An industry stakeholder has suggested the role of research houses needs to be examined more closely in the wake of high-profile product collapses, such as the Shield Master Fund and First Guardian Master Fund offerings.
Research reports and ratings are the first step in the retail distribution chain for fund managers as a report is required for most dealer groups to add a product to their approved product list.
“In the case of Shield and First Guardian, it is clear that no rating should have been issued,” FundMonitors chief executive Chris Gosselin indicated.
“The research process is potentially highly conflicted as the fund manager pays the research house for the report. In reality, the fund manager is not so much paying for a research report, they’re paying for the rating.”
Further, Gosselin noted many in the industry have raised concerns about the current process, which has a lot of fund managers paying up to $35,000 a year per fund for a research report and suggested some could be paying well over $500,000 a year.
“A research report should be unbiased, but if the manager is paying the research house, there’s the potential for massive conflicts of interest. That’s not to say all research is flawed or that conflicts aren’t correctly managed in many cases, but Shield and First Guardian highlight the potential issues,” he explained.
He proposed the Australian Securities and Investments Commission (ASIC) should be more involved in holding research houses to account for their activities.
“A research house should have an AFSL (Australian financial services licence) issued by ASIC, but to date there is a relatively light-touch approach from ASIC to ensure the accuracy and independence of their reports, partly because it is generally only distributed to advisers who are AFSL holders and technically because it doesn’t contain advice,” he said.
In addition, he called for the payment system for research and ratings to be changed.
“Rather than the fund manager paying for the research, the platform or end user should pay. A beneficiary-pays approach would remove the conflict inherent in the system,” he proposed.
