Dominic McCormick

An ASIC analysis used to make a case against conflicted selling arrangement such as so-called stamping fees associated with LICs and LITs doesn’t present a full picture of the investment structure, according to an independent investment consultant’s analysis.

In particular, like-for-like comparisons of after-tax returns, proper consideration of the value of options associated with these listed products, as well as representation of an LIC/LIT performance time horizon and the potential value of reinvested dividends are all shortcomings which threaten to undermine the regulator’s recommendations to government in this area, Dominic McCormick reckons. McCormick was an expert panelist on the topic at Professional Planner’s recent Researcher Forum in December.

“Proper returns analysis of LICs/LITs is more complex and nuanced than many perceive and needs to be multi-dimensional.” McCormick says. “A range of mistakes can easily be made and ASIC’s recent analysis… has made most of them.”

“Simple analysis of share price plus raw dividend returns… is obviously relevant to investors, but is far from the full picture,” he adds.

ASIC’s analysis of 48 LICs/LITs listed between 2015 and 30 June 2019 was revealed following a freedom of information (FOI) request as part of the ongoing coverage on the topic by the Australian Financial Review. The ASIC analysis and correspondence regarding the analysis has since been viewed by Professional Planner.

Mainstream press coverage of stamping fees in recent months argues that these incentives represent a workaround for fund managers seeking to remunerate advisers and brokers to sell their products, incentives banned under Future of Financial Advice (FoFA) reforms for unlisted products.

McCormick’s counter-analysis suggests the topic could be more complex than this coverage suggests and indeed is likely to be addressed as part of the FASEA’s new Code of Ethics which advisers must adhere to starting as of January this year.

“Shouldn’t we allow client best interests duty and commitment to ethical behaviour drive decisions around whether advisers/brokers receive some or all these stamping fees, or instead rebate them to clients, particularly with most stamping fees in the 1-1.5 per cent range?” McCormick asks.

ASIC was contacted but declined to comment for this article.

McCormick’s view that stamping fees will be addressed by best interest rule is supported by high profile listed investment company provider and founder of Wilson Asset Management, Geoff Wilson, who tells Professional Planner he believes these incentives don’t impact outcomes for investors. Wilson was a prominent voice in the campaign against the Labor government’s plan to abolish tax refunds for franked dividend recipients which it took to the last federal election.

“The performance of the underlying manager, the tax paid and the fully franked dividends paid to the investor determines the outcome for investors,” Wilson says.

The initial carve out for stamping fees was given because of an argument that companies would not be able to raise capital, ASIC observed. While LICs were left out of this original carve-out, it was the Abbott government which decided to extend the exemption to these structures.

“If an investor was paying an annual advice fee to a financial planner or wealth manager and they recommended a LIC/LIT IPO, client best interest would suggest that any stamping fee should be fully or largely rebated to the client,” McCormick states. “But could a stockbroker whose business relies largely or exclusively on transaction fees and other financial services groups that are making the fund available directly to clients be justified in receiving a small stamping fee for the work involved in orchestrating the concentrated nature of these closed-end, listed offerings?” McCormick states.

As part of his counter-analysis, which was also published on Livewire this week, McCormick highlights the following points: