What does the future hold for the LIC/LIT industry following the Treasurer’s decision to exclude listed investment entities from the stamping fee provisions available to other listed companies, asks Angus Gluskie.
In late May the Federal Treasurer announced that the Government would remove listed invested investment entities from the stamping fee exemption provided to all other ASX listed companies.
This move seeks to align the treatment of listed investment entities with unlisted investment funds and ETFs, yet in so doing it creates a differential treatment between listed investment companies and trusts and all other ASX listed companies, including AREITS.
Aligning the treatment of listed investment entities with unlisted investment funds and ETFs
Based on an overarching policy objective that advisory fees should be directly agreed and paid by the client, the Treasurer’s move to align the treatment of listed investment entities with unlisted investment funds and ETFs is understandable.
Nevertheless, it must be remembered that a listed investment entity raises capital from thousands of investors at a single point in time, unlike ETFs and unlisted managed funds which raise capital continuously from one investor at a time. The prior process of aggregating and paying transactional advisory fees in a single block was an efficient process for both advisers and investors and was a process suited to the traditional transactional nature of the adviser-client relationship for investors in listed shares.
The new challenge for stockbrokers and advisers
Following the change in regulation, the stockbroking and advisory community will need to examine the way in which they are remunerated for the provision of transactional and advisory services to customers investing in ASX listed investments.
This may involve both the adjustment of fee agreements with clients and the development of billing processes and systems to accommodate these changes. In some cases, advisory fees based on funds under advice (FUA) may be suitable, in other cases transactional fees may be more appropriate, and in other cases again a combination of FUA and transactional charges may be considered most equitable.
Can the efficiencies of aggregating and paying advisory fees in one block be maintained?
Possibly. In Regulatory Guide RG 246 ASIC outlines the mechanism through which this may be done. The acceptable mechanism is for customers to provide a clear authorisation for an advisory fee to be added to an application for shares. The issuer may than aggregate the authorised advisory fees and remit them in one payment to the relevant advisory group.
Should listed entities incorporate this functionality in capital raisings the efficiency of aggregating and paying fees could be retained, so long as any additional paperwork does not outweigh the administrative benefit.
Ongoing question-mark about arranger/manager fees
It is not yet clear whether the proposed legislation will inadvertently conflict with the legitimate payment by the issuer for the services of arrangers and managers to share issues, in circumstances where the Arranger/Manager also has a separate division providing financial advice to customers.
Arrangers and managers provide a range of services to the issuer during a share issue, including assisting with PDS preparation and due diligence, administering and underwriting settlement and liaising and distributing the issue to advisory groups. These services to the issuer (not the customer) are synonymous with the sales and distribution services that are paid for by ETFs and unlisted funds on an ongoing basis.
Inadvertently preventing the valid payment of arrangers/managers is clearly not the intent of the legislation, nor would it be consistent with the treatment of the extensive sales and marketing costs paid by ETFs and unlisted funds.
When will we see more LIC/LIT issues?
Several LIC/LIT issues were placed on hold during late 2019 and early 2020 due to the aura of uncertainty that existed while the Government reviewed the method of adviser remuneration. This has more recently been supplemented by the market volatility stemming from the COVID crisis.
LICs and LITs want to see a defined, transparent and efficient method for customers to receive sound advice and for advisers to be fairly remunerated for that service. We are keen to see the legislative change finalised, which will assist all parties by providing certainty of regulation.
Our industry would hope that as market conditions themselves stabilise, that a further range of LICs and LITs will be brought to market, in turn providing investors with a continued expansion of investment choice as well as the benefits provided by closed-ended investment vehicles.