In its 60-page report entitled Professionalising Financial Advice, the CFA Institute and CFA Societies Australia detailed their concerns over the practice where some platforms or adviser groups place ‘wraps’ around existing funds and then market their own ‘products’ to clients as a way to access certain funds or investment managers.
“This allows the adviser to charge higher fees than would apply if the client was given direct access to the underlying investment product,” the report noted.
While the royal commission final report did not cover platform fees in detail, Hayne’s interim report stated:
Licensees may and often do include third party manufacturers of products on their approved product lists (including the approved product lists maintained by platforms) but, much more often than not, advisers recommend that clients use products that are manufactured by entities associated with the advice licensee with which the adviser works.
Related to this practice is the issue of fund managers paying a ‘sponsorship fee’ or ‘shelf space fee’ to have their products offered on platforms, the CFA Institute said.
“This means that even if a firm claims to be independent and use ‘open architecture’ (offering access to all products), the best products are not necessarily those that are put in front of a client seeking advice.”
In its comments on platforms, the interim report of the Hayne royal commission noted that the charging of platform fees evoked comparisons with “fees for no service” because the default setting seemed too often to be “set and forget”.
“Charging platform fees evoked comparison with inappropriate advice because, very often, the platform that an adviser recommended the client use was a platform provided by an entity associated with the licensee with which the adviser was aligned or by which the adviser was employed and the arrangements were allowed to stay in operation despite the platform not remaining cost-competitive” said Mr Hayne in his interim report.
“Both the practice of ‘set and forget’ and the ways in which fees for, and services provided by, platforms could remain unaltered over time show that customers using platform services exert little or no effective competitive pressure on platform operators.”
The CFA Institute argues that, just as when recommending investment products, financial advisers should have the client’s best interest in mind when recommending an investment platform.
“This is consistent with the financial services regime which treats platforms as financial products and hence best interest must be observed when one is recommended.”
The CFA Institute also warned about fund managers paying to have their products rated by rating agencies.
“The conflict is obvious – an agency is being paid by a fund manager to rate that manager’s fund offerings. [A] fund manager also may shop around to find an agency that will provide them with a better rating. They then pay this rating firm and advertise the resulting rating of their funds in their marketing material,” the report said.