Who is squeezing $100,00 a year out of fund managers?
By the time platforms, ratings houses and financial planning dealer groups take their clip of the ticket it can cost a fund manager around $100,000 a year to make its product available to retail investors.
That is one of the critical bottom lines of new research commissioned by the Australian Securities and Investments Commission (ASIC) which suggests that while legislative changes such as the Future of Financial Advice (FoFA) legislation made a difference, there are still plenty of players reaping gate-keeper benefits.
The report, developed by Deloitte Access Economics, suggests that financial advisers are the least of the problem because they sit at the end of the food chain and are reliant on their licensees’ approved product list (APL)
Dealing with the post-FoFA make-up of the industry, the Deloitte Access Economics report suggests that there are significant barriers to entry for new fund managers and that in most instances they have little bargaining power as they work their way through the process of research and ratings houses, platforms and then licensees and their APLs.
Referencing the role of research houses, the report said that they “generally do not appear to use market power to lessen competition” but nonetheless pointed to their influence.
“Similar to platform providers, research houses have market power in dealings with fund managers, as there are only a few major research houses rating many funds, and fund managers are strongly reliant on ratings to reach retail investors. As a result, research houses have discretion over which funds they rate. In particular, research houses with:
- supply-side models only rate a fund where the fund manager is willing to pay for the fund
- demand-side business models will not rate a fund if there is not deemed to be sufficient investor interest
“Both models have the effect of lessening the ability of fund managers to compete by preventing investor access to some funds and ensuring that ratings results are not representative of the industry. The demand-side model particularly reduces the number of funds available to investors as fund managers are not able to control this access by paying the research house.”
“It does not appear to be the intent of demand-focused research houses to limit competition, but rather to ensure that rated funds are supported by client demand. However, there are concerns among industry that the supply-side business model can be conflicted and lessen fund managers’ ability to compete.”
Where platforms are concerned, the report said platforms could create barriers to entry for new fund managers and have substantial market power because there are fewer platforms than funds and dealer groups and advisers tend to only purchase funds that are available on the platforms they use,
“As a result, platforms can limit advisers’ and investors’ ability to access and invest in a fund of their choosing,” it said.
“This has the effect of lessening the ability of fund managers to compete by restricting access to retail investors. However, it does not appear that platform providers’ have the intent of lessening competition. Funds do not seem to be restricted through commercial or other arrangements from seeking to be listed on more than one platform.”