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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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