IPO sales fees — necessary evil or conflicted commission?
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Brokers say a crackdown on stamping of sales fees for IPOs would be catastrophic for small companies, but others say these payments are not in investors’ best interests.
Last month the government launched a surprise review into stamping fees on IPOs and capital raisings for listed investment entities — LICs, LITs, and REITs.
Stamping fees are payments made to brokers for selling to their clients an IPO or capital raising.
Brokers get a percentage based on how much they sell, usually about 1 per cent but more risky and harder to sell IPOs can pay more.
It’s a system that brokers say isn’t broken, but which challengers say presents a fundamental conflict: if a broker is being paid to offer you, their client, an IPO how do you know whether they’re primarily looking after their fee, or looking after you?
Submissions to the review are due by the end of this week.
The review into stamping fees on LICs was spurred by media coverage of the issue from the perspective of conflicted remuneration and financial planners that began in late 2019, which was then picked up by the Federal Opposition.
But those who work in and around capital markets are watching and waiting to see whether it could expand to cover all IPOs and capital raises.
“It’s something we would be concerned about,” said Judith Fox, CEO of lobby group Stockbrokers and Financial Advisers Association.
“I don’t think it will be at this point in time, but it’s more a matter of why is one product being singled out. It raises the question of whether people think there’s a problem with the product, or whether there’s a problem with the issue generally.”
The Australian Shareholders Association (ASA) is concerned about the risks associated with conflicted fees, yet also about retail investors’ access to IPOs which could be limited if stamping fees are changed or banned.
ASA policy and advocacy manager Fiona Balzer says ad hoc changes are not good for the sector, if the rules for a single part of the market were changed.
“With the absence of a discussion paper from Treasury [which is conducting the review], because the current exemption applies to all IPOs and because we don’t have any specific wording around what they’re looking for, we don’t know if what is proposed will apply to all IPOs or only the listed subsectors,” she said.
“Picking and choosing between different listed entities sectors could be confusing.”
Changing how brokers are paid for pitching and selling IPOs to their clients would be devastating for small companies looking to list, say brokers spoken to by Stockhead but who did not wish to be named.
IPOs need a minimum of 500 investors to get over the line. Finding people willing to back risky smaller IPOs is more difficult and smaller companies, which make up the majority of aspirants, would struggle to list.
ASIC in a paper in 2016 said firms generally received higher stamping fees for higher-risk IPOs, which tended to be technology businesses and small to medium sized businesses, “because these types of IPOs are more difficult to sell to investors”.
Brokers pointed out there was a lot of work done to reach the minimum spread of 500 investors and brokers should be paid for that, because they don’t receive any other fee for introducing clients to an offer.
Clients are protected from bad deals because, the argument goes, they will not remain clients long if they are regularly offered poor investments.
The opposing argument is that ASX investors are regularly talked into investing in inferior small IPOs.
For IPOs and capital raisings generally, there are few alternatives to a stamping fee which was carved out of Labour’s Future of Financial Advice (FoFA) reforms in 2013.
These banned commissions to advisors for putting clients into unlisted products but exempted the same fees on listed products.
Even ASIC in 2016 was stumped as to how else to efficiently pay brokers for their costs of handling funds and organising the registration of stock sold.
“Stamping fees are by far the most practical way of giving advisers an incentive to raise funds for a company,” the report said.
“Charging a flat fee instead is not a practical solution, and may lead to higher charges to clients. For example a charge akin to brokerage on subscriptions which traditionally has not applied, may need to be applied.”
Fox said retail investors might prefer not to pay for something they’ve never had to before, or would apply for new issues without obtaining advice at all, or would simply stop buying into IPOs.
But ASA chief John Cowling argues that an extra fee isn’t what’s restricting retail shareholders’ opportunities to get into good IPO opportunities.
“Recent experience is that private equity has taken a number of IPOs off the table [such as Latitude, PropertyGuru, Retail Zoo and Onsite Rental Group]. I would add experiences of poor floats in the past few years such as Big Un and Getswift may have scared off some investors,” he said.