Funds ratings agencies emerged from the global financial crisis with a better reputation than credit ratings agencies – but not by much. Glowing reports on products which subsequently blew up – from Astarra Strategic to the Basis Capital Yield Alpha Fund – have been stored away in the bottom drawer by aggrieved financial planners, to be taken out again when the inevitable class actions emerge. As those planners tighten their belts, the pressures on funds raters would appear to be rising as well, with at least one dealer group chief predicting that only a couple of big global players would be able to survive in the Australian market. MICHAEL BAILEY reports.

The financial services industry houses a lot of people who know they are on to a good thing, and are hardly willing to risk it for the sake of an interesting soundbite. Peter Johnston, the executive director of the Association of Independently Owned Financial Planners (AIOFP), is a rare exception, so there was plenty of airtime for his prediction, made a few weeks back, that only two of the big six funds’ rating agencies would survive long-term in Australia. Johnston opined that Standard & Poors and Mercer Investment Consulting would be the chosen two. One would doubt it was a coincidence, but the AIOFP had at the time just inked a deal with Mercer Investment Consulting for it to recommend a portfolio of managed funds, from which its member planners could construct an Approved Product List.

His members liked Mercer, Johnston said, because it charged planners a flat fee for its advice, and did not take payments from funds managers for rating their products. “The first and arguably the most important function of a practice is research. Over 80 per cent of our industry’s research input is compromised by product manufacturers paying research houses to rate their products – a profoundly conflicted practice,” Johnston proclaimed at the time. “Advisers face a real conundrum,” he continued. “They heavily rely upon research to make recommendations to clients but when product failure occurs, research houses do not stand by their recommendations and ASIC does not appear to hold research recommendations in high esteem. “Advisers then get attacked by the media, the Financial Ombudsman, lawyers and the courts and rarely win. Advisers generally do not have the time or expertise to leave the office and assess products, they need to rely upon something.