Planners looking to leave large, vertically integrated institutions in search of freedom from conflicted product arrangements are often leaping from the frying pan into the fire, says Alex Donald, head of distribution at Ironbark Asset Management.
Speaking at the Institute of Managed Account Professionals 2018 Portfolio Management Conference, in Sydney, during a panel discussion titled “Vertical dis-integration – leaving the mothership”, Donald said becoming truly free of conflict was not as simple as it seemed.
“Vertical dis-integration is a bit of a misnomer in a way,” Donald said. “There’s a sense that people just leave a large licensee, get self-licensed and set up a managed account – but they’re actually becoming more vertically integrated than they were in the first place.”
Panel chair Paul Saliba, the managing director of Evolutionary Portfolio Services, asked Donald how practices setting up managed accounts could avoid replicating “the conflicts that come from the construction of mothership APLs” and “the commercial arrangements that may be involved in driving those”.
While adding the caveat that the Hayne royal commission may have a bearing on the answer, Donald replied that a major issue for firms is whether or not “model managers” should charge a fee, and how they should be charging it.
Clear conflicts
“It’s reasonably clear that there are conflicts,” he said. “If you build an SMA (separately managed account), and you are the model manager, and you are going to charge your clients a fee… you’ve got to remember that those conflicts are dealt with under current regulations.”
Donald also disclosed Ironbark’s role in those arrangements.
“As an RE (responsible entity), we have those structures in place with licensees and ultimately we make payments to licensees in those structures.”
Donald defended the arrangement – as long as those charges are disclosed as advice fees and the client has consented.
“They are effectively advice fees,” he explained. “In every construct that we work with on every platform, they are advice fees. They may be quoted in the PDS, they may be quoted outside the PDS, but they are ultimately disclosed and consented to by the client. Normally, they are part of the ongoing fee disclosure and the [fee disclosure statement] FDS of the licensee, and so they are dealt with under the current structure and disclosure of advice fees.
“I don’t think there’s anything wrong with that. What would be a problem – I think there was an old model that people wanted to use, which was that they could embed a product fee as a licensee. That, I think, has conflict when it’s not disclosed.”
Ironbark has an unusual commercial arrangement within managed accounts; while the RE function is usually served internally by the licensees, or externally by the investment platform, Ironbark offers RE services externally as an asset manager.
“We’re one of, if not the only, RE that is piped into all the platforms as an external RE,” Donald said.
Preferential pricing
Another possible source of conflict, identified by Zenith Investment Partners’ joint founder David Wright, who was also a panellist, was preferential pricing on platforms for select fund managers.
“There’s another potential [issue]…As you know the platforms are doing various deals with different managers to have lower-priced options on the platform, and they can’t do that with every manager in every asset class because part of the pitch, say, to the global equity manager, is that they’re not going to do this with every manager on the platform,” he explained.
While these arrangements are part of the commercial, competitive market, Wright believes they can warp advice.
“You’re getting preferential pricing for some funds on different platforms,” Wright said. “So you’re getting encouragement to use these discounted offerings by the platform. And the platform is making more margin on those products.
“The conflict is slightly different, but there’s still incentive, if you like – and now it’s at a platform level – to use a particular product.”
Wright also took issue with “the way that motherships, or big institutions, have constructed their APLs”, which “has had a bias towards internal product”.
“But I think that’s already breaking down as a result of the” Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, he said.
