Money Management | Vol. 36 No 1 | February 10, 2021

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Vol. 36 No 1 | February 10, 2022

MANAGED ACCOUNTS

Understanding the complexities

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ADVISER SENTIMENT

EDUCATION

The professional year

The danger of young advisers utilising experience pathway

BY LAURA DEW

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A year to take a breath AFTER the last difficult couple of years, filled with regulatory change, it looks like 2022 might be a year in which advisers can take a breath, according to many.

Advisers should take advantage of it by focusing on what the core of their business is really about, spending more time with their clients and finding solutions in the challenging environment.

This would also provide a good opportunity for them to look after their business processes, succession planning and improve their system efficiency.

Ben Marshan, head of policy, strategy and innovation at the Financial Planning Association of Australia (FPA), said the implementation of the Royal Commission’s recommendations had introduced a number of new processes that were often pushed onto adviser businesses but, in return, had created additional paperwork and inefficiencies.

“This is really the main thing planners should be focusing on this year. They met the education requirements, they’ve gotten through the Royal Commission period and now it is time to think about their businesses.

“The last couple of years have been a little bit dramatic [for advisers] so it is not surprising that they are still worrying that there is more to come but the reality is that probably isn’t.”

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Full feature on page 20

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PARAMETERS need to be in place with the adviser experience pathway to prevent young advisers with minimal experience from qualifying for the exemption, according to the Financial Planning Association of Australia (FPA).

Speaking at a roundtable, FPA chair, Marisa Broome, said the association had received around 2,500 responses to its consultation on the experience pathway, representing more than 20% of its membership.

This would see advisers without degrees but with more than 10 years of experience, exempt from the education requirements and only required to complete an ethics module.

The issue had “polarised” the membership, she said, with

members unanimously agreeing it was a backwards step. While they agreed there had been a lack of recognition for advisers’ experience in the past, they disagreed the proposal was the right way to go about rectifying this.

Specifically, there was poor support for implementation of the 10-12-year pathway .

Broome said: “It could mean that an adviser aged 30 with 10 years experience could practice for another 30 years without any adequate formal tertiary qualifications. For attracting new entrants and for general professionalisation can’t be good for a consumer perspective. You need to have some parameters around who qualifies for the experience pathway.

Continued on page 3

Extra costs likely if wholesale test amendments go ahead: SAFAA RECLASSIFYING clients who previously qualified as wholesale clients will be detrimental in a time of declining adviser numbers, according to the Stockbrokers and Financial Advisers Association (SAFAA).

In a discussion paper ‘Does the wholesale investor test need to change’, the association said there were many firms who had adopted a business model of solely servicing wholesale clients and would be negatively impacted if these clients were instead classed as retail investors.

“With business models relying on the definitions in structuring their businesses to meet client demand, change will bring disruption and attendant costs associated with implementing change”, the report stated.

“Licensees have aligned their business models to the current Continued on page 3

3/02/2022 12:38:55 PM

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February 10, 2022 Money Management | 3

News

Pro bono work would boost public’s perception of advice

BY LAURA DEW

MANY consumers are unaware of financial benefits available to them and helping them to understand this via pro bono work would boost the public’s perception of financial advice.

Pro bono work offers financial advisers the opportunity to work with clients who were experiencing financial stress but might not ordinarily be available to afford advice, an area that had been highlighted by the high cost of advice.

Incidents of financial stress had increased during the pandemic as people were furloughed or lost their jobs. One-in-four Australians said they felt under financial stress during the pandemic and one-in-three said their financial situation had worsened, according to research by charity The Smith Family.

Speaking to Money Management, Nicola Beswick, senior financial adviser at FMD Financial and chair of the Pro Bono Financial Advice Network said there had been an increase in people seeking advice, particularly those suffering personal health crises.

“We have had so many more enquiries that advisers could help them with. We help people who have gone through personal health diseases and match them with an adviser who wants to help that cohort.

“There has been a significant increase in people seeking assistance, we have 130 advisers in our network and would love to have more.”

She said pro bono work did not need to take up a lot of an adviser’s time.

“It doesn’t need to be a lot of work, even helping one client a year would be helpful.

“You can change people’s life by just talking with them for an hour, I have had so many cases where clients didn’t realise about insurance in superannuation that they could claim and that can have a significant change to

The danger of young advisers utilising experience pathway Continued from page 1 “You can’t expect to go on forever where you can do a two-day course to be a financial planner, that’s not appropriate.

“Prior to FASEA [Financial Advisers Standards and Ethics Authority] there were no CPD requirements, they had no ongoing education requirements until FASEA came into play and that can’t be called a profession.”

FPA chief executive, Sarah Abood, who took over in January from Dante De Gori, said another proposal the organisation had was around specialisations but that further discussion was needed.

“If you are a planner who only practices in one area, then perhaps there’s an opportunity for us to recognise that. When we talk about specialisation, there are two ways of looking at that; one is that is a specialist designation where everyone is a financial planner and some have an extra specialist designation or is it in the sense of practicing in a specific area?

“I think we need more conversations and what the impact would be on the profession. That conversation needs to be had about what those areas might be.”

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their life and they may not have even known.”

While there was no continuing professional development (CPD) points available as an incentive to do pro bono work, Beswick said a positive activity would go towards changing the public’s perception of financial advisers.

“I would love it to count for CPD, that is definitely something to think about but maybe it would detract from the altruism we get from it.

“There is also a sense of highlighting that advisers are good and it is a way to change the negativity around advisers.”

Extra costs likely if wholesale test amendments go ahead: SAFAA Continued from page 1 regulatory framework, including the wholesale client definitions. Advisers who have adopted a wholesale clientonly business model are not required to have satisfied the educational and exam requirements that allow them to provide advice to retail clients.

“They would therefore find themselves treated as new entrants, subject to not only to the education and exam requirements but also the Professional Year requirements and without a livelihood.”

Similarly, they would be unable to provide advice to their former clients who were now ‘retail’ clients which would deprive those investors of access to an adviser they may have built a long relationship with.

“One outcome of the combination of

a change in the wholesale client definition and the significant decline in the number of retail client advisers would be that reclassified clients would lose access to personal advice.

“At a time when the government, regulators and the financial advice industry concur that access to financial advice is now more difficult and there is a need to work together to improve access, cutting a cohort of clients adrift would be counter-productive.”

Finally, the pool of potential clients for those who remained offering advice to wholesale clients would also decline which “may exacerbate the decline in availability and affordability of financial advice”, particularly given the high numbers of advisers exiting the industry.

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4 | Money Management February 10, 2022

Editorial

laura.dew@moneymanagement.com.au

FE Money Management Pty Ltd

A GREAT YEAR AHEAD

Level 10 4 Martin Place, Sydney, 2000

Editor: Laura Dew

After a hectic few years, advisers will finally have the chance this year to look inward at how they can improve their businesses.

Tel: 0438 836 560 laura.dew@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814

AS ADVISERS return from their summer breaks, they may be feeling apprehensive about how the year ahead will go given their past experience.

With the Omicron variant still lingering around, this is likely to mean working from home will continue for longer and clients will continue to seek advice remotely, many of whom may still be facing financial stress as a result of the pandemic.

However, much has been said about the potential for less regulatory and compliance change this year which will, no doubt, be a welcome relief to advisers after several years of implementing recommendations following the Hayne Royal Commission.

With a Federal election just months away, this is likely to give advisers at least six months of regulatory respite as all political activities are refocused towards election efforts.

At a time when consumers are in need of, and are seeking, trusted financial advice more than ever, the level of compliance over the past few years has led many advisers to sigh and decide it is easier to

oksana.patron@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au ADVERTISING Account Director: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Director: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Junior Account Manager: Karan Bagai Tel: 0438 905 121 karan.bagai@moneymanagement.com.au Events Manager: Nicole Pusic Tel: 0439 355 561 nicole.pusic@moneymanagement.com.au PRODUCTION

shut up shop than meet the innumerable requirements. The number of advisers is expected to fall to between 15,000-16,000 this year from more than 18,000 last year.

But, for those who have passed their education requirements and chose to remain in the sector, industry associations are united in the view that this will be a great year.

Advisers who had been ready early with their educational requirements are now reaping the benefits; advice being provided is of a higher quality, firms are more

professional, have more stable income streams and are able to pick up high fee-paying clients given the strong consumer demand for advice.

As for next steps, this is now the time to look inward at their businesses and assess whether processes can be made more efficient through technology implementation.

Money Management looks forward to interacting with our readers and keeping you abreast of all developments in the year ahead.

Laura Dew Editor

WHAT’S ON Retirement products special interest group

Delivery of advice – can we do better?

Online 11 February aist.asn.au/events

Online 15 February fpa.com.au/events

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Factual information vs financial product advice

SMSF Discussion Group

Online 15 February superannuation.asn.au/ events

Online 22 February superannuation.asn.au/ events

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6 | Money Management February 10, 2022

News Insignia loses self-employed advisers due to fee change CHOICE ‘shocked’

BY JASSMYN GOH

INSIGNIA Financial (formerly IOOF) lost 118 advisers during the December quarter, largely through the loss of smaller practices in the self-employed channel as a result of the reset of management fees charged by IOOF to self-employed advisers.

In an announcement to the Australian Securities Exchange (ASX), Insignia said it had 1,765 advisers in its network and the number of practices in the selfemployed channel decreased by 59 to 480 at the end of December.

“This reduction in self-employed adviser and practice turnover is mainly the result of the reset of management fees charged by IOOF to self-employed advisers from 1 October, 2021,” Insignia said.

“The revised fee model removes historic subsidisation of fees and supports our target for ANZ-aligned licensees to break-even on a run-rate basis by 30 June, 2022. The reduction in advisers for the quarter is consistent with Insignia Financial’s commitment to deliver to this break-even target as planned.”

Insignia Financial chief executive, Renato Mota, said the

advisers who left were unable to transition to its “new sustainable advice model”.

“This contraction in adviser numbers reflects the necessary changes to ensure the financial advice profession can prosper after a period of change, while supporting continued investment in technology and process improvements, for the benefit of advisers and their clients,” he said.

“Where advisers left due to retirement or exit from the industry, a significant portion of their client books of business have been retained.

“During the last 12 months, Insignia Financial has facilitated over 50 intra-group acquisitions and mergers as part of our adviser

succession plan. This consolidation not only aids succession and retention of clients and funds under administration [FUA], but improves the scale of advice practices, reduces our cost-to-serve and supports the path to break-even of our advice business.”

Insignia posted an increase of $4.2 billion to $222.7 billion in funds under administration during the December quarter while it lost 118 financial advisers. However, it said positive market movements of $5 billion were partly offset by pension payments of $730 million and reduced net outflows of $69 million.

It noted that net flows into advised platforms improved at $632 million, compared to outflows of $157 million in the prior quarter.

However, outflows from acquired MLC and pensions and investments (P&I) platforms registered signs of reducing following the delivery of product enhancement and strategic repricing initiatives.

The firm’s funds under management (FUM) rose $556 million to $98.8 billion over the quarter as market gains of $507 million were supported by net inflows of $49 million.

Govt education proposal backwards step: FPA THE Government’s education proposal to allow financial planners with 10 years of experience to continue practicing without higher education is a backwards step, the Financial Planning Association of Australia (FPA) believes.

Speaking to Money Management, FPA head of policy, strategy, and innovation, Ben Marshan, said the association had a long-held position that there was a need to raise education standards and the proposal was effectively a backwards step.

“How do you balance taking experience into account and having a high education standard? That’s what we’re working through with members at the moment.”

Marshan said 60% of FPA members were opposed to any form of exemption for experience and 85% of members thought experience could be taken into account but not a full exemption.

“We’re still getting feedback from members, we’re still talking to other associations, and we’re still talking to academics and trying to understand the issues that are going on. We are supportive of a higher education degree, the kind of comes out of framework, but

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providing a lot more credit for experience along the way.

“FASEA definitely did not take experience into account in a fair way. They didn’t do it in a way that allowed an experienced financial planner to demonstrate that they were competent to meet the education requirements.”

Marshan noted he did not necessarily believe Treasury would put the proposal out if it was not their intent to implement it.

“I’ve had a lot of conversations with a lot of associations and I think we’re all universally in agreement that while FASEA didn’t get 100%, right, they weren’t necessarily far off. So, throwing the baby out with the bathwater is not necessarily the right outcome either,” he said.

“If all of the associations are in agreement that this proposal is not the right one for the profession, then Treasury might turn around and says ‘well, we propose it’, then the profession says ‘no’. So, Treasury will need to come up with something else.

“I think that’s where there’s an opportunity to get the right kind of outcomes.”

by civil penalty exclusion for execs

BY LIAM CORMICAN

CONSUMER advocacy group CHOICE is “shocked” that the Government removed civil penalties of up to $1 million for executives that breach the Financial Accountability Regime (FAR) in its proposed bill.

Appearing before the Senate Economics Committee, CHOICE chief executive, Alan Kirkland, said the group welcomed the proposal back in 2020 because it “made sense [as] obligations without consequences… are worthless”.

He said it would bring penalties under the regime in line with the new maximum penalties that the Government introduced under the Corporations Act, the Australian Securities and Investments Commission Act, the Insurance Contracts Act and the National Consumer Credit Protection Act. “We were therefore shocked when that provision was deleted from the bill that was introduced to Parliament,” he said.

“So, we strongly encourage the committee to recommend that the bill be amended to include penalties in line with the government’s original proposals.”

Senator Paul Scarr, chair of the committee, asked Kirkland how civil penalties would work when directors were indemnified against a company.

Kirkland replied there would still be a significant deterrent effect.

“Regardless who ends up paying that, it’s still a significant black mark against that executive.”

In CHOICE’s submission, it said the proposed deferred remuneration obligations were weaker than the existing requirements in the Banking Executive Accountability Regime (BEAR).

Under the FAR draft, accountable entities must defer at least 40% of the variable remuneration of their directors for a minimum of four years, and reduce their variable remuneration for non-compliance with their accountability obligations.

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February 10, 2022 Money Management | 7

News

CFS partners with FNZ for platform launch

BY LAURA DEW

COLONIAL First State is expecting to launch a new wrap platform by the end of 2022, having partnered with FNZ. The firm said FNZ would replace its current solution, which used a mix of technology providers, to provide a “significantly improved” experience for advisers using CFS’ wrap platform.

FNZ had $70 billion in assets on its wealth platform service in Australia and $2.1trn worldwide and CFS said it had been selected for its ability to integrate with multiple providers.

It had also been working directly with financial advisers to best understand their needs and how the platform could help them day-to-day and said it expected to continue to get feedback from them over the next 6-12 months.

Chief distribution officer,

Bryce Quirk, said: “FNZ is very capable of integrating with multiple providers so we expect to integrate with other services in the future and to provide the integration of adviser technology.

There are also lots of opportunities around data management and how that can provide insights for advisers.

“The new platform will be more streamlined with high levels of automation, the more we can automate at our end, that will reduce the time for the adviser which will increase efficiency.

“All the regulatory change is impacting adviser’s work ability and that has been a challenge for them. So we need the platform to be robust, simple and efficient.

“This is our first step forward since our separation from CBA and is a real decision to be competitive in the platform space to meet the needs of financial advisers.”

Kelly Power, CFS chief executive, added: “This will greatly strengthen our competitiveness in the wrap platform sector and allow us to become one of the major players.”

FASEA had knowledge of mental health issues

BY JASSMYN GOH

WHILE the now-defunct Financial Adviser Standards and Ethics Authority (FASEA) was aware of mental health issues in the financial advice industry, it did not monitor the number of affected advisers or have the “power” to exempt an adviser from sitting the exam.

In an answer to the Senate Economics Legislation Committee questions on notice, FASEA said it was aware of mental health issues in the industry and the research into adviser wellbeing.

However, when asked what actions it had taken when it was aware an adviser was experiencing mental health issues and might be at risk of self-harm, FASEA said its role was to administer the exam.

“FASEA’s role under the act is to administer the

exam, as required by legislation. FASEA has no power to exempt an adviser from sitting the exam, nor to provide counselling services,” it said.

“Where FASEA becomes aware of an adviser experiencing mental health issues FASEA refers them to their licensee or industry association to provide appropriate support.

“FASEA is not funded nor staffed to provide counselling to advisers. Where FASEA becomes aware of an adviser experiencing mental health issues FASEA refers them to their licensee or industry association to provide appropriate support.”

When asked if it tracked the number of advisers who might be deemed to be experiencing mental health complications, the entity said “no”.

Dixon Advisory files for voluntary administration DIXON Advisory and Superannuation Services (DASS) has been put into administration as its directors determine that mounting actual and potential liabilities meant it was likely to become insolvent at some future time.

DASS parent E&P Financial Group said it appointed PwC Partners as voluntary administrators.

The actual or potential liabilities included: • Possible damages arising from representative proceedings led

by Piper Alderman and Shine Lawyers; • Claims against DASS being determined by the Australian Financial Complaints Authority (AFCA); and • Penalties agreed between DASS and the Australian Securities and Investments Commission (ASIC).

E&P said following the appointment of the administrators it aimed to: • Facilitate the prompt transfer of DASS clients to a replacement services provider of the client’s choice with minimal disruption to client service; and • Propose a deed of company arrangement for the comprehensive settlement of all DASS and related claims in a manner which provided for equitable treatment of all DASS clients/creditors.

E&P also said the voluntary administration related only to DASS, no client assets were at risk, there would be no staff impact, and there would be minimal disruption to client service.

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8 | Money Management February 10, 2022

News

More focus on client portfolios needed

BY OKSANA PATRON

AFTER another intensive regulatory year, financial advisers may finally need to go back to their roots and focus on the provision of advice, according to Lifespan Financial Planning.

The company’s chief executive, Eugene Ardino, said advisers would in particular have to help their clients manage the impact of market volatility on their portfolios.

Ardino said that assuming there would be no more regulatory changes and once the transition period during which many advisers would be moving to fixed term arrangements with their clients would be over, there would be some time for advisers to go back to advice, servicing clients, and finding solutions in the challenging environment. “[One of the] big themes that is going to

play out this year is going to be stock market volatility and normalising interest rates and the impact of that on client portfolios and how to minimise the fallout and make it as painless as possible for clients,” he said.

“I think a lot of people were expecting the share market to go a little bit higher last year.

That obviously did not happened, so I think a lot of advisers now are starting to look at the portfolio construction and try to make sure that they are positioning well for what could be a very turbulent year.”

Ardino stressed that the sheer volume of all the compliance changes in one go worked as an obstruction to the main thing the advisers should be spending their time on.

“Barring any more structural or procedural changes, this could be the year when we just sort of get on with it and go back to our main focus being our clients and advice,” he said.

Opportunity to grow adviser client base

BY JASSMYN GOH

THERE are opportunities for financial advisers to grow their client base this year as the regulatory environment will be more stable and most have settled on the chosen advice model for their business, according to BT. BT chief executive, Matthew Rady, said the last two years had seen introspection across the industry while advisers worked out their new advice model and whether they would continue practicing as advisers.

“Questions on whether advisers will be self-licenced or will be supported by someone else have largely settled for advisers who have committed to stay. Product providers and advisers alike have been inwardly a little bit too focused on our own internal business models and not focused enough on the clients and the people that matter.”

“This year’s sense and what I hear from advisers is that this is a foundation year for them in re-pointing their focus now that their business models are settled now that they’ve made decisions in the way they want to run their business in client experience and client outcome.

“That’s a great thing for clients and hopefully we’re in a period which I wouldn’t expect is going to be stable, but a relatively stable to what it’s been in the past.”

Rady said advisers he had spoken to were optimistic on the future given markets had been buoyant over the past 12 months and that there was demand for advice.

“The general feedback is that advice clients are pretty satisfied with the services they’re getting from their advisers which is helpful,” he said.

“Secondly, despite fewer advisers in the industry demand for advice has not dampened. So, there are opportunities for advisers and we’re seeing advisers genuinely growing. For those that have elected to stay the opportunity to grow their client base is strong and that’s what I think they see into 2022.”

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Licensees lag with reporting adviser numbers ADVISER numbers continued to fall in the week to 21 January with a net change of -49, driving the net number of advisers down to 17,621, but this was slower than anticipated, according to Wealth Data.

Money Management previously reported that adviser numbers were expected to hit below the 17,200 threshold in January. However it seemed the holiday period and COVID-19 caused many licensees to lag behind with their reporting to the Australian Securities and Investments Commission (ASIC).

This was particularly apparent in the peer group of accounting – limited advice, a segment that mostly consisted of accountants providing self-managed super fund (SMSF) advice under restricted licences, which were yet to report.

According to Wealth Data’s director, Colin Williams, these were mostly very small licensees who needed to remove themselves and close the license which might be more complex than expected.

“To put this into context, there are 258 ‘one adviser licensees’ and 50 ‘two adviser licensees’ in this peer

group and they had some of the lowest Financial Adviser Standards and Ethics Authority [FASEA] exam pass rates when this data was available,” Williams said.

There were 22 licensee owners with net gains of 33 advisers, while 46 licensee owners saw a net loss of (-81) advisers. At the same time, three new licensees commenced while eight licensees ceased.

The highest losses were reported

by CBA, Consilium Advice, and Insignia Group (previously known as IOOF) which were all down by a net of seven advisers.

These were followed by Synchron that was down by (-4), and four groups including AIA and WT Financial Group were down by three advisers.

According to the data, the largest group was Insignia with 1,239 advisers while AMP Group had 1,111 financial planners.

AMP Financial Planning was still the largest licensee, with 595 advisers, and was followed by SMSF Advisers Network (544) and Morgans, in third position, with 446 advisers.

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February 10, 2022 Money Management | 9

News

Advisers crucial for Retirement Income Covenant success

BY LAURA DEW

THE Retirement Income Covenant is doomed to fail if there are a lack of advisers in the industry to convince consumers of its worth.

The Retirement Income Covenant aimed to promote choice and competition in the retirement phase of superannuation and for superannuation trustees to have a retirement income strategy that outlined how they planned to assist members in retirement.

This included maximising retirement income, managing risks and having flexible access to savings.

Speaking at an industry event, Stephen Jones MP, shadow minister for financial services and superannuation, said advice was crucial to the covenant’s success.

Jones said: “Unless the advice piece gets fixed, the Retirement Income Covenant will

fail. Because people will not adopt strategies for which they are unfamiliar unless they have the confidence of someone they trust who says ‘this is the best way for you to deal with your retirement nest egg’. It will fail until that advice piece is fixed.

“I’m intensely uncomfortable with a model that looks like that. It would be naïve for us to think that the stuff exposed by the Hayne Royal Commission was only a problem that could ever just be subject to one part of the industry, so we need to send a clear message to me that we need to get the advice model right and the traditional advice models aren’t working anymore.”

The superannuation industry was now over $3.3 trillion in size but Jones said more effort needed to be put into the retirement phase, the same way focus had been given to the accumulation phase.

Lengthy plans disengaging clients from advice CLIENTS are disengaged with lengthy financial plans and could benefit from a clear and concise, one-page overview in order to understand and value the advice received, according to Astute Wheel.

Johann Maree, Astute Wheel practice development manager, said the adviser-client experience had changed over the years.

“For many years, financial advisers have delivered the same advice experience to their clients and although many financial advisers love the analysis this – and the 50 plus page legalistic financial plan – does not engage their clients,” he said.

“What clients want is an executive summary – a bottom line and solution to get them where they need to go. By having a digital and client-friendly one-page overview of the client’s position, advisers can creatively and collaboratively engage with their clients all the while determining the relationship between income, expenses, assets and liabilities, as well as determining how the clients are funding for what matters to them.”

Clients’ expectations from communication from their adviser had also changed from periodic meetings to ongoing guidance which provided greater insight into investment portfolios. This included the use of secure portals where they could view their portfolios online.

He said clients most valued the financial advice they received when it allowed them to achieve peace of mind and fulfilment rather than simply focused on money management and financial goals, particularly if they related to complex financial situations.

“Meaningful engagement happens when clients can be involved in the process and see in real time how their world can be positively changed for the better,” Maree said.

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Should product providers be mandated to provide independent advice?

BY JASSMYN GOH

MECHANISMS need to be looked at to help encourage Australians to understand investment risks but clients of financial advisers should not be paying for advice for other investors in the same scheme, industry associations believe.

During a Senate Economics Legislation Committee, industry associations were asked by the committee chair Paul Scarr, who pointed to the Sterling Collapse, about whether promoters of managed investment schemes should be mandated to provide independent financial advice and that the cost of the advice should be distributed across all participants in the scheme.

Association of Financial Advisers (AFA) chief executive, Phil Anderson, said: “That’s a big call to mandate getting access to financial advice. Obviously coming from a financial advice association we would strongly support people getting access to advice, particularly if they’re investing in something that is higher risk.

“The design that you described in terms of the cost of that advice being shared across other investors is a pretty significant consideration.

“We would argue that clients of financial advisers shouldn’t, if they’re already paying for that advice, they shouldn’t be paying for advice for other investors in the same scheme. But mechanisms need to be looked at to help encourage Australians to understand the risks they are taking and to consider other forms of protection.”

CPA Australia financial planning policy adviser, Keddie Waller, agreed with Anderson and said the industry needed to think about the complexities around products.

“If you look at Sterling there was a misconception that some people were actually investing more around their retirement living as opposed to going into a product and I think that’s some of the things we need to think about language and how products marketed to people, especially when they’re directly marketed to individuals,” she said.

“In that case, I think another thing we need to think about is financial literacy.

And the important point about trying to upskill more broadly the community to understand what information they’re receiving, what they should be looking for, and that will also help encourage seeking professional advice.”

2/02/2022 10:49:36 AM

10 | Money Management February 10, 2022

News

Has the Govt gone too far with education pathway proposal?

BY JASSMYN GOH

WHILE the Association of Financial Advisers (AFA) believes the Government’s proposal to amend the adviser education pathway is a good thing, it is on the fence about whether the proposal has “gone too far”.

AFA chief executive, Phil Anderson, said the association was pleased the Government made the decision to review the education standard and that it had sought feedback from its members but so far had seen a “mixed bag” of reactions.

Anderson said it was a mix of those who were supportive and those who had reasons to disagree with parts of the proposal.

At the end of 2021, the Government proposed an “experience pathway” that would allow financial advisers who had 10 years or more of full-time experience in the last 12 years to only complete a tertiary level unit on

the code of ethics to continue providing advice.

“There are concerns about whether it’s going to undermine the recognition of financial advice as a profession. There are people who’ve already done the study as they were required to do so who feel this is unfair,” he said.

“The issue is whether they’ve gone too far with requiring someone to do just one subject and

if that will undermine confidence in advice, recognition of advice as a profession.

“With the qualification pathway, it’s whether that ensures that people have done study in an area that is most relevant and what does it mean for new advisers who are looking to come into financial advice over the next few years.”

Anderson said these were really critical policy matters and the association was considering feedback from its members on what was in the long-term best interest of financial advice.

“We’re pleased that they have put a proposal on the table where they are going to better recognise experience,” he said.

“The question is whether going from eight subjects to one subject for people who’ve got 10 years of experience as at the first of January, 2026, is going too far. If it was accepted that it’s going too far then what is the right compromise or the right balance?”

Magellan hopeful conservative approach pays off in 2022

BY LAURA DEW

INVESTORS will think “thank god we’re with Magellan” this year thanks to its defensive positioning, despite poor performance by the Magellan Global fund in 2021, according to its chief investment officer and chair, Hamish Douglass.

In an investment update, Douglass said inflation was the biggest factor to watch in 2022.

“I think the big story of 2022 is what happens with inflation in the world,” Douglass said.

“If the Federal Reserve is forced to stamp out inflation next year, it is hold onto your chairs. The markets are so wound up in crowded trades that if that was to happen, people are in for a rude shock.

The great party of 2021 will become the great unwind of 2022 and I put the probability of that [happening] at 30%.

“If that happens in 2022, I think people will say ‘thank god we’re with Magellan’ because half our portfolio is in super defensive assets. It’s the mirror image of us being conservative through 2021.”

At the meeting in December, the Federal

01MM10022022_01-13.indd 10

Reserve agreed to speed up the ending of its bond purchasing programme in order to counter rising inflation which had reached 6.8% in December. This compared to inflation of 3% in the September quarter in Australia.

Magellan had been criticised during 2021 for its overly-defensive positioning which led to poor performance during the year.

The Magellan Global fund returned 19.3% over one year to 31 December, 2021, according to its factsheet, versus returns of 29.3% by the MSCI World index.

Asked would he change anything about the portfolio, Douglass reiterated that he was happy with his current positioning.

“I am not about to start chopping and changing and swinging for the fences just because I’m embarrassed about underperforming the market in a 12-month period. The movie hasn’t ended yet, there is a lot of risk in these markets,” he said.

“People appreciate having a conservative approach here, it’s like we’re the designated driver at a wild party.”

Push for employed paraplanners to become advisers WHILE paraplanners may have no desire to become a financial adviser, almost 90% believe they have an influence over the advice given to clients.

A survey by Tanngo and Paraplanner Hub of 135 paraplanners found 72% were looking to remain as paraplanners in the long-term, compared to 28% who wanted to become advisers.

The volume who most wanted to become an adviser were those who were employed as opposed to contractors or self-employed paraplanners.

“Unsurprisingly, the paraplanners that have the biggest desire to move to adviser roles are employed paraplanners. This suggests that employed paraplanners could be the perfect candidates for the Professional Year programme to cultivate new advisers.”

However, while the remainder were content to remain as paraplanners, this did not mean they felt excluded from the advice process.

Only 21% of paraplanners were registered on the Australian Securities and Investments Commission’s (ASIC’s) Financial Advisers Register (FAR), which was not a legal requirement, but they believed they had influence over client’s advice and product choices.

Some 89% said they believed they had influence on the advice provided to a client on strategy and 70% believed they had influence on the advice provided to a client on products.

The report said: “It could suggest that paraplanners are critical to developing appropriate and compliant advice for our clients. If this is the case, then they should have recognisable qualifications so that all produced advice is suitably qualified and their qualifications are transparent and easily identifiable for those who employ their services.

“Maybe there could be a future where we see two names on the statement of advice.”

2/02/2022 3:55:27 PM

February 10, 2022 Money Management | 11

News

Education would boost trust and lower costs

BY LAURA DEW

WHILE experienced financial planners may be exempt from educational requirements in the future, it is still a worthwhile study as a minimum standard can help build client trust.

It was proposed last year that advisers who had worked in the industry for 10 years would only have to complete an ethics bridging course instead of the full educational requirements.

Speaking to Money Management, Michael Miller, financial planner at Capital Advisory, who had more than 10 years of experience, disagreed with the plans.

Research by the Australian Securities and Investments Commission had found there was low trust in the financial planning profession, which he felt was exacerbated by the lack of educational standard.

People felt more comfortable and trusting, he said, if they knew an adviser had met certain educational requirements.

“There is that hurdle to overcome before people feel comfortable with you and that

takes time and increases the cost of providing advice. If people have that evidence that a minimum standard has been reached from the beginning, that removes the barrier and helps to build rapport with the client.”

In a written submission to Treasury, he added: “I support having an education standard that requires a portion of formal study for existing financial planners as well as new, so that consumers can reasonably expect any financial planner licensed in Australia has undertaken a reasonable standard of formal education. I support this standard as a reasonable effort on behalf of experienced financial

planners, for the benefit of consumers and the profession”.

However, Miller welcomed modifications to the educational pathways to broaden the range of subjects related to financial planning.

This was expected to benefit those professions where financial planning was not the main task such as stockbrokers and insurers. These sectors had already raised doubts about the relevance of the Financial Adviser Standards and Ethics Authority (FASEA) to their work.

“What is being proposed is that people can still meet the educational qualifications by studying related areas such as commerce or business. This is less prescriptive now and these areas are more relevant to their jobs and something they may want to study or to expand their skills.

“Before, people were willing to do the study but they didn’t necessarily feel it was relevant or broadening their knowledge.”

Miller encouraged other planners to make their own submission to Treasury, even if they already passed the FASEA requirements.

Talent development critical to business worth NEW advisers may have the educational knowledge but a focus on soft skills and emotional intelligence is needed for them to maintain long-term careers.

David Carney, founder of outsourcing firm Virtual Business Partners, said financial advice firms were measured on their ability to scale up their business in the future, which meant the long-term development of staff was crucial.

This was a change from previous years when acquirers looked at firms’ funds under management and recurring revenue whereas now the focus was on profitability and scalability.

Carney said: “It is more important than ever for businesses to show they are able to grow and are able to scale up and attracting talent is the number one challenge there. You’ve got to be able to provide career paths or employee share programs.

He said many new advisers had met the education requirements but needed help to learn the soft skills for dealing with clients which was a skill that could be developed on their professional year.

“That is what differentiates a good adviser, we have put so much into the legislation and the education that

01MM10022022_01-13.indd 11

we have missed the soft skills. The real good advisers are the ones who can develop those soft skills,” Carney said.

“Twenty or 30 years ago, it was probably the opposite where people were put in front of clients without having the knowledge but that was a different time.”

To help them gain these skills, firms were offering to mentor new advisers and understood that the pathway to becoming an adviser had changed since they joined.

“Advisers of the future don’t want to repeat the career path of advisers in the past where they joined the industry via a bank or worked in an admin or paraplanning role before becoming an authorised representative. That’s antiquated now,” he said.

“The practices that we deal with, they have developed their own mentoring programmes and helping [new advisers] to engage with clients and fast track that experience.

“This is an opportunity for businesses to think not just about the next few years but to look at how they can develop the next generation of advisers and have a clear pathway for them. Those businesses will be so much more valuable in the future.”

‘Great time’ to be an adviser in 2022

BY JASSMYN GOH

FINANCIAL advisers should be in a different mindset as 2022 has kicked off as there are a lot of opportunities in front of them, according to Countplus chief executive, Matthew Rowe.

Rowe said he hoped advisers had put issues of 2021 such as regulatory change, education and exam requirements, behind them.

He said this year would be about focusing on growth and servicing hybrid clients who had advisers leave.

“But there’s just a lot of supply challenges. Advisers should focus on different economic models where you need to focus around products and utilisation within your firm – a professional services model. I also think there’s going to be further consolidation and as there’s too many licensees,” he said.

Rowe believed advisers would be able to look past the noise of 2021 but did not underestimate the level of change they had to go through along with navigating the COVID-19 pandemic.

“Those advisers that have shown resilience, and the toughness to get through this and will be looking to the future. I think that they should be now thinking about 2022 in terms of a whole different ballgame as they’ve got a lot of opportunities in front of them.

“There’ll be further consolidation and key things will be growth, recruitment, retention of staff and talent, building the bench strength of the next generation of financial advisers coming through behind them and focusing on efficiencies, productivity and utilisation of their firms.

“Some of that will be technology driven, and some of that’s process driven to continue to improve the economics of their individual firms. That’s really what it’s coming down to.”

Rowe noted as there would be less advisers but a growing need for advice, it was a “great time” to be an adviser in 2022 and going forward.

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12 | Money Management February 10, 2022

News

Advice firms need to be employer of choice to attract talent

BY JASSMYN GOH

THE RECRUITMENT OF staff will be a key focus for many financial advice firms in 2022 and practices need to become an employer of choice to attract talent.

Countplus chief executive, Matthew Rowe, said potential adviser recruits were looking for practices that could mentor and coach them, had opportunities to deal with clients or be in a client program, and that they looked for firms with a growth mindset.

“The firm needs to be demonstrated that they’ve got a growth mindset, and that they’ve got technical training on hand as it’s not just around soft skill development that forms part

of that mentoring relationship,” he said.

“But they’ve actually got a proper technical skill set framework that they can learn the necessary technical aspects of the profession and have that in-house and that capability.”

Rowe noted that candidates also wanted to feel like they were part of an organisation that gave back to the community.

“We shouldn’t underestimate this as this issue around workplace giving and philanthropic giving is very, very important to millennial people coming through,” he said.

“Firms have to have a think about what it is that they’re doing in terms of giving back to the community as well that their team can engage with them because that’s what they’re looking for.”

He said practices needed to find a way to employ people and have a pathway to get the recruits to be productive and generate a return on their salary back to the firm.

“Then, they can get them into a position where as quickly as possible they’re through the professional year process and they can start to sit in front of clients you know, under some supervision, and be generating revenue for the firm, because that’s what every other profession does,” he said.

Rowe also said that while one-man band operations had a very unique value propositions, those that did not have a succession plan would struggle.

“I think they’re going to have trouble attracting and retaining talent because the kids leaving university don’t want to join a firm where there’s only one person where there’s no training because they’re so busy being busy seeing clients,” he said.

“I think smaller firms with sole practitioner operators with no clear succession plan in place, no real value proposition for people to join them, and they don’t have a growth mindset are going to struggle into the future.

“If you’re a single operator you need to have a very unique value proposition in terms of what you’re offering your clients, but also what you’re offering potential talent to join the firm.”

FASEA exam remains top of mind for advisers

BY LAURA DEW

COMPLETING THEIR EDUCATIONAL requirements remains the top focus for advisers going into 2022, according to BT. From looking at topics raised with BT by its advisers, completing the Financial Adviser Standards and Ethics Authority (FASEA) exam, which was now run by the Australian Securities and Investments Commission, was the top focus.

The deadline to pass the exam had been extended until 30 September, 2022, giving advisers who had previously failed twice, an extra nine months to pass.

Bryan Ashenden, BT’s head of literacy and advocacy, said: “The implication, based on current law, is that these

01MM10022022_01-13.indd 12

advisers will have been removed from the Financial Adviser Register as at 1 January, 2022, and will no longer be able to provide personal advice to a retail client.

“It’s important to point out that they can still provide advice to wholesale clients, and help with running successful financial planning practices.

Furthermore, whilst they cannot be the supervisor of a new entrant undertaking their professional year, they can still act as a mentor – and so advice practices can still benefit from these advisers’ experience and expertise.”

Similarly, advisers were also asking about FASEA and Standard 3 of the code of ethics and whether the wording of this conflict of interest standard

would change following a consultation.

Following this, other common queries included reviewing client advice to assess the impact of the removal of the work test for non-concessional contributions for clients between ages 67 and 74, revisiting strategies related to the lowering of age for downsizer contributions and regulatory developments relating to exiting certain complying income streams. This last point was particularly relevant for advisers who had clients with self-managed superannuation funds.

“Another opportunity advisers are asking about is the 2021 Budget announcement about the ability to exit certain complying income streams.

Unfortunately, this measure was not included in the bill recently introduced into Parliament, so advisers will have to wait a bit longer to know the exact details of how this will work. It is expected to take effect from 1 July 2022,” Ashenden said.

“For certain clients, particularly those in a selfmanaged super fund [SMSF], this could provide a great opportunity to exit out of income streams that had been established for life, especially where the members have only stayed in the SMSF because they had no way to exit the income stream product. This could result in some pensioners finally being able to exit and close down their SMSF if it is no longer the most suitable retirement product for them.”

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February 10, 2022 Money Management | 13

InFocus

2022: THE FINANCIAL ADVICE REDESIGN IS UNDERWAY 2022 is set to have less compliance and regulatory activity, writes Zach Castles, leaving advisers with more time to focus on helping consumers and improving their businessses.

THE PROPOSED TERMS of Reference for much anticipated Quality of Advice Review was recently released by the Government. The financial advice community has reason to hope this marks the end of two decades of regulatory encroachment on the industry.

Over-regulation has caused the unprecedented attrition of advisers from the industry. The advice sector begins the year with an estimated 18,500 advisers, having experienced a 25% decline from over 25,000 advisers three years ago, in a market of 2.6 million consumers of financial services.

A good number of these consumers are approaching retirement with upwards of $300,000 in accumulated superannuation savings, but only now becoming aware of the benefits of receiving financial advice. Law and regulation, however, have made the cost of producing advice over $5,000, out of the reach of most Australians.

If a consumer wants bespoke advice (eg how best to invest your superannuation during retirement, rather than a full wealth plan) few businesses and advisers have confidence they can provide such advice without falling foul of the regulator.

Under the current rules, consumers must choose between

AUSTRALIAN MANAGED FUNDS FLOWS IN 2021

either an expensive full advice plan that is unaffordable for most, or not get advice at all. We hope 2022 can be the year where policymakers and the industry agree on a more flexible approach.

While the Government’s draft terms of reference touches on nearly all the issues explored by the Financial Services Council (FSC’s) White Paper, it is pleasing to see the Government focus on ensuring financial advice is affordable and accessible, as well as maintaining robust consumer protections.

There is also recognition from both sides of politics that reform is necessary to make the advice industry sustainable. Labor’s timely announcement that advisers with a good track record and significant experience would be exempt for some education

requirements is an example of this, as was the Government electing to freeze ASIC levies for financial advisers.

Building consensus around specific reforms, and when these should occur, is the next crucial step the in the redesign of financial advice.

Getting meaningful reform in 2022 will be the difference between achieving an efficient, simpler and less costly advice process for consumers, or one that continues on a course of structural decline.

Given the prevalence of small businesses in the advice industry there is a narrow window to relieve the cost pressures facing the sector and the time to act is now.

The FSC’s White Paper proposes additional reforms that are required, and when these should be implemented.

We want to expand consumer protections to 275,000 more Australians by increasing the wholesale asset threshold to $5 million from next year.

Next, we would eliminate nearly 40% of the cost of providing advice by removing red tape that straightjackets the advice process – abolish the safe harbour steps and simplifying documentation and definitions of advice.

Together, KPMG estimates these reforms will reduce the cost of providing advice by almost $2,000. For the first time in a decade, the regulatory framework would also respect the professional judgment of financial advisers and not impose pointless ‘tick box’ requirements.

Finally, work needs to begin on a self-regulatory framework for the advice industry that creates pathways for new advice professionals, recognises prior learning, and enables financial advice associations to take a leadership role in regulating and growing their profession.

The FSC’s hope is that 2022 is the year in which the advice sector strikes off in a new direction and that the Quality of Advice Review successfully charts that course.

Zach Castles is policy director for advice at the Financial Services Council.

$5.5 bn

$35.7 bn

$15 bn

2020 funds inflows

2021 funds inflows

2021 equity fund inflows

Source: 2021 Calastone Global Fund Flows report

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2/02/2022 10:48:05 AM

14 | Money Management February 10, 2022

Managed accounts

DETANGLING MANAGED ACCOUNT COMPLEXITY

Managed accounts have come a long way in the two decades that they have been growing in Australia, Liam Cormican writes, but the only thing holding them back is their complexity.

MANAGED ACCOUNTS (MAS) can provide clients with tax benefits, bespoke investment solutions and investment transparency while allowing advisers to cut down on their administrative costs – freeing up time that they can spend with clients.

01MM10022022_14-27.indd 14

In the past five years, MAs funds under management (FUM) have increased by $80 billion to $111 billion, according to the Institute of Managed Account Professionals (IMAP). And in the six months to June 2021, their total FUM soared by $15.8 billion.

But despite record growth, there is one thing getting in the way of further adoption: their complexity.

That’s why this feature will explore MAs, their usage in Australia and how they are continuing to evolve in the advice landscape.

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February 10, 2022 Money Management | 15

Managed accounts

Mat Walker, chief executive of Praemium, a MA provider, says MA growth has been driven by the numerous benefits they present to investors.

“Managed accounts enable investors and their advisers to outsource the management of their investment portfolio to a professional investment manager, typically there is greater transparency of the underlying investment assets in the consolidated reporting of their investment portfolio and lower ongoing investment costs relative to other managed investments options, [such as managed funds],” Walker said.

“Advisers like enabling these benefits for their clients as it often leads to improved client outcomes and they can clearly and easily demonstrate that they are meeting their client best interest duty.

“Advisers also appreciate the advice practice efficiencies they can generate through the outsourcing of the investment portfolio management.

“Advisers can spend less time managing the client’s portfolio and more time on engaging their clients about their longer-term goals and plans such as strategic advice, lifestyle and event planning, cashflow planning, regular plan reviews.”

Patrick Jackson, Centrepoint Alliance’s investment solutions executive, says MAs have been getting more popular following the Hayne Royal Commission, as advisers start to understand that they have to become more efficient.

He estimates advisers spend about half their time on investments and that it made

01MM10022022_14-27.indd 15

sense for advisers to reduce that significantly.

Peter Ornsby, Consultum Financial Advisers chief executive, says MAs provide active management in an environment that can drive down the cost of delivering advice.

“It reduces back-office costs, administration costs, it provides a great outcome in many cases for the client and if it’s driving down the cost of administering, then it’s driving down the cost to the client as well,” he said.

But Jackson says advisers need to be prepared to change how they view their value proposition if they want to become more efficient, a change that was starting to take place and leading to MAs recent growth.

“Advisers feel that doing that investment stuff is part of their value proposition to the client, whereas for me personally, if I went to an adviser, I wouldn’t think that should be their key priority, I’d think they should be concerned principally with what I was trying to do,” Jackson said.

“Budget, saving for holidays, estate planning, superannuation strategies, that's what I’d go to a financial adviser for - not to go and try and shoot the lights out with clever investment returns.

“So if you can access the skills and expertise of a Morningstar, BlackRock or Dimensional or whoever it might be, then you don't need to do all this stuff that you've been doing and you can focus on being more efficient and focusing heavily on the requirements for that client.

“It's just an absolute no brainer, and they will continue to grow.”

Jackson said the issue also came down to adviser and client

education, which was increasing as more licensees became more familiar with the types of MAs.

EFFICIENCY When client’s portfolios go out-of-whack as asset classes grow or shrink, advisers will rebalance it through a series of switches, triggering an onerous process of records of advice documentation.

Managed accounts take away the advice documentation, sometimes, but not always, sacrificing ongoing adviser investment decision making.

And it does that through several structures as Tristan Bowman, director of investment management at Cameron Harrison, explains: • Separately Managed Account (SMA) – a portfolio of direct shares managed on behalf of investors, typically with no or little investor discretion on inclusions/exclusions and invested according to a manager-constructed model portfolio.

• Individually Managed Account (IMA) – a customised SMA where the portfolio manager constructs a portfolio individually for the investor taking into account client risk tolerance, tax considerations, preferences and objectives.

• Managed Discretionary Account (MDA) – an account where the portfolio manager can tailor the investment process to modify the portfolio to match the investor’s goals and risk tolerance, with consideration to tax outcomes but requires a contract under which the MDA operates.

Continued on page 16

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16 | Money Management February 10, 2022

Managed accounts

Continued from page 15 “Which type of managed account is appropriate depends on the client’s financial circumstances; the higher level of customisation of IMAs and MDAs will potentially be more suitable to those with complex needs or objectives, albeit there will be additional costs to those services as compared to a SMA. Essentially, the decision will depend on the level of complexity in the client’s circumstances,” Bowman said.

PLATFORMS Platforms represent the next level of understanding managed accounts.

The Australian Securities and Investments Commission’s (ASIC) Regulatory Guide 148 (RG148) defines platforms to mean investor directed portfolio services (IDPS) and IDPS-like schemes.

IDPSs hold and deal with one or more investments selected by investors and are unregistered managed investment schemes, meaning they are not registered on the ASIC website.

They are managed investment schemes because investors have the expectation of cost savings (e.g. through the netting of transactions or the pooling of funds to acquire investments) or access to investments that would not otherwise be available to them.

IDPS-like schemes, on the other hand, operate similarly to IDPSs in that investment decisions are generally made in accordance with specific member instructions, but they are registered with ASIC. Jackson says Centrepoint Alliance uses Ventura Managed Accounts Portfolios (VMAPS), an IDPS-like scheme.

01MM10022022_14-27.indd 16

According to Jackson, an IDPS-like scheme sits somewhere between a managed fund and an IDPS, providing access to hundreds of managed funds or shares in a professionally structured portfolio.

He says the investment is done through a professional manager like Morningstar or Dimensional where users get a share of the scheme and benefit from the diversified managed account.

TAX EFFICIENCY Research conducted by platform provider HUB24, in collaboration with Milliman, found an investor switching between three managed portfolios of Australian shares on the HUB24 platform over a 10-year period would have outperformed comparable managed funds by nearly 10% or $20,847 assuming an initial investment of $100,000 and tax

rate of 47% (45% + Medicare Levy), or $7,157 assuming a tax rate of 15%.

The outperformance was attributed to a technological function on the platform which allows only shares not held by both portfolios to be bought and sold, minimising capital gains tax and transactions costs.

Brian Long, Lifespan Financial Planning senior investment specialist, said: “When you want to change investment managers, rather than selling down all the holdings in the portfolio which is what is required when using unit trusts (managed funds), you can simply appoint the new manager and they will rebalance the portfolio to bring it into line with their portfolio which will generally result in fewer buys and sells, resulting in less tax and transactions costs.”

Continued on page 18

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31/01/2022 10:18:17 AM

18 | Money Management February 10, 2022

Managed accounts

Continued from page 16

ADVANCES AMP’s director of platforms, Edwina Maloney, said execution was often overlooked.

“Buying or selling assets is not deemed as important as the assets themselves – this is likely true, but more efficient technology is helping to reduce trading costs and minimise risk, which can deliver better performance outcomes for clients,” Maloney said.

“Contemporary platforms allow managers to buy and sell listed securities and managed funds simultaneously.

“This reduces time out of market risk and improves efficiency which ultimately has a positive impact for clients.

“More efficient trading systems also help to reduce broking costs and allow platforms to bring smaller trades to market through the use of fractional holdings. This helps to make managed portfolios more accessible.”

Maloney said there was a trend towards a more integrated and end-to-end advice experience.

“Traditionally, platforms have been execution engines, helping advisers execute their advice strategies, but with a greater range of decision support tools and modelling, platforms are now helping advisers form strategies, prior to execution.”

OUTLOOK Jackson’s only concern is the fear of oversaturation of MAs, particularly that there may be many different SMAs run by small licensees.

“So lots of licensees might build a managed account when they don't necessarily have the

01MM10022022_14-27.indd 18

expertise and this is just a slight concern because we're going to end up with 1000s of these things if we're not careful,” Jackson said.

But he said growth will accelerate as people gravitate towards the use of professional investment managers.

Ornsby said due diligence on the appropriate structure of the MA and its ongoing management was paramount.

“When there is a change in the market, who’s reviewing the portfolios?” Ornsby said. “And some are more costly than others, so you’ve got to do the diligence around cost versus value.”

He said there had also been a number of distractions in the industry from a regulatory point of view that had slowed the takeup of MAs. “But we are starting to see an escalation in the take up because people are starting to see that

there are more options out there from a platform perspective,” Ornsby said.

“We’re moving to a stage where so much of the regulation coming out of the Royal Commission has been implemented at the licensee level, businesses are starting to focus on the business.”

Long said MAs will continue to grow simply because they reduce cost, increase efficiency and transparency, and generally improve the portfolio management experience.

“In an environment where cost pressures are everywhere, these factors become so important,” he said.

Maloney added: “The challenge is to educate and support the advice community as they embed them as part of their advice proposition, and so they can in turn educate their clients”.

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31/01/2022 10:18:58 AM

20 | Money Management February 10, 2022

Adviser sentiment

A YEAR TO TAKE A BREATH

Business processes, succession planning and system efficiency are among areas that advisers can focus on this year thanks to a lull in regulatory change, writes Oksana Patron.

WITH THE LAST couple of years being incredibly difficult for advisers and filled with regulatory changes and Royal Commission recommendation implementations, 2022 might be time to take a breath, according to industry experts.

What is more, this is an election year and what that means for advisers is that it will be highly unlikely, from a legislation and regulation perspective, to see many changes to financial planning laws or the ways advice

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is delivered to consumers.

In many regards, this might be the year which will finally provide financial planners with a good opportunity to reset and take time to look after their businesses.

According to Ben Marshan, head of policy, strategy and innovation at the Financial Planning Association of Australia (FPA), one way advisers should take advantage of the next couple of months would be by paying more attention to the advice processes.

Marshan said implementation

of the Royal Commission’s recommendations over the last two years has introduced a number of new processes that were often pushed on adviser businesses.

“I think for the most part that has been done very quickly and they probably created a lot of inefficiencies and additional paperwork within the businesses.

They do not necessarily mean to.

So, if [advisers] can spend time looking at their business, looking at what the obligations are, you can

probably find a lot of ways to make your systems and your business being run a lot more efficiently.

“This is really the main thing planners should be focusing on this year. They met the education requirements, they’ve gotten through the Royal Commission period and now it is time to think about their businesses.

“The last couple of years have been a little bit dramatic [for advisers] so it is not surprising that they are still worrying that there is more to come but the

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Adviser sentiment

reality is that probably isn’t,” Marshan noted.

Speaking of the potential sources of uncertainties, Marshan pointed to the Australian Securities and Investments Commission (ASIC’s) new financial services panel. But he said, given it was in the early stages, it would be hard to predict how the panel would go about, for example, the Code of Ethics, and its interpretation.

“We do not know how it is going to operate and there is probably a little bit of uncertainty there.”

However, he said, given the number of complaints going through the Australian Financial Complaints Authority (AFCA) and the messaging that ASIC has been providing in saying they have been seeing a good quality of advice, Marshan said it seemed like there would be very few issues for advisers to worry about.

“I think that virtually every planner out there, they do not need to really be worrying about what is going on in the disciplinary body because they are doing the right things and consumers, ASIC and AFCA trust them. And you will not really see a lot of complaints coming through so that is probably a little bit of uncertainty that we’ve got at the moment.”

On a positive note, Marshan said the current sentiment around the quality of advice was more optimistic.

“If you ask any of the regulators, which we do regularly, or speak to AFCA or read their comments, the quality of advice being provided at the moment is good or better than it has ever been and it just shows that all the regulatory change and the professionalisation has actually been working.”

Eugene Ardino, chief executive of Lifespan Financial Planning, admitted that advisers had put a very intensive regulatory year behind them, and while many of them were still in the transition period, as they were busy moving to fixed term arrangements and

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through compliance requirements, others might use the coming months to look at and finalise their succession plans.

“Once you get through to the next six to nine months, unless there is going to be more regulatory change, it seems as though we might be at the end of it and advisers can get back to focusing on what they do best and what they should be focusing on which is providing advice,” he said.

According to him, advisers should also use this time to focus on advice, servicing clients, and finding solutions in the challenging environment as well as helping to position their clients’ portfolios better for “what could be a very turbulent year” for markets. “[One of the] big themes that is going to play out this year is going to be stockmarket volatility and normalising interest rates and the impact of that on client portfolios and how to minimise the fallout and make it as painless as possible for clients,” he said.

Speaking of the cost of advice, Ardino said, the industry will continue to see more mature advisers exiting the industry but the newer advisers might be choosing their clients more cautiously.

“More mature businesses have a greater capacity to take on clients and loss because they’ve got more stable income streams while fresher businesses are more reliant on making sure that all of their time is well spent.

“In my experience, people setting up new businesses, irrespective of the age, are much pickier about the clients and with more professionalisation of the community, you are getting more potentially high-fee paying clients.

“Actually, the demand for advice is going up, so given all the bad things and all the negative things I might have said, any adviser that has got their education stuff sorted out and they are going to be in the industry for the next 10 years, it’s going to be fantastic.

“Any adviser that has got their education stuff sorted out and they are going to be in the industry for the next 10 years, it’s going to be fantastic.”

-Eugene Ardino “You will be able to pick and choose the clients you want, and you might pretty much charge whatever you like, and you are going to be seen as more of a profession.

“However, even if it is really great for the advisers, in terms of consumers and affordability for the advice, essentially a lot of people who were able to access advice, they are going to be dealing with robots to choose the investments.

“A lot of clients that would get orphaned as a result of lot of these changes, will not be able to access advice,” he said.

Ardino also stressed that although the changes might bring about a better industry, possibly more polished and more educated profession for the wealthy and the middle class, lower-income earners will be left to rely on robo-advice and general information from providers focused more on selling their investment products.

Greg Cook, chief executive and senior adviser at Eureka Whittaker Macnaught, said the other positive thing had been the change in public sentiment towards the quality of financial advice in Australia and that planners were clearly benefiting from the change of perception, with many planners having received record numbers of inquiries from prospective new clients.

Cook said the scale of business models would continue to be important but warned there were still some businesses with conflicted revenue models out there.

“I always thought that you need to take care with the term of independence as you can have a very vertical model that sort of fits these independent criteria but it can still be very problematic.

“Obviously the Royal Commission is another area of focus but I guess the profession is never going to be like any other profession and it needs to be completely free from elements of poor practice.

“But the potential for poor practices needs to be minimised and achieved through higher standards, higher education and appropriate regulations but not regulations that make impossible to deliver advice at a reasonable price,” he added.

TALENT SQUEEZE The talent squeeze has remained one of the hottest subjects across many industries at the moment, as a result of post-pandemic changes in people’s choices.

However, it has been even further exacerbated across the financial advice industry which has declined from around 25,000 advisers only a few years back to around 17,600 as at the end of January this year. The number is expected to fall even further and reach the level of 15,000 to 16,000 during 2022.

“That is a challenge and the case with most businesses that I speak to, they are struggling to find staff at all levels. And we manage to be able to recruit because we have achieved the position that allows us to be able to recruit largely through our network and I think that is the best way to find a good candidate right now, is through the network,” Ardino commented.

“One would think that with all the banks getting out of advice, there would be a lot of advisers looking for a job and potentially support staff that go with that but I also know that a lot of these people have changed their careers.”

3/02/2022 10:11:18 AM

22 | Money Management February 10, 2022

ETFs

GREAT ROTATIONS: THE VALUE FACTOR With the Federal Reserve signalling multiple interest rate rises, writes Russel Chesler, what does this mean for value investing?

IN THE WORLD of investing, a factor is any characteristic that helps drive the performance of a particular asset class. Value is categorised as a ‘pro-cyclical’ factor, meaning it has tended to benefit during periods of economic expansion.

Higher interest rates reduce the value of companies’ future earnings, which weighs more on growth companies with their profit expected in years ahead.

Value stocks are less sensitive to changes to macroeconomic conditions and have a history of emerging as the winning ‘factor’ following a recession.

At the end of 2021, the value factor performed well as the US Federal Reserve signalled that it expects to raise interest rates faster than expected given inflation concern. Value stocks are becoming increasingly appealing to investors who have sold down growth stocks as bond yields rise.

In Australia, the 10-year government bond yield is trading around 1.94%, up 36 basis points over the month to 19 January while 10-year US Treasuries are trading at 1.87%, up 47 basis points. We are likely to see 10-year government bond yields reach over 2% this year as inflation fears mount.

THE RETURN OF RISING RATES Driving up bond yields is higher inflation in developed countries worldwide. In the US, inflation exceeded 7% in December, the seventh consecutive month in which inflation has topped 5%, and well above US Federal Reserve’s long-term target of 2%.

Over 2021, the US inflation rate

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rose to 6.8% over the last year to its highest point since 1982. Prior to the end of the last quarter, markets and US Federal Reserve had shrugged off concerns about rising inflation, citing that the drivers were ‘transitory’ as opposed to persistent, expecting inflation to ‘cool off’.

That has changed. The chairman of the US Federal Reserve, Jerome Powell, said of ‘transitory’, “I think it’s probably a good time to retire that word and try to explain more clearly what we mean,” during a congressional hearing at the start of December 2021. Financial markets reacted almost immediately, with rate rises expected as early as this year and inflationary pressures expected to persist. Some analysts are predicting as much as seven official interest rate rises in the US this year alone.

In Australia, with inflation running at around 3% per annum level, and interest rates expected to rise at least once this year, the economic environment is expected to support value companies, including cyclical stocks. Australian value companies that can maintain or increase margins without impacting on demand will be the ones who will win. In contrast, growth stocks, including highlypriced technology shares, could continue to suffer in 2022.

THE IMPACT ON EQUITY MARKETS The recent outperformance of value is not an historical aberration. Since the turn of the century, the value factor has outperformed the MSCI World ex

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Strap ETFs

Australia index, despite its ‘lost decade’ post the Global Financial Crisis. Value companies typically outperform when inflation and interest rates increase, as they are less sensitive to changes in macroeconomic conditions. High inflation and rising rates were characteristics of markets in the late 70s and 80s, when value stocks outperformed.

Value has several dimensions including the stock price as a multiple of company earnings, price as a multiple of dividends paid, price as a multiple of book value, and other such ‘ratio descriptors’. But at the core of value investing is the belief that ‘cheaply’ valued assets tend to outperform ‘richly’ valued assets over a long horizon.

The concept of value was developed by economists Benjamin Graham and David Dodd, who advocated owning companies that provide a ‘margin of safety’ – meaning the current

stock price is less than it is expected to be under conservative projections of the firm’s future earnings. Graham and Dodd believed that the true value of a stock could be determined based on its assets, future earnings, dividends and prospects. The lower the price of the security relative to this intrinsic value, the higher the ‘margin of safety’ and the potential for outperformance.

Over the very long term this has proven to be true. One of the world’s most successful investors Warren Buffett and his investment company Berkshire Hathaway have made a fortune using the principles of Graham and Dodd’s.

Buffett has made a career identifying value companies when others have been selling.

Key to Buffett’s success has been identifying real value stocks and avoiding the cheap and nasty.

A low price alone does not indicate good value, and those who pursue low price alone can

“At the core of value investing is the belief that ‘cheaply’ valued assets tend to outperform ‘richly’ valued assets over a long horizon.” easily fall into ‘value traps,’ or ‘trying to catch a falling knife’.

The performance of factors can be cyclical. Value has been used by savvy investors to diversify their other exposures, by combining approaches. Exposure to the value factor can be achieved through a variety of investment products, including actively managed funds and exchange traded funds (ETFs) based on factor indices. MSCI Factor indexes, for example, are designed to capture the return of factors which have historically demonstrated excess market returns over the long run.

For those after a low cost, transparent and accessible

Chart 1: Five year per annum performance comparisons

solution, value ETFs can be used by investors to diversify their portfolios beyond the Australian value share market, which is dominated by the big banks and miners.

The VanEck MSCI International Value ETF (VLUE) for example, offers access a portfolio of international companies that are selected for their high value score relative to sector peers as measured by MSCI based on: (i) price to book value; (ii) price to forward earnings; and (iii) enterprise value to cash flow from operations.

Based on back testing, the index VLUE tracks (net of VLUE’s 0.40% p.a. management costs) displays strong long-term performance.

The value outperformance is long overdue, coming after a decade of underperformance. The value rotation will likely continue into 2022 as inflation is not likely to go away as long as the COVID19 pandemic strains the global supply chain and labour markets continue to tighten with emerging labour shortages, which have been exacerbated by the spread of the Omicron variant.

Inflation is likely here to stay for some time and investors need to position accordingly.

Russel Chesler is head of investments and capital markets at VanEck.

Source: Bloomberg. MSCI, MSCI World Value index inception 31 December 1974.

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2/02/2022 3:41:28 PM

24 | Money Management February 10, 2022

Model portfolios

THE BIGGEST PORTFOLIO MISTAKES IN 2022

In reviewing investment portfolios, there have been several consistent themes arising when it comes to constructing a portfolio, writes Rowan Stewart.

2022 IS ALREADY shaping up to be a year of major changes in investment markets. Equity valuations are dipping from record levels and bond yields are expected to rise significantly for the first time in years to combat inflation. We’ve been thinking about the impact of these changes on portfolios as they are typically positioned now, and what advisers should do.

YESTERDAY’S WINNERS It’s very common to find portfolios filled with investments that have done well. Most commonly we see a large concentration of growth

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equity funds. Delving deeper with clients we find one of two reasons for this. The first is simply that portfolios haven’t been fully rebalanced, either because of time constraints around reviews or because the adviser is reluctant to recommend that the client realises some capital gains.

The second reason is usually that the adviser is selecting funds based largely on historical performance either by deliberately choosing the best performing funds or by ruling out funds that have underperformed in recent years.

The problem is that funds that

have done well tend to have common exposures. Within equities, funds that are heavilyoverweight technology stocks and consumer cyclical names with high valuations and long-term growth expectations have done extremely well over recent years.

So the resulting portfolio, even if it contains several funds in each asset class, is actually much less diversified than it first appears and therefore is at greater risk of downturns due to market shocks.

And we’ve seen increasing divergence between the valuation of growth stocks and value stocks. The valuation gap is at

levels that we haven’t seen since the later stages of the tech bubble, and the current valuations of growth stocks price in a large amount of sustained future growth. We estimate that there are 40 stocks in the ASX 200 that must at least triple their earnings over the next 10 years in order to deliver a modest return of 7% per annum to investors, so high is their current initial valuation.

It’s possible for companies to enjoy growth that fast for that long, but it’s very rare and almost impossible to believe that a fifth of the market will achieve this. And we’ve already seen these stocks

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Model portfolios

fall significantly as the prospect of higher interest rates caused many in the market to revaluate their long term valuation estimates of these stocks.

On the fixed income side, we see many portfolios where the allocations to credit, particularly the more speculative grades, have become much higher than the strategic target due to low returns on safer fixed income investments. Many of these funds have done very well, but with central banks around the world pointing to a rise in interest rates, credit spreads at historically tight levels, falling fiscal stimulus and bad debt charges at historic lows, it’s very hard to see where additional good news could come from to propel the valuation of these investments even higher.

Therefore we’re recommending that advisers reorient their equity allocations toward value and select growth managers that are not heavily exposed to the most richly valued concept stocks. We’re also underweight fixed income, particularly credit, and overweight cash. We’re anticipating that we’ll put some of that cash to work in the next few months as interest rates rise and fixed income becomes more attractive again.

STRETCHING THE STRATEGY The last few months have been an uncomfortable time to be an investor. Fiscal and monetary support have kept growth high and propelled asset prices to new levels even though inflation and COVID threatened economies and markets.

Many investors have responded to this by deviating from their strategy. For example, we often see many portfolios where the investor has been nervous about markets and their adviser has ended up recommending that only part of their strategic asset allocation be fully implemented.

While it’s understandable that investors would be concerned about risk it’s unwise to deviate

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from your agreed investment strategy unless there has been a dramatic change in the clients’ personal circumstances. A good investment strategy should adapt to the changing economic environment but do so within controlled limits and a wellestablished process. This helps protect against behavioural biases, and also manage compliance risks around the implementation of portfolios.

To put it more simply, if you’ve already adjusted your model portfolio’s investment selection to avoid the least attractive segments of an asset class and tilted your asset allocation towards the more attractive markets on offer, you will be taking a disproportionate risk by abandoning that process at the implementation stage and omitting part of the portfolio entirely.

Previously we’ve studied the performance of 3,000 implemented portfolios across a dealer group over 10 years and we found that those investors that were closest to the model portfolio experienced 82 basis points per annum higher returns and around 10% lower risk than those that were furthest away from the model.

The biggest difference between these groups was that the ones furthest from the model portfolio omitted certain investments in the model portfolio. The reality is that timing markets is extremely difficult to do reliably and a well-diversified portfolio that takes moderate tilts based on a disciplined investment process is likely to outperform an approach that chops and changes investments based on emotion and the whims of investors.

KEEPING UP WITH MANAGED ACCOUNTS The increasing compliance burden on advisers is a fact of life.

But an unintended consequence is the increasing amount of paperwork that needs to be kept

for every portfolio change or piece of advice is that reviews become less frequent, and portfolios can drift further and are less responsive to markets. A common theme across advisers is that review cycles are stretching out and that their clients’ portfolios are diverging more and more, which only makes reviews more time consuming.

This problem doesn’t only affect advisers. Many institutional multimanagers and asset consultants operate under a calendar cycle, with portfolios updated at investment committee meetings that occur once a quarter. And strict governance regimes often mean that papers for committees need to be submitted at least four weeks in advance. So it could take up to four months for portfolios to be updated.

Fund research ratings can be even slower: most ratings houses have an annual review cycle for each fund.

This obviously limits how effective an investment strategy can be, but the shift to passive investments means that the impact of drift on portfolios will be more severe than in years gone by when most investors had active managers adapting the underlying exposures of the portfolio. And when a client asks ‘why are you recommending this change now when the event happened months ago?’ most advisers don’t want to respond with ‘because I only have time to look at your portfolio once a quarter and my research providers take up to a year to update their views’.

As we’re currently seeing the first significant inflation in developed markets in many years, changes in interest rates throughout 2022 are likely to cause profound shocks in investment markets. We’ve outlined a few of the possible implications above, but we suspect that any repricing will happen quite quickly.

Studies show that a three month delay in implementing changes would waste about 80% of the value added by those

changes, and the value-add is greatest at times of market dislocations like those that we’re expecting over the next year.

Many advisers are turning towards managed accounts to help manage client portfolios more effectively and reduce their workload. In our study of implemented portfolios we found that the average managed account portfolio was 90% aligned with its target model portfolio while the average manually managed portfolio was only 50% aligned.

It’s simply not possible for an adviser with even a moderately large book of clients to keep all of their portfolios in line with model portfolios through the gyrations of markets given their compliance burden, but managed accounts can respond to markets within hours, and without the need for any Records of Advice (RoAs). This improves portfolio responsiveness, but also allows advisers to engage more with their clients as there will be a consistent narrative across clients.

Advisers we work with have a mix of managed account strategies: some are happy to use an “off the shelf” SMA from a provider they trust, others partner with a group like us to develop a branded or customised managed account program of their own. In some cases this is with a view to eventually moving the management of portfolios in house.

Regardless of the approach taken, we believe that managed accounts should be the default offering for most advised clients.

The benefits from improved portfolio implementation, increased use of passive and direct investments and manager fee rebates more than compensate investors for the small additional cost. It is our view that advisers should start moving their clients into managed accounts before market turbulence, rather than waiting until after the event.

Rowan Stewart is joint chief investment officer at Aequitas Investment Partners.

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26 | Money Management February 10, 2022

Financial advice

PROFESSIONAL YEAR IS THE MAKING OF A FINANCIAL PLANNER The professional year offers new entrants a bridge between academic theory of the postHayne landscape and the real world of service, writes Anne Palmer.

FINANCIAL PLANNING HAS been forever changed by the events of the past six years.

After all the inquiry, regulation and upgrading of skills, financial advice is taking its rightful place among the professions. A client seeking the services of a financial planner can feel confident that they are approaching a qualified and capable practitioner who has completed years of education, meets high professional standards and complies with rigorous legal requirements.

The professional year (PY) is the bridge that every new entrant to the profession must now pass in order to participate in this new environment. It acts as a finishing school to prepare budding financial planners for the real world of work.

It is a qualification of its own, marking the transition from a technically skilled but inexperienced graduate to a qualified professional.

INDUSTRY RESPONSIBILITY On another level, the PY is also going to be the key to furthering the trust in our profession. It’s vital for advice practices to take the responsibility to train and develop a strong pipeline of new graduates to take up a career in financial planning, especially to address the affordability challenges of accessing advice.

While it can seem daunting to take the responsibility of training a graduate on the job, it is important that the PY is seen as a valuable development process for both the mentor and the emerging planner, not just a tick-box requirement. It is

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an opportunity for the new graduates and career changers to become well-rounded financial planners skilled at delivering quality, compliant financial advice.

The profession now is roughly half the size of what it was three years ago, with the big four banks exiting the financial planning business and the unwillingness of some to embrace the new educational standards.

The profession has around 16,850 people with the formal qualifications to fulfil the role, according to latest figures from the Financial Advisers Standards and Ethics Authority (FASEA). Of those, 14,630 are practising planners and 360 are new advisers who may now be authorised as provisional financial planners, the designation for those who have passed the halfway mark of PY qualification.

Across the 20 universities offering relevant degree courses, around 500 students graduate each year but not all will go into financial planning. In an environment where there may be few incentives to move practice, nurturing and building the pool of new talent coming into the profession is the best way to futureproof the practice.

Forward thinking and successful practices have been and will continue to be the ones taking the opportunity to attract and retain the best talent coming through that education system. While the PY is still a relatively new process and many are yet to embrace it, there is an opportunity to pick the best of the emerging talent and mould them in your own image.

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Financial advice

“Having a candidate learning the ropes of client meetings alongside an experienced planner can create time for the supervisor to see more clients” TRAINING FOR TRAINERS There are benefits for the existing planners, too, as it provides an opportunity for practices to upskill others through training for mentoring and coaching roles.

Despite the constant changes in education and professional requirements for financial planners, ensuring there are significant numbers of planners with the ability and willingness to mentor new graduates is an important step as PY training will be the bedrock of sound financial advice for years to come.

Depending on the size of the practice, several planners can be involved in the PY. The way the legislation is structured requires a primary supervisor to sign off at each stage of the programme. But that supervisor can change through the year - for instance, if the supervisor takes annual leave.

Other planners can also be used to train specific requirements of the course. This provides the opportunity to place the candidate with a specialist in the subject being trained and the workload can be spread across several people.

For the supervisor, there is a wealth of practical and personal gains to be had from taking part in the PY. PY candidates can grow the capacity of the business, help with succession planning, free up time that can be spent with clients or running the business and bring fresh networks and perspectives to the practice. The structure also provides increasing levels of autonomy for the candidate meaning their contribution to growing the business increases over time.

Working alongside a seasoned professional can also expose the provisional financial planner to the disciplines of running a small business such as a financial advice

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practice, helpful networks and career opportunities.

At a personal level, there is the satisfaction of giving back to the profession, helping someone along the way and establishing lasting relationships built on trust and shared experience.

MORE THAN A FORMALITY Anecdotally, it can make for a more productive practice. For example, having a candidate learning the ropes of client meetings alongside an experienced planner can create time for the supervisor to see more clients. The aspiring financial planner can document the meeting and do the prep work for the paraplanner that would otherwise be done by the supervisor, but with the benefit of having discussed the clients’ needs beforehand.

Another benefit of participating in the PY as a supervisor or sponsor firm is in developing their own robust understanding of the skillset for a successful planner in the particular practice and articulating it through the program. The PY is broken up into four quarters of formal and supervised learning totalling 1,600 hours. That means the supervisor and sponsor firm need to have a well thought out and structured programme with milestones, a clear sense of what is to be achieved at each stage and what a successful finished product looks like. What will give a practice confidence in taking on a candidate is having the goals clearly articulated and knowing what they are signing off on at the end.

It is a significant commitment.

The practice needs to understand that they are responsible for teaching new entrants the necessary professional competence in order for them to be registered with the Australian

Securities and Investments Commission (ASIC) by the AFS licensee as a relevant provider.

That said, the requirements are not so onerous as to be beyond the capabilities of even a one-man band to complete. It can be tempting to over-engineer the program, to load in so many specifics that the standard cannot possibly be met.

It’s understandable that firms might want to be cautious in complying with these new legal requirements, but it is neither helpful nor productive to have unrealistic or excessive requirements built into the programme. As with any goalsetting process, the goals for the PY should be clear, attainable, have milestones along the way, and successfully identified.

GIVING CANDIDATES THE BEST START The danger of overengineering the program can be avoided by working backwards from what a successful planner looks like and then structuring the training accordingly.

Keep in mind that the PY is only one year of experience. There is plenty of refinement still to come from a career in financial planning.

The point of the PY is to give the candidate the best start in the fundamentals of practice - technical ability, client care, and practice skills, regulatory compliance and consumer protection, professionalism and ethics - and allow them to build from there.

Similarly for the financial planner in training, it is crucial to keep and maintain accurate records of having satisfied the work and training PY standard.

As the PY becomes more entrenched, the range of tools available to help manage the experience is growing in range and

sophistication. Some candidates have been recording their hours and progress on a spreadsheet. The Financial Planning Association of Australia (FPA) is developing a comprehensive PY tool which should help licensees, career changers and students to simplify and streamline the mandatory documentation processes. The association also offers a tailored PY training plan, mentoring and coaching resources, and automated certificates upon completion of stages.

As a profession, we are moving from a very prescriptive regulatory environment to a professional environment and the transition with the PY is one of the most important steps in that direction. Practices need to take their responsibility seriously to contribute to the process and put aside concerns that their investment in training a candidate could be lost when they just pick up and join another firm or strike out on their own. If candidates are not properly trained then it is a cost to the firm and the wider profession because those individuals might not become as successful or productive a planner as they could have been.

However prospective planners will still have plenty to learn as they settle into a full-time practice. The FPA wants to grow the pipeline and the next generation of financial planners and ensure we are continued to be perceived as the trusted professional by our client’s.

Giving the provisional financial planner a successful PY experience with education in a supervised environment and on the job experience will help make them a true professional.

Anne Palmer is head of education and professionalism at the FPA.

2/02/2022 10:41:16 AM

28 | Money Management February 10, 2022

Toolbox

EARNINGS ACCELERATION FOR EQUITY SELECTION

Earnings acceleration is an underexamined metric that can add important diversification benefits to portfolio construction and provide investors with an additional tool, writes Laura Granger.

THE RELATIONSHIP OF earnings acceleration to outperformance has had only limited empirical studies. In fact, most studies focus on the US market, and we believe our research is one of the first to examine earnings acceleration in a global universe, by region and sector.

Earnings acceleration refers to the change in the velocity of growth in a company’s earnings. The exact point can be subjective, but it

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fundamentally refers to the stage when a company’s earnings growth experiences an inflection point on a sustainably upward path.

We conducted a study to further explore the relationship between earnings acceleration and outperformance. The study looked at stock performance in different countries and sectors, and the research was also designed to ascertain whether it was the size of the earnings acceleration, the

direction, or the duration of the acceleration that was more important in determining stock outperformance.

The study measured earnings acceleration as the difference in the compound annual growth rate (CAGR) of reported earnings per share (EPS) figures between the next three years and the previous two years. Each EPS in the CAGR calculation was summed over 12 months.

The results were divided into companies experiencing positive earnings acceleration (accelerating) or negative earnings acceleration (deceleration). And companies were also grouped into deciles to drill down further into the findings.

WHAT DID THE STUDY FIND? The study looked at the earnings of stocks in the MSCI All Country World index (ACWI) universe and found that stocks with earnings

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February 10, 2022 Money Management | 29

Toolbox Chart 1: Cumulative forward excess returns

acceleration tended to deliver positive excess returns on a forward one, two and three-year basis. Stocks with decelerating earnings were associated with negative excess returns across the same time horizons.

The speed of the acceleration was also an important determinant, with stocks exhibiting the highest accelerating earnings more likely to deliver higher excess returns on average over time.

When separated into accelerating and decelerating earnings, the cumulative forward excess returns of the acceleration portfolio were 8.4%, 16.8% and 21.4% over the one-, two- and three-year periods respectively.

On average, there are approximately 822 companies in the acceleration portfolio compared to approximately 1,500 companies in the deceleration performance of the MSCI ACWI. And when divided into deciles, decile one (i.e., the highest), showed cumulative forward excess returns of 11.6%, 24.1% and 29.4% over the one-, two- and three-year time periods respectively.

Chart 1 displays the linearity of the results when examining the excess returns of the universe broken into deciles of earnings acceleration.

It also highlights that the faster a company’s earnings accelerate, the more likely its stock will outperform the relevant benchmark over a one- to three-year period.

Another useful statistic the study measured is the information ratio of the accelerating (and decelerating) earnings stocks. The information ratio measures the risk-adjusted returns of a portfolio compared to its benchmark. A negative information ratio indicates an investment underperformed a benchmark. Any result over 0.5 is considered quite good.

In the accelerating group, the information ratio was 1.1 over the one-year period, dropping to an acceptable 0.8 for the three-year period. The information ratios for the decelerating group were negative for all time periods, and as low as -1.6 for the three-year

01MM10022022_28-32.indd 29

Source: FactSet, American Century Investments

Chart 2: Contribution to excess return by sector

Source: FactSet, American Century Investments

time period.

When measured for the difference deciles, the results were similar, with information ratios of 1 or more for all time periods of the first decile.

The analysis covered the period of 2005 until 2017 and also revealed that the percentage of companies with positive earnings acceleration varies over time and can be cyclical in nature. During this 12-year period the percentage of companies with earnings acceleration ranged from a low of 17% in 2006 to a high of 47% in 2010.

When the market is coming off a low, such as the period immediately following the Global Financial Crisis of 2008/09, more companies displayed earnings rebounds. This trend has fallen off in recent years as a result of a more mature economic cycle globally.

REGIONS AND SECTORS Studies to date have mainly examined US company returns and their relationship to outperformance. While these studies have shown a credible link, they haven’t explored this trend in other markets.

By applying the same analysis to the regional universes of MSCI ACWI – i.e., MSCI Europe ex-UK, MSCI USA, MSCI EM and MSCI Japan, we were able to conclude that the trend of accelerating earnings translating to stock outperformance is, in fact, international.

Stocks with higher earnings acceleration continued to outperform their peers in the country-specific indexes. Emerging market stocks appear to benefit most from earnings acceleration but the trend was also observed

across European, US, Japanese and UK stocks.

Earnings deceleration can also provide a useful filter to screen out poorly performing stocks, particularly for US and emerging market stocks.

Another interesting finding was that the relationship between earnings acceleration and outperformance is not sector specific nor particularly concentrated in any one sector.

In terms of their composition of the accelerating group over the life of the study, sector allocations ranged from 5.2% in the energy sector to upwards of 16.5% across financials.

Looking at the one, two and three-year periods, there were also variations in the contribution Continued on page 30

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30 | Money Management February 10, 2022

Toolbox

CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development.

Continued from page 29

1. What is earnings acceleration? a) The growth of a company’s earnings

to excess return by the different sectors. Information technology, for example, contributed 8.3% over the one year but as much as 15.8% to excess return over the three-year period.

Financials, on the other hand, had a declining contribution, falling from a 12.7% contribution to excess return over the one-year period to 4.1% over the three-year period.

The analysis shows that the earnings acceleration occurs consistently over time in each equity sector. Many investors often equate earnings acceleration with traditional growth sectors like technology or health care, however, the data demonstrates that earnings acceleration occurs in companies in every sector of the economy, including more traditional value sectors like financials and industrials.

b) The decline in a company’s earnings

EQUITY FACTORS

c) The risk-adjusted returns of a portfolio.

Asset managers receive a lot of questions about equity factors in meetings with clients. Often people will equate earnings acceleration with price momentum, so a further pillar to the study was to analyse the relationship between earnings acceleration and the equity factors of momentum, value and size. If earnings acceleration was related to any of these equity factors, then it may not be a useful predictor of enhanced performance.

The study used a T-Test to determine if there was a significant relationship between these equity factors (the T-Test measures whether there is a significant difference between the means of two groups, with a negative T-statistic indicating there is not). The analysis found a negative T-statistic for momentum and size, and a small positive T-statistic for value, as measured by book to price.

The modestly positive relationship between earnings acceleration and value suggests the alpha associated with earnings acceleration may be distributed across the growth and value-oriented sectors of the universe, with a modestly increased incidence in the latter.

REAL WORLD USE It's important to remember that earnings acceleration can be a useful compliment to an overall equity process, rather than a sole consideration. It is also useful to consider the drivers and durability of earnings acceleration as part of the process, as there are many reasons that can cause earnings to accelerate.

That said, the research shows that the excess returns of a portfolio of stocks with accelerating earnings are durable and persisted through the different market environments examined as part of the research. The relationship was also consistent in all equity sectors, which demonstrates durability and independence from style bias.

When applying an earnings acceleration screen to a portfolio, common sense must also be applied. For example, for an early-stage software company it would be prudent to look more closely at revenues as opposed to earnings. But there is certainly value in considering earnings acceleration as an overlooked source of excess returns in any portfolio.

Laura Granger is senior client portfolio manager at American Century Investments.

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c) The change in size of a company d) The change in velocity of growth in a company’s earnings.

2. What is the information ratio? a) The non-risk-adjusted returns of a portfolio compared to its benchmark b) The risk-adjusted returns of a portfolio compared to its benchmark

3. What does a T-statistic measure? a) The difference between the means of two groups b) The difference between the averages of two groups c) The difference between the medians of two groups d) The difference between the sizes of two groups.

4. How many companies were in the acceleration portfolio? a) 802 b) 812 c) 822 d) 832.

5. What were the cumulative forward excess returns of the acceleration portfolio over the three-year period? a) 20.4% b) 21.4% c) 22.4% d) 23.4%

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/features/ tools-guides/ earnings-acceleration-valid-means-equity-selection

For more information about the CPD Quiz, please email education@moneymanagement.com.au

3/02/2022 10:24:57 AM

February 10, 2022 Money Management | 31

Send your appointments to liam.cormican@moneymanagement.com.au

Appointments

Move of the WEEK Phil Anderson Chief executive The Association of Financial Advisers

The Association of Financial Advisers’ general manager for policy and professionalism, Phil Anderson, had been appointed as the association’s new chief executive.

Anderson replaced previous CEO, Helen Morgan-Banda who stepped down from her role to return to New Zealand.

Anderson had been in the acting CEO position for six months prior to Morgan-

Merged superannuation funds LGIAsuper and Energy Super appointed Mark Rider as its new chief investment officer (CIO) ahead of its planned acquisition of Suncorp’s super business this year.

The funds said Rider would help the fund deliver an investment team and approach to serve its members in its next stage of transformation given his experience as an economist and investment strategist.

Rider would start in the role in February while outgoing CIO Troy Rieck would leave the fund this month.

The funds’ chief executive, Kate Farrar, said: “The amalgamation of our funds, and the planned acquisition of Suncorp’s superannuation business, have given us a unique opportunity to reconfigure our investments to ensure that we are delivering the best possible outcomes and future security for our members.

“Mark comes to our team with a unique perspective, having been the CIO at both a large organisation like ANZ and small (Christian Super), while excelling at both.

“He has the vision and nous to further our investment strategy while incorporating the needs of our unique, combined memberships. He is considered about investment matters, data-

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Banda’s appointment.

Commenting, AFA president, Sam Perera said the board thanked Morgan-Banda for her efforts over the last five months.

“The AFA enters 2022 with a clear strategy along with a dedicated and hardworking team. We will strengthen our voice in advocating for policy settings that support vibrant and thriving financial advice

driven, and risk-aware, and understands how to add value in this ever-changing environment.”

Chris Whitehead stepped down as managing director and chief executive of the Financial Services Institute of Australasia (FINSIA) and would be replaced by Yasser El-Ansary.

Whitehead would step down at the end of April and would work with El-Ansary to ensure a smooth transition.

El-Ansary had been chief executive of the Australian Investment Council for the past eight years and was previously general manager of policy at the Institute of Chartered Accountants in Australia.

FINSIA president, Victoria Weekes expressed her thanks to Whitehead for his leadership over the last five years.

“Chris made a huge impact on professionalisation of financial services by successfully introducing new professional education options in banking and securities through international partnerships, strengthening continuing professional development and leading a focus on professional standards,” Weekes said.

Colonial First State Investments (CFSIL) and Avanteos Investment

practices. We are intent on bringing our communities back together to network, share and socialise in fun and safe environments around the country,” he said.

“The board is highly engaged in developing strategies to ensure the AFA and its important work endures into the future. The AFA team is refreshed and energised by the opportunities that the new year brings for our members.”

Limited (AIL) appointed John Brogden as an independent nonexecutive director to its boards.

Brogden was currently chief executive of Landcom and would step down from the role in April. He was previously managing director and CEO of the Australian Institute of Company Directors, CEO of the Financial Services Council, and CEO of Manchester Unity.

CFSIL and AIL acting chair, Greg Cooper, said: “I am delighted to welcome John as a director of Colonial First State.

“With his thorough understanding of superannuation and experience as a nonexecutive director, John will bring a deeply informed and strategic perspective as we pursue our purpose of helping Australians to have better retirement outcomes and achieve financial freedom.”

AMP’s newest appointment Stuart Eliot will start as new head of portfolio management for AMP’s multi-asset group (MAG) in early April 2022, reporting to AMP’s chief investment officer, Anna Shelley.

In his new role, Eliot would be responsible for overseeing portfolio construction and asset allocation across MAG’s investment portfolio with funds under management (FUM) at $104.8 billion, as at 30 September, 2021, and a focus

on investment management for institutional clients and super funds.

Eliot joined from Pendal Group, where he was senior portfolio manager, multi-asset investments.

AMP Capital appointed Nadine Lennie as chief financial officer (CFO) for PrivateMarketsCo, who joined with several years of CFO experience from leading Australian companies.

Lennie would commence her role in April 2022 and would be based in Australia.

PrivateMarketsCo was the name for the de-merging private business part of AMP Capital.

Lennie previously worked at Atlas Arteria, a global owner, operator and developer of toll roads, where she has been CFO and CFO-elect since 2018.

In this role, Lennie was a key part of the team to transition from Macquarie Bank’s external management to the internal management model.

Prior to that, she held CFO roles at Afterpay Touch Group and Touchcorp, overseeing the successful merger with Afterpay Holdings Ltd, as well as at Australian Pacific Airports Corporation. Lennie was also currently chair of the Victorian Government Purchasing Board.

3/02/2022 12:37:45 PM

OUTSIDER OUT

ManagementFebruary April 2, 2015 32 | Money Management 10, 2022

A light-hearted look at the other side of making money

Contactless delivery MINGLING at drinks receptions might be back on the agenda but that doesn’t mean Omicron has gone away.

At an industry event, there was only one topic of conversation among delegates and Outsider, who has so far avoided the plague, was shocked at how many of his industry friends had been struck down by the virus.

It seems the summer break was a hotspot for the virus as one person after another regaled Outsider with their self-imposed Christmas isolation.

Luckily, many were living in

two-storey houses which meant they were able to separate themselves from their children on separate floors.

Outsider particularly liked the person who built a barricade and said they passed food over the wall to their sick family member, bringing a new interpretation to ‘contactless delivery’.

While Outsider is glad to be out and about with the best and brightest of the Sydney financial services industry, he is also hopeful his mingling doesn’t come at a price. If it does, he knows who to call for supplies.

A timely union WHILE Outsider wouldn’t admit to watching reality TV, he can’t help if it’s on when he walks back and forth across the lounge.

So he couldn’t help but catch the latest series of Married at First Sight, the wedding show where individuals volunteer to be matched with their future life partner at the altar.

Now, while Outsider would obviously prefer to be watching the golf or the cricket, there was something about this particular episode that stopped him in his tracks.

One of the contestants was a financial adviser.

“Huh, that’s unusual”, he thought.

Before he could get his head around that fact, a second contestant was also revealed to be a financial adviser.

Given the declining number of financial advisers, the recruitment team would have hunted high and low to find not one but two people in that profession.

Having navigated the troubles and regulation of the advice profession in the past few years, Outsider reckons these two contestants are well-prepared for any challenge that reality TV can throw at them.

Keeping schtum on advice plans AS Federal election campaigning goes into full swing, marked by the Prime Minister’s appearance at the National Press Club, Outsider wonders when or if there will be a meaningful distinction in advice-related policy between the major parties.

As Labor’s proposed education pathway, which exempted advisers with 10 years of experience from the need for tertiary qualifications, swiftly received bi-partisan support from the Government, perhaps it

OUT OF CONTEXT www.moneymanagement.com.au

01MM10022022_28-32.indd 32

would have been better for Labor to keep its cards closer to its chest?

It is a shame really that Labor let the cat out of the bag so early, Outsider ponders, as now the advice industry will have to wait until six weeks out from the election for political speeches with any policy substance.

For now, Outsider would be content if politicians could save their rhetoric and attempts at inspiring speeches for their bored partners at home.

"We present this award to Stephen Jones for his 'three dimensions'"

"I'm sure there was some snickering - who's this guy to say he's going to build the next Platinum from scratch? And they just got there."

-An odd award for Stephen Jones MP

-Forager manager Gareth Brown on his initial view of Magellan

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3/02/2022 10:28:18 AM