'Flawed' management fee structure the key to many MIS failures

Structuring management fees so there are high upfront fees and inadequate ongoing fees has been the key to the failure of many tax-driven primary production managed investment schemes, according to barrister and financial services companies director Noel Davis.

Also a director of Count Financial, Davis said this type of high-upfront management fee structure left ongoing fees inadequate for the subsequent management of many of these investment schemes.

“For years high upfront fees have been offered within many of these schemes as an inducement for the management to perform."

However, three or four years after launching the ongoing management fees were often found to be inadequate for the proper management of these schemes and they either closed or went into liquidation.

Davis emphasised that in his experience a majority of the schemes over the past 30 years have had this type of flawed structure, although some schemes were “well structured and properly run”.

He emphasised that he could not speak for failed Great Southern or Timbercorp schemes, as he did not know their structure.

Another key reason for the failure of these investment schemes, he said, was their “dependence on further investments being made in future years, which in some cases did not eventuate”.