Much of the value of having a research house rate a financial product comes in the way of its perceived independence and ability to offer a completely objective view.
However, in recent times many of the raters have begun offering other services to clients, such as implemented consulting and investment products, which has raised concerns among fund managers about research houses’ ability to remain completely impartial.
This year’s Rating the Raters Survey asked fund managers to voice which of these additional activities created a definite conflict of interest.
The results show the majority of respondents feel providing implemented consulting, offering model portfolios, offering investment management products, and being owned by a fund manager or other institution, all posed a conflict of interest.
Fund managers seem to feel most strongly about the latter two, with 84 per cent believing there is a conflict arising from offering investment products, and 81 per cent unhappy with the erosion of independence brought about by financial institution or fund manager ownership.
The majority of respondents were in agreement though, that operating a platform, be it a wrap or master trust, did not create a conflict of interest.
Attitudes of researchers
One fund manager thinks a rater’s attitude towards having its own peripheral services or products examined provides a good illustration of undeniable conflicts.
“The prime issue for any of the research houses which offer implemented consulting is whether or not they are prepared to have other research houses crawl all over their product and rate it,” he says.
“If they expect us to believe Chinese walls and ‘no, all of that stays in house’ in terms of ‘we need to understand your process’, at face value, they should be prepared to let one of their competitors crawl over theirs and rate their product.”
Another fund manager highlights other issues that arise from research houses offering additional services.
“We’ve cut off some ties with researchers in the past because they have become a direct competitor in our space. There’s just no point in us speaking to them because we don’t think that it is going to be fair for a number of reasons,” he says.
“One obviously is we’ve got a competing product, and also because there are potential competitor issues in talking to them about what our products involve and what our process is, and giving them some inside and proprietary information. So, obviously there are relationships that can’t exist,” he explains.
However, it would appear, that the raters themselves are very conscious of the perceptions of existing conflicts of interest within the market and are keen to implement measures that will alleviate any concerns their clients may have.
One researcher says: “Our different activities are completely separate and even located on different floors. We make sure that there can’t possibly be any interaction between the different services we offer. Not that there would be, but you want it to be seen that it doesn’t happen, so that people have got confidence in you.”
Another participant feels the demand on researchers for additional products means that ‘pure’ research houses may be a thing of the past and the issue will centre around how these perceived conflicts are managed.
“If you look at the way the van Eyk business has changed over the last three years, they’ve moved from a research background to offering their own fund of fund product and asset/implemented consultancy. I’d say that is the direction in which the industry is headed,” he says.
“So while you can’t get rid of the conflicts of interest, the barrow I’d like to continue to push is for greater transparency.”
Ratings fees
While most fund managers admitted to paying a fee to be rated by a research house, 84 per cent, as well as a fee for being able to use a rating in marketing material, 53 per cent, the majority of them disagreed with both of these practices, with 62 per cent believing the payment of a fee could compromise the objectivity of the rating.
Rather than fund managers paying for the ratings process, one respondent thinks the onus of payment should revert to financial advisers who rely on the research to allow them to recommend products to their clients.
“Financial planners are the ultimate users of the research and therefore in my view it should be paid for by them and they should direct the companies that they wish to have research sought on,” he says.
But another fund manager could not see how a fee paid for a rating could compromise the end result.
“The researchers who do charge a fee have a fee structure for everybody which is exactly the same. So if I don’t pay the fee, I can’t have a product rated.
“But by paying the fee I’m not going to get a better rating, I’m just going to get a rating. So I can’t see how I’m going to get a better rating by paying the fee. I’m either going to get a rating or I’m not,” he says.
