rated them as good or excellent.

Morningstar co-head of fund research Tim Murphy admitted it was a tough environment for financial advisers, but said Morningstar had worked to improve its communication with advisers in the last couple of years, including creating a training manager role for its adviser research centre.

Morningstar has also increased the number of tools supporting its research, including adviser desktop tools.

Advisers also appear to be increasingly unhappy with the funds research on offer. Zenith, S&P, van Eyk, Mercer, and Morningstar have all declined in their satisfaction ratings, while only Lonsec has managed to stay steady.

More than 16 per cent of respondents now disapprove of Zenith’s funds research, compared to 100 per cent approving of its research last year.

Morningstar’s disapproval rating has risen by more than 10 per cent, while S&P’s disapproval rating is 5 per cent higher than last year.

van Eyk

One researcher that has suffered in most categories in this year’s adviser survey is van Eyk.

Besides an increase in the number of financial advisers who rated their client services as poor, new survey results show low trust in the researcher in terms of the strength of its staff, with 53.8 per cent rating staff strength as poor.

Fund research has also seemed to suffer, with a little more than 30 per cent rating its research as poor, good or excellent in each category, while 7.7 per cent now rate its research as awful.

That is a marked decline from 2011, when a combined total of more than 83 per cent rated its research as good or excellent, and 15 per cent rated it as poor.

van Eyk recently restructured its research towards asset classes such as alternatives, while reducing its developed market equities research to 25 per cent of its asset allocation.

The new strategy would focus less on fund managers taking small amounts of risk, with more of a focus on those taking active risks, chief executive Mark Thomas said.

In a written response to Money Management, Thomas expressed surprise that satisfaction with van Eyk’s research had declined, and said it contradicted feedback from their clients.

van Eyk has been responsive to client needs and the changing investment landscape, and clients were appreciative of those changes, Thomas said.

More investment strategies are being rated more often, and they have boosted coverage of fixed income and alternative strategies, he added.

Reflecting the recent restructuring of van Eyk’s research strategy – which resulted in three analyst redundancies and one voluntary departure – more than 64 per cent of advisers rated its corporate strength as poor or worse. Around 28 per cent rated its corporate strength as good.

Perhaps ominously at a time when financial advisers are increasingly using advice support tools online, satisfaction with van Eyk’s website information and tools also decreased.

Almost 70 per cent of respondents now view van Eyk’s website and associated tools as good or higher, compared to 100 per cent in 2011.

The cumulative decline in satisfaction across a number of categories has seen van Eyk’s overall rating of good or higher fall from 66.7 per cent to 57.1 per cent over the last 12 months. More than 40 per cent now rate it as poor or worse, compared to 33.3 per cent last year.

Value for money

As the economic environment becomes tougher out there and the industry searches for a way to cut business costs, advisers are becoming increasingly critical of the value for money they receive from research houses. 

Lonsec and Morningstar have benefited clearly from this trend.

Around 16 per cent of respondents disapproved of Lonsec’s value for money offer, down from 19.1 per cent in 2011. More than 83 per cent rate its offer as good, compared to 80.9 per cent the year before.

Gillespie said a freeze on fees helped keep its value for money proposition at a time when financial advisers are concerned about the cost of doing business.

Lonsec realised that advisers were struggling in the challenging environment and were hoping to deliver more for the same fee, Gillespie says.

Advisers’ approval of Morningstar’s value-for-money proposition has risen to 62.5 per cent this year compared to 50 per cent in 2011.

Morningstar was focused on offering not only good research, but portfolio construction tools to empower advisers to engage with clients more easily and more meaningfully.

“That’s a critical piece at the moment in an environment that’s quite tough,” Murphy says.

Mercer’s subscription-based model means it can’t subsidise the cost of research for advisers through manager fees like in a pay-for-ratings model, Mercer head of wealth management Brian Long says.

“That always means that in this market we’re never the cheapest, and that’s something we’re pretty up-front about,” Long says.

The number of advisers who rated Mercer’s value-for-money offer as poor jumped from 12.5 per cent to 46.2 per cent this year, the biggest rise in dissatisfaction among the other research houses.

van Eyk has also declined, with 42.9 per cent of respondents now rating their value-for-money offering as poor or worse. Around 80 per cent rated its offering as good or better the previous year. 

However, this result may be due to van Eyk’s subscriber-only model.

Dissatisfaction with value for money has also risen with Zenith and S&P this year. More than 30 per cent of advisers rate Zenith’s value for money as poor this year.

All respondents rated its offering as good or better in 2011, while in S&P, 50 per cent of advisers consider its offering to be poor, compared to 33 per cent in 2011. 

If advisers are concerned about value for money and are dissatisfied with client services, Mercer hasn’t seen that reflected in the amount of business it has won this year.

“We haven’t seen those concerns reflected in our client base, and we’re monitoring them fairly closely,” Long says.

Mercer has also significantly enhanced its adviser portal and introduced high-end tools to build portfolios, doing more adviser education and thought leadership.

Thomas warned that skimping on the upfront cost of research was a false economy.

“It concerns us that there may be a lack of appreciation in the market of the value of good research,” he said.

Pay-for-ratings model

Adviser concerns over value for money are intimately tied together with the debate around pay-for-ratings.

Most advisers don’t understand that if the pay-for-ratings model ends, they will be charged more for research subscriptions, which will flow through to the client, Wright says.

“We already have an issue in the Australian market with the cost of financial advice, so any other form of remuneration subsidises the cost of advice for the consumer,” he says.

Those research houses that don’t charge fund managers for ratings neglect to say that they collect payments in other ways, Wright claims.

In its submission to the Australian Securities and Investments Commission (ASIC) review on pay-for-ratings, Zenith urged that all manager payments should be disclosed by a research house, including payments for data, conference attendance, and using ratings in marketing.

Managing potential conflicts of interest is driven by market forces, because no researcher wants to be sued by an investor for a favourable rating on a bad product, Wright says.

The survival of the pay-for-ratings model is also a practical issue, according to Long.

Licensees are trying to reduce the number of fund managers that they deal with, and with fewer managers being used, fewer are being rated, which means less money is being paid by the managers to the research house.

That means ratings agencies no longer have the money to take overseas trips to monitor fund managers, so another revenue stream has to be found, Long says.

Dealer groups see the pay-for-ratings models as a conflict of interest even if it’s managed well, he says.

“The whole issue is making pay-for-ratings not only a conflict, but impractical for licensees to engage,” Long says.

Both van Eyk and Morningstar believe conflicts of interest can be managed with more disclosure.

In their submission to the pay-for-ratings review, van Eyk recognised that licensees could find payments for ratings to be a potential conflict, but said the adviser’s Statement of Advice should contain a mandatory declaration that the advice was based on research paid for by a fund manager.

Morningstar chief executive Anthony Serhan supports a bi-annual compliance report to manage that conflict of interest.

However, making the market turn to a subscription model only is unnecessary, he says.

The ratings agencies would not move away from a pay-for-ratings model unless ASIC or the market forced them to, Serhan says. 

Market saturation

It’s arguable whether the pay-for-ratings model is responsible for the market being saturated with research.

Murphy believes the reason Australia has more research than any other country in the world is because it is one of the last countries that views issuer-pays research as still being acceptable.

“That creates a distortion where you have fund managers underwriting the revenue lines of several research houses that otherwise wouldn’t have a justifiable business model,” he says.

van Eyk believes there are too many companies in the market.

“The only reason the market can support this many is that the pay for ratings model encourages fund managers to use ratings as a sales vehicle for their fund,” Thomas says.

While the market is arguably crowded, the points of difference between the ratings agencies meet a vast range of investor needs which are quite dynamic, Gillespie says.

Research providers are also narrowing their focus and others are aiming to provide deeper and broader coverage.

Mercer and Morningstar are the only two global researchers in the Australian market, with significant differences in what they do, and there are only three other local researchers.

Many licensees like to have a second opinion with a different approach to their main researcher, particularly with a global researcher, Long says.

“It’s not easy, and there is a lot of consolidation going on, but I don’t think the research market is overly competitive at the moment,” he says.