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

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

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.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

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?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

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.