Boiler-rooms are back as fundies pay sales commissions to flog their products

Christopher Joye

Coolabah Capital

In my column today I reflect on the explosion in fund managers raising money via LICs/LITs and how these vehicles allow them to legally circumvent the Future of Financial Advice laws that expressly ban payments of conflicted sales commissions to brokers/advisers selling funds to retail investors (click on this link to read the full column for free or AFR subs can click here). Excerpt enclosed:

Parliament originally introduced the FOFA reforms to stop product manufacturers, mainly fund managers, paying conflicted sales commissions to advisers and/or brokers - or anyone with a financial services licence - providing advice to retail investors.

FOFA does not apply to wholesale (as opposed to retail) investors, nor to any normal business issuing shares, senior bonds, subordinated bonds or hybrids (preferred equity) to raise money to fund their operations. In these cases, conflicted commissions are permitted.

When these laws were introduced in 2012, they applied to all investment entities, including both listed and unlisted funds and investment companies. In 2014, however, sustained industry lobbying convinced politicians to exempt listed investment companies and trusts from FOFA's all-important reach.

Fund managers are now simply shifting their capital raising efforts on to the ASX to allow them to side-step FOFA completely.

As a consequence, there has been a tsunami of new listed investment companies (LICs) and listed investment trusts (LITs) launched since 2017, raising more than $6 billion for fund managers who have paid brokers/advisers enormous sales commissions of up to 3 per cent of the value of the capital contributed by mums and dads. This includes big names like Wilson Asset Management, Magellan, Platinum, VGI, and many others.

In dollar terms, fund managers have paid over $150 million in conflicted commissions to get brokers/advisers to push their products to retail investors, often in incredibly short timeframes.

For the vast majority of fund managers rushing to exploit this huge loophole, there is zero chance they could secure this volume of capital as quickly as they can on the ASX through normal FOFA-compliant channels.

And there is a real risk that advisers and brokers incented by large sales commissions promote complex strategies on to retail investors that do not properly understand the products.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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