Advisers' need for research a benefit, not a hindrance: Douglas

It should be seen as a positive thing that advisers are reluctant to recommend equities without third-party support, a former investment researcher in New Zealand says.

Tuesday, May 14th 2019, 6:00AM

The Capital Markets 2029 Review Steering Committee began its work in March. It was initiated by the NZX and Financial Markets Authority.

The review is aimed at helping the domestic equity market to work more efficiently, and encourage more IPOs.

The committee has conducted initial work and issued a paper summarising the issues it has identified.

Among them are problems that relate to the role of advisers.

The committee said it was hard for investors without "substantial sums" to invest to get access to advice and that a need for research was holding some back.

“Financial advisers are hesitant to recommend equity products where third-party research is not readily available, even though this is not a requirement under current legislation. This means that many small market capitalisation stocks receive limited focus by the broking community.”

But Chris Douglas, former head of manager research ratings in Asia-Pacific for Morningstar, was unconvinced that was a problem. He is now a principal at MyFiduciary, which supports investment advice businesses.

"Isn't it a good thing that advisers are hesitant to recommend equity products without third-party research? We should be doing everything we can to promote good independent research."

He said the issue should be the lack of third-party research that was available to help advisers.

"There is no clear direction from the FMA to grow and develop the independent research market in New Zealand compared to what we have seen from other markets and I think that is a very big lost opportunity for the overall development of capital markets. Just look at what the regulator does in Australia, the US, UK and even Mexico to get an understanding for how to foster more independent research and as a result growth in our local capital markets."

Over the past decade, research options for advisers have dwindled as Lonsec and Van Eyk both left the market.

Former adviser and consultant Simon Hassan said there were reasons advisers sought research.

"Very early in my career I vividly recall being told that whatever I said or did as an adviser, one day I'd find myself having to defend it in court.

"Thankfully that hasn't happened but the message was an important one, and is clearly one reason for adviser reluctance to recommend products without third-party research. I can see that this reluctance is not aligned to the needs of capital markets but the solution has to lie in better adviser education so that more advisers feel confident about conducting their own equity research - not to mention more effective PI insurance and other protection options."

Douglas said advisers might be able to offer advice to a wider range of clients if there were more diversified products that were not too expensive and could be a total investment solution for the client.

"The number of products here has been growing in recent years, and I would hope that it continues to grow as there is definitely a demand for them and they will help advisers to efficiently grow their smaller client base."

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