How do raters feel about being rated?

rate the raters Zenith FE fundinfo morningstar sqm Louis Christopher

18 November 2021
| By Oksana Patron |
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The second part of Money Management’s ‘Rate the Raters’ survey has traditionally asked financial planners to rate research houses on a range of measures. 

This year, Money Management has invited the research houses to share some insights of their own and address some of the most contentious issues that have been raised consistently by financial planners over recent years.

All the main providers of independent research in Australia were contacted for this exercise and asked to shed light in regard to the ratings ascribed by financial planners to their services and were asked whether they saw any particular areas that required further improvement.

One of the concerns was around the quality of qualitative research offered by research providers and transparency over how their coverage was being decided. Money Management asked research houses to explain their processes.

Lonsec said it employed a team of over 60 analysts who undertook regular meetings with close to 200 fund managers and superannuation funds. It noted that it would rate

“any fund that is prepared to undertake” its ratings process.

According to the firm, the execution of the best interest duty depended on how well financial planners understood the product that they were recommending and whether they were able to explain it to their clients.

“We believe that qualitative research permits a deeper understanding of the product, far beyond the numbers. We have a simple menu-based pricing structure for the process of the rating. The rating is, in no way, influenced by that payment,” Lonsec said.

Over the last five years, Lonsec saw over 180 downgrades while 66 funds were redeemed or screened out as they were considered not appropriate for investment. 

Its competitor, Zenith, said its process included both qualitative and quantitative screens and the funds were rated on their investment merits and “not on external factors such as adviser demand or product funds under management [FUM]”. 

Money Management's owner, data provider FE fundinfo, recently acquired Zenith, subject to regulatory approval.

“The screening process filters out sub-investment grade products so that we only invite quality products into the research phase,” the firm said.

This enabled Zenith to identify new products, lesser known names, and offer advisers “an unbiased and continually refreshed list of investment opportunities”, the firm said.

Zenith had a minimum of two analysts allocated to a product review and said it aimed to have analyst continuity from year to year to help ensure “a deeper dive into the fund” and remove any potential for bias.

Morningstar, on the other hand, stressed its commitment to the principle of independence, meaning the research house did not accept payment to produce qualitative research and ratings.

“We produce analysis for the benefit of investors and their advisers, not asset managers. As a result, Morningstar will deliver their genuine opinion of an investment strategy and associated investment vehicles and will not hesitate to give a negative view when warranted. We believe this position supports the highest quality research,” the firm said.

The research house said its research coverage was driven by adviser and individual investor demand and the products were rated based on their assessment of whether it may be useful to investors.

Also, the coverage committee canvassed different parts of the Morningstar business to understand client demand for a particular product and to consider the fund flows into the given product.

Asked about their pricing with regards to added value, Morningstar said its value was in providing assistance to advisers in developing recommendations for their clients while mitigating risk.

“Our business model is subscription based, we do not accept fees from investment managers to deliver research or ratings; meaning that our fee is user based and recognises the extensive data that must be analysed in a fashion that supports the quality of our research without being encumbered by potential conflicts of interest,” the firm said.

SQM Research said it charged “a competitive flat fee for its adviser subscriptions with affordable plug-in options such as direct equities research and property data”.

“Fund rating fees charged to managers are also flat, cost effective, and generally known by the industry,” SQM Research owner, Louis Christopher, said.


On the assertion of limited coverage of managed funds and low interest in new investment managers, Christopher said he believed his business was known for its “strong coverage of up-and-coming managers”.

He said approximately a half of all SQM’s rated funds had a FUM of between $20 million to $100 million, and the firm’s current fund coverage was around 350 ratings.

Lonsec said it currently covered almost 1,400 funds, exchange traded funds (ETFs), listed investment companies (LICs), and listed investment trusts (LITs). It rated approximately 200, or two-thirds, of registered fund managers in Australia.

However, the firm stressed, many new investment managers chose not to be rated by Lonsec, as a result of their inability to demonstrate experience or a track record.

“New managers coming into the market from overseas often have well established teams, with track records in other markets. Those issues can be taken into consideration as part of the ratings process,” Lonsec said in a statement, confirming that there was a significant interest among these funds in the Australian market.

Zenith said that its investment universe encompassed thousands of funds globally, however the company stated it was not in the business of “trying to rate every fund” but instead was aimed to provide a high conviction approved list.

“New investment opportunities are continually coming to market and we act swiftly to review new products. Our ratings of listed investment companies and exchange traded funds reflects this trend. We have increased coverage significantly to meet increasing adviser demand for more product structures,” it said.

At the same time, Morningstar said its goal was to cover a broad spectrum of investments that would meet investors’ portfolio construction needs. From an equities research perspective, Morningstar said it covered “virtually all of the Australian Securities Exchange (ASX) 100, the vast majority of the ASX 200 and a handful of ex-ASX 200 stocks with a bias towards high quality companies”.

“We may also look for opportunities to extend our coverage in an industry we already cover to leverage our knowledge,” Morningstar said.

“There is some meaningful work required in the initiation, and we would want to satisfy ourselves that the company in question will present meaningful investment opportunities for our clients through the cycle.”

From a fund research perspective, Morningstar said, it produced a “prospects” document every six months that outlined the new and prospective managers that were under consideration to be added to the coverage. 

“One of our inputs is our assessment of whether an investment manager brings a differentiated offering that will be of benefit to investors, this includes new investment manager offerings,” it said.


The other concern often raised by advisers was the fact that research houses were often expanding into consulting/portfolio solutions space which made them effectively act as product manufacturers and raised the question of conflict of interest.

SQM Research dismissed this claim and said it would continue to “strictly and very deliberately stick to our vision of being a pure research and data organisation for this very reason”.

Answering the same question, Lonsec said it provided model or paper portfolios to assist advisers with their investment decisions for many years. The research house also said this view was supported by its analytics which indicated that there were many advisers who followed its models.

“Further assisting advisers and the dealer groups that they may be part of, with their approved product lists (APL) management and investment committee work, is a natural extension of this capability,” the firm said.

“Those two parts of our business research/consulting operate independently within Lonsec. We have a strict compliance framework in place to avoid any potential conflicts from arising.”

Zenith also stressed that consulting, understood as managed accounts portfolios management, and research were two separate business functions. 

“Consulting has no vote in the ratings determination of a product. Research has no vote on inclusion of a fund in managed accounts,” 
Zenith said.

“Consulting and external clients are notified and can act on ratings changes at the same time, for example consulting cannot ‘front run’. We have a compliance committee that monitors all consulting trading and ratings change disclosures and all staff are subject to open and closed periods for asset class reviews underway at any point in time.”

Morningstar said a broader range of the advice market now more than ever needed assistance, not just in investment selection, but in the combination of those investments in portfolios that would meet a client’s best interest.

“Whilst Morningstar is a research house first and foremost, we recognise that the needs of the market would benefit from our portfolio consulting and management capability,” it said.


Commenting on to what degree the recent regulatory changes focused on commissions, including the end of the grandfathered commissions, and the collapse of the vertically integrated business models impacted the independent research, the research houses pointed to the following issues.

Christopher warned the move taken by some of the researchers to enter product creation such as running their own models presented a significant potential conflict for those organisations which was, according to him, the single largest issue today affecting independent research.

“The past events surrounding the downfall of van Eyk provide us all with an example on how badly this can end. As stated above, SQM Research will never walk down this path under my leadership,” he said. 

“While no question the end of grandfathered commissions has meant many planners have left the industry, the collapse of bank-owned vertically integrated business models has also offered opportunities for smart operators to go out on their own. 

“In this light, SQM has had the strategy of offering relatively low-cost research options for the independent financial advisers (IFA) market in particular, while increasingly being able to offer full-service capabilities to larger networks without the above mentioned conflict issues.”

Morningstar was of a similar opinion and said the advice and investment industry had changed significantly, particularly since the Hayne Royal Commission.

“From a research house perspective, it has meant that research commercial engagements have somewhat shifted from large enterprise arrangements to smaller IFA businesses and smaller AFSLs [Australian financial services licences],” it said.

“Nevertheless, Morningstar’s focus remains the same, to assist advisers in their pursuit to assist clients achieve their personal goals through high quality independent investment research, end-to-end advice technology and managed portfolios.”


The findings from the second part of Money Management’s 2021 ‘Rate the Raters’ survey showed that ease of use of research houses’ information and tools, along with the breadth of information and easiness of integration with planning tools, was one of the most important metrics.

About 94% of advisers participating in the survey said this was either ‘essential’ or a ‘very important’ criterion to their business when choosing a qualitative fund research and ratings provider. 

Advisers most appreciated Lonsec’s and Morningstar’s tools as 93% and 71% of participants, respectively, having said the website and information tools from these two researchers were either ‘excellent’ or ‘good’. 

Similarly, advisers decided that the researchers’ ability of funds and fund company research, which included coverage breadth and depth, reporting formats, timelessness and responsiveness, among others, was the second most important criteria. 

Over two-thirds of the respondents appreciated Morningstar’s and Zenith’s ability in this regard, while Lonsec managed to attract positive ratings from over 93% of advisers.

The researchers’ core strength, which was rated by 74% of respondents as either ‘essential’ or ‘very important’ metrics, saw 92.9% of those who voted in the study ascribed their highest ratings to Mornigstar’s which was followed by Lonsec. 

Subsequently, more than half of those participating in the study gave their highest ratings for corporate strength to Zenith and 20% appreciated SQM Research in this regard.
The next two metrics that were either an ‘essential’ or a ‘very important’ criteria were staff and client services offered by researchers. 

When it came to rating the research houses’ staff, advisers took into account factors such as staff quality, experience and turnover. High ratings were rewarded for client services focused on quality of presentation skills and proactive communication. 

Under one-third of advisers who rated SQM Research in the study assigned the highest ratings for its staff and one-third rewarded the research house with the highest ratings for its client services. 

Following this, approximately two-thirds of those who rated Zenith were of the opinion that the quality of its staff was either ‘excellent’ or ‘good’ and 61% said the same about Zenith’s client services. 

Morningstar and Lonsec saw 82% and 87% of respondents, respectively, who were content with the quality of their staff and 71% and 80% who said the same about their client services.

This year, advisers were in agreement that the consulting services offered by the research houses were at the bottom of their wish list when it came to choosing an external research partner. 

According to the survey, only 34% of respondents were of the opinion this was an ‘essential’ or ‘very important’ criteria in their decision-making process and, at the same time, around 15% described it as being a criteria that was ‘not important’.

Also, advisers were of the opinion that model portfolios offered by the research houses were not their top priority compared to other metrics. According to the survey, the highest number of advisers ascribed this category the lowest ranking  as ‘not important’. 

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