Great article Dominic. The shine seems to have gone off the AFR's credibility since the Nine takeover

Thank you for throwing more light on this murky issue. The last paragraph re “right decisions” from ScottyfromMarketing says it all.

A helpful contribution to what has become a very heated debate

I agree about the excessive fees charged by the Smarter Money High income and Long/short funds. I otherwise like the funds but have resisted buying them.

Well done Dominic on calling out Chris Joye for his obvious conflict. So what is it Chris, are you a commentator on the Financial Services Industry or a participant? Can't have it both ways. Now if we could only weed out those floggers of financial services that get away with shamelessly pushing their own products under the guise of financial advice articles here on Livewire...

Great article - I always suspected that there was some conflicted interest in Chris Joye's articles - good to understand why.

It is pretty sad that Dom as a paid lobbyist for the LIC/LIT industry you would resort to highly emotive personal attacks on me to advance your cause, including trying to tar me politically. I have been vocally arguing these same points---ie, the need to remove conflicted remuneration from financial advice---in the AFR since 2014! And in case you did not notice, my opinions have been a direct attack on Coalition policy, which the Labor Party have consistently applauded. I explained recently why I think removing conflicts of interest from financial advice is important here: https://www.linkedin.com/pulse/why-debate-important-christopher-joye/ Conflicted? Pinnacle, one of the biggest LIC/LIT issuers via its excellent fund managers Antipodes, Metrics and Spheria, owns 25% of my business. Turning a blind eye to this debate would be the easy thing to do for both Pinnacle and its LIT funds, but I have taken the hard road in continuing to engage in what I believe is a very important public policy matter even though I risk upsetting my relationship with Pinnacle and their other affiliates. If around 20%-30% of brokers/advisers take selling fees from fund managers, and I am calling into question that practice, then these key investors are also presumably upset with me. I have certainly noticed that we have lost brokers/advisers as clients because of my advocacy of this subject. And I have been repeatedly threatened with personal attacks on me by those who are pushing LICs/LITs unless I withdraw from the debate, which of course you have now duly delivered on. Ironically, only this morning I wrote to one LIC/LIT operator who is on my side of the debate (and there are a few!) that "I find it incredibly sad and dispiriting that so many very smart and talented people are happy to suppress what they know to be in their clients' best interests because they are commercially conflicted". Here's what I wrote recently on why I got involved in this debate...(The links are here https://www.linkedin.com/pulse/why-debate-important-christopher-joye/) "I am sometimes asked why I waded into the LIC and LIT debate. Is it because I have something against them personally? It has even once been suggested that maybe we tried to launch one and failed! That is obviously absurd: we have been approached on numerous occasions to do LITs, as recently as late last year by one leading stockbroker in the space. We further run the fastest growing active ETF on the ASX, which has amassed over $650 million in two years. And we are more generally responsible for $3.5 billion across a large array of institutional/retail clients. Raising ASX listed or unlisted capital has never been an issue. Pinnacle Investment Management recently bought one-quarter of our business, and it has more than $60 billion across 15 outstanding managers, including LICs and LITs. Sister groups like Metrics, which is a Pinnacle affiliate, have done a brilliant job opening up new asset-classes such as the direct loan space to institutional/retail investors, including via LITs. Like Magellan, their brand power is such they can raise money in any format. I have no problem with the LIC and LIT structure at all. In fact, as Magellan's Hamish Douglass has argued in interviews with me, LICs and LITs can play a unique role when you want to offer consumers distinctive value propositions, as both Magellan and the likes of VGI have done. There are further opportunities in the LIC and LIT space to buy cheap assets given 80% trade below NTA (see the table below). No, I wrote about the importance of the Coalition not winding-back the crucial consumer protections in the Future of Financial Advice (FOFA) laws endlessly in the AFR 2014 (see, for example, here, here, here, here, here and here to cite a few). The mis-selling risks in LICs and LITs are a direct consequence of the Coalition's decision, against the express advice of ASIC at the time, to grant them a silly exemption from FOFA's ban on conflicted kick-backs from fund managers to financial advisers. Finally, I have a long track-record of writing about economics and finance policy issues, and actively advising governments, for almost 20 years. Now that the risks I railed against in 2014 are starting to materialise in completely unprecedented form via the LIC/LIT tsunami on the back of extraordinarily large commissions, it was inevitable I would return to warning retail investors about these hazards, even if I am not going to make too many friends doing so. I know that most are not willing to stick their necks out in this fashion, and I have certainly been begged by many to keep my mouth shut. But I have a pretty intrinsic belief in speaking up. It's one reason why I write every week for the AFR."

Its all getting a bit silly boys. Make it simpler. ALL financial advice " fee for service" only - no exceptions. Paul V.

Sorry but to me you ruin your article with the gratuitous comments in the last paragraph . Stick to the facts .

i would run 100 ks from any advisor trying to get me to invest in a LIC IPO. i would even less likely listen to a lobbyist for that industry

One of the worst articles I've ever read Dominic - in my dismay, I have tried calling you but not got through. I am shocked you would write an article like this attacking the person rather than sticking to the issues. The financial services industry would be much better if funds and advisers competed on a level playing field on their merits alone, and if financial industry participants could present what they believed was in the interests of clients instead of clamouring over the fast easy money (with no long term alignment) from raising LIC funds or from lobby groups. If those participants then choose to themselves work in alignment with these beliefs (which are also in alignment with client interests), then that should not be a surprise to anyone. Chris Joye has raised numerous excellent points about this issue and would quite obviously have been able to raise higher margin and more highly profitable LIC money should he have wanted to without any wrath from other industry participants . Furthermore, he is directly challenging Coalition policy and can hence hardly be considered a stooge for them. I don't believe Chris Joye is employed by any LIC lobby group nor does he benefit directly or indirectly from the large amounts of funds LICs have raised, as do the vast majority of people arguing in favour of keeping the commissions. Whether you like Chris Joye or not, I believe the way you have attacked him here - seemingly only because you are now employed by the lobby group and because he is the leading advocate of the other side of the debate (and not paid for by any lobby group) - is inappropriate and unprofessional in my view. It reflects poorly on you, the lobby group which has employed you and the fund managers that are funding that lobby group. I would be interested in knowing which fund managers are funding the lobby group?

Frankly I'd like to see you both working with the LIC LIT crowd to get those massive discounts to NTA out of the system!!!!

I agree Dominic, the whole debate of this issue seems to be full of misstatements and exaggeration. Whom are we targeting? Advisers, distributors or brokers or product managers? The following may help with some context. It seems to me that the intermediary market, between product issuer and investor, is made up of 3 broad components. These are: 1. A broker or product distributor. They are akin to a retailer of product (think Woolworth's or Harvey Norman in consumer retail). They have built their business, brand and reputation over many years and their clients want to deal with them. These intermediaries are paid by both the product issuer and also by the client through brokerage. However, their business will not prosper if it distributes poor product as it will suffer a decline in brokerage or repeat business; 2. A pure adviser to a investing client. These intermediaries are paid by the client. Again they prosper if their advice to client is good and will falter if their advice has poor outcomes. Any distribution fees are correctly rebated to the client; and 3. A hybrid intermediary whom distributes and who can give advice on the suitability of investment products to their clients if engaged to do so. The law is clear regarding the best interest test for advice given. However, for pure distribution services the market is harsh and ensures that the distribution of poor products will ultimately affect the viability of a distribution business. My point is that the market place that intermediaries engage in does affect outcomes and ultimately dictates the ability of intermediaries to flourish or fail. The market place will similarly affect the ability of poor product developers or managers to prosper or fail. It is also absolutely correct and essential that the regulators govern the provision of "advice" to ensure that it is given in the best interest of the client. However, the pure distribution of product is clearly a different issue that is ultimately controlled by the market. If laws are introduced to inhibit the pure distribution of product then the outcomes will need to be understand. In particular if those laws inhibit competition, drive more investment capital to less product providers and stymie the provision of investment capital across the economy and particularly to emerging companies. I wonder whether Woolworth's or Harvey Norman would like their distribution margins dictated by the Government? Whether they would like their brands and goodwill diminished by regulation that dictated how and where they could promote products for sale? Or how they could claim rebates for allowing suppliers to access their long developed distribution capacity? If we diminish the capacity of a market place to allow buyers and sellers to transact then we have to be very clear of what the outcome will be and whom will actually benefit. John Abernethy Chairman Clime capital limited

I have posted a full response here: https://www.livewiremarkets.com/wires/lic-lit-lobbyists-get-desperate-and-resort-to-personal-attacks

Anyone who takes 1% in fees on a fund earning 4% has lost the right to comment. That's just straight up shameful.

Some fair points on both sides, but unfortunately the way the financial-advice industry is currently structured then it Chris’s side that carries the most weight for me...it talks to a wider point than LIT/LIC stamping fees, and that’s that conflicts must be removed as much as possible from the financial advice industry. In this post Royal Commission (RC) world, conflicts abound and unsuspecting clients are lamb to the slaughter. I suspect the general public think the RC cleaned up the industry - far from it. Post the RC we’re still referred clients who were victims of conflicted advice...some of the worst cases I’ve seen. It appears it’s going to take another RC or three to ultimately sort this industry out. To this wider issue of conflicts and the unsuspecting public, I’d like to see rules around who can call themselves an ‘adviser‘. If an adviser has any element of conflict in their offering then they shouldn’t be able to use the term...they're a Financial Salesperson. If they are conflict free, then Financial Adviser. Those wanting to earn a living in this industry can decide on the right path for them and importantly, the public will have a better idea whose interests are being served.

Nice work Dom....cheers for article

Anyone arguing against Chris Joye' advocacy for the removal of stamping fees, at a minimum needs to identify HOW a client's best interest can be served at the very same time that substantial economic incentives remain (Stamping Fees). These present a "MATERIAL CONFLICT" to advisers and all parties involved in a deal. Best Interests Duty/Outcomes co-existing with Stamping Fee Retention by the Adviser is the YARDSTICK..... Anyone? To anyone who defends Stamping Fees; if you cannot identify how a client's best interests can be served (with Stamping), you are at a disconnect to the obligations owed by Advisers to investors, and missing the main game. Given that the likely Treasury outcome will be a reduction / cap on stamping fees; engagement around what quantum of Remuneration drives a material conflict, and what level does not would be timely. My view is that 10-15 basis points of brokerage (charged only to Wholesale clients), is the level, at which no material conflict of interest can exist.... Whereas, 10-30 x larger than this level, clearly changes things!! Hamish Douglass has flagged 50bp as a cap. Hard to argue for higher. “Maybe they cap the commission to an amount that is no more than what they would earn on a normal piece of brokerage advice, such as 50 basis points,” Mr Douglass said. (AFR, by Kehoe, Aug 14, 2019).

Odd - a person with a vested interest stating"Personally, though, I don’t have a particularly strong view for, or against, the continued existence of stamping fees on LICs/LITs in their current form." yet by showing considerable insight and knowledge argues strongly the FOR and attacks the side against. While I also don't believe the Woolworths HNorman analogy is accurate, I agree with the general sentiment of allowing the market the most capacity to transact, something I would believe a conflict of interest impairs? Normally exploited by those who don't have the intellectual capital themselves. Just like trading/investing, it is often more about the (traders) psychology than the trade/investment itself.

Let’s give C Joye a break. I mean, if I was earning 1% MER + 20% performance fee over RBA cash I may be damn well conflicted too seeing all that money flowing into LITs from (at least) top quartile global investment managers. Dom has simply stated the blindingly obvious. And I could add number of other fund managers to the list that are simply protecting their existing market position.

Hey Rodney, don't the LICs/LITs pay you to rate their products?

Yes. Along with ETFs, unlisted MFs, and equities. And my remarks pertain precisely to an objective unwavering rating methodology - fees (or ICR more to the point in relation to Coolabah - circa 30%) be a key criteria. Ego, otherwise viewed as weak investment decision processes is also a key consideration. The reality is Chris, your products would not have a snowflakes chance in passing the multiple review processes those fixed income LITs go through at the various levels (researchers only being one). It’s not possible these days to pull a broad broking syndicate together to raise circa $500m if you’re not a top 10% global debt manager. But thanks for point that out Chris - what was that about not playing the man?? I’m happy to discuss any single point on this matter. What I know is the absolute hypocrisy from vested interests pushing to annul stamping fees is absolutely gobsmacking. For eg, I can not recall ever seeing a 30% ICR product. Talkings caps - that should be downright illegal (otherwise know as flippin highway robbery).

Here is what I don't understand in this debate: If we set aside the arguments about the correct size of the selling fees, if we set aside the arguments about the merits -or otherwise - of the LIC/LIT structure and if we set aside the arguments about the correct measurement of the performance of the LIC/LIT securities, I am yet to hear a sensible argument explaining why a selling commission that is illegal in an unlisted context is considered acceptable in a listed context. The regulations banning selling commissions came about because "FOFA recognised that product commissions: ...may encourage advisers to sell products rather than give unbiased advice that is focused on serving the interests of the clients. Financial advisers have potentially competing objectives of maximising revenue from product sales and providing professional advice that serves the client's interests". Since 2012 we have all accepted that, for unlisted investment products, sales commissions have been banned because of the risk that they produce adverse client outcomes. What is it about the listed market that is so different that this basic protection for clients should not apply?

Hi Rodney, great chat on the phone. As I explained, an Indirect Cost Ratio or ICR is not calculated the way you have proposed. ASIC requires that all ICRs are calculated the same way and they simply represent all direct and indirect fees divided by the Net Asset Value of the fund. To quote the ASX: ""ICRs measure the total indirect costs of managing a fund and includes management costs. Indirect costs can include performance fees, investment-related legal, accounting, auditing and other operational and compliance costs The aggregation of these indirect costs are ***divided*** by the average net asset (this being the size) of the fund and presented as a percentage". So it is not surprising you have not seen a 30% ICR before, because the ICR for the fund you are talking about comprises a 0.75% management/admin/custody fee plus in this period a 1.90% performance for, which equates to a total ICR of 2.65%. And this is in a year where returns were high (ie, around 7% net with no interest rate duration risk). In a difficult year where there were no performance fees, the ICR would be 0.75%. Good to talk and discuss the technical nuances of this topic.

Hi Paul Heath, great distillation of the essential question. This is not about LICs/LITs or different asset-classes, this is about your key point: ""I am yet to hear a sensible argument explaining why a selling commission that is illegal in an unlisted context is considered acceptable in a listed context. The regulations banning selling commissions came about because "FOFA recognised that product commissions: ...may encourage advisers to sell products rather than give unbiased advice that is focused on serving the interests of the clients. Financial advisers have potentially competing objectives of maximising revenue from product sales and providing professional advice that serves the client's interests". Since 2012 we have all accepted that, for unlisted investment products, sales commissions have been banned because of the risk that they produce adverse client outcomes. What is it about the listed market that is so different that this basic protection for clients should not apply?" I could not have said it better.

Here are some previous quotes from Dominic McCormick. I encourage Dom to comment on these points. Dominic McCormick - 7 January 2014 "Unfortunately, when investors are clamouring for LICs, new IPOs are often structured with a focus on the interests of the management and boards, rather than the initial or potential investors." (Source: https://www.moneymanagement.com.au) Dominic McCormick - 28 July 2016 "LICs are heavily promoted at IPO stage at which point investors effectively buy in at a small premium to NTA because of costs but they are often poorly supported afterwards and dumped at discounts to NTA in the weeks, months and years following the IPO." "In my experience, many investors and advisers investing in LICs do so from a rather casual/part-time perspective. Too often, they succumb to the heavy promotion of a new LIC at the IPO stage and only begin to properly understand the fund (including the pricing dynamics described above) after it is drifting to a discount and disappointing investors." (Source: https://portfolioconstructionforum.edu.au) Dominic McCormick - 29 October 2018 "But perhaps the biggest factor in the popularity of these listed investment structures has been the ability of brokers, dealer groups and planners to earn ‘selling fees’ of 1-2 per cent as part of the IPO process [...] the ability to earn what are effectively commissions on listed fund IPOs is one of the more obvious Future of Financial Advice (FoFA) anomalies." (Source: https://www.professionalplanner.com.au)

Chris J, you’ve clearly been caught out here & hence your reaction to this article and comments following calling you out on your own fee gouging and hidden agenda to benefit your own backyard. The fact is that many advisers (inc myself) rebate stamping fees so clients are in effect buying in at a discount to NTA (ie 98.75c on a $1.00 issue with all costs associated with LIT raisings now being covered by the issuer. If you were genuinely concerned about fees being conflicted, you would have accurately reported in your numerous LIC centric articles, that the FOFA carve out in 2014 applies to ALL primary market issues (IPOs), not just LIC/LITs as you have continually misrepresented - FACT. You have deliberately avoided the fact that Hybrid issues also pay stamping fees (obviously because you run a hybrid fund and presumably have accepted stamping fees on these issues in the past?). If the view following consultation is that LIC/LIT stamping fees are conflicted, then all securities issuing in the primary market should be treated equally (REiTs, hybrids, corporate raisings, listed/unlisted bonds etc etc). These were all included along with LICs in the FOFA carve-out so stop with the blatant mis- reporting that the carve out was put in place for LICs/LITs only?? I’ve seen nothing (zero) in your articles presenting a balanced view on the quality of many recent LIT issues that have come to market. In fact the majority of yield related LITs issues in the past couple of years have traded at or above par and at a premium to NTA. How has recommending these been grossly misaligned with clients’ best interests? There is clearly some ground to be covered during this fee consultation period and I welcome a fair & balanced outcome for all stakeholders. However I implore you to try and present a more balanced view across the whole primary market space, rather than the constant LIC/LIT bashing which is not accurate and clearly benefits your own interests.

Jerome - in answer to your question -> https://www.licat.com.au/members/

"EYOJ OGE" whoever you actually are, I have repeatedly dealt with the hybrid commission issue, as I did again in my response to Dom. In any event, as John Pickle, highlighted, it appears that Dom agrees with my essential argument that the success of the LIC/LIT wave is being driven by the selling fees paid by the fund managers to advisers, although I would argue that 1% to 2% is a very large selling fee and I think Dom has a different view...As Pickle highlighted, in October 2018, Dom wrote in Professional Planner: "But perhaps the biggest factor in the popularity of these listed investment structures has been the ability of brokers, dealer groups and planners to earn ‘selling fees’ of 1-2 per cent as part of the IPO process. Financial planners have become a larger component of LIC initial public offerings in recent years, compared with the listings’ historical reliance on stockbrokers and direct investors. While the fees are not particularly large and some rebate them to clients, the ability to earn what are effectively commissions on listed fund IPOs is one of the more obvious Future of Financial Advice (FoFA) anomalies... It remains to be seen whether the selling fee anomaly will continue to exist, given the current focus on eliminating grandfathered and other previously excluded forms of conflicted remuneration. Greater scrutiny around, and possible elimination of, the ability of some to earn these selling fees following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is one potential headwind for growth in the LIC/LIT sector. " Dom McCormick, October 2018 https://www.professionalplanner.com.au/2018/10/lics-at-the-high-water-mark/

Dom the issue at hand here is not the merits of a LIT/LIC structure, nor is it the merits of the underlying investment, nor is it Chris Joyes fund. As an adviser, a supposed beneficiary of these fees, I want to see these gone, they are a stain and I don't trust my peers to not abuse them as there is no evidence to the contrary. In the context of FOFA, FASEA and other recent regulatory interventions, these fees represent a scar for the industry and represent a time in the past we are trying to totally incinerate. This is the last vestige of conflicted investment remuneration and this debate and the fee are tarnishing are our reputations and our profession. Moreover they are a raw deal for consumers who think they have a fiduciary advising them in their best interests. I quite frankly dont give a rats about debating any manager or any particular product, that is for another debate, this is about the stamping fees being paid to licensed advisers who are subject to a best interests duty and a code of ethics. The "disinterested person" is not going to be convinced this variable remuneration doesnt cause a conflict, sorry. It is also an absolute insanity after the RC to believe financial intemediaries will simply "do the right thing" in the presence of a strong sales incentive, this idea is demonstrably false and there is little support for this assertion. The intermediaries have unbelievably strict laws governing them and receipt of these fees are close to unworkable in any case. This means the best interest duty and indeed the FASEA code are going to get violated at SCALE by these fees. The conflicted advisers are sowing the seeds of the next mass remediation, class action and conflicted advice crisis, as inevitably ASIC will seek their teeth into these files given the public campaign. They are going to find a dogs breakfast of advice and compliance with the best interest duty and the code. If ever there was writing on the wall for advisers, here it is, if you are an adviser, dont go near this, you are an audit away from pain. As for you lobbyists and product manufacturers, go for your life with LIC raisings and good luck to you. Keep the products flowing, just dont pay comms. If your investments are good they should surely stand on their own merits, its a sad indictment of the products if the business model is totally reliant on a conflicted sales force.

Responses below are mainly to John Pickle which will be my last words on the issue for now. Some of the historical comments you refer to I still agree with while some are now outdated/have softened because the world has changed. In the words attributed to Keynes “When the facts change I change my mind. What do you do? Re the first comment I still do believe that some LIC/LIT IPO’s are skewed too much towards managers/boards although there has been some improvement in recent years. However, this referred mainly to issues around ongoing fees, expenses, termination clauses/fees, governance etc rather than IPO costs. There is still room for improvement here. -Regarding the second comment, it’s outdated. Investors, now don’t pay a premium to get into a LIC/LIT IPO because managers not investors typically pay the IPO costs including stamping fees. Investors now typically buy in at NTA or a discount if stamping fees are rebated. - Stamping fees have been falling through recent years. At an average level currently around 1% (and paid by managers, not investors) its simply not as big an issue as it was when I wrote earlier comments. - The average quality of LICs/LIT managers has improved significantly in recent years which to some extent offsets other concerns. - I still believe many investors have a poor understanding of the future pricing dynamics around LICs/LITs they buy at IPO. There is much that can be said here and I hope I can contribute some intelligent commentary on this in the future. Having said all this I reiterate again what I wrote above that personally I am not strongly for, or against, stamping fees today so it’s not surprising I have made arguments against them in the past, particularly when those fees were higher and paid by investors not managers. I just want a balanced debate now based on the current facts and a sensible solution that works for all listed investments. As for my supposed “paid LIC/LIT lobbyist” role, I clearly disclosed that the Livewire thoughts were outside any consulting with LICAT. Obviously, I’m a poor “lobbyist” as my understanding is some involved with LICAT had very mixed views of my contribution here. Frankly, I’m looking forward to getting beyond this debate and contributing on a range of other important issues around LICs/LITs that have been neglected because of this debate - e.g. better understanding discounts/premiums, better disclosure of NTAs/performance, governance etc as well as my other investment consulting roles. Let’s see where things end up post the Treasury public consultation. Therefore, until the government makes a decision, on the stamping fee issue at least, for me it’s “over and out”.

So your closing argument is that because it’s not so big a problem, or it’s not so big a % , or that some times it rebated, that it’s all OK and there is not an intrinsic conflict. I call BS on your argument. Get rid of all conflicts or at the very least make it very very clear that there is a kickback involved.