(This article was updated on 28 January 2020 to reflect developments subsequent to the original publication. Other articles on this subject are published here and here).
A record amount of over $4 billion was invested in new Listed Investment Trusts (LITs) and Listed Investment Companies (LICs) during 2019, up from $3.3 billion the previous year. Fixed interest LITs were one of the success stories of the year, with $2.2 billion raised in four issues.
The overall sector now holds $52 billion across 114 issues, and while the fixed income LITs are trading close to the value of their Net Tangible Assets (NTAs) value, most equity LICs are struggling at price discounts to NTA.
But suddenly, there is also a cloud hanging over all new issuance, with financial advisers and stockbrokers unsure whether they can accept selling fees under the Financial Planners and Advisers Code of Ethics 2019 Guidance (it is a guide, not legislature). Amid the uncertainty, well-known global managers such as PIMCO, Neuberger Berman and Guggenheim are hoping to issue in early 2020.
Will advisers participate? Prominent columnist and fund manager, Christopher Joye, opened his Australian Financial Review article on 13 December 2019 in no uncertain terms:
“From January 1 commissions on listed investment companies and trusts will be banned, opening the way to huge compensation claims for losses incurred by any clients other than sophisticated institutional investors.”
The Financial Adviser Standards and Ethics Authority (FASEA) has advised me that Chris Joye's interpretation is incorrect, and this article will explain why. However, a high level of confusion over the proposed Code remains.
Are financial advisers caught in another trap?
In the worst position of all, financial advisers are unsure whether they will breach their Code of Ethics from 1 January 2020. The selling fee for placing clients into new LITs was one of their few bright spots in a tough 2019. The uncertainty arises just when it seemed there was little more that could be thrown at advisers already reeling from:
- the Royal Commission identifying conflicts of interest and not acting in the best interests of clients
- a mountain of compliance and paperwork at every client interaction
- the early removal of grandfathered commissions
- the exit of the major banks which were once big supporters, and
- new education standards pushing thousands out of the profession.
- A managed fund on various platforms. Commissions are banned under FoFA.
- A managed fund accessed using the ASX mFund service. Again, commissions are banned under FoFA. This fund has raised less than $1 million over the years of its availability on the mFund service.
- An active ETF listed on the ASX, with no selling fees (ETFs do not pay selling fees).
- A new LIT with a selling fee of 1.25%.