Researching research houses

Given the nature of the relationships which traditionally exist between dealer groups and research houses, how many financial planners can actually claim to have a better than passing knowledge of the various financial models which underpin research house activity or the quality of the research they produce? 

This is a relevant question in the context of last week’s reminder by the Australian Securities and Investments Commission (ASIC) that licensees giving personal financial product advice should, consistent with Regulatory Guide 79, quiz their research provider to ensure they are providing quality research. 

As the ASIC reminder stated, “research is commonly used by advice providers to identify products that may be suitable for their clients and by licensees. Not all research is the same and nor is each research provider”. 

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What is not stated in the ASIC reminder, but which is undoubtedly well understood by the regulator, is that the structure of the financial planning industry is such that only a very few financial planners have what might be termed a “direct” commercial relationship with a research house such as Lonsec, Morningstar or Zenith. 

By far the majority of planners are reliant upon the commercial relationship which exists between their dealer groups and the research houses and, to some degree, upon the analyses provided by the dealer group’s research committees which are then translated into approved product lists. 

However there is very little stopping individual planners becoming much more actively engaged in not only the ratings provided by the research house mandated by their dealer group but the other research houses servicing the market.

There is ample material published by the ratings houses in publicly accessible forums, including in Money Management. 

It might also be argued that good planners owe it to their clients to be able to look beyond the recommendations of a single research house or a single investment committee and to have a fuller appreciation of the underlying dynamics of particular products and the personalities involved. 

Before the global financial crisis there were well-known instances of quite high-risk products finding their way into the low-risk end of approved product lists (APLs) via research houses and investment committees.

It is worth noting that Money Management at the time interviewed planners who, having done their own analyses, assessed those products as being inappropriate for their clients. 

All of which reinforces the importance of the underlying message contained within ASIC’s RG 79, as well as also emphasizing the need for planners to not only understand the findings produced by ratings houses but the manner in which they were generated. 

Successive events in the market have proved that ratings houses are far from infallible. Good planners know this and inform themselves accordingly. 

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