Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 341

Three overlooked points on the LIC/LIT fee battle

The articles have been flying back and forth over whether financial advisers can accept commissions for selling LICs/LITs to their clients. If you haven’t been following this so far, Graham Hand wrote a well-rounded article recently, with Jonathan Shapiro and Christopher Joye also leading the charge in The Australian Financial Review.

I’m not going to rehash the main points here but want to bring three additional points to the discussion.

1. Financial advisers shouldn’t be keeping any commissions

Whilst some are arguing that LIC/LIT commissions must go, they are supporting the continuance of commissions for other listed product types. There’s no decent argument for this. If any commission is viewed as biasing an adviser’s decision, they must pass the commission to their client or refuse it outright. Saying that an adviser has a conflict if the commission relates to a LIC/LIT but doesn’t if it relates to a hybrid or equity investment is nonsensical.

For those struggling with the concept of selling hybrids or equities on their merits and without an adviser commission, look to the institutional debt markets. These have long functioned without the need for commissions. If the bond is considered poor value it receives little interest, but if it is good value, it is many times oversubscribed. There’s no reason that hybrids and equities can’t be distributed in the same fashion.

2. Brokers can keep commissions, subject to disclosure

Those dealing with clients need to choose whether they are sales people (brokers) or financial advisers. Whilst a financial adviser needs to adopt a best interest/fiduciary duty position and consider the wider client position, I don’t see that a broker should be subject to the same restrictions. A broker should however, be clearly disclosing that they are a broker being paid for the sales they make. This could be as simple as a verbal statement such as;

“I am a salesperson not a financial adviser which means that I earn commissions by selling products and services to you. The products and services I am selling may not be in your best interest and you may want to seek independent financial advice before agreeing to purchase.”

Some might argue that this is overkill and retail investors are smart enough to know who is a broker and who is an independent adviser. I think the Royal Commission showed that not only were clients confused about the distinction but many so called ‘advisers’ were as well.

3. LICs/LITs are an appropriate structure for illiquid investments

Some of the arguments against LICs/LITs come from a viewpoint that open-ended managed funds are the best solution for retail investors as they always offer a quick exit at close to the net tangible asset (NTA) calculation. This is fair for the most liquid sectors such as large cap equities or vanilla investment grade bonds.

However, for more illiquid assets such as sub-investment grade debt, private equity, some hedge funds and direct property, history is littered with examples of funds that ran out of cash and locked their investors in. If the assets take substantially longer to sell than the redemption period on the fund, investors and managers are playing with fire.

Given this, unlisted closed ended funds (e.g. direct property syndicates, private equity funds), individual mandates or LICs/LITs are the most appropriate vehicles for illiquid assets. As many retail investors insist on having some form of liquidity, a listed fund is likely to be their best avenue to access these sectors.

Critics of listed funds often point to the higher fees (from listing and governance costs) for these funds compared to their unlisted equivalents. This isn’t always true, with fees running at over 1% per annum for retail investors on some open-ended unlisted funds. It also ignores that higher fees could be more than offset by higher returns as listed funds do not have to hold large cash positions to offset the risk of a run on the fund that open-ended unlisted funds face.

 

Jonathan Rochford, CFA, is Portfolio Manager for Narrow Road Capital. This article is for educational purposes and is not a substitute for professional and tailored financial advice. This article expresses the views of the author at a point in time, which may change in the future with no obligation on Narrow Road Capital or the author to publicly update these views.

 

5 Comments
Aussie HIFIRE
January 22, 2020

With regards to the first point, bonds may be sold to the institutional market without commissions, but they are certainly not sold for free. The investment bank may not receive a "commission" but they will certainly receive a fee for marketing and distributing the bond which will be divided up between various departments. Sure it may not be called a commission, but it's still money changing hands and functions in much the same way.

Graham
January 22, 2020

Hi Steve, I see a difference between financial advisers and brokers on this point.

Advisers usually take an annual fee for the services they provide, and it should cover everything, including directing clients into LICs. Brokers don't usually take an annual fee but are paid for each transaction, and the client should know this. Brokers make a living by selling investments, advisers provide holistic advice.

Steve Darke
January 22, 2020

1. Financial advisers shouldn’t be keeping any commissions

Absolutely agree on this point. Why this was left out of FOFA is ridiculous. Professional advisers don't accept commissions of any kind, period.

2. Brokers can keep commissions, subject to disclosure

Not sure about this one. When a broker rings up to flog a product, they are viewed (rightly or wrongly) as giving advice. "Hey, it's Bill here, I've got this great little investment that's just perfect for you, we think it'll go a long way and I think you should put fifty grand into it". Sounds like advice to me. Not really any different from an adviser who is also giving advice and shouldn't be influenced by commissions.

Mark Beardow
January 22, 2020

Hi Steve....I think there is a role for "brokers" or "salespeople"; the issue with Bill's sales patter is that it's misleading and deceptive.

Gen Y
January 22, 2020

I agree, re your second point... the clients of brokers are going to see this as a recommendation, unless there is strong controls around what the broker can say. Unless the regulator can enforce this (eg call recording), then I think it is too risky to continue. Leave the broker flogging to the so called sophisticated investors.

 

Leave a Comment:

RELATED ARTICLES

Conflicted selling fees are back, and it’s game on

Authorities reveal disquiet over LIC fees

Why LICs may be close to bottoming

banner

Most viewed in recent weeks

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.