Regulator seeks improvements from DIMS licence holders

Providers tasked with managing their clients’ portfolios on their behalf have been asked to lift their game on fee disclosure, helping investors better understand the service they’re getting and their management of liquidity risk.

Thursday, October 24th 2024, 1:45PM

by Kim Savage

The Financial Markets Authority monitors a sample group of the 49 providers licensed as Discretionary Investment Management Services - a licence which allows them to accept authority from investors to make buy and sell decisions on their behalf.

Its first monitoring report into the sector, which manages 47,000 retail accounts with $48 billion of funds under management, the FMA found providers overall were able to demonstrate how they put investors’ best interests at heart.

“Where a client allows another person to exercise discretion over investment decisions, it demands a high degree of trust and confidence, both in the people involved, and the processes and controls used,” said the regulator’s Director of Markets, Investors and Reporting, John Horner.

How well do investors understand what they are paying for?

When it came to fees, some providers were found to be lacking in their efforts to make sure investors understood the service they were offering, how much it would cost and why.

“While we did identify some potential breaches, we are confident that, following engagement with the FMA, providers have taken appropriate action.”

“Our future monitoring will build on what we have learned and focus on the areas of improvement identified in this report,” said Mr Horner.

The FMA said providers needed to take more time to consider and communicate how much work goes into research, analysis and strategy maintenance and oversight and how this is reflected in fees charged to clients, also ensuring their clients understand how the make-up of their portfolio can affect what the service costs them.

While there were no issues discovered with the timing of providers’ fee disclosures to clients, the FMA’s monitoring found not all fees were clearly disclosed to investors.

Some marketing techniques were questioned, including the prevalence of terms such as “highly personalised,” “tailored,” or “bespoke” when investment strategies reviewed were not always personalised for each investor but were in some cases guided by a model asset allocation. While there was no longer a legal line separating class and personalised DIMS, providers needed to ensure investors understood clearly how their portfolio would be managed.

To avoid conflicts of interest, some of the good practices identified included charging flat management fees leaving out additional brokerage expenses, removing turnover incentives. Paying managers and advisors a salary to avoid commission-based incentives linked to funds under management was also highlighted as an effective measure.

More hands-on management needed

The regular suggested providers should be looking beyond their own minimum cash balance, to assess liquidity at portfolio not just asset level, sector and concentration risk within a portfolio, trading volumes for listed assets and clients’ own circumstances and risk appetite.

Most providers did not “stress test” different scenarios of portfolio management, but they should consider introducing stress testing policies or procedures, according to the FMA.

Tags: FMA