A new report from Deloitte, commissioned by ASIC, suggests that the regulatory constraints on the advice industry have led to a narrowing of the range of investment products available to retail investors.
It’s perhaps unsurprising that the health of the advice sector and competitiveness in retail funds management are closely linked – after all, as the report explains, advisers account for the vast majority (86%) of retail inflows. And in an environment where the number of advisers is dwindling – and those remaining, due to their obligations, are incentivised to make recommendations from a relatively small product set – assets tend to be channelled towards incumbent players in the funds management market.
This, the report explains, “makes it challenging for newer funds to gain listing on [APLs] or to be recommended through the adviser channel to retail clients.”
According to Deloitte’s research, this problem stretches back farther than the recent spate of reforms that were implemented post-Royal Commission. As some fund managers who participated in the report noted, while FoFA produced a “good outcome for consumers, it has made it more difficult for new entrants to access retail distribution channels. Commissions incentivised distribution channels to offer products before there is sufficient demand from investors.”
The report also examines the role of platforms in the interdependency between advisers and fund managers. Consultations with fund managers indicate that around 80% of their funds are intermediated through platforms – which, generally, “only include a selection of available managed funds.”
The report continues: “Regulations require financial advisers and investment platforms to conduct due diligence on funds. Many use research houses to inform this process. Due diligence aims to protect retail investors but has implications for choice and competition in funds management. Intermediation creates a series of principal-agent relationships: intermediaries act as agents for retail investors or other intermediaries.”
This, the report says, “can lead to suboptimal outcomes. For example, advisers may not have sufficient incentives to negotiate discounts on behalf of investors or they may be influenced by relationships with fund managers. While it is possible for advisers to recommend funds that are not available on platforms they commonly use, internal systems and processes may discourage this.”
All of this suggests that the conditions of the advice sector – at least those imposed via regulatory boundaries and licensee policy – have a material effect on the capability for innovation in the retail investment product space. And with our own research suggesting that one of the consequences of the now-commenced DDO regime will be a further narrowing of some advisers’ APLs, one hopes any upcoming review of advice in Australia considers the advice policy framework within the context of its relationship with the broader financial services industry.
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