Financial planners continue to question the relevance of research houses, yet we still see little evidence of change in the service offering from research houses to keep pace with the ever changing financial advice environment.
Are research houses now redundant? Or can they change with the times and actually start adding value to the financial advice process?
What value do the major research houses really provide to financial planners anyway? They did little or nothing over the last few years to assist financial planners and their clients to navigate their way through the financial crisis.
The role of a research house should be to scrutinise fund managers and their products, and exclude them if they are sub-standard, and to then let financial planners know the basis of their recommendations. It should not be the aim of research houses to appease fund managers by making it easy for them to get on the recommended list.
Research houses may need to consider to stop taking money (or is that bribes?) from fund managers for ratings so they can be unbiased and transparent in how they develop their recommendations. Of course, they will then need to increase the fees they charge financial planners. But this would then result in planners demanding a better service and more accountability from the research houses. That would be a good result, but I can’t see it happening soon.
Financial planners feel there are a number of anomalies surrounding the output they receive from research houses, including:
- Asset allocation recommendations seem to remain static no matter where markets are placed. They are the same today as they were during the bull market – shouldn’t there be some adjustment to take into account the value of markets today based on future forecasts?
- What have research houses done to beef up their research capability so that toxic investments are not recommended… or at least are weeded out in a timely fashion?
Most financial planners feel that research houses have not added value to the financial advice process, in fact many of their recommendations put financial planners and their clients in harm’s way.
For example, in 2006 and the first half of 2007 you didn’t need to be Einstein to work out that equity markets and commercial property markets (both listed and unlisted) were generally extremely over-valued. And yet financial planners had little or no guidance from the research houses, and their asset allocation recommendations to planners didn’t change. This resulted in clients being hit hard when the inevitable correction came.
Further, the so called defensive portfolios contained within some research houses’ model portfolios proved to be not so defensive, with clients taking significant losses on the defensive portion of the portfolio, with no chance of a rebound on lost capital (as is generally the case with blue chip equities following a crash).
Why did this happen? Was it because those research houses were chasing high returns on high risk fixed interest vehicles such as Basis Capital? I would love to know how some research houses justified shoe-horning Basis Capital and other high risk investments into the defensive portfolio of their models.
Why chase high returns on the defensive portfolio anyway? If the client needs higher returns, consider allocating more to growth assets provided they are not overvalued. Defensive assets should be exactly that – defensive.
Over the last 12 months many bond funds have continued to perform poorly due to a combination of interest rate risk and credit risk – and yet they continued to be recommended by research houses. And still are. Why be in these funds while interest rates appear to be only going one way – up. Consider that term deposits have proved to be very effective defensive assets over time, with the added advantage that clients know exactly what return to expect from term deposits. I find that there is a certainty about the outcome with term deposits that provides clients with a lot of comfort.
Financial planners and dealers alike recognise they are liable for the advice they provide to clients. Therefore, if they can’t rely on the support and recommendations provided by research houses, they may as well do it all themselves by developing in-house capabilities.
Surely this option wouldn’t provide a worse result than the one we experienced over the past four or so years when we relied on the research houses?
To be honest, I would still prefer to rely on the research houses… but they need to lift their game first!