SQM, Zenith the adviser’s choice

SQM Research and Zenith Investment Partners have polished off the second and final part of Financial Newswire’s inaugural ‘Rating the Ratings Houses’ survey with another joint win as the top research houses voted by financial planners.

For an interactive and graphic overview of the results of the second part of the survey prepared by Wealth Data, please scroll down to the bottom of the article.

While Lonsec and Morningstar also emerged as the two most-used research houses by financial advisers in Australia they did not appear to be the most-loved, coming in third and fourth place respectively.

The results from the survey also cemented the final standings across Part One and Part Two of ‘Rating the Ratings Houses’, crowning both SQM Research and Zenith Investment Partners as joint Overall Ratings House of the Year for 2022. Mercer was close behind in third place, followed by Lonsec in fourth and Morningstar in fifth.

Part two of this year’s survey collected perspectives from a range of financial planning professionals, with over 50 per cent financial planners, 22 per cent a principal or business manager of a financial planning practice or network and 11 per cent a researcher with a financial planning practice or network.

With advisers asked to rate the five major research houses on a variety of metrics and measures, Mercer understandably yielded no results due to the research house’s changed business model, modified approach to ratings, and more focus on development of relationships related to asset consulting as mentioned in the first part of the survey.

While Morningstar and Lonsec experienced the highest usage levels by survey respondents, with 58 per cent and 50 per cent respectively, they also saw the highest levels of subscription outflows, with 26 per cent and 30 per cent of financial planning professionals saying they subscribed to the ratings houses in the last three years but do not currently use their services.

Of those professionals to exit Morningstar and Lonsec, 21 per cent and 29 per cent were financial planners, respectively. However, when asked if they use any investment consultants other than those included as part of this survey, 86 per cent overwhelming responded ‘No’. The survey also found Zenith experienced 15 per cent and SQM Research saw seven per cent of advisers exiting their research services in the last three years.

Respondents highlighted the impact licensees have on the choice of research provider, with one indicating they ceased their subscription to Lonsec because of “a change in licensee”, while another said their licensee Count Financial was responsible for changing their research company affiliation. While SQM’s separately managed accounts (SMA) research received a special shoutout as a reason to engage the firm’s services, a financial planner said Lonsec’s “bland coverage” that “doesn’t add value for the sort of information I’m seeking for clients” was their reason for leaving.

This year’s assembly of respondents also voted fund and fund company research (including coverage breadth and depth, reporting formats, timeliness, responsiveness and value-add) as the most essential criterium when it comes to subscribing to the services of a ratings provider (92 per cent), while consulting (including service availability and quality, and value-add) was rated the least important (63 per cent).

The rest of the qualitative metrics were placed in the following order of importance by survey respondents:

2. Website information and tools (including ease of use, breadth of info and integration with planning tools) (89 per cent)
3. Value for money (i.e., compared to just ‘low-cost’) (85 per cent)
4. Client service (including quality, presentation skills and proactive communication) (85 per cent)
5. Staff (including quality, experience and turnover) (83 per cent)
6. Corporate strength (i.e., financial strength and stability) (79 per cent)
7. Asset allocation research (including methodology, resourcing, timeliness and value-add) (77 per cent)
8. Model portfolios (including methodology, resourcing, timeliness and value-add) (64 per cent)

The outcome of this ranking was also reflected in the ratings of each research house, with the most essential qualities being fund and fund company research and corporate strength also voted the top two qualities among most of the providers featured in the survey, while the least important features being model portfolios and consulting were also voted their worst capabilities.

LONSEC

Lonsec’s best research quality as rated by financial planning professionals from the metrics provided in the survey was fund and fund company research which received a final score* of 89, with comments reflecting overall satisfaction with the research house: “We are happy with this selection, its ranges and reviews of funds”.

Corporate strength and website information and tools were also identified as key capabilities for Lonsec as both came in second with 86, and were closely followed by staff (83), client service (80), value for money (76) and asset allocation research (74).

However, survey respondents highlighted its model portfolio and consulting capabilities as its worst features, both receiving a final score of 69.

MORNINGSTAR

Neck and neck with Lonsec but not enough to top the ranking, Morningstar’s best rated quality was its fund and fund company research sitting at a final score of 87, as corporate strength sat right behind with a score of 86.

Planners rated Morningstar’s asset allocation research better than Lonsec’s and delivered a final score of 80, but the ratings house was edged out on the remaining metrics: website information and tools (84), asset allocation and research (80), staff (75), client service (75), value for money (71), model portfolios (67), and finally – similar to Lonsec – consulting at the tail end (63).

ZENITH

The survey results revealed Zenith managed to edge out Morningstar by one point, with planners also rating its fund and fund company research as its top quality and delivering a final score of 88.

While Zenith’s corporate strength may not be considered as highly as Lonsec’s or Morningstar’s with a lesser score of 84, the firm did outrank them with its website information and tools, asset allocation research, staff, value for money and consulting services (all scored 84).

As for its less-regarded features, Zenith matched Lonsec’s score for client service (80) and beat both Lonsec and Morningstar when it came to model portfolios (76). However, respondents signalled the firm’s inflexibility to adapt with the growing needs of clients: “Zenith was good but as we progressed, we need a wider view of the funds”.

SQM RESEARCH

SQM Research continued the trend of lower ratings of its model portfolio and consulting services much like the other research houses, but also produced different results related to the other metrics. While Lonsec and Morningstar both saw qualities like corporate strength and fund and fund company research rank the highest this was not the case for SQM, with survey respondents indicating the firm’s value for money, client service and staff were its most regarded (all with a final score of 88).

This was followed by corporate strength, website information and tools, fund and fund company research, and asset allocation research (all with a final score of 84), which speaks to the provider’s youth in the space and focus on genuine adviser relationships compared to the other houses as it continues to develop its capabilities, but also indicates its popularity among advisers with a final score of 88 as well.

INVESTMENT COMMITTEES AND APPROVED PRODUCT LIST

In a ‘Rating the Ratings Houses’ first, Financial Newswire asked planners about the statuses of their Approved Product Lists (APLs) and Investment Committees, with 65 per cent of respondents confirming they have an Investment Committee.

Financial planning professionals also provided an estimate as to the number of products on their APL, with 63 per cent reporting between 100 and 500, 25 per cent less than 100 and 13 per cent over 500.

However, some respondents also highlighted how their licensee uses external research providers to determine their APL, with one saying all products rated by Lonsec as ‘Recommended’ and above were on the list and another commented that all products holding an “‘Approved’ recommendation from Zenith” were on its list.

These responses also exacerbated the trend that emerged from the survey that criticised the perceived lack of effort on behalf of Investment Committees to base their offerings on research conducted in-house combined with that from external providers.

ROOM FOR IMPROVEMENT

In another ‘Rating the Ratings Houses’ first, Financial Newswire also asked members of the financial planning profession to offer up one single piece of criticism of ratings providers. Quite forthcoming, respondents met this question with several areas of improvement across the board, with conflicts of interest the top concern (29 per cent), followed by research quality (20 per cent), capabilities (17 per cent), financial investment (13 per cent), general enhancements (13 per cent) and time/staffing (eight per cent).

Several planners told Financial Newswire that Lonsec, Morningstar and Zenith’s shifting business model from research only to also offering investment products like separately managed accounts (SMAs) presents a significant conflict of interest, as their research “now does not cover some multi-asset class SMAs because of the conflicts with their offerings”.

Other respondents questioned the independence of research houses if they “are paid by the fund managers to be rated and then paid by us to use them”, as some called it a “conflicted remuneration structure” and the prevailing sentiment was: “Who is keeping them honest? … It seems that it is about their profit”. Planners also emphasised the rising costs of research, with SQM singled out as “value for money” but the others as just “too expensive for a self-licensee” – an issue that continues to become more prevalent as more advisers turn to this business model.

Survey respondents also offered several criticisms related to the quality of research offered by providers, with most indicating a lack of detail behind the ratings and of “real research into industry super funds”. However, comments also highlighted the need for more timely and updated research data as one planner suggested “an emphasis on quality of team and longer-range ability would be more useful [and] insights into the fund structure (tax credits etc.) can make a big difference”.

As staffing emerged out of the survey as a relatively important quality, it comes as no surprise that planners also offered some critiques for research houses regarding this. They cited frequent time delays due to staffing changes causing issues with updating fund research, as “they can be slow in communicating change to portfolios” and need more “timely issue of alerts for ‘Under Review’ or substantial downgrades”.

* These scores originated and have been developed from Financial Newswire’s proprietary scoring system also used for Part One of the survey.

In Part Two, financial planners were asked to rate the five research houses on a scale of Excellent to Poor on each of the nine metrics/qualities. Every ‘Excellent’ rating received a score of 5, every ‘Good’ rating received a score of 4, every ‘Average’ rating received a score of 3, every ‘Below Average’ rating received a score of 2 and every ‘Poor’ rating received a score of 1.

The ratings were calculated and divided by the highest possible score (the number of responses for each research house multiplied by 5), which provides the final score for each metric for each research house.