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Advisers blamed in $37 billion product failure

Of the 164 frozen or failed funds since 2005, all “purchased a positive rating” from a “conflicted research house”, says the AIOFP in a new paper calling for change.

In its submission to the Financial System Inquiry (FSI), the industry body reiterated its longstanding concern that research houses have been ineffective in preventing or providing sufficient warning about the $37 billion worth of “product failure, impaired structures or frozen funds” since 2005, all of which has negatively impacted “consumers' ability to save for retirement”.

“The previous Labor government erroneously levelled the blame for this environment at the product commission level in the financial advice industry and failed to address key systemic problems we believe are responsible for these catastrophic conditions,” the submission states.

“Adviser behaviour certainly needed to be modified but we contend these failed funds should not have been on the market in the first place and they should have not been allowed to get distribution traction with advisers and self-directed consumers.”

The AIOFP contends that the “very powerful and influential position to dictate distribution outcomes” held by the research houses means that payment for ratings by these organisations creates “massive conflicts and interest and distortions”.

Citing the US Congress finding that “shopping around” for favourable ratings by financial product manufacturers was a contributor to the conditions that led to the GFC, the submission proposes an alternative system.

That system would implement a levy on advisers, nominally listing a hypothetical annual fee of $1,000, which would fund a “panel of research houses” which would “examine new PDSs before market release i.e. business model sustainability, director profile and background, likelihood of success etc”, thereby effectively ending the need for research houses to “seek funding from product manufacturers to survive”.

“FOFA has not addressed these weaknesses,” the submission states, speaking directly to the issues of PDS confusion and conflicted research house ratings. “Product failure history will continue to repeat itself unless meaningful structural change is implemented,” it said.


Would you be willing to pay $1,000 to fund non-conflicted research? Have your say below