Are you happy paying LIC kickbacks?

Would you buy a product from someone knowing that they were receiving a payment for doing so?

That's the question at the heart of a debate over "stamping fees" - kickbacks that listed managed funds pay to brokers for recommending a product.

The debate reignited this week after the government vowed to review the process around the fees charged by listed investment companies and listed investment trusts - which were exempted from previous crackdowns.

Josh Frydenberg says a four-week public consultation will help decide whether stamping fees should be modified or scrapped altogether.

The Treasurer says the government wants to put investors first but at the same time ensure the local system remains competitive.

Fees for (no) service

Fees for service - or lack thereof - has been a hot topic even before the banking royal commission examined it.

The debate chiefly concerns LICs - listed investment companies - and LITs - listed investment trusts.

These investment vehicles were excluded from a ban on commissions and asset-based payments – ongoing percentage fees levied on investment portfolios of managed funds – introduced after the Future of Financial Advice reforms of 2015.

Stamping fees were addressed during the Hayne inquiry, which recommended all exemptions for kickbacks, or “conflicted remuneration” in financial speak, be removed by 2022.

Issuers of LICS and LITs charge stamping fees when they launch an initial public offering for a product. The brokers of these IPOs – those who drum up support among financial advisers, who in turn encourage clients to invest – receive these fees.

Many financial planning groups, including those still held by Australia's big banks, have vowed to scrap trailing commissions by next year.

Product manufacturers - banks and insurance companies, mostly – were banned from paying fees to financial advisers when the final FoFA reforms were rolled out.
But in 2014, the Coalition made sure financial advisers and brokers involved in the distribution of listed closed-end funds continued to receive stamping fees.

There's nothing stopping brokers paying fees on to financial advisers who place their clients into the funds, but in some cases these fees are refunded to clients.

Magellan's launch last August of the Magellan High Conviction Trust LIT is one recent example of this. The launch set an Australian precedent in paying no commissions to stockbrokers and financial advisers who recommended the product to investors.
Magellan co-founder and chief investment officer Hamish Douglass at the time called on the Coalition government to consider capping commissions - which has happened in other markets.

There's been growing concern about the performance of some LICs and LITs, several of which are trading below the value of their net tangible assets.

The chart below provided by the ASX shows the majority of LICs are trading at a big discount to their NTA.

Graham Hand, editorial director of FirstLinks and Morningstar Australia, notes more than 70 per cent of LICs are trading at a discount to their NTA value, though most of the recent LITs have done well.

We've already seen at least one international fund manager delay or cancel IPOs of new listed investments in Australia.

And this week global bond giant PIMCO announced a pause in its plan to launch a potential $1 billion Australian corporate bond fund here.

John Likos, director of investment research at BondAdviser, emphasises the importance of financial advice for investors, but says "deepening the pool" of fixed income products increases competition and drives down prices.

"I would be gutted if US shops were kept out of this market," Likos says.

"The industry should be promoting a diverse range of high-quality credit issuers, because the asset class is one that remains grossly under-invested domestically."

He believes the discussion has "veered off course into product and issuer bashing, when the heart of the issue remains mis-selling".

"How the widening of the ASX-listed investment universe across domestic and global credit capital structures can be a bad thing is beyond me," Likos says.

"The risk of these products being mis-sold to the wrong clients is a different issue altogether that of course needs to be continually monitored."

Top-rated LICs

Morningstar’s Ross MacMillan, senior analyst, manager research, says investors considering LICs must consider several factors before investing.

“Look very carefully at how it fits into your portfolio. Consider the fact that quite often LICs can trade at a discount or premium; they can trade quite irrationally, either trade at a large discount or premium, so be careful when you buy and sell,” MacMillan says.

“Look carefully at the NTA [net tangible asset] backing and the price on the market. And also look at the underlying investment manager. Do they have a history of running this sort of fund? Have they been successful previously at running this sort of investment strategy? And have a look at what else is available in the markets.”

LICs favoured by Morningstar include Platinum Capital Limited (ASX:PMC), awarded a silver rating in March for offering “a convenient access point to an excellent global-equity strategy.

The Magellan Global Trust (ASX: MGG) has a silver rating for its features including “a highly rated investment process, predictable distribution profile, and convenient exchange-traded access," says manager research analyst Michael Malseed.

Morningstar also rates Australian Foundation Invest Co (ASX: AFI) highly for similar reasons.