Financial advisers and other intermediaries are creating “sub-optimal” outcomes for retail investors according to an interim report on competition within the managed fund sector produced by Deloitte.
The consultancy firm’s report, which was commissioned by ASIC and released for submissions over the weekend, says the “long and complex” value chain between fund managers and retail investors creates issues regarding incentive alignment, transparency and conflicts of interest.
One of these issues is that advisers purportedly lack motivation to negotiate fee discounts and are susceptible to prioritising relationships over client outcomes.
“There is competition between fund managers on fees and discounts. However, retail investors may not receive the full benefits of competition over discounts,” the report states. “For example, advisers may not have sufficient incentives to negotiate discounts on behalf of investors or they may be influenced by relationships with fund managers.”
While advisers now have to comply with FASEA’s Code of Ethics, Deloitte remain concerned that “…if overly influenced by BDMs when making recommendations, advisors [sic] may not act in the best interests of investors”.
The report’s authors do acknowledge one benefit of having licensees and advisers in the distribution cycle.
“Acting as gatekeepers in the supply chain, intermediaries provide due diligence on funds before they reach the market and reduce transaction costs for investors,” the report states.
Even then, however, consumers are negatively affected as these processes “impact investor access to funds by increasing barriers to market access for new funds”.
The due diligence role also creates opportunities for “imperfect decision-making processes”, the report continues, while the extra time it takes to assess products “can also affect incentives for product innovation”.
No single source of truth
According to Deloitte Access Economics associate director Ben Lodewijks, the report was originally commissioned by ASIC in early 2020.
The domestic managed funds industry now manages almost $2.3 trillion in consolidated assets. While the vast majority of those funds are allocated to institutional investors like superannuation funds, the report focuses on the 6 per cent accounted for by retail investors.
There are now over 3,700 managed funds on offer in Australia provided by over 300 fund managers. In 2018, 86 per cent of retail inflows came via financial advisers.
Managed fund fees average out at 87 basis points in 2020, a figure the report notes is “low by global standards”.
While the industry is competitive, the study found that information about funds is “complex and voluminous”, with “no single source of truth” that allows consumers to directly compare them.
“Fund managers use advertising to inform and attract retail investors,” the report says. “In some instances, advertising is misleading.”
Submissions are now open to the report via the Deloitte website. The final report should be delivered by mid-2021, Lodewijks advises.