ASIC targets stockbrokers selling poor-performing funds

ASIC targets stockbrokers selling poor-performing funds Australian Securities and Investments Commission
ASIC has reviewed advice provided by stockbrokers believed to have sold riskier products to financially naïve clients that were 'misclassified' as sophisticated investors.

Stockbrokers have come under the spotlight with the Australian Securities and Investments Commission (ASIC) launching a probe over “misclassified” clients being sold poor-performing listed investment funds.

The corporate watchdog has conducted on-site reviews of advice provided by stockbrokers that are believed to have evaded financial advice laws by misclassifying ‘mum and dad’ investors (non-professional/retail clients) as sophisticated investors to sell riskier stocks, according to documents obtained by The Australian Financial Review.

The investigation is part of the government’s four-week assessment on the merits of commissions known as stamping fees, which are paid by fund managers to stockbrokers and other financial service licensees for selling newly-floated listed investment companies and trusts (LIC/LITs).

This type of commission is prohibited on other products including unlisted managed funds and exchange traded funds, but listed entities were an exception.

Federal Treasurer Josh Frydenberg announced the review at the end of January, saying it would enable the government to “make an informed decision on whether to retain, remove or modify the stamping fee exemption in order to ensure that the interests of investors are protected and capital markets remain efficient and globally competitive”.

New rules for classifying investors

At the start of 2020, the Financial Adviser Standards and Ethics Authority (FASEA) made effective its updated Code of Ethics, which includes new rules on how advisers can determine who is a sophisticated investor.

Previously, a retail client that passed an individual wealth test could receive a two-year certificate from their accountant that would enable them to be classed as a sophisticated investor, or wholesale client – giving them access to a wider range of investments, in addition to reduced disclosure and compliance requirements.

This wealth test required investors to earn a minimum of $250,000 in annual income and have at least $2.5 million in net investable assets.

Alas, this means advisers could exploit the lenient wholesale rules to sell riskier products to less financially-savvy clients, such as high-income earners with little to no understanding of investment, recipients of large inheritances or homeowners benefitting from rising property prices.

However, FASEA’s new code states that clients can no longer be deemed sophisticated investors based on wealth alone, after concerns were raised that some clients could lack good financial knowledge and judgement.

According to FASEA, an adviser must be satisfied a client understands the provided advice, including the benefits, costs and risks of any recommended financial products.

ASIC reviews

In a letter revealed by the AFR, ASIC chairman James Shipton allegedly said the watchdog had undertaken “significant recent work” including “recent analysis of stamping fees, secondary market discounting, management costs and performances of LICs and LITs”.

Mr Shipton was also quoted as saying further work is planned to “ensure brokers are cognisant (and reviewing) their obligations to clients when assessing whether advice about financial products is both appropriate for, and in the best interest of, the client”.

He said ASIC is focused on “root cause” of the stamping fee issue, rather than product intervention powers, which runs the risk of being challenged by an adviser.

Financial advisory firm Taylor Collison and stockbroking network Morgans Financial were named by the news wire for their involvement in ASIC’s internal list of the 10 “worst” deals on LICs and LITs.

National Australia Bank (ASX: NAB), Crestone Wealth Management, Evans Dixon (ASX: ED1), Ord Minnett, Bell Potter Securities, Morgan Stanley and Patersons Securities are also among the biggest sellers of listed funds.

The Treasury’s four-week review on the stamping fee exemption was accepting submissions until Friday 21 February. A decision is anticipated within weeks.

The ASX is also re-evaluating how investment funds disclose their performance, particularly how LICs report their portfolio’s gross returns but can exclude fees and certain expenses that unlisted managed funds are typically required to include in their returns.

    Join Small Caps News

    Get notified of the latest news, events, and stock alerts.