Photo: Matt Fatches
Professional Planner ran its fourth annual Research Forum in Sydney on Thursday, and again a who’s-who of the research community attended, representing licensees both large and small, external research houses and consultants, and some self-licenced wealth firms.
This event has grown from an idea hatched over a good lunch about five years ago to what one participant described yesterday as the most important gathering on the calendar for the research community.
But enough of the trumpet blowing; let’s just say it seems to be meeting its aim. It’s become a valuable forum for the people who sift through the thousands of potential investment solutions (products) and determine which are, and are not, fit for purpose for use by financial planners and financial advisers.
They’re also closely involved in creating model portfolios, portfolios for use in managed account services, working with advice firms on investment committees, and in other capacities.
In other words, these are the people who are pivotal in helping advisers define and then deliver the most appropriate investment solutions for clients. It’s a complex and time-consuming task. There’s been an avalanche of investment products in recent years, much of it indistinguishable from everything else (more than one participant described the futility of trying to differentiate in a meaningful way between 100 Australian equity strategies).
When it’s really difficult to distinguish between products, investors (and advisers, to a lesser degree) look for something where differences are clear, and typically that’s the past performance of a product.
(This is the thinking behind next Monday’s InvestSense Idea Factory: six managers, each with five minutes will leave the product at the door, front up to an audience of advisers and an expert panel, and pitch the “one big idea” in a way that gets it across in a way that cuts right to the chase. After all, if an adviser is trying to convey to a client an investment idea that transcends mere past performance, they probably only have five minutes to do it before the client drifts off. It’s about condensing issues into terms that clients can relate to – and once they are engaged like this, past performance begins to matter much less.)
Misunderstood and undervalued
Research is sometimes misunderstood and in some cases its also undervalued. And it doesn’t always work as expected, as statistics from disputes settled by the Financial Ombudsman Service (FOS) continue to show.
There’s a presumed reluctance among advisers to pay for research – although that presumption was challenged in the forum on the basis that advisers simply haven’t really been asked to pay for it before.
Advisers that are part of large licensees take research for granted – it’s part of the what they get for the dealer group fee, and the lower the dealer group fee the better.
That’s led to the so-called “pay-to-play” situation, where the only products that get researched and rated come from those fund managers who are prepared to pay for the rating. That’s a self-selection process that can cause distortions in the universe of “approved” products; but in the absence of more widespread willingness to pay a fair price for research, this is the business structure that has by and large taken hold.
Getting 40 or 45 of the leading lights in the research game together in one place for a full day provides a good insight into the issues they’re facing, and how they’re dealing with them. To the extent that financial planners take research for granted, it would be enlightening for them to spend a day listening to this group and the work done by the teams and the organisations that provide analysis of the investment solutions advisers use.
Except, of course, the Forum is only open to people engaged in the research business; and it’s run under the Chatham House Rule, so I can’t actually tell you who said what. But that’s the best way to ensure the space is relatively safe for the participants, and it encourages open and free-flowing debate. It also often leads to differences of opinion, and that’s sometimes where the deepest insights are to be found.
Always a touchy subject
Conflicts of interest are always a touchy subject and for good reason. Conflicts were described as the elephant in the room that doesn’t get discussed often enough but it got a good airing yesterday. And they run deeper than just the pay-to-play issue.
Fund managers might pay to entertain researchers from time to time. Is that something that should be disclosed? Once a product is rated, should fund managers have to pay to use those ratings in advertising and other promotional materials?
Is it adequate, and appropriate to assume (or perhaps hope) that the end users of research are knowledgeable enough and sophisticated enough to recognise where conflicts potentially occur in the research process, and mentally adjust or compensate for it when consuming the research materials?
Conflicts exist; that much was not in dispute. Conflicts can be managed, but they’re better avoided. The thing is, research is still a competitive market, and it’s understandable the no particular organisation would want to willingly put itself at a disadvantage, either by pricing itself out of the market, or otherwise limiting how many advisers use its services.
So one of the big ideas that emerged from the day is an advocacy or representative group that can work to develop frameworks and standards for the individuals who do research.
It can develop mechanisms for avoiding conflicts of interests in the first place, and managing and disclosing them where they can’t be avoided. And it can ensure this is done in a standard way across the industry, so no single player is at a disadvantage for doing something that others don’t or in a way that they won’t.
Here are some standards
It would say, simply: Here are some standards. Here are some things that we agree are unacceptable; and here are some things that we’re agree are acceptable. Call it good governance.
And it could also start to call out minimum education or qualification or certification standards for researchers too. One that springs to mind is the Certified Investment Management Analyst (CIMA) – because that’s one that was spoken about during a session on education. But there are others too.
Research is ultimately a commercial enterprise and its participants have the expectation of making, and the right to make, money from doing it. But when the output of the process is so influential in directing capital to markets via investment product and structures, each of which clips the ticket and has potential to add or detract significant value, consumers of research have an equally valid – and arguably dominant – right to know they’re being given good information, and being given it for the right reasons.
So here’s an analogy to finish off – again, no names under the Chatham House Rule (so unfortunately no credit for it). Imagine the financial planning industry is a hotel. The advisers are the front-of-house staff and they’re the ones usually in the firing line. The researchers are in the kitchen, and while they might be the Master Chefs (or think they are), how do the hotel guests know for sure the chefs are not spitting in the soup?
