Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 339

1 January is a moment of truth for the wealth industry

For investors who poured $925 million into the listed KKR Credit Income Fund (ASX:KKC) during October 2019, the opening weeks of trading would have provided a sobering insight into the pitfalls of a Listed Investment Trust (LIT) structure.

The experience also highlighted an important ethical question for the wealth advice industry to answer.

KKC upsized the deal to $925 million following a flood of demand, but since listing, the shares have consistently traded below the $2.50 issue price. And when the shares sank to $2.43, the decline in capital value had eaten into nearly half of the expected total annual income return.

Problem of trading at a discount

One of the major challenges of a LIT structure is that the underlying shares can trade away from the value of the units in the trust. Occasionally, the shares trade at a premium to the underlying value, but of the 114 Listed Investment Company (LICs) and LITs trading on the ASX at the time of writing, 72% trade at a discount to Net Tangible Asset (NTA) value. The average discount is 12.6%.

While there is always a risk of capital loss when investing, the possibility of a discount to NTA amplifies that risk significantly.

The risk of variance to NTA is just one of the pitfalls of investing via a LIC/LIT structure. Another major risk for investors is the lack of liquidity. In the first three weeks of listing, only around 3% of KKC changed hands. The total value of KKC bid for in the market at time of writing is a mere $270,000. The harsh reality of a LIT such as KKC is that even if an investor decided to exit their investment, it will be difficult to sell volume without driving the price down further.

The toxic pairing of a discount to NTA and a lack of liquidity is a value-destroying combination that is unique to LIC and LIT structures.

Why do so many investors line up to participate?

Depending on the specific LIC/LIT, there can be a variety of reasons for the massive demand. However, our view is that a loophole in FoFA regulations that allows fund managers to pay incentives to advisers who sell LICs and LITs to their clients is a major contributor.

Under the 2012 Future of Financial Advice (FoFA) regulatory reforms, fund managers are banned from paying sales commissions to advisers who sell their products. But in 2014, listed funds were exempted from this rule, and the extent to which that exemption has been exploited is eye-popping. Nearly $45 billion of capital is now invested in LICs and LITs, mostly on behalf of mum and dad investors.

And advisers are being paid lucrative incentives, called 'stamping fees' by fund managers, to sell their clients these funds. Initially these structures were used to buy portfolios of listed shares, similar to a managed fund. However more recently, as in the case of KKC, the structures have been used to acquire portfolios of unlisted, high yield, fixed income securities that are more difficult to value. We can now add another risk into the mix: opaqueness. 

There are several more similar strategies queued up to come to market in 2020.

Can an adviser be impartial when paid to sell a product?

Good advice is always important, and that importance is only increasing as the risks keep rising. The key question to consider is how can an adviser who is receiving a significant fee for selling a product be in a position to offer good, impartial advice to their client? The truth is, they can’t.

As Kenneth Hayne noted in his final report of the recent Royal Commission,

“Experience shows that conflicts between duty and interest can seldom be managed; self-interest will almost always trump duty.”

The advice industry in Australia has evolved around the idea that it is acceptable for an adviser to have an interest that is in conflict with the interests of their client. There has been a view that the conflicts could be adequately managed, or adequately disclosed. The case studies of the Royal Commission graphically revealed why the current situation cannot be allowed to continue.

We have taken a public position against the exploitation of the stamping fee loophole. You can read the article we published (There Are Still Dangerous Loopholes In Financial Advice Rules) on the topic earlier this year here.

Good advice means conflict-free advice. We took a stand that we would only accept fees that were paid by our clients to ensure our advice would never be compromised. 

A shift in what is acceptable

Importantly, conventional wisdom is slowly shifting for the better. The Financial Adviser Standards and Ethical Authority (FASEA) Code of Ethics came into force on 1 January 2020, and Standard 3 states:

“You must not advise, refer or act in any other manner where you have a conflict of interest or duty.”

The guidance notes attached to the Code specifically call out stamping fees on Initial Public Offerings. However the disciplinary body charged with monitoring and enforcing adviser’s adherence to the code has not yet been established. Whilst ASIC has provided relief for the requirement that advisers are registered with a compliance scheme, they have also stated that:

“AFS licensees will still be required to take reasonable steps to ensure that their financial advisers comply with the code from 1 January 2020, and advisers will still be obliged to comply with the code from that date onwards. ASIC may take enforcement action where it receives breach reports.”

So it is at this point that we reach the fundamental ethical question for the industry.

We know where the regulator stands on this issue. Will fund managers follow the lead of Magellan and voluntarily call time on the practice of paying lucrative incentives to advisers to place private investors into risky structures? Will advisers voluntarily call time on accepting fees that compromise the advice they give to the clients who trust them?

Or will the industry continue to exploit the loophole before it finally closes?

1 January 2020 is a moment of truth for the wealth advice industry. How the industry responds will say a great deal about integrity and intent.

 

Paul Heath is a Founding Partner and Chief Executive Officer at Koda Capital. This article is general information and does not consider the circumstances of any individual.

 

RELATED ARTICLES

Who's next? Discounts on LICs force managers to pivot

Authorities reveal disquiet over LIC fees

Fewer new LICs and LITs in 2019, but more funds raised

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Latest Updates

Economy

The ‘priced out generation’ and what they should do about it

A fiery interview on housing exposed deep generational divides, sparking youth outrage and political backlash. As homeownership drifts out of reach, young Australians face a choice: fight the system - or redefine success.

Taxation

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Superannuation

Meg on SMSFs: Ageing and its financial challenges

Ageing SMSF members can face issues funding their pension income as cash reserves dwindle. Potential solutions include involving adult children in contributions to secure future financial stability.

Economy

US earnings season was almost too good to be true

The second quarter US earnings season has wrapped up, with a record 82% of S&P 500 firms beating earnings estimates. As tailwinds fade, Q3 may reveal whether AI momentum can offset rising economic headwinds. 

Gold

Does gold still deserve a place in a diversified portfolio?

9,000 years and no devaluations later, gold is the world’s most enduring store of value. It remains attractive as the value of several paper currencies, including the US dollar, are threatened by deficits and rising debt.

Shares

Checking in on the equity market's silent engine

Consumer spending directly impacts corporate earnings, sector performance and market sentiment. The latest data from different economies uncover risks and pockets of opportunity for investors.

Fixed interest

6 key themes driving bond markets

The Fed could soon be prompted to join other central banks in cutting interest rates. This would have ripple effects across global fixed income markets and provide an especially attractive backdrop for emerging market bonds.

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.