altThe global financial crisis has thrown the spotlight on the relationship between planners and researchers, and big changes could be on the way. Simon Hoyle reports.

The past 18 months have been a brutal but highly effective reminder that it doesn’t matter how smart we think we are, there’s always the chance of something coming out of left field and bringing us comprehensively undone.

As 2008 progressed, any planner who made an explicit promise of investment performance, or professed to be an expert product-picker, was made to look foolish or, worse, dishonest.
The global financial crisis underlined once and for all that when it comes to investing there are few sure things – and that investment returns are not among life’s certainties.

And it underlined that the principles of good financial planning call not for a focus on product selection, but on developing high-level strategies, setting in place the correct structures, minimising tax and getting the big-picture asset allocation right. And never losing sight of risk.

For some clients, it came as a shock to learn, or perhaps rediscover, that sharemarkets don’t just keep rising forever, because their planners had not taken the time or effort to explain things properly, and the focus of the advice was performance-orientated.

It came as an equally big surprise that the use of excessive debt makes the wealth destruction process just as ruthlessly efficient in a falling market as it does the wealth creation process in a rising market.

Not surprisingly, planners caught on the hop were keen to point the finger of blame elsewhere to explain why products failed or why performance promises weren’t met. The finger often ended up pointed at the researchers, on whose recommendations planners had relied.

The events of 2008 also revealed a worrying lack of clarity on the issue of where each party’s responsibility begins and ends.

It is a natural assumption by planners that if a product is on a recommended or approved-product list, or has an “investment-grade” rating or some such imprimatur, then it is the researcher’s fault if the product goes wrong or if it fails to live up to expectations.

But researchers have never believed this – and still do not – and do not rate or grade products on that basis. They say the law makes it clear that ultimate responsibility for a product recommendation sits squarely with the planner.

Treasury and the Australian Securities and Investments Commission’s joint Review of credit rating agencies and research houses questions whether there is “an over-reliance on product ratings” by financial planners.

“Product ratings may be an efficient way of screening financial products,” it says. “However, recent corporate collapses have highlighted the issue of whether some financial advisers may be over-relying on the information provided by research houses.

“Financial advisers are required to assess whether the financial product is suitable for the specific circumstances of the retail client when providing personal advice.

“This requires an understanding of the financial product that it recommends.

“Financial advisers are also required to consider and investigate the subject matter of the advice they provide.

“While, in some circumstances, it may be reasonable for an adviser to rely on information supplied by research houses, financial advisers should take reasonable steps to ensure that the research is accurate, complete, reliable and up-to-date: see RG 175 Licensing: Financial product advisers – Conduct and disclosure.

Research is just one tool that planners should use to form an opinion on whether a product suits a particular client’s circumstances.

But the lack of clarity, and other concerns with the process of rating and approving financial products, prompted the Rudd Government to launch an inquiry into the ratings industry. The initial target was credit rating agencies, but managed fund research firms were lumped into the Government’s inquiry soon enough.

The use of managed fund research ratings and analysis within the planning industry is mixed. Research commissioned by Professional Planner, and conducted by brandmanagment, has found some firms spend little money on research and put little stock in researchers’ analyses; others spend considerably more and rely far more heavily on the researchers’ opinions.

Almost half of the survey respondents use a mix of research sourced externally and from internal resources. But more than 40 per cent of respondents say their sole source of research is external.

The vast majority of planners surveyed – two-thirds – believe the pay-to-be-rated model (in which the managers of investment products pay the ratings firms to rate products) is unacceptable. But overwhelmingly, planners are not intending to spend more on research in 2009 than they did in 2008, which would be a natural source of replacement income for research firms if they were to abandon the pay-to-be-rated model.

The greatest value to planners of the research they buy is the research firm’s underlying analysis of the fund, followed closely by the research firm’s role in sifting out unacceptable, inappropriate or simply just poor investment products. Actual fund ratings are valued slightly less highly.

Underlining some of the confusion around the various parties’ responsibilities, 20 per cent of respondents believe the researcher is either “totally accountable” or “more accountable” than planners themselves for the product recommendations made to clients. A similar number believe that planners are totally responsible.

However, a small majority believe the planner is responsible for fund performance.

But worryingly – for researchers, at least – about 27 per cent of respondents think managed fund product recommendations are either “not reliable at all” or “somewhat reliable”. Less than 10 per cent regard fund recommendations as “very reliable”, and almost a third are completely agnostic.


Peter Johnston, chief executive of the Associa- tion of Independently Owned Financial Planners (AIOFP), says it’s unacceptable that a researcher can disclaim or deny responsibility when an investment product that it has researched and approved turns bad.

But Johnston says the legal situation is that the buck stops with the planner, even if the planner has relied, in good faith, on a third-party research opinion.

“ASIC says ‘What have you done?’, and we say, ‘It’s on a recommended list’,” Johnston says.

“ASIC says,‘Why is it on there?’, [we say,] ‘It’s been recommended by whomever’, and they say, ‘That’s not enough – what have you personally done?’

“That’s quite unbelievable. It’s very hard for planners to see clients and go out and interview fund managers.”

Last year, AIOFP asked its members to contribute towards funding a legal opinion that the association can use to challenge the boundaries of responsibility for all parties involved in recommending a product to a client.

“Nothing is black and white in the legal fraternity, but it’s come back with a positive slant, saying research houses cannot be reckless and that they have a duty of care,” Johnston says.

Dissatisfaction with the current relationship between planning firms and research houses has led AIOFP to explore an alternative set-up that will make clear who is responsible for what, and which, if implemented as Johnston intends, may also reduce professional indemnity (PI) insurance costs for planners.

“The current environment has been around since the early 1980s and we have found it, over the years, to be inefficient,” Johnston says.

“Research houses have positioned themselves to be the gatekeepers of the industry, where they’re all care and no responsibility, as far as we can see.

“Planners have been responsible for this, to some degree, because there’s been a lot of discounting going on, which has reduced revenue lines to research houses so they have sought other ways of making money, and that has compromised the [research] process, in our view.

“What we’re doing to counter this is to put in place an investment committee, made up of third parties. Yes, using a research house to filter three or four thousand funds down to three or four hundred, [but] then using the committee in a consulting role, where everything is monitored daily. We’re putting a panel in place to filter that three or four hundred funds down to about 75 funds.

“Members who subscribe to this filtration process, it will cost them a fee to get involved, but that will be offset by a reduction in their PI insurance. It will be somewhere in the vicinity of 20 per cent. This is our view: it will be between 20 per cent and 30 per cent savings.

“The big-ticket items from a PI cover point of view are for product failure. It’s not bad advice, as in someone giving bad strategic advice – the financial ombudsman takes care of that – it’s about product failure.

“So we think it will become a cost-neutral exercise for our members. They may even make a profit out of it.”

Johnston says the structure will “get right away” from the pay-to-be-rated structure so prevalent in the industry.

“There will be no fund managers paying to be rated at all,” he says.

“That’s where the whole system has been corrupted in the past.”


Gone are the days where investors turned to financial planners solely to find the best money-making opportunities, or to minimise the opportunity cost of not picking the best-performing fund. What clients are increasingly seeking is high-level, sound strategic advice and asset allocation services; at a product level, as AIOFP’s chief executive Peter Johnston puts it, clients are now “more concerned about return of capital than return on capital”.

Assyat David, co-founder and director of technical research group Strategy Steps, says the severity and duration of the financial crisis caught many planners off-guard.

“Many advisers had been perceived to be add- ing value to their clients’ portfolios by producing double digit investment returns for a number of years,” David says.

“This was a successful business strategy in times of consistently strong investment markets. “

As often happens in such times, clients were seeking the ‘sexy’ investments that were producing great returns, without recognising that they were doing so based on a higher level of risk – especially where such investments were effectively gearing into rising markets.

“Among all this, advisers were positioning themselves as wealth creators for their clients, based on producing high investment returns and, as a result, spending more time and effort in finessing the investment portfolio and less time on other, broader and non-investment-related financial planning matters.

“Some clients believed that their advisers were adding value if they were offering them interesting and new investment products and structures and actively managing their investment portfolios.

“It is the type of scenario that we often see in times of strong bull markets.”

David says that the global financial crisis “is likely to have permanently changed the attitudes of advisers and their clients”.

“Even when financial markets recover, the memory of the experience currently taking place will alter the approach to financial planning,” she says.

David says that, among other things, advisers will be less likely to rely on adding value to clients from investment performance:

“Many advisers have lost their confidence in effectively managing and timing investment portfolios, particularly where they have been caught up in high risk products that have suffered greatly in this high-risk environment.

“Overall, my view is that the recent events will cause advisers and dealer groups to rethink their offering and positioning to clients. They do not have the luxury of returning to their old ways once markets recover.”


For some planners, the quality and content of managed fund research is largely a moot point. For example, Darren Johns, principal of Align Financial, on Sydney’s northern beaches, says his business has significantly reduced its use of and reliance on fund research.

“In the past I have used [external research],” Johns says.

“About seven years ago the group I worked for paid some $25,000 to $35,000 a year for them to come up with some recommended portfolios, and then some specific fund manager buy, sell and hold recommendations.

“They did a reasonable job and made us feel all warm and fuzzy about their recommendations.”

Of the recommendations, a couple turned out to be good, a couple turned out to be “middle-of- the-road”, and a couple turned out to be poor.

“So at the end of the day our clients were no better off than if we’d just taken a more passive, index-type approach,” Johns says.

That’s an approach that Johns has now adopted for clients of Align.

“One of the spin-offs or benefits is that it diminishes the need for current and up-to-date research, because of the style of the investment,” he says.

Investment returns are driven by investment markets; the performance of a given fund is not dependent on an individual or a team; and the selection of a fund is not driven by a research process that may bring with it a potential host of biases and conflicts.

Another benefit is lower cost – Johns says the history of the managed funds industry is littered with examples of funds that claim to be actively managed, and charge fees accordingly, but whose portfolios are quasi-index funds and produce (at best) index-type performance anyway.

Johns says this type of approach, and hence a lower reliance on product-specific managed fund research, is likely to catch on more widely because, apart from the benefits to clients, it takes away from the adviser any need or temptation “to continually have to sell the next ‘big thing’ to clients”.

“Most of the money that we advise on today is invested in-line with this investment philosophy,” Johns says.


Mark Hoven, head of fund services at Standard & Poor’s, says the global financial crisis is highlighting to financial planners that “the single most important thing they can focus on is having a strong relationship with their clients”.

What planners will demand from research houses, then, is likely to be less product-specific research and more guidance and insight into strategies and tactics that help support the planner/client relationship.

The boom in global investment markets that preceded the slump fostered a very high degree of financial product innovation. Planners and researchers alike were challenged to keep pace with the rocket scientists and gurus employed by institutions and boutiques, whose sole purpose seemed to be to find new and exciting ways of offering high returns with little (or sometimes, claims of no) risk.

“It’s been such a fast journey,” Hoven says.

“Eighteen months ago we were at the end of a boom, of an extended investment markets boom.

“There was a lot of innovation, and a lot of boundaries being pushed.

“[There was] a lot of risk taken, and I think generally markets were not pricing that risk in as they are today.”

That’s changed, however, and as growing numbers of planners rediscover that the greatest value they add is often at a strategic level, researchers are fine-tuning their offerings to match.

“We think we can provide a whole lot more than we currently do,” Hoven says.

“As a research house we not only do ratings of products, we do research on the asset classes, and [investment] themes. We provide what I call ‘wealth management services’ – advice around [product] shortlists and model portfolios.”

Hoven says a clear opportunity for researchers is to provide more holistic and in-depth advice and analysis not just on products as a stand-alone proposition, but where they fit into a client’s broader strategy.

That necessarily means research firms must be well staffed and well resourced, and Hoven says that’s an issue. Competition in the Australian fund research business is intense. Good people are difficult to find, and really good ones are expensive to maintain.

“Competition is a good thing,” he says.

“[However,] to the extent that competition leads to a weakening of the business models, we would say that’s a bad thing. That high degree of competition has led to good and bad things; it’s certainly led to a high degree of innovation, I think, and that’s good.”

Hoven says the Government review of the research business is “a great opportunity for research houses to restate their case, to demonstrate where they add value” and for all parties in the chain to reassess and confirm the role they play.

“Researchers have a role to play in that,” Hoven says.

“Dealer groups have a role to play. Clearly, advisers are central, and the retail client [is] the ultimate decision-maker.

“When these roles are understood and accepted…things run nice and smoothly.

“A lot is very clear. The AFSL holder has ultimate responsibility for the advice; what we do is assist the adviser to know their product.”

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