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.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
3 comments on “Advisers hindering consumer access to managed funds: Deloitte”
  1. ASIC blew some of their budget on this? Retail investors can buy into thousands of managed funds directly with providers, via platforms and in the case of ETFs, via online brokers – all without coming into contact with advisers or BDMs. What problem is ASIC trying to solve here?

  2. Avatar Christoph Schnelle

    I wonder what the purpose of the report is? To me it states the blindingly obvious that intermediaries (financial advisers) add costs to a transaction. That is the same for all professional transactions. Lawyers add costs to legal transactions as anyone could write their own contracts or wills and lawyers could be overly influenced by overusing existing precedents, charging too much, writing contracts that are too one-sided etc.

    Here the fear is that BDMs may be overly influential. If they are that successful with experienced intermediaries what hope would customers have who don’t have access to an adviser?

    The rise of passive investments, i.e. index funds and index ETFs, much of which is adviser driven, seems to point in the opposite direction with advisers driving down investment costs. I find it strange that this has been omitted from the Deloitte report.

    Investment advice could have been and was heavily influenced by investment commissions. Those have been outlawed, seemingly without loopholes, with the exception that product providers can still have their commercial salesforces.

    I would be really surprised if BDMs of fund managers have anything like this level of influence.

    What is the purpose of this report except to lay the ground that financial advisers should be prohibited from investment advice as BDMs may be too influential and advisers add costs to the process?

  3. Avatar Steve Blizard

    I’m sure all the thousands of institutionally owned tied agent Intra-Fund “advisers” will inform the fund members they are “advising” about these vital facts. lol

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