Hall of Fame Broker: Ban Stamping Fees

Christopher Joye

Coolabah Capital

Writing for Switzer Daily, Hall of Fame stockbroker Paul Rickard argues that stamping fees "are conflicted remuneration, and should have been banned back in 2014 when the then Abbott Government bowed to industry pressure and watered down the Future of Financial Advice (FOFA) law reforms". And Rickard continues:

""What are the arguments to keep paying them? To be brutally honest, it is very hard to find anything of substance...The simplest outcome is to recognize that it is conflicted remuneration and ban it in its entirety. Good brokers and financial planners, working on a fee for service basis with their clients, will survive and prosper. For the record, I am a Master Practitioner Member of SAFAA. Rightly or wrongly (some argue wrongly), I was awarded ‘Stockbroker of the Year – Industry Hall of Fame’ way back in 2005."

In my own column today, I argue that the raging debate as to whether fund managers should be able to pay advisers conflicted selling fees to push their products is a test-case of Treasurer Josh Frydenberg's decision-making integrity (click on that link to read the full column or AFR subs can click here). Excerpt only:

Frydenberg’s decision to hold a short, four-week public inquiry on the subject is to be applauded, so long as it arrives at the right conclusion. This is not a matter of opinion.

There is only one answer if Frydenberg chooses to act in Australians’ best interests – reinstate FOFA’s ban on all LICs and LITs paying advisers conflicted remuneration...

Labor’s far-sighted FOFA reforms revolutionised the advice and funds management industries. Almost all advisers are now aligned with their clients’ interests.

And fund managers rise and fall based on their performance, not because they are paying advisers huge conflicted kickbacks.

These consumer safeguards are being fundamentally threatened by the Coalition’s decision to excise listed funds from FOFA, which has led to LICs and LITs paying up to $440 million in selling/transaction fees to advisers in the past three years alone.

This has in turn allowed the fund managers to grab about $15 billion in cash from mums and dads.

While the Treasury previously assumed this problem was not a priority, the fact is it is slowly crushing FOFA. All fund managers are being forced to consider moving their capital-raising activities to the ASX so that they too can pay unlimited sales commissions to compete for the feeding frenzy over retail money.

Since the Coalition granted the exemption, the size of the LIC/LIT sector has more than doubled to over $52 billion. And these products are not vanilla funds.

Most of the new issues since 2017 have been hedge funds or junk bond funds with a complex array of risks that few retail investors could hope to understand.

Already this year several high-yield debt LITs have hit the market, offering advisers fees of up to $30 million to secure $1.4 billion from main street.

And advisers willing to accept kickbacks from funds are salivating at the prospect of another 20 to 30 LITs purportedly in the pipeline.

The Coalition’s rollback of FOFA has, therefore, created competitive dysfunctions: whereas FOFA-governed unlisted funds and exchange traded funds (ETFs) have to compete purely on their merits, and cannot pay selling fees, LICs/LITs can raise almost unlimited sums if the commissions are juicy enough.

While some argue LICs/LITs are sourcing this money because of consumer demand driven by the search for yield dynamic, that is utter nonsense.

If these selling fees had no impact on adviser behaviour, why would the LICs/LITs be sacrificing up to four years’ worth of their management fee earnings to pay them?

They would instead simply raise the money for free as all other unlisted funds and ETFs do (and Magellan has proven is possible with its recent LIT offering).

Almost all LIC/LIT operators privately concede that if they did not pay these fees, they would not raise diddly squat. Ipso facto, the fees unambiguously motivate advisers to funnel client funds into complex products when it is rarely in their clients’ best interests to do so.

A leading fund manager tells this story. They were pitching their latest LIT issue to a stockbroking firm –a well-known, brand-name company.

One of the first questions a senior broker asked was: "If I get my client to invest with you guys, can I get my commission in three months’ time?" After confirming this was possible, the broker then said, "You run Aussie stocks, right?" The manager worked in a completely different asset class...

One obvious problem here is that the many stockbrokers who have become recently qualified as advisers are struggling to come to terms with the idea that they are not salesmen and should be sourcing their earnings solely from their clients on the basis of the value they generate for them.

A different set of competitive dysfunctions is eroding the advice industry. Conflicted advisers who are taking huge sales commissions from fund managers are able to discount the fees they charge their clients.

In contrast, unconflicted advisers who can only accept compensation from clients cannot cross-subsidise their costs in this way. And when a new customer is assessing which adviser to use, they are not aware of these conflicts – they only become apparent when they are onboarded and subsequently spruiked LICs/LITs.

Over time, conflicted advisers will capture more and more market share as unconflicted advisers cannot compete with their lower fees. The casualty will be the quality of advice Australians receive.

Some argue that a halfway house is a cap on these sales commissions of between 0.5 per cent and 1.0 per cent. But this Frankensteinian proposal is no solution.

Mortgage brokers are paid upfront commissions of only about 0.6 per cent, and it is easy to see the huge impact those fees have on their behaviour.

Likewise, real estate agents typically take home about half of their 1 per cent to 2 per cent fees, and they are the biggest spruikers in town.

For a normal stockbroker parading as an adviser, a commission of 0.5 per cent to 1 per cent is between two times and 10 times what they earn on broking secondary shares (ie, a massive improvement in their economics).

If you care about protecting Australians' rights to unconflicted financial advice and a level playing field in the funds management industry, you can make a private or public submission to Treasury here: stampingfeeteam@treasury.gov.au.

Disclaimer: This information has been prepared by Smarter Money Investments Pty Ltd. It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not an indicator of nor assures any future returns or risks. Smarter Money Investments Pty Limited (ACN 153 555 867) is authorised representative #000414337 of Coolabah Capital Institutional Investments Pty Ltd, which holds Australian Financial Services Licence No. 482238 and authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271.

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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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