ASIC warns on over-reliance on ratings houses
Financial planning licensees and their financial advisers have been placed on notice that they may have become over-reliant on the work of research and ratings houses.
In what represents a somewhat under-reported element of the Australian Securities and Investments Commission’s (ASIC’s) Report 799 dealing with Superannuation Choice products, the regulator has made clear that it is sees significant deficits in the current relationships which exist between AFSLs and research houses.
In fact, ASIC’s report pointed out what appeared to be a dangerous progression of some financial advisers relying on the approved product lists of the AFSLs who, in turn, were reliant on the work of the ratings houses.
“Trustees, advice licensees and advisers rely on research reports provided by research houses to perform their roles,” ASIC said in its report.
“This was a constant theme observed in our review. We acknowledge the importance of this external investment research for the fair, efficient and transparent operation of financial markets,” it said.
However, it then went on to warn of the dangers of over-reliance on ratings houses and, in particular, investment-neutral ratings.
“Ratings systems are generally designed to reflect the degree of conviction the ratings provider has for the relevant product to achieve risk adjusted returns in line with certain objectives. We observed that trustees commonly adopted a minimum investment neutral rating for assessing investment options and some advice licensees did the same,” it said.
“Generally, an investment neutral rating was applied where the research house’s conviction about returns was not high, but the investment option was not yet on a watch list. A neutral rating was also applied in circumstances where the investment option was potentially not as competitive as other available options. We observed that ratings a step up from an investment neutral rating generally reflected a more positive conviction by the research house about returns and were often the recommended point of entry for investment.”
The ASIC paper went on to state that trustees, advice licensees and advisers should make sure that they understand the ratings they are relying on, particularly in terms of performance.
“Over-reliance on investment neutral ratings in investment management processes is concerning, particularly where it is the only barrier to entry on an investment menu or APL. We consider that a clearly identified member benefit is required for inclusion where the rating is neutral. This should be considered by appropriate approval channels and documented,” it said.
In the first point there is somewhat of argument here on a neutral rating being included.
The second point being that as ASIC is so diligent and ’up to speed’ it would have done the analysis that showed almost every portfolio constructed of the highest rated funds underperformed.
Given the second point, the first point is now …. let’s say pointless.
Well done again ASIC nailed it with the same degree of accuracy and beneficial outcome you always do.
The issue with ratings houses is their conflicts. They’ll push the funds that pay to be on their ‘active’ list and pretend the other funds don’t exist. That way fund managers see inflows after being included on such lists and the ratings house can attract more and more and see revenue growth. No adviser would get away with this model. ASIC has (for once) hit on a real problem in the industry. Ratings agencies have become rent seekers after losing their insto business.
But surely like everything else on this planet, IT’S THE ADVISERS FAULT !!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Wonder how performance at Industry Super would be if they didn’t prop up returns with up to 50% unlisted property, infrastructure & credit and their made to order valuations.
Give the poor ratings houses a break They have to research and EVERYTHING!!!
Advisers have way more time and are better placed to make manager calls as we just have to work through tax, asset allocation, super, non super structures, investments, estate planning, intergenerational wealth planning, risk insurance all the while managing the pesky peccadillos called clients and their wayward ideas on all of the above.
As advisers have so much they are expert on surely they are better placed than research houses who have teams of people doing just one job?? Better give it to one person who has clearly demonstrated they can do a massive list of different things requiring all manner of different types of expertise.
One only has to look at ASIC. They only have to one thing to do and look how crap they are at that!!!
I think you’ve nailed the problem that is so often prevalent with ASIC/advice. Somehow it’s always advisers to blame for the faults of product providers/manufacturers.
We have to be able to trust the product providers/research houses etc to do their jobs. If a fund manager doesn’t follow its investment mandate and fails due to taking on excessive risk its on the fund managers/directors/trustees. It doesn’t mean the advice was necessarily deficient (of course it may have been) but advisers seem to be the first ones to blame for investment failures when we play no part in the running of the investment/product.
So who am I supposed to rely on – those who mark their own homework?
How can I trust unlisted asset valuations and form an opinion if they aren’t visible?
How do I get a meeting at Vanguard? I need to interview them and have access to their financials so that old Betty can invest her $40k.
Why wont Australian Super or CBus take my calls for an interview?… I need to ask some questions regarding their property exposure.
What’s the point of it all anyways? Past performance is not an indicator of future performance – so you can’t hang your hat on anything really. In fact evidence shows you should buy the dogs, who are likely to outperform next year.