More choice for investors and advisers following Royal Commission | BetaShares

More choice for investors and advisers following Royal Commission

BY Mai Platts | 27 March 2019
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More choice following Royal Commission

Reading time: 6 minutes

The dust continues to settle following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. As a new dawn breaks across the financial services industry I was keen to share a few of my insights into how investors, their advisers, and funds management businesses like BetaShares are affected by some of the findings.

In simple terms, in order to run a financial services business or provide financial services, including financial advice, you need to have a licence.

Financial advisers generally have two options. An adviser can apply for their own licence from the Australian Securities and Investments Commission (ASIC), meaning they are ultimately responsible for ensuring their licence conditions are met. These advisers are referred to as independent financial advisers (IFAs).

The other option is to become an authorised representative of an existing licensee. This is referred to as being an ‘aligned adviser’. Typically, the larger licensees belong to the banks themselves or are owned by a subsidiary of the bank.

Whether an adviser is an IFA or an aligned adviser has some implications for the end investor. There are positives and negatives in both scenarios.

An aligned adviser will generally need to operate with an Approved Product List (APL). The APL is set by the licensee’s research or investment team. They do their due diligence on the product and then make an assessment as to whether it is suitable to be on the APL. Their criteria may include a minimum rating from a research house (this is the industry standard), the level of demand from advisers, and whether there are similar strategies already available.

The aligned adviser may also be limited in their choice of technology provider/platform. Larger licensees will generally own and manage their own platform and recommend/require that the adviser use this platform.

An IFA typically has more scope to make investment decisions. An IFA may choose to apply some of the parameters used by aligned businesses, such as requiring that recommended products have a minimum research rating, or they may use their own internal research capabilities or outsource the function of assessing the investment merit of a product. The choice of technology provider is entirely up to the adviser, who can specify their technology requirements, fee structure and functionality.

For an investment manager such as BetaShares these considerations are always front of mind, because it determines who we can deal with on a day-to-day basis.

Dealing with aligned advisers who are limited to an APL and platform list can present additional considerations. Sometimes advisers want to use our funds because they are looking for a certain asset class allocation/strategy/investment outcome for their clients, but are unable to do so because the licensee’s research team doesn’t have the capacity to review the funds, or doesn’t believe the strategy has appeal for the broad group of advisers the dealer group represents. At the same time, we appreciate that licensees need to have a due diligence framework in place to ensure that the funds their advisers are recommending do what the label says they will.

One positive outcome of the Royal Commission is that APLs are opening up. BetaShares and other fund managers are noticing that licensee research teams are now providing more flexibility for advisers who have a genuine need for a certain fund for their clients, and are allowing one-off approvals where the adviser can apply to use funds outside of their dealer group APLs. This is a welcome change, and one the funds management industry is hoping will be permanent.

For advisers, it introduces the potential to add further value for their clients. Advisers with an understanding of funds beyond those on their licensee’s APL can offer a broader range of solutions to meet their clients’ needs (providing their licensee gives approval for the use of those funds).

For investors, it means they may not be tied to their adviser’s APL. An investor who wants to invest in a fund that is not currently on the APL can discuss the merits of the investment with their adviser, and request that the adviser apply for approval from their licensee.

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