LIC investors gave up $1.6 billion in 2019

LICs have come under the spotlight for their poor performance and conflicted fees. We review LIC returns compared to ETFs in 2019.

It’s a new decade but some things don’t change. Many Australian investors are still getting terrible performance from investing in Listed Investment Companies (LICs).

The good news is that the regulator, ASIC, has taken notice and has started pursuing advisers who have recommended conflicted LICs. This should make advisers and stockbrokers think twice before recommending LICs.

The Financial Review also recently revealed that ASIC have raised the poor performance of LICs to Treasury as a concern.

Last year we showed how 95% of LICs fail to achieve the returns of an index ETF. Index Exchange Traded Funds (ETFs) are what we recommended to Stockspot clients because they have consistently performed better than opaque, high cost LICs over every time period. ETFs beat LICs because of their superior structure and because indexing almost always trumps active management.

Investors in LICs would have been better off by $1.6 billion in 2019 if they had invested into an index-tracking ETF.

It saddens us to see many Australians are still getting pushed into poor performing LICs because of the commissions (aka stamping fees) paid to the brokers and advisers who recommend them.

LICs have another terrible year in 2019

We’ve updated the figures for 2019 and it’s looking even more dire for LICs. In 2019 almost all of the Australian share LICs underperformed the index ETF we recommend to Stockspot clients. 

The average 1 year return of an Australian share LIC was 11% worse than the Vanguard Australian Shares Index ETF (VAS). Global share LICs did even worse, underperforming the iShares Global 100 ETF (IOO) by a whopping 19%. That’s in one year!

Nearly a fifth of LICs had negative returns over 12 months, a period when the share market market rose by 25%! 

Will the government act?

We’ve been advocating for the government to ban the stamping fees and commissions paid by LICs to advisers for recommending these products. This loophole needs to be closed urgently as it’s harming investors in a big way. 

According to ASIC, the 42 LICs that paid a conflicted stamping fee since 2015 returned negative 7.3% since inception.

Clearly this is not good for the end investor!

The Financial Review reported on January 2, 2020

“The Australian Securities and Investments Commission (ASIC) recently told Treasury the government’s exemption was “hard to justify” for commissions paid by fund managers to advisers and stockbrokers selling listed investment companies (LICs) and listed investment trusts (LITs) to mum and dad investors.

ASIC has also cast doubt over whether advisers have been satisfying their best interests duty under the law when recommending LICs and LITs that are paying conflicted sales commissions.”

ASIC mentioned our research in its report to government:

Source: ASIC’s Review of LICs and LITs market and conflicted selling incentives

How conflicted LIC stamping fees work

When you see a financial adviser you should expect to get impartial advice on what’s in your best interest. Unfortunately some products (like LICs) can still pay commissions to advisers. These kickback fees can easily add up to 3% of the amount you invest, which provides some advisers and stockbrokers with a strong incentive to recommend LICs over other products like ETFs.

We’ve always believed that financial products like LICs should not be able to pay sales commissions to financial advisers. Stockspot has never received commissions or stamping fees. We believe there there would be much fewer (if any) advisers who would recommend LICs over ETFs to clients if they were not paid sales commissions.

What to do if you’re invested in LICs

There are 2 things you should look at doing

  1. Review your LIC returns and fees – make sure you focus on the net returns after fees as some fund managers hide the truth by reporting gross performance (before fees) and returns based on the net asset value (NAV). Look at the LIC price at the start and end of 2019, then add in any dividends you received in the year. If your return wasn’t at least 25% in 2019 then you’ve underperformed a simple index ETF.
  2. If you believe your adviser has not acted in your best interest and recommended a LIC or other product without giving proper advice, you should follow ASIC’s advice on making a complaint.

Stockspot will continue to support a ban on any payments that investment products can provide advisers and stockbrokers because it’s clearly not in the interest of investors. 

We’re glad to see the work ASIC has been doing which should lead to more investors, as well as government, recognising the dangers associated with LICs paying conflicted commissions.

We believe children deserve the best start possible, which is why you can invest for your kids for free with Stockspot.

Investment Associate

Marc has previously worked for Morgan Stanley, AMP and KPMG. He holds a Bachelor of Business (Finance/Accounting) from the University of Technology Sydney (UTS), and has completed his Chartered Financial Analyst (CFA) Level 1.

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