Conflicted fees and investment losses

Australian law firms Mayweathers Lawyers and William Roberts Lawyers, along with an unnamed litigation funder, are investigating potential claims by investors who may have suffered financial losses as a result of a recommendation by a financial planner or stock broker (Advisor) to invest funds in a Listed Investment Company (LIC) or a Listed Investment Trust (LIT) prior to 1 July 2020 (LIC or LIT Investors), including in circumstances where the Advisor was paid a fee for recommending the investment, commonly referred to as a stamping fee (or otherwise referred to in public offer documents as a broker or advisor fee) (Stamping Fee).

In a submission made by the Australian Securities & Investments Commission (ASIC) to the Treasury dated 20 February 2020, ASIC expressed concerns which include the following:

• Stamping Fees create an incentive for Advisors to put clients into LICs and LITs over other comparable products that do not pay Stamping Fees.

• The conflicts of interest arising from Stamping Fees are too great to be effectively managed and should be avoided.

• LIC or LIT Investors experience poorer outcomes relative to other investment opportunities for reasons including that LICs and LITs tend to underperform (in some cases materially) against relevant benchmarks and other comparable products. The opportunity cost of investing in many LICs and LITs is foregone profits (or the minimisation of losses).

ASIC reported that that in the 5 years to the end of 2019, advisers had earned over $186 million in stamping fees from more than $14 billion of initial capital that had been raised by LICs and LITs, excluding secondary capital raised in the form of secondary equity offers, entitlement rights and attached company options.

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