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FINANCIAL PLANNING FIB #6
It's standard procedure in financial planning
firms to give out research reports on the products they are
recommending. These documents are very brief - typically just
one or two pages long - and are designed to bolster your confidence
in the planner's advice. The underlying message is: don't
just take my word for it; this independent research group
reckons the ABC High Alpha Fund is a good product too.
This is reassuring to most people who have no desire to wade
through a full product disclosure statement. If some independent
research group has rated the product as 'approved' or 'recommended',
the odds are that the client won't ask too many questions.
The key problem here is that research houses are not like
judicial inquiries dispassionately weighing up the evidence.
They're in business to make a buck and there's a lot of pressure
on them to keep fund managers on side.
To begin with, most fund managers pay the research houses
to be rated. If the research firm makes too many negative
recommendations, new business is sure to dry up. Others are
'commissioned' by fund managers to write research reports
on their new products.
More subtle pressures can creep in as well. For example, if
the fund manager gets an unfavourable rating, they may engage
in some payback by refusing to answer the research group's
product questionnaires, or denying them information on other
funds in their range. Likewise, some employees at research
houses see it as a stepping stone into the lucrative funds
management industry. Why cut off your job prospects by writing
something uncomplimentary?
There are also ownership issues to consider. Some research
houses are part-owned by fund managers and some are producing
financial products themselves. This issue was highlighted
by ASIC in April 2006 as a key conflict of interest concern.
So treat their recommendations with plenty of caution. While
some of the analysis is reasonable, frequently it's closer
to marketing material than research.
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