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Vol. 34 No 2 | February 27, 2020
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ALTERNATIVES
Answering the big questions
INVESTING
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Allocations of UHNW investors
LIFE INSURANCE
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TOOLBOX
Business insurance
TPB signals embrace of FASEA CPD cross-over BY MIKE TAYLOR
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APRA’s tough move on DII AGREED value disability insurance had become a staple offering for life/risk advisers but all that changed last year when the Australian Prudential Regulation Authority (APRA) signalled that the sale of fixed value policies would be brought to an end. The regulator’s move has been disruptive, but the reality is that the insurers had largely brought the situation on themselves by failing to move adequately to address the problems which had made disability income insurance (DII) a highly unprofitable sector for nearly a decade. At the time that APRA announced its move, APRA commissioner and former insurance company executive, Geoff Summerhayes, put the reasons succinctly, stating: “In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work”. Now, nearly three months later, there appears to be general agreement that disability insurance needed to be fixed, and that APRA’s tough remedy may well prove to be worth the pain it inflicts.
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Full feature on page 14
THE TAX Practitioners Board (TPB) has confirmed it is considering increasing the minimum number of continuing professional education (CPE) hours required for all tax practitioners to 40 hours a year – something which would bring it into line with the continuing professional development policy of the Financial Adviser Standards and Ethics Authority (FASEA). The TPB made its intention clear in a discussion paper indicating any changes would be staged over time. The TPB said it had received a range of views including that “the requirements for tax (financial) advisers should more closely align with FASEA requirements” and that “the TPB should adopt a position that compliance with FASEA’s CPD requirements automatically satisfies the TPB’s CPE requirements for tax (financial) advisers”. Importantly, the current TPB
CPE requirements require tax (financial) advisers to undertake a minimum of 60 hours over a threeyear period, or seven hours a year. The TPB signalled it intended to further clarify that a tax (financial) adviser who met FASEA’s CPD requirements was also likely to meet the TPB’s CPE requirements. “The TPB also proposes that completion of a course by a tax (financial) adviser to satisfy FASEA requirements, in order to continue to operate as a financial adviser, can count toward the TPB’s CPE requirements (if it is relevant to the tax (financial) advice service being provided),” it said. “For clarity, courses completed for the purpose of initial registration with the TPB cannot be counted toward the TPB’s CPE requirements, consistent with the TPB’s current approach for all tax practitioners.”
Most give FASEA exam thumbs-down BY CHRIS DASTOOR
DESPITE its high pass rate – 90% for the first sitting, 88% for the second and 86% for the third – many advisers, even those who passed, were left unsatisfied by the questions and conditions of the Financial Adviser Standards and Ethics Authority (FASEA) exam. Of those surveyed by Money Management, only 21.7% said the exam questions were fair, while 62.3% said the conditions were fair. Among the biggest complaints about the exam was that, despite being open-book, the exam had intense conditions placed on it that matched a closed-book exam. Continued on page 3
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How Count Financial swelled the CountPlus bottom line BY MIKE TAYLOR
THE CountPlus acquisition of Count Financial has proved positive for the company with the company reporting a strong first half. It reported that profit was up more than 100% to $13.46 million, largely owed to the terms of its purchase of Count Financial from the Commonwealth Bank booked as a bargain purchase of $12.49 million. Minus the Count Financial factor, the company’s net profit after tax was $2.04 million – an increase of 7%. However the CountPlus half-year results have also revealed the degree to which it has scaled back and imposed changes on Count Financial with the number of advisers decreasing from 380 in December, 2018 to 281 in December, last year, but will increase to 326 as ‘a select number’ of Total Financial Solutions advisers join Count Financial. As well, the company revealed that the number of Count Financial member firms had dropped from 177 in December, 2018 to 133 in
December, 2019. The company said the drop in adviser firms and advisers had been anticipated and was largely due to the changes in the regulatory environment and pricing models resulting in firms opting out of the financial services model.
Has the Govt created an advice structural imbalance? AT a time when the number of retired Australians is about to increase, the exodus of financial advisers from the market will impose immense structural limitations on advice resources. That is one of the key points made in a CPA Australia submission to the Retirement Income Review panel which stated there is a significant risk that Australians who need professional advice most, may miss out. The submission has pointed to the complexity of the regulatory environment confronting retirees. “The fact that one needs to transfer their superannuation to a new product in order to commence an income stream is fraught with uncertainty and paperwork. The most basic retirement income product, the account-based pension, still requires a formal rollover and application process before it can commence, where retirees would most likely prefer a simple switch to turn it on from their existing account,” it said. “The Age Pension means testing process is no simpler. Deeming, lifetime incomes and exemptions conspire to make it almost impossible for retirees to know how their affairs should be set up when they decide that they wish to retire. “We are not aware of any evidence that matters are improving,” the CPA Australia submission said. “At a time when the number of retired Australians is about to increase, this will impose immense structural limitations on advice resources, meaning that Australians who need professional financial advice most may miss out.”
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CountPlus also made clear that Count Financial had been transitioning to a userpays model since 1 December, last year, phasing out the old model under which costs for software, selected research tools and professional indemnity insurance were not recovered.
Most give FASEA exam thumbs-down Continued from page 1 The exam covers multiple areas of specialisation, which means advisers who specialise in one area were expected to accurately answer questions on areas they don’t specialise in to pass the exam. Advisers had said they lacked feedback from results, leaving them unaware if they had performed poorly in a certain area, despite FASEA chief executive Stephen Glenfield’s previous assertions that unsuccessful candidates would “receive guidance on which knowledge areas they need to improve to enhance their ability to pass at a future sitting”. In the ethics component, only a third (34.9%) said it was relevant, while a 32.6% each said it wasn’t or that it was hard to say. Ambiguous was the key word as advisers felt the questions were subjective, unclear or poorly worded. Another notable complaint was learning disabilities were not accounted for, neither were there any provisions for people who used English as a second language, which is significant for a multi-cultural country, which becomes a greater issue when combined with the ambiguous questioning line. Although there was no shortage of exam preparation resources available in the market, older advisers still felt the pressure of sitting an exam for the first time in decades, if at all. Many in the industry already had experience in tertiary education, including exams, and felt the FASEA exam didn’t compare in fairness.
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4 | Money Management February 27, 2020
Editorial
mike.taylor@moneymanagement.com.au
WHAT IS THE REAL PURPOSE OF THE RETIREMENT INCOME REVIEW?
FE Money Management Pty Ltd Level 10
The strident voices of a number of Government backbenchers should prompt some serious questioning around the real objective of the Government’s Retirement Income Review. AS the number of submissions to the Government’s Retirement Income Review continues to build well beyond 100 it is worth reflecting just how many Liberal National Party backbenchers continue to question the underlying premise of Australia’s compulsory superannuation regime. The most prominent of those to question the regime have been former Financial Services Council policy director and now NSW Liberal Senator, Andrew Bragg, former Institute of Public Affairs (IPA) staffer and now Victorian Liberal Senator, James Paterson and, more recently, former tax accountant and now Queensland Senator, Gerard Rennick. The fact that the three Senators have seen fit to ventilate their critical views on superannuation at the same time as the Retirement Income Review panel considers submissions from a broad crosssection of groups, suggests that they are intent on having a material impact and ensuring that their views are not ignored. Little wonder then, that there are many in the superannuation industry who have seen fit to frequently reference the undertakings given by both the Prime Minister, Scott Morrison and the Treasurer, Josh Frydenberg, that the Government has no
intention of moving away from the time-table which would see the superannuation guarantee lifted to 12% by 1 July, 2025. However, when Frydenberg in September last year announced that the Government would be initiating the Retirement Income Review consistent with a recommendation from the Productivity Commission (PC), there were plenty of superannuation veterans who suggested that the review might, ultimately, prove to be the means by which the Government reneged on the 12% and indeed the embedded compulsory nature of super. With this in mind, it is worth considering the terms of reference of the Retirement Income Review which is that it should identify: • How the retirement income system supports Australians in retirement; • The role of each pillar in supporting Australians through retirement; • Distributional impacts across the population and over time; and • The impact of current policy settings on public finances. And it is the latter of these four points – ‘distributional impacts across the population over time’, and ‘the impact of current policy settings on public finances’ – which can be seen as turnkeys capable of
enabling the Government to legitimately review the compulsory nature of the SG and whether, given current economic circumstances, it makes sense to proceed with progressively lifting the SG to 12% in 2025. What is clear is that over the past two years voices within the Liberal National Party coalition have continued to question the rationale behind the current superannuation system and to accuse superannuation executives and organisations of protecting their own vested interests. Queensland’s Senator Rennick was just the most recent voice to enter the debate, when he stated “Of all the rorts that exist in this country, nothing compares to superannuation” arguing that it was devouring the real economy and that at the very least it should be voluntary, not compulsory. Between Senators Rennick, Paterson and Bragg it is clear that an agenda exists to make the compulsory nature of superannuation a major policy debate. It is in these circumstances that the Government needs to be much clearer about what the objectives of its Retirement Income Review really are.
Mike Taylor Managing Editor
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6 | Money Management February 27, 2020
News
Free up scoped, scaled and episodic advice says AMP BY MIKE TAYLOR
AMP Limited wants the Government to consider changes which would make it easier for people to access scoped, scaled and episodic advice, arguing that over the last several years the financial advice regulatory burden has increased alongside costs to a point where “advice can only be accessed by the wealthy”. AMP has made the call in its submission to the Government’s Retirement Income Review at the same time as it works to reshape its advice business. At the core of the AMP submission is a call for the tax deductibility of the preparation of financial plans and for “changes to the processes that would enable greater access to scoped/scaled/episodic advice”. In doing so, it said that the tax-deductibility of advice had been proposed multiple times, including within the Ripoll report which underpinning the Future of Financial Advice (FoFA) changes but little had been done. “The extension of tax deductibility of advice would immediately reduce the cost of advice and therefore improve access to
advice for individuals approaching and in retirement,” it said. “The introduction of scoped and scaled advice as part of FoFA was also seen as a way of reducing the cost of advice to the client, including episodic advice, but for a variety of reasons scoped and scaled advice
remains expensive, to the detriment of the consumer,” the AMP submission said. It said that a key question for policymakers related to the cost of advice because it was “now at a point where financial advice is difficult to afford for the many people that most need it”.
Hume lashes IFM Investors over $12.7m bonus THE Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, has taken a direct swipe at the practices of industry funds-backed asset consultant, IFM Investors, questioning a $12.7 million bonus paid to an unnamed director. In doing so, Hume accused the Federal Opposition Labor party of double standards. The Assistant Minister described IFM Investors as being “notoriously opaque” and claimed that the business had paid “a whopping $12.7 million bonus to an unnamed director, on top of their $2.8 million salary”. “It’s concerning that the owners of IFM – 27 all profit for members super funds – are pouring their members’ money into an entity generating super-profits for executive, with alarmingly little transparency for members about where that money goes,” she said.
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Hume said she could only wonder if a $12.7 million director’s payday was consistent with IFM’s ‘responsibility’ to put their fund members’ interests first. “All profits for members, or fat profits for executives – what does Labor say?” she asked.
Big bank platform dominance at an end THE days of the big bank offerings dominating the Australian platform space appear to be over, with Netwealth and HUB24 once again confirmed as leading the pack in the latest Investment Trends Platform Benchmarking and Competitive Analysis Report. The Investment Trends research found that Netwealth continued to lead the market for overall platform functionality, followed by HUB24 with the only big bank offering to make it into the top four for overall functionality being Westpac’s BT Panorama. This represents a significant turnaround from the situation a decade ago when the offerings of Colonial First State and others were seen to dominate. According to the Investment Trends analysis the top-ranking full-function platforms were 1) Netwealth 2) HUB24 3) BT Panorama 4) Praemium 5) OneVue Investment Trends gave a special mention to Macquarie Wrap’s Digital Portfolio Manager which it said was helping advisers deliver affordable scalable advice. As well, it said that managed accounts remained a key development area for platforms as the solutions continued to gain popularity among financial planners. Investment Trends senior analyst, King Loong Choi, said platforms were aware that more financial advisers were starting to use managed accounts, while existing users were using the solutions more extensively. “As a result, improvements in the last 12 months focused on helping both new entrants and also model managers who demand greater flexibility and functionality,” he said.
19/02/2020 11:44:29 AM
February 27, 2020 Money Management | 7
News
FSC canvasses capital requirements for advice licensees BY MIKE TAYLOR
OTHER sectors of the financial services industry should not be made to fund client losses generated by financial advisers under a compensation scheme of last resort (CSLR), according to the Financial Services Council (FSC). In a submission to the Treasury on the proposed scheme, the FSC said it supported a targeted ‘mid-coverage’ scheme which included the sectors which historically had unpaid determination – “namely financial advice, investments and credit”. “The targeted CSLR should be funded solely by the sector responsible for the unpaid determinations via Sector Specific Funding. Sector Specific Funding should take into account the historical experience of unpaid determinations (that is, whether or not and if so the extent of, historical unpaid determinations in that sector) to identify appropriate funding requirements for
each sector, until a fulsome risk-based funding approach can be implemented in the CSLR,” the FSC submission said. It argued that sector specific funding should be deep enough to meet estimated costs including expected variability across different periods, but not require cross-subsidisation from other financial services sector. The submission said that to facilitate sector specific funding and to ensure that the CSLR was sustainable it was essential that outstanding regulatory gaps in the advice licensing regime were addressed, particularly relating to professional indemnity (PI) insurance and capital requirements. The submission said the FSC believed there needed to be greater oversight of PI insurance requirements by the Australian Securities and Investments Commission (ASIC) and the introduction of appropriate capital requirements for advice licensees, noting that the current cash
needs requirements set out by ASIC only required sufficient cash to meet 12 weeks of liabilities. “This latter measure of introducing appropriate capital requirements need not result in prudential supervision. Rather it can simply require minimum cash or liquid capital requirements as part of licence conditions. These assets are then available to meet any consumer claims. This can be built up over time to streamline the introduction of such requirements,” it said.
MOMENTUM
Bringing Australia’s top financial advisers together MLC believes in the value of financial advice and we’re committed to supporting those who provide it. That’s why we’re proud to be a Gold Partner of Barron’s Australia Summit. We’d like to congratulate those recognised as Australia’s Top 50 Financial Advisers at this year’s event. It’s an opportunity for us to work together and find ways of driving deeper client value and delivering sustainable growth. We look forward to shaping the industry’s future together. For more information, visit barrons-advisor.com/australia
National Wealth Management Services (ABN 97 071 514 264), 105 Miller Street, North Sydney NSW 2060, a wholly owned, non-guaranteed member of the National Australia Bank Limited (‘NAB’) Group of Companies (‘NAB Group’). “MLC” and the “Nest Egg” logo and all associated trademarks are owned by National Wealth Management Holdings Limited, a member of the NAB Group, and are used under licence by related bodies corporate in the NAB Group that provide wealth management services.
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19/02/2020 10:19:20 AM
8 | Money Management February 27, 2020
News
ASIC bans ex-Spectrum director for six years BY OKSANA PATRON
THE Australian Securities and Investments Commission (ASIC) has banned former director of Spectrum Wealth Advisers, Mark Schroeder, from providing financial services for six years due to numerous compliance failures. The regulator found that Schroeder, who was Spectrum’s most senior manager and the person responsible for its day-to-day activities, was involved in the company’s contraventions of financial services laws. According to ASIC, he was “likely to contravene a financial services law in future” due to his responsibility and involvement in Spectrum’s past failures as well his poor understanding of the obligations of providers of financial services, particularly regarding compliance matters. Under his leadership the licensee failed to
audit its representatives on a regular basis and ensure that they were properly trained and competent. Spectrum also lacked sufficient human and technological resources to meet its licence obligations, the regulator found. “ASIC expects that people holding a position of responsibility with an Australian financial services (AFS) licensee, particularly directors and responsible managers, understand the obligations of financial services providers and make every effort to ensure compliance,” ASIC commissioner, Danielle Press, said. Spectrum ceased trading and its parent company, Freedom Insurance Group, applied to ASIC to cancel Spectrum’s AFS licence. Schroeder is continuing to seek a review of ASIC’s decision at the Administrative Appeals Tribunal.
Intrafund advice simply not enough says FPA BY MIKE TAYLOR
PEOPLE who receive comprehensive financial advice experience an 85% higher financial well-being than those who receive intrafund advice. That is one of the core elements of a Financial Planning Association (FPA) submission to the Government Retirement Income Review, with the planning organisation arguing that the inherent complexity of the Australian Retirement Income System (RIS) makes the involvement of financial planning critical to ensuring retirement incomes adequacy. It said that, on the available evidence, the complexity of the existing system and the inter-linkages between the superannuation guarantee, the age pension and personal savings, made it difficult for consumers to understand. As well, the FPA sought to play down the usefulness of intra-fund advice beyond superannuation. “…the capacity of intra-fund advice as an enabler of the ‘system’ and the interaction of the three pillars is limited, as such advice cannot consider the individual’s circumstances outside their interest in the fund,” it said. “This limitation is of most significance when
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considering transitioning to retirement. Absent from intrafund advice considerations are the individual’s assets held outside of that particular superannuation fund, tax implications, health and aged care needs, spousal and family financial arrangements, and eligibility to social services benefits including the Age Pension, for example. “Decisions made in relation to the individual’s superannuation can positively or adversely affect the other pillars of the system. Hence, making decisions about superannuation in isolation can hinder cohesion of the system.” “Personal financial advice plays a key role in improving the cohesion of the system by helping clients
overcome the issues created by the complexity of the RIS, making the interaction of the pillars work as appropriate for each client’s circumstances, and importantly, educating clients about the system and financial management more broadly,” the submission said. “Further, those individuals who engage in comprehensive financial planning experience an 85% higher financial wellbeing over those who have engaged in limited planning such as intra-fund advice. Increasing understanding can impact on member engagement and reduce the possibility of poor decision making.” The submission said that financial planners also acted as a conduit
between consumers and providers, both private and Government, providing service providers with an informed source of consumer information and detailed insights into consumer needs and preferences. “It should be noted that the financial planning industry has undergone significant reform over the past decade. For example, the Future of Financial Advice (FoFA) reforms and the establishment of legislated professional and education standards have been implemented,” it said. “Government, the private sector, and individuals all face a challenge to encourage a savings culture and integrate the roles of the three pillars to provide an adequate, equitable, sustainable and cohesive Retirement Income System into the future. The role of personal financial advice in helping to change the attitude of consumers in relation to the accumulation, use and management of retirement savings and the cohesion of the RIS is significant.” “Making personal financial advice more accessible for all Australians would enhance the operation, sustainability, adequacy and cohesion of the Retirement Income System,” the FPA submission said.
19/02/2020 10:19:38 AM
February 27, 2020 Money Management | 9
News
Are financial advisers being asked to ‘dob’ each other? BY MIKE TAYLOR
THE Federal Government is proposing legislative changes which would obligate financial advisers or licensees to breach report other organisations or advisers. The startling proposal is included in a consultative document issued by Treasury around the Financial Sector Reform (Hayne Royal Commission Response Protecting Consumers (2020 Measures)) Bill 2020 implementing key recommendations of the Hayne Royal Commission. The Treasury’s explanatory memorandum explains a significant expansion of the situations that would generate a need for licensees or planners to report to ASIC including: • Investigations about whether a specified breach or likely breach has occurred or will occur, and outcomes of those investigations; • Conduct constituting gross negligence or serious fraud (to the extent this conduct was not previously considered a breach of the financial services law); and • Where there are reasonable grounds to suspect that a reportable situation has arisen in relation to a financial adviser operating under another licence. It is this third category which has raised eyebrows around financial planning policy specialists such the Association of Financial Adviser’s (AFA’s) Phil Anderson who said he believed there were significant implications for financial advisers and their licensees from
such an arrangement. The explanatory memorandum went on to explain that “financial services licensees will have to report to ASIC about serious compliance concerns, which are reflected in the reportable situations, in relation to individual financial advisers operating under another licence. A copy of these reports will need to be provided to the licensee responsible for the
Legislation passes to impose mortgage broker best interest duty THE Royal Commission-based legislation changing mortgage broker commission arrangements and imposing a client best interest duty have passed the Parliament. The Treasurer, Josh Frydenberg, said that the changes were contained in the Financial Sector Reform (Hayne Royal Commission Response Protecting Consumers (2019 Measures) Bill 2019. The legislation covers the Royal Commission recommendation that mortgage brokers be required to act in the best interests of consumers when providing consumer credit assistance. As well, it also covers off the Royal Commission’s recommended reforms to mortgage broker remuneration by requiring the value of upfront commissions to be linked to the amount drawn down by the borrowers instead of the loan amount, alongside the banning of campaign and volume-based commissions and payments and capping soft dollar benefits. The changes bring the regulatory environment for mortgage brokers more broadly into line with those of financial advisers.
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financial adviser at the time the concern arose. Such reports are due within 30 calendar days.” Elsewhere in the legislation, the Government would provide qualified legal privilege from defamation proceedings for licensees sharing information as part of a reference-checking related to advisers moving between licensees.
CFSGAM exit helps CommBank’s bottom line THE $1.69 million sale of CFS Global Asset Management has put a gloss on the Commonwealth Bank’s first half net profit after tax which was up 34% to $6.16 billion. Announcing the result to the Australian Securities Exchange (ASX) CBA chief executive, Matt Comyn, referenced the company’s strong focus on strong execution in the bank’s core franchise. The result saw the board announce an unchanged interim dividend of $2 per share. Looking ahead, Comyn said the Australian economy was underpinned by good long-term fundamentals.
However, he said uncertainties remained about the global economic outlook and that the company was mindful of the impacts of drought and bushfires which had occurred in recent months. CBA’s past problems with respect to the Prudential Inquiry were mentioned in the ASX announcement with the bank confirming it had submitted 107 of 173 milestones. On the wealth management front, cash net profit after tax reflected the bank’s move out of many of its financial planning exposures with cash net profit after tax down 50% on the prior comparative period to $133 million.
19/02/2020 11:45:02 AM
10 | Money Management February 27, 2020
News
Large fund managers top global equities BY CHRIS DASTOOR
THE CFS FirstChoice Acadian Wholesale Geared Global Equity fund provided the best return during the 2010s – and by a significant margin – returning 624.11%, according to data from FE Analytics. This was followed by PM Capital Long Term Investment (367.96%), Magellan Global (335.19%), CFS Generation WS Global Share (313.56%), Macquarie IFP Global Franchise (291.98%), MFS Concentrated Global Equity Trust Wholesale (286.01%), CFS FirstChoice Wholesale Geared Global Share (274.56%), Zurich Investments Unhedged Global Growth Share Scheme (273.58%), Zurich Investments Global Growth Share Scheme (272.44%) and Legg Mason QS Investors Global Equity X (265.46%). The sector average was 172.45%, with a Sharpe ratio of 0.75. Almost all of the top 10 were from major fund managers, with PM Capital being the only boutique fund manager on the list, as opposed to the Australian equities sector in the same timeframe where five of the top 10 were boutiques.
As with the performance of the Australia equities during that same time, the decade was marked with significant growth after rebounding from the Global Financial Crisis (GFC). When it came to risk-adjusted returns, Macquarie had the best Sharpe ratio (1.07), followed by Magellan (1.06), CFS Generation (1.04), MFS (0.99), Legg Mason (0.87), both Zurich funds (0.86), PM and CFS FirstChoice Acadian (0.74), and CFS FirstChoice Geared Global (0.59). The CFS FirstChoice Acadian fund’s strategy was to capture long-term capital appreciation
by borrowing to invest in all global equities, but the Australian market. Its current top holdings were Microsoft (4.84%), Apple (4.25%), Alphabet (2.4%), Berkshire Hathaway (2.31%) and Procter & Gamble (2.24%). The fund’s inception was 16 April, 2007 and if you had invested then, as opposed to the beginning of the last decade, you would have only seen a return of 114.27%. Its return from 16 April, 2007 to 31 December, 2009 – during the height of the GFC was -70.41%.
Chart 1: Top 10 best performing funds v sector over the 10 years to 31 December 2019
Source: FE Analytics
Licensees face stronger obligations to notify clients of bad advice BY MIKE TAYLOR
FINANCIAL planning licensees will be under a specific obligation to notify clients of suspected misconduct by financial advisers when it actually comes to their attention. That is one of the key changes to the Corporations Act being pursued by the Federal Government in response to the Hayne Royal Commission and contained in exposure draft legislation released by the Treasurer, Josh Frydenberg. It makes clear that when a licensee detects misconduct, it is required to inform potentially affected clients within 30 days and to investigate the nature and full extent of any misconduct within a reasonable amount of time. As well, once an investigation is complete, the licensee will need to inform affected clients within 10 days of
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the full extent of the misconduct and remediate them for their loss within 30 days. Importantly, if licensees fail to live up to these obligations then they will leave themselves open to not just civil penalties but also criminal penalties. The explanatory documentation accompanying the proposed new legislation makes clear that licensees need to act where “there are reasonable ground for the licensee to believe that a reportable situation has arisen and either that reportable situation amounts to a significant breach of a core obligation, or it amounts to gross negligence, serious fraud and other circumstances prescribed by the regulations”. It said the person that had to be notified was the affected client and such notification allowed clients to consider their rights and the ways they could mitigate potential loss or damage.
Adviser Choice Risk Awards 2020
ClearView named as Risk Company of the Year BY JASSMYN GOH
CLEARVIEW has been crowned as Risk Company of the Year in the Money Management/DEXX&r Adviser Choice Risk Awards. The winning insurer also took out three other awards – Term and TPD Product 2020, Disability Income Products 2020, and Inside Super Individual (Guaranteed Renewable) Term and TPD Rider 2020. ClearView inched ahead to take the main award as MLC Insurance also won three awards. The full list of winners were: Term & TPD Products 2020 ClearView – LifeSolutions Life & TPD Rider Trauma Products 2020 MLC Insurance – Critical Illness Plus with Extra Benefits Disability Income Products 2020 ClearView – LifeSolutions Income Protection with Extra Benefits Business Overhead Products 2020 MLC Insurance – Business Expense Platinum Inside Super Individual (Guaranteed Renewable) Term and TPD Rider 2020 ClearView – LifeSolutions Life Cover and TPD Super Inside Super Disability Income Product 2020 MLC Insurance – Income Protection Platinum Super Public Offer Super Funds (Group) Term and TPD Benefits 2020 UniSuper – Personal Superannuation (TAL) Public Offer Super Funds (Group) Disability Income 2020 First State Super – Personal Superannuation (TAL) Risk Company of the Year 2020 ClearView
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News
If FoFA cost $3 billion, what will FASEA cost?
CFP certification available as part of Master of Financial Planning
BY MIKE TAYLOR
THE Certified Financial Planner (CFP) Certification Program will be embedded into the Master of Financial Planning at Deakin University, under a new partnership with the Financial Planning Association of Australia (FPA) and Deakin University. CFP certification units 1, 2, 3 and 4 were now mapped against the Masters units at Deakin Business School, and the CFP certification capstone would be included as an elective option. Dante De Gori, FPA chief executive, said the move would allow financial planners to combine their study requirements into a single course. “This is a significant win for financial planners, who will now be able to graduate with both an academic qualification and the highest global professional designation in financial planning, which is recognised in 27 countries around the world,” De Gori said. “This partnership is designed to offer choice and flexibility to financial planners and brings the education options in line with other professions, like accounting, who already embed designations into their academic programs.” Peter Carey, head of the department of accounting at Deakin Business School, said the university’s goal was to provide the highest quality study options for financial planners. “At a time when all financial planners are grappling with the need to satisfy new education standards and demonstrate the highest level of professionalism and competence with their clients, this partnership demonstrates our commitment to working closely with the profession,” Carey said. Marc Olynyk, program director – financial planning at Deakin Business School said Deakin had a long history of partnering with professional associations and organisations. “This landmark partnership will provide both existing and emerging financial planners with a significant point of difference in a new era of financial planning in Australia,” Olynyk said.
IF implementing the Future of Financial Advice (FoFA) reforms cost the industry $3 billion, what will be the ultimate cost of implementing the Financial Adviser Standards and Ethics Authority (FASEA) regime? That is a question being posed by InFocus managing director, Darren Steinhardt, who said that while much attention had been directed to the additional costs being carried by financial advisers, the additional costs to licensees should not be overlooked. He said that during the FoFA implementation, effort was made to keep track of the implementation costs across the industry, but this was not the case with respect to FASEA. “…it is strangely quiet when it comes to calculating the cost of the FASEA implementation,” Steinhardt said. “The end cost of FoFA implementation was massive, (approximately $3 billion based on research undertaken by the
Financial Services Council at the time) and ultimately these costs were absorbed by advisers and by clients. It is somewhat unnerving that all is silent on the cost of FASEA and how this might impact clients and the affordability of quality advice. “This lack of consideration of the cost is symptomatic of all changes that are being imposed on advisers (and ultimately their clients) at the moment,” he said. “There is no such thing as a
Regulatory Impact Statement or in fact any visible thought being given to costs, which ultimately are passed on to clients.” Steinhardt suggested it was time to slow down and consider the real cost of FASEA implementation. “Ironically, the future for good advice businesses has never been greater because ultimately (and sadly) there will be less advisers and higher barriers to entry,” he said.
Does size matter to fund performance? BY CHRIS DASTOOR
EIGHT of the top 10 Australian equity funds over the last three years were boutiques, showing that backing a big-name fund managing group does not always guarantee the best returns. According to FE Analytics, within the Australian Core Strategies universe, over the last three years to 31 December, 2019 the top five best returning Australian equity funds were boutique funds, including DDH Selector funds as the top two. The best performer was DDH Selector Australian Equities which returned an annualised 20.06%. This was followed by DDH Selector High Conviction Equity A (17.76%), Platypus Australian Equities Trust Wholesale (16.78%), Bennelong Australian Equities (15.39%) and Bennelong Concentrated Australian Equities (15.07%). The best institutional fund was BlackRock Concentrated Total Return Share E1 (14.91%),
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followed by Macquarie Australian Shares (13.74%). The Australian Equities sector returned 9.13% annualised in that time period. DDH was an independent boutique fund manager whose stock selection utilised a bottom-up approach based on quantitative research. The appearance of Alphinity’s Sustainable Share fund was notable as it was a boutique environmental, social and governance (ESG) fund that focused on the advancement of the UN Sustainable Development agenda. Stephane Andre, principal and portfolio manager for Alphinity, said the impact of market changes had helped their agenda. “A very clear one [market change] would be the move away from thermal coal, so that means you have less demand for it,” Andre said. “There are a quite a few companies here that are supporting sustainable development goals.”
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News
0.5% levy cap urged for any compensation scheme of last resort BY MIKE TAYLOR
THE Federal Government’s proposed compensation scheme of last resort (CSLR) should be funded by all industry participants and should be based on a levy capped at 0.5% of revenue, according to the Institute of Managed Account Professionals (IMAP). In a submission filed in response to a Treasury discussion paper on the CSLR, the IMAP is recommending broad coverage for claimants extending across advice, investment product losses, personal lending losses and superannuation, but not including bank liabilities. It said compensation should be available for retail and wholesale investors in Australia where they had less than $10 million invested, but that the compensation should be aligned to the limit applying to the bank despite guarantee scheme – $250,000. “IMAP recommends a levy which is based on funds under advice, administration, management or lent and the levy must be capped for each organisation to avoid severe contingent liability issues and IMAP recommends this be 0.5% of revenue,” the submission said. In doing so it recommended a tiered compensation scheme structured around a pool to meet claims in any year of $100 million, catastrophe insurance to cover claims in any
year or from a single event between $100 million and $1 billion and Government funding for any claims in a single year in excess of $1 billion “on the grounds that this is symptomatic of regulatory failure”. The IMAP submission also warns that the creation of a pool of funds to be used to compensate people for adverse financial outcomes will create both risks and complex, particularly when the pool can be replenished by incremental or subsequent levies on those
who remain in business but were not involved in causing the compensated losses. Among the factors raised by IMAP was the possibility that precisely those organisations most likely to cause a claim on the CSLR were likely to promote the existence of the scheme as a way of promoting their services. It also suggested that the existence of the CSLR might reduce the level of caution which an investor ought to exhibit in their decision-making.
Court finds former adviser unfit for trial BY CHRIS DASTOOR
FORMER financial adviser Daniel McSweeny has been found unfit to stand trial for 20 charges of dishonest use of his position as a director of two companies with the intention of directly gaining an advantage for himself and others, and one charge of falsification of books. In determining that Sweeny was unfit to stand trial and unlikely to become fit in the next 12 months, Judge Flannery relied upon uncontested medical evidence tendered by each party. Sweeny was originally charged on 27 November, 2018, which was referred to the District Court in 2019 after a question over McSweeny’s fitness to stand trial was raised by his legal representatives. He was the sole director of Constantia Capital and Prettoria Capital, which are now both in liquidation, which held a bank account where his clients’ funds were transferred. The Australian Securities and Investments Commission (ASIC) alleged between 28 March, 2011, and 24 December, 2012, he dishonestly transferred or directed others to transfer funds from these accounts for the benefit of himself or others. Judge Flannery found a prima facie case had been established in relation to each of the offenses for which McSweeny had been charged. McSweeny was released with conditions that he remained in the care of his treating doctors and follow their directions, with the order to continue for a period of three years from 11 February, 2020.
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Zenith takes Chant West RESEARCH and ratings house, Zenith has acquired superannuation-focused ratings house, Chant West. Zenith said it had entered into an agreement to purchase the Chant West superannuation and consultancy business from Chant West Holdings Limited with the transaction to take place by way of an asset sale for a $12 million consideration with the transaction to be completed in April. Commenting on the move, Zenith chief executive, David Wright said it represented a logical fit for Zenith’s growth plans to expand the client base. The combined business will employ more than 70 staff and have an office location in both Sydney and Melbourne.
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InFocus
HOW AN END TO GRANDFATHERING BRINGS AN END TO ADVISER SUBSIDIES Mike Taylor writes that the transition of Count Financial advice practices to a user-pays model has starkly revealed the degree to which the end to grandfathering has also ended so-called adviser subsidies. THE degree to which subsidies have been removed from the financial advice industry and the consequent impact on the relationship between advisers and their dealer groups has been starkly revealed in the half-year results released by publicly-listed, CountPlus. And the reason it has been revealed is that the company has had to explain to shareholders what flowed from last year’s acquisition of Count Financial from the Commonwealth Bank in circumstances where Count Financial advisers were working in what can be described as a heavilysubsidised environment. The bottom line for CountPlus was its acquisition of Count Financial only made commercial sense if the subsidies were removed. As pointed out by CountPlus chief executive, Matthew Rowe, Count Financial historically charged relatively low fees to members for the provision of services, subsidised software and professional indemnity expenses “and received large grandfathered commissions and product platform rebates which are ultimately paid by clients of Count Financial advisers”. In a letter to shareholders, Rowe explained that, in total, approximately 60% of Count Financial’s revenue related to
RESERVE BANK OF AUSTRALIA’S KEY ECONOMIC INDICATORS
grandfathered revenue arrangement and he said those arrangements would likely cease from January, next year. “Colonial First State announced that it was ending grandfathered revenue arrangements early, which means approximately $1.5 million of grandfathered revenue payable to Count Financial will be redirected to clients in July, 2020 and we must prepare for others bringing forward their plans,” the letter said. “To mitigate the impact of the changes to these grandfathered arrangements we are welladvanced in our plans to have our new pricing model embedded by 1 July, 2020.” Rationalising the need to impose a more pragmatic pricing model on Count Financial advisers, Rowe said
that, in recent years, the company had not been profitable. “Count Financial has subsidised member firm software costs, professional indemnity insurance and the total cost to serve based on grandfathered revenue received from product manufacturers. “Some of these subsidies were removed on 1 December, 2019 as the first step toward a user pays model. The impact of working with firms to adjust to this first stage of the new pricing model was unrecovered expenses from 1 October to 1 December, 2019 of $859,000 which were expected as a transition cost,” the letter said. Rowe noted that a market shift had occurred as around 58% of advisers were now authorised by privately-owned licensees with 50%
growth in the number of licensees having occurred in the last five years. “There appear to be some players in this space competing on a low cost/compliance model. Whilst we do not believe these business models are sustainable or provide adequate client protection, the economics in the advice space are stressed and these players look – on the surface – to be attractive to some advisers.” Rowe said there was a significant change process underway as Count Financial began to provide tools to its advisers to identify where revenue would be redirect to their clients that was previously subsidising the costs to serve their firm. “Count Financial has been late to the market in addressing the user pays trend in advice businesses. Key to bringing our advisers on this change journey will be open communication and collaboration with our advisers, various calculators and tools to assist them in building a ‘new world’ value proposition that is sustainable for clients, firms and Count Financial. “Significant challenges come into play in the 2021 financial year as we move away from grandfathered revenue, reposition our business model and face the risk of falling adviser numbers due to regulatory change,” the letter said.
1.7%
1.8%
0.75%
economic growth
inflation
cash rate
Source: Reserve Bank of Australia
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HAS APRA’S TOUGH MOVE ON AGREED VALUE DII CHANGED THE GAME FOR GOOD?
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Life insurance
Mike Taylor writes that few, if any, of the major players are arguing that the Australian Prudential Regulation Authority got it wrong with its major intervention with respect to agreed value disability insurance, but can the insurers now get it right? FOR ALMOST A decade the Australian Prudential Regulation Authority (APRA) was signaling to Australia’s major life/risk insurers that disability insurance income (DII) insurance products had become a problem and that they would need to act. The insurers, variously and severally, acknowledged those problems but apart from seeking to raise premiums and to change the wording of policy documents, they did not act to face up to the problem. Thus, for six years from 2014 to the end of 2019, DII remained alarmingly unprofitable. The problems had nothing to do with the practices or risk advisers or even market demand. It had a little to do with changing social norms and tighter economic circumstances but, bluntly, it mostly had everything to do with the strategies of the major life companies themselves and their preparedness to use DII to gain market share. When APRA finally and decisively moved on the issue in December, last year, APRA commissioner and former insurance company executive, Geoff Summerhayes, summed it up succinctly stating: “In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work. In the barely three months which have passed since Summerhayes laid down the law on behalf of APRA, signalling an end to the sale of fixed value policies, few
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of the participants in the life insurance industry have seen fit to question the regulator’s rationale. From some of the most experienced dealer group executives in the life/risk space, to life insurance consumer advocate, Col Fullagar and ClearView chief executive, Simon Swanson, all agree that the situation around DII had become unsustainable and that APRA was right to act. As Fullagar makes clear in a column elsewhere in this edition of Money Management, it was better that the regulator acted to ensure continued access to disability insurance than for it to be lost to advisers and consumers entirely. “DII has protected countless Australians and their families since its genesis more than 50 years ago,” he said. “It would be an unimaginable tragedy if access to it was lost.” One of the principals of riskfocused dealer group, Synchron, Don Trapnell acknowledges that what APRA’s move on agreed value DII has done is disrupt the market and created some headaches for advisers, but he argues it was made necessary by the past actions of the insurers. “It was about time it happened,” he said. “Agreed value disability insurance was no longer a supportable product and unless APRA stopped the arrangements we would have had a problem.” Trapnell also suggests that, perhaps, APRA should not have stopped at DII and that it might also have looked at trauma insurance. “We also need to look at trauma insurance. It is underpriced and unless insurance
companies do something, it will become a problem as well,” he said. “The problem with agreed value disability insurance is that you can only run something as a loss-leader for so long.” ClearView was one of the first of the insurers to announce that, in compliance with APRA’s December edict, it would be ceasing offering agreed value DII on 1 April, this year. However, as Trapnell made clear, the relative absence of legacy business within ClearView made the company’s action on the issue far less difficult than was the case for other insurers with major legacy issues such as AMP and TAL. ClearView’s Swanson has little hesitation in declaring that the company was and is supportive of the APRA move, agreeing that the situation around DII had become unsustainable. This is hardly surprising on the part of the ClearView boss in circumstances where the company in January, 2019, issued a white paper examining the sector and highlighting its problems, noting that “retail income protection profit margins have been on a steady decline for roughly a decade. The white paper included a chart which showed the annual industry profit margins (pre-tax) for Retail Income Protection (also known as Disability Income) over 12-month rolling periods; showing substantial losses in the last five years. In doing so, the ClearView white paper also cited, point by point, the reasons for the problems. “Examples of design features
Continued on page 16
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Life insurance
Continued from page 15 that have contributed to rising claims costs include: • The 10 hour or 20% income rule, where policyholders can work up to 10 hours per week or generate 20% of their usual income with no reduction in benefit payable. This is even more prevalent in the case of part-time workers where reduced thresholds apply; • The one duty rule which says that the life insured is considered to be disabled where they are unable to perform at least one major income producing duty of their occupation. Alternatives include expanding the stipulation to where one or more duties of a person’s regular occupation can’t be performed and they are under the care of a medical practitioner; • Generous built-in benefits such as the ability for policyholders to work for a certain timeframe during the waiting period; day one accident options; and more flexible claims options. Day one individuals to receive income protection payments immediately, rather than after a defined waiting period, if the life insured suffers disability due to an injury; • The occupational drift phenomenon, whereby policyholders change their mode of employment after policy inception. For example, shifting from desk-based to manual work. The rise of the gig economy could be implicated here; and • There has been a move towards a three-tier approach to disability definitions which has now been largely
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endorsed by providers. The bottom line according to Swanson in 2020 is that both premiums and terms will have to change, and that is what will be happening at ClearView and doubtless with respect to the other major insurers. Precisely how insurers intend to move has been made clear by MLC Life in its messaging to advisers being that there are timeframes within which they can operate with respect to agree value policies, even extending to the end of the financial year.
MLC told advisers that the last day for Agreed Value Income Protection digital quotes and applications would be 19 March, 2020, with the last day for paper applications to be submitted and received being 30 April, 2020, where the application was signed and dated on or before 31 March, 2020. “For transition customers who submit their application to us before the above submission dates, APRA will allow us to finalise the assessment and issue the Agree Value insurance up until 30 June, 2020.”
Continued on page 18
Chart 1: Australian retail life insurance - rolling 12-month income protection profit before tax
Source: APRA
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Life insurance
Continued from page 16 What is clear is that APRA will be closely monitoring the process, and this raises questions about just how lenient the regulator will be with respect to any rush by advisers to push through agreed value policies before the regulator’s deadline. Synchron’s Trapnell questions whether pushing to close agreed value business ahead of the deadline will ultimately prove to be wise. APRA’s determination on the issue was underlined by Summerhayes in December when he acknowledged the importance of DII in terms of providing replacement income to policyholders when they were unable to work due to illness or injury. “In a drive for market share, life companies have been keeping premiums at unsustainably low levels, and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work. “Insurers know what the problems are, but the fear of firstmover disadvantage has proven to be an insurmountable barrier to them making the necessary changes. By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with DII and to address unsustainable product design features – or face additional financial penalties.” APRA’s statement said that, to underline the urgency of the situation, it had decided to impose an upfront capital requirement on all individual DII providers, effective from 31 March, 2020. “The capital requirement will
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remain in place until individual insurers can demonstrate they have taken adequate and timely steps to address APRA’s sustainability concerns. In instances where individual insurers continue to fail to meet APRA’s expectations, APRA may also issue directions or make changes to licence conditions. “APRA also expects life companies to better manage riskier product features, including by: • Ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies; • Avoiding offering DII policies with fixed terms and conditions of more than five years; and • Ensuring effective controls are in place to manage the risks
associated with longer benefit periods. In other words, life/risk insurers are on notice and have little room to manoeuvre. What drove the APRA decision was the data, exemplified by the regulator’s most recent report. It stated that, for the 12 months to September 2019, risk products reported a combine after-tax loss of $417 million, a significant reduction from the $654 million profit for the previous 12 months. Individual Lump Sum remained largely the same pre-tax while other risk products deteriorated, particularly Individual Disability Income primarily driven by loss recognition as adverse claims experience persists.
Table 1: Risk product net profit after tax for the life insurance industry in the year ended 30 September, 2019
Source: APRA
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February 27, 2020 Money Management | 19
Alternatives
THE BIG ALTERNATIVE QUESTIONS Oksana Patron finds out how advisers can incorporate alternative investment strategies into their clients’ portfolio, what they need to understand about alternative investing and what are common investor misconceptions. AS INVESTORS CONTINUE to increase their asset allocation to private markets and other alternatives at the expense of traditional assets, they need a better understanding of what alternative investing is really about and what the key characteristics of this asset class are, fund managers say. Over the last two decades global asset allocations to private markets jumped from 6% to 23% which marked the beginning of investors’ departure from traditional assets, like equities and
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bonds, according to research by the Thinking Ahead Institute which looked at the global institutional pension fund assets across the 22 largest major markets. At the same time, analysis of the seven largest markets for pension assets which included Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US, proved equity allocations across these markets dropped from 61% to 45% over the past 20 years. According to Regal Funds Management, which runs three out of five top-performing funds
in the ACS Alternative sector, including the Regal Australian Small Companies and the Regal Australian Long Short Equity which returned 33.07% and 18.13% for the three-year period ended in January, respectively, according to FE Analytics, there is a broad range of products and strategies operating in the alternative space and therefore investors have to understand what their selected alternative investment strategy represents. “The real benefit of alternatives, the value of having
alternatives in your portfolio, is principally to generate absolute returns, typically uncorrelated to the remainder of the portfolio, that is providing diversification benefits and improving the risk return outcome for investors,” Regal’s chief executive, Brendan O’Connor, said. However, alternative strategies tend to generate such returns through manager’s skill rather than trying to ride the rising market, he explained. Continued on page 20
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Continued from page 19 According to Steve Shepherd, managing director and head of APAC at Capital Fund Management (CFM), these strategies would also benefit any investors looking to diversify their portfolio as they can help smooth out the path for returns. “Smoothing out means that sometimes you mitigate some of the downside risks. It’s not because alternatives never go down because like every other investment strategy, alternatives have good years and bad years. They just go up and down at different times from traditional assets portfolio,” he said.
ADDING ALTERNATIVES TO A PORTFOLIO When asked about how advisers could make the best use of alternative investment strategies and incorporate them into their clients’ portfolio, Andrew Lockhart, managing partner at Metrics, admitted that it was a difficult question as there was no ‘one size fits all’ solution. “It’s more about understanding what the client wants, how to access that market and what differentiates private markets to other markets,” he said. “Investors need to understand what the manager is doing, what risk is that manager taking, how is the transaction being structured and what is the appropriate vehicle to control these activities.” Sarah Shaw, global portfolio manager and chief investment officer at 4D Infrastructure, said advisers also need to consider carefully their clients’ objectives, risk appetite and defensiveness before allocating a portion of their
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portfolio to the alternative asset class such as infrastructure. “I think infrastructure has a plus in every portfolio and if I look at my own portfolio it’s quite a substantial spot. But I would say that at least 5-10% in infrastructure is a really good place to start - it gives you equity exposure, but with a lower correlation to general equities, it gives you yield , it gives you global exposure and it’s directly correlated to the domestic demand,” Shaw said.
MISCONCEPTIONS So, what are the most common misconceptions around alternative investments? According to O’Connor, one of the most problematic issues for investors when it comes to alternative investing was understanding of dispersion, which means the difference between the best-performing alternative investment manager and the worst-performing manager, which was far greater in alternatives than in other asset classes. “If you are looking for long only equity manager or long only fixed income manager the difference between the top of the class and the bottom of the class is relatively small as a generalisation,” O’Connor said.
“It’s more about understanding what the client wants, how do I access that market and what differentiates private markets to other markets,” - Andrew Lockhart, Metrics “Within alternatives, the difference between the best performing and the worst is quite large. So, the first thing that investors who are looking to allocate to alternatives need to do is actually to do their homework on the manager.” This means investors need to know whether their selected manager is able to demonstrate a track record of generating returns independent of market movements, how long a given company has been around and the degree to which it was recognised by peers or industry for the returns they have generated, he said. According to Shaw, another big misconception when it comes to infrastructure as a part of the alternative asset class was that many still perceive it as a ‘just a defensive asset class’. “[Infrastructure] has a beautiful combination of defensive
characteristics with huge growth potential and then you’ve got this macro diversity within subsectors that it’s not just a defensive asset class,” she said. “There’s a global need for infrastructure. Then there are things like population growth and the West is getting old and the East is getting younger, we’ve got an emergence of the middle class in the developing economies, we’ve got sustainable investments - these are all thematics we think about– they are not short term but they are definitely thematics that investors can gain traction to via infrastructure investments.” What is more, investors often perceived alternative strategies as being very complex and wrongly assumed they could time them properly. “I think it is probably one of Continued on page 22
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Alternatives
Continued from page 22 the biggest impediments beyond the fee question to advisers and other investors who may be concerned about alternatives,” Shepherd noted. “So understanding what alternative truly means and typically it means that they diversify your portfolio and that they go up and down in different time – than traditional markets. “The second one is really noted as an assumption that we can time the markets, so time the alternative strategies. Although people try to do it a lot, very few people have shown any level of real success in timing them.”
WHERE IS THE MONEY GOING? “I think that there is a lot of money going into private credit, and a lot of money going into private equity,” O’Connor said. “I’m not sure if all this money is chasing returns in those sectors while necessarily understanding the risks that they are taking. Some of the risks can be in private credit – the huge growth in corporate credit that has been issued post the last financial crisis – there are some great charts that show the great increase in triple B debt post the financial crisis issued by corporates. That could a warning sign for some,” O’Connor said that, at the same time, a lot of money has been flowing into strategies such as alternative investment strategies which offer exposure to a broader range of beta and that, over the last five years, there has been a lot of money going into infrastructure, private debt and private equity.
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Another category that has generated good returns for investors but hasn’t seen the same flows is what they call liquid alternatives. “A lot of it is going into private asset markets, so alternatives that are private markets, and one of the largest sources of capital that is being deployed is in in private credits markets – so direct lending strategies and private credit – that’s what we do,” Lockhart said. According to Shepherd, the attractiveness of various subsectors of alternatives looked differently across geographies. “I think it depends a little bit on where you are in the world, certainly here in Australia there’s a different dynamic than we are seeing in countries like Canada or in the US or Europe. “One is the broad category of alternative strategy and then I think this whole idea of alternative beta and or sometimes called the alternative risk premia - it seems to get a bit of a traction here.”
WHY IS THE ALTERNATIVE SECTOR GROWING NOW? O’Connor said there might be a few reasons behind why investors are looking to diversify their portfolios now whereas they might
have been reluctant in the past. “One is the search for investment returns, not just yield but capital growth as well, I think the performance of equity markets – over the last 10 years would have been more of a bull market in many respects, people perhaps were of the view that it is going to be hard to generate those sort of the same returns of the next 10 years,” he explained. “Point two is that interest rates have been coming on down dramatically and we think that the interest rates are going to stay lower for longer, for quite a while. “So with equity markets looking expensive, with fixed income returns coming down and likely to stay down for a while, investors are increasing the exploring other investment strategies, alternative investment strategies to generate growth and even yield in their portfolios.” According to Shepherd, those investors who have been invested in traditional assets for a long time have “done very very well” but this may be coming to an end. “It was probably one of the longest, if not the longest, bull markets in stocks historically. However, I think everybody has a sense that at some point the party ends.”
19/02/2020 1:35:27 PM
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18/02/2020 2:44:17 PM
24 | Money Management February 27, 2020
Regulation
LET PRUDENCE PREVAIL Life insurers are under the spotlight of APRA over their handling and the sustainability of disability income insurance claims, writes Integrity Resolution’s Col Fullagar. AS PER ITS website, the Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia. As per the online dictionary, “prudential” means “involving or showing care and forethought, especially in business”. APRA has for some time been concerned about the sustainability of individual disability income insurance with sustainability effectively meaning
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will insurers and reinsurers continue to make the product available if they are not receiving a reasonable profit from it? In May 2019, APRA addressed a letter to life insurers and friendly societies, announcing its findings from Phase 2 of the “thematic review of individual disability income insurance (“DII”)”. Phase 2 was made up of “onsite reviews with the top eight primary writers of individual DII, engagement with other stakeholders, including rating houses, industry/professional bodies and ASIC…” Phase 1 consulted with reinsurers.
The APRA letter may not have received all the attention it deserved due, in part, to financial advisers, representing current and intending insureds, not being on the immediate distribution list. The letter set out APRA’s expectations of insurers and noted that “addressing these expectations will be critical to enhancing the sustainability of the market for individual DII”. "The life insurance industry's failure to design and price sustainable individual DII products has been an area of heightened focus for APRA. APRA's objective is to identify and drive changes
required to improve the performance of individual DII and enhance the product's sustainability to ensure life companies remain willing to offer this product to consumers." It is of course, hugely disappointing to learn that life insurers have “failed” yet again and so soon after the Royal Commission exposures; however, not only have they failed but they have comprehensively done so in what is often seen as the jewel in the risk insurance protection crown, DII. DII has, in kind and reality, protected countless Australians
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February 27, 2020 Money Management | 25
Regulation
and their families since its genesis more than 50 years ago. It would be an unimaginable tragedy if access to it was lost. Good on the independent regulator for picking up on and exposing the failure and seeking to get the insurers back on track. “APRA identified several factors that are impeding life companies' ability to improve the performance and sustainability of individual DII. To address these factors, APRA has listed four themes (thus 'thematic review') . where greater attention and action are needed by life companies.” The identified themes were: (i) Strategy and risk governance Essentially, the insurance company board had to own and drive a long-term strategy to address issues pertaining to individual DII sustainability and management needed to formulate and execute the strategy. What is scary is that this needed APRA identification and communication. (ii) Data “APRA observed that the quality, quantity and timeliness of data used in the management of individual DII are poor... - Necessary data are unavailable; - Data used is inconsistent or inappropriate; - Data analysis is conducted within business function 'silos' with no feedback to other relevant areas in the business.” “APRA is concerned that FSC ADI 2007-2011 table (the first new DII experience table for more than 20 years) is so out of date that it is unlikely to be appropriate for life companies to rely on to set their base assumptions.” The scare-ometer started by
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(i) above, continues to rise when it is realised that premium pricing is apparently being based on out of date data. The old saying “rubbish in – rubbish out” springs to mind. (iii) Resourcing “The complex nature of individual DII products requires support from adequately skilled and experienced staff.” This is a bit of a “duh”, yet APRA “...observed that some (insurers) have not adjusted resourcing to keep pace with the increased level of workload and complexity. This has resulted in inadequate resourcing and staff expertise in key functions such as risk, data management and analytics, claims handling and actuarial”. “The impact of inadequate resources was demonstrated in data from some (insurers) which showed a strong positive correlation between high caseloads per claims assessor and poor termination experience” i.e. where insufficient and/or inexperienced staff existed, claims experience was poor. The scare-ometer is now shooting towards the stratosphere… not only are boards and management needing to be advised of the fundamentals of their role, not only is it identified that pricing data used is out of date but resourcing and staff experience levels are not up to scratch either. Clearly, the above facts and findings are of concern and, whilst it should not have been necessary, identification and correction are right up the APRA’s alley; this is its role and its area of qualification and expertise. As an aside, is there any chance of APRA naming insurers
in the above categories to assist insured’s and advisers to make an informed decision about where to place cover or, in the alternative, should the offending insurers be banned from offering DII until they are able to manage it properly? Getting back to the APRA letter; however, the fourth theme is detailed… (iv) Pricing and product design “APRA is concerned that product design and pricing decisions MAY be contrary to the long-term interests of policyholders... Pricing and product development and design are crucial components of the value chain for individual DII... APRA considers that poorly formed pricing and product development and design decisions MAY have exacerbated the risks life companies are exposed to with their individual DII portfolios.” (writer’s emphasis) Unfortunately, APRA now moves from previously-identified facts and findings into somewhat rumour and innuendo evidenced by the use of the word “may”. Also, in the absence of direct policyholder engagement, is there an inherent concern that the interests, short and long-term, of policyholders are precariously being based on assumptions rather than known facts? “...APRA found most (insurers) have acknowledged the need to develop simpler individual DII offerings that are more sustainably designed and priced, but are reluctant to develop such products due to the first mover disadvantage.” “First mover disadvantage is another way of saying 'not possessing the ability to explain changes in a compelling way' thus
removing any suggestion that management, by retaining its head in the sand, similarly retains its sales bonus. "APRA believes that product design needs to be more robustly aligned to the commonly accepted principles of insurability with sustainable product features that are priced appropriately based on underlying assumptions that reflect a realistic view of the future.” “Principles of insurability” are not detailed but one of its key principles is to place the insured in the same or similar position after an unintended and unexpected insured event as existed prior to the event? Whilst dogmatism might suggest the inclusion of “immediately” when considering the “prior position”, this is where insuring people differs from insuring things because the risk insurance needs of people, especially within the realm of DII, requires understanding and flexibility bearing in mind advice, to use APRA’s own words, should be “appropriately based on underlying assumptions that reflect a realistic view of the future”. APRA then expressed a need for insurers to place “more emphasis on providing policyholders with greater certainty about the expected future premiums”. Whilst some degree of certainty about future premiums would no doubt be welcomed, arguably more important to the policyholder would be greater certainty and confidence of insurer conduct and claim experience. It is worth recalling Continued on page 26
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26 | Money Management February 27, 2020
Regulation
Continued from page 25 that the focus of the recent Royal Commission was on the failure of insurers in the last two areas rather than the first? In their defense, insurers offered up “… individual DII products need to be fully featured to be rated highly by the rating houses and distributed by financial advisers' but APRA was not having a bar of that, hitting back with “...compliance with financial advisers’ best interest obligations requires advisers to balance the type, level and structure of coverage with affordability and sustainability considerations for their individual clients. Unfortunately, whilst an adviser might analyse and advise on affordability, they are currently unable to do so in regard to sustainability. Showing prudential forethought APRA expects insurers to “proactively engage with rating houses throughout their product development stage to discuss and agree on how the sustainability characteristics of the product could be better reflected in the product pricing.” In case it is of assistance, the article “Insuring within your clients’ means” (Money Management, 3 February, 2011) considered the matter of premium sustainability and measures more than nine years ago. As the APRA letter draws to a close it leaves little doubt about what the future holds: “Specific actions within set timeframes will be communicated to each (insurer) separately. “APRA will assess the adequacy of each life company's response, and monitor the progress in executing the planner
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actions. If APRA considers the action plan proposed by the life company to be inappropriate, or the life company's progress in implementing that action plan to be inadequate, APRA will increase its supervisory intensity of that life company and may impose an entity-specific capital charge. “Boards of all life companies need to also consider whether APRA's expectations are applicable to other product groups that may be experiencing performance challenges (read as 'lousy profits'), such as total and permanent disability insurance.” The May, 2019, letter was followed in December, 2019, by a media release which has received widespread attention. Sadly, in the intervening period, insurers reported further losses to the tune of $1 billion dollars, providing APRA with cause to “escalate its response” and go after the insurers with all the subtlety of Miley Cyrus atop a wrecking ball. “Insurers know what the problems are, but the fear of firstmover disadvantage has proven to be an insurmountable barrier to them making the necessary changes. By introducing this package of measures, APRA is forcing the industry to better
manage the risks associated with DII and to address unsustainable product features or face additional financial penalties. “To underline the urgency of the situation, APRA has decided to impose an upfront capital requirement on all individual DII providers, effective from 31 March, 2020. The capital requirement will remain in place until individual insurers can demonstrate they have taken adequate and timely steps to address APRA's sustainability concerns. “APRA is introducing measures to drive changes in product features that violate the principle of indemnity or exhibit heightened risk due to the uncertainty arising from long term horizons. These product features contribute to adverse financial impact on life companies, as well as continual premium increases, presenting consumers with affordability challenges.” Between May and December 2019, uncertainty has given way to an irrevocable confidence that the cause of DII sustainability problems are known and will be named such that they can be put to the sword. Further, APRA flags that, what follows “should not be regarded as a definitive list of the
areas where changes may be required.” The APRA hit list is impressive: (i) Agreed value “With effect from 31 March, 2020, APRA expects that life companies discontinue writing IDII contracts where insurance benefits are not based on income at time of claim... “With effect from 1 July, 2021, APRA expects that income at risk for all new IDII contracts be based on annual earnings at time of claim, not older than 12 months.” The plight of newly-qualified graduates, people suffering from chronic, debilitating medical conditions, those recently rendered redundant and those recently returned to work following a claim but suffering a new disability, appear to be collateral damage. (ii) Income replacement ratios “Current IDII products have features and ancillary benefits that can cause the insurance benefit to exceed earnings at claim. Evidence shows that returning to work is usually in the best interests of claimants (Spoiler alert but not always possible despite best efforts), and the incentive to return to work is
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Regulation
undermined by excessive income replacement ratios (Further alert depending on severity of medical condition). On the hit list are indexation increases and features that allow the insured to earn income from continued work, with no offset to the insurance benefit being paid. “With effect from 1 July 2021, new DII contracts will be designed so that: - Insurance benefits do not exceed 100% of earnings at time of claim for the first six months of the claim, taking into account of all benefits paid under the IDII product as well as all other sources of earned income; and - After the initial six months, insurance benefits are limited to 75% of earnings at time of claim. Suddenly, the definition of pre-disability earnings takes on even greater importance. (iii) Policy contract terms In regard to IDII policies being guaranteed renewable, APRA notes “The underlying contract terms and conditions are set for an extended period of time, typically until retirement age. Guaranteed renewable for such extended periods causes significant difficulty in designing products that will remain sustainable and appropriate for consumers APRA views it as not appropriate for life companies to offer IDII contracts with fixed terms and conditions exceeding five years.” With effect from 1 July, 2021, APRA expects insurers will only offer new IDII contracts where: • The initial contract is for a term no longer than five years; and • The policy owner has the right
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to renew for further periods not exceeding five years without a medical review, but with a financial and occupation review, on the terms and conditions then applicable to new contracts. Hopefully, new contracts will not include pre-existing conditions exclusons. (iv) Benefit period “If the risks associated with long benefit periods are not managed appropriately, they can detract from claimants' motivation to return to work and have an adverse impact on claim duration. “With effect from 1 July, 2021, APRA expects that life companies have effective controls in place to manage the risks associated with long benefit periods e.g. having a stricter disability definition for longer benefit periods…” In regard to each of the above, APRA feedback questions are asked which immediately gives the impression that, whilst the designations and timeframes are being made, a degree of prudential care may be lacking or to put it another way, has APRA moved outside its area of expertise? It is also relevant that, much of what is being pilloried was introduced to the DII market around 40 years ago. Surely, insurers and reinsurers have not gone without their profits for all that time which begs the questions, could the current financial woes be due to something else, for example, poor management, use of out of date data or even deficiencies in staffing numbers and expertise? Few would deny that change is
required in the DII arena but maybe a different approach with a better outcome is possible – refer “Gun, Trigger, Bullet” (Money Management, 12 February, 2018). Initiatives might include: • An elevation of the training regime for claims assessors to the equivalent of a degree or TAFE qualification with salaries to increase accordingly – hey, if it’s good enough for financial advisers maybe it is for claims assessors too; • Encouraging adviser-informed participation in the claims management process with regular claims reports being provided in preference to the current mind-numbing periodic progress claim forms; and most importantly • Insurers appreciating that there are ways in which to compelling promote a DII policy on factors other than “generosity”, for example, the value of a balance between insurer and insured protection. If management of insurance companies do not understand this, then get someone on board who does. The efforts of APRA in identifying, highlighting and seeking to correct sustainability issues are acknowledged and applauded with the codicil that APRA does not send the DII product back to the 1970’s, something that would, without any doubt, have a severe and adverse impact on the lives of countless policyholders and their families, and further damage the reputation of the Australian life insurance industry.
COL FULLAGAR
Col Fullagar is principal of Integrity Resolutions.
17/02/2020 2:51:59 PM
28 | Money Management February 27, 2020
Investment
HOW DO THE ULTRA-RICH INVEST? Adrian Frinsdorf explains how wealth advisers can tailor a portfolio for ultra high net worth investors and how their needs differ. AS DIRECTOR OF wealth advisory at William Buck, I’m often asked how the rich invest. Part of the service offering of our private office team is to meet the specific needs of the ultra high net worth (UHNW) and high net worth (HNW) investors. In financial services, UHNW is a term used to describe people with investments of $10 million plus, whereas HNW is reserved for those with investments outside the family home valued at or above $1 million to $10 million. These investors are usually in their 50s and come from successful business backgrounds or established families. But we are increasingly seeing clients in their 30’s and 40’s who have built exceptional wealth through smart business decisions. While many people tend to think UHNW clients take on more risk than regular clients, my experience is that UHNW clients are more conservative than HNW clients, but they do invest differently. Our observation is that wealthy clients take similar risks in their overall asset allocation than less wealthy clients, however, they have a much larger level of diversification and invest in products that are not widely available to less wealthy
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clients. This results in portfolios that have significantly less deviation due to investments that are not marked to market on a daily basis. These include private equity, direct property, and fixed interest. We also tend to see UHNW and HNW individuals are often disinterested in taking large, speculative risks but rather, in growing their nest egg for future generations. Increasingly, our private office clients are involving family members in decision making and allocating them funds to invest themselves with guidance. The younger generation is largely focused on environmental issues as a starting point for their investments, but parents are quickly joining them in relation to allocating to assets that are sustainable, including social impact bonds. We have based this observation on asset allocation of our non-private office clients (about $900 million across 500 clients that we refer to as wealth advisory clients) against our private office clients (about $650 million across 22 clients not including business or non-investment related property). Analysing the asset allocation of UHNW clients shows us that:
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February 27, 2020 Money Management | 29
Investment Strap
1. Property is the single-largest asset held by UHNW clients we see. This is via direct property or wholesale property trusts and represents 30% of all holdings. There is little residential property held and where it is, it tends to be in a development with friends of property-developer associates. Commercial building investment tends to be “rent and collect” and will often include business premises or former business premises held in the client’s superfund. 2. Bonds and/or bond funds is the second-largest asset held and represents almost 30% of holdings. 3. International shares and Australian shares combine to occupy about 15% of their portfolio. The weighting towards international is consistently increasing at the expense of Australian shares and the holdings tend to be all unhedged. There is a combination of wholesale managed funds in this area and direct investment through wellknown international brokers. 4. Alternative assets are held almost in equal weight to shares (about 15%) for UHNW clients. This includes predominately infrastructure, private equity and commodity exposure (only 1-2%). 5. Available cash tends to be around 5%, which is higher than wealth advisory clients who tend to hold more in term deposits. 6. Assets such as direct commercial property and full ownership or part stakes in
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family businesses are generally favoured by UHNW clients while cash is also popular. Almost no term deposits are held by UHNW clients, compared with wealth advisory or non-private office clients that hold about 15% as part of their portfolio. In addition, UHNW clients had little to no hybrid fixed interest allocation. The overall split of growth and defensive assets is about 60%/40%, depending on classification of alternative. We found this split to be very similar to our wealth advisory clients. The greatest difference occurred in the type of products invested across asset classes, which we have summarised below:
PROPERTY UHNW clients hold more property than their less wealthy counterparts and they tend to be holding it directly – either alone or through ‘club’ investments with friends, or wholesale property syndicates. They generally prefer commercial property over residential while our wealth advisory clients hold a larger number of property trusts.
SHARES The way Australian shares are held is also quite different, with private office clients using funds more than regular wealth advisory clients. There is also a much larger prevalence of index and exchange trade funds (ETFs), as in our experience, UHNW clients have less desire to be involved in the buy/sell decision making or manage their own share portfolio as well as less need to target an income return.
International shares are held in a similar manner through wholesale funds for both wealth advisory and private office clients. However, private office clients use boutique fund managers more often than wealth advisory clients.
FIXED INTEREST AND CASH INVESTMENTS There is a significant departure when it comes to fixed interest and cash investments. Private office clients are using over-the-counter (OTC) bonds in several portfolios with a large concentration towards floating rate investments and supplementing that with specialist fixed income managers. Allocation towards fixed income tends to be at the expense of cash holdings. Wealth advisory clients have a much higher allocation towards cash and term deposits and much of this is around strategic advice to fund lifestyle payments. There is a small allocation toward hybrid securities and then fixed interest is a blend of fixed income managers.
ALTERNATIVE INVESTMENTS Alternative investments is quite a considerable difference again, given there are more options for private office clients within infrastructure, commodities, direct water entitlements, small direct private equity options and specific hedge fund strategies. For wealth advisory clients this is still a growing area, and while gaining access to quality products has traditionally been a problem, this is improving, with some clients allocating to invest in wholesale funds. While these observations
reflect what we have seen from our own clients, Capgemini’s World Wealth Report 2019 explains that cash and cash equivalents are becoming more significant than equities and property as UHNW and HNW individuals become more riskadverse in preparation for a potential market downturn. And unfavourable market conditions have triggered an increase in global alternative investments allocations. This is complemented by the large volume of startups and early-stage, fast-growing companies, particularly in Asia-Pacific. It is difficult to determine whether private office or non-private office clients are getting better returns as there are so many factors to consider in these investments, including drawdown for pension payments, distribution, various inheritances and the like. Over the past year, wealth advisory client returns have been propelled by share markets and listed property trust returns but the cash and term deposits tend to reduce this return. Private office returns look to be more consistent and certainly have delivered a much lower level of volatility. The one clear deduction that I make is that wealthier clients do not want greater returns, but they most definitely want greater diversification with less risk. In my opinion, the right financial advisers can greatly assist in this space, given they have the requisite skills in asset allocation. Adrian Frinsdorf is director for wealth advisory at William Buck.
17/02/2020 5:01:54 PM
30 | Money Management February 27, 2020
Insurance
LIFE INSURANCE: THE DYNAMICS OF CHANGE Life insurers need to improve their models and invest in automation if they want to ‘futureproof’ their business, writes Chris Powell. GLOBALLY, THE LIFE insurance industry has long been ripe for change. Well before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the winds of change were already blowing. This started with the inception of the earliest insuretechs in 2010 and since then venture capitalists have been piling billions into insurance technology. Indeed in 2016, Lemonade, the US insurance company, fuelled by artificial intelligence and behavioural economics, raised one of the largest-ever seed rounds in US
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fundraising history. Modernisation of the life insurance industry has become a global movement, with the Royal Commission expediting this process in Australia.
CHANGE HAS BEEN SLOW By the time the Royal Commission rolled into town in 2017, the Australian life insurance industry was overdue for disruption, lagging behind our international life insurance peers. From the ashes of the Royal Commission’s findings we are now seeing the industry rebuild, seizing the opportunity to deploy new technology that would allow the industry to respond to Hayne’s
demands for simpler, customerfriendly products and processes. New providers, like ourselves, who were in the process of coming to market, were able to launch with a non-conflicted customer-centric proposition, rewriting the rule book and providing the antidote to a battered industry.
CHANGE IS INEVITABLE This change is far from complete. The Australian life insurance industry will continue to evolve and will be impacted by forces that are going to give rise to a more sustainable industry, more intelligent technology, redefined risk
profiles and high levels of responsiveness. The new age of life insurance will be customerfocused, adaptable and technology led. Importantly, this will need to be coupled with an increased focus on the care provided to the insurer’s policyholders, especially at claims time, with transactions being as simple and automated as possible. 1) Sustainable pricing is a sustainable trend As a key strategy to protect a client’s wealth on an ongoing basis, life insurance is an important purchase. It is, after all, a product ‘for life’. This means that it should be priced on a
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Insurance long-term and sustainable basis. The Year One price discounts that we currently see offered to make life insurance look cheap up-front ignore the enduring nature of life insurance. It is an ongoing contract that must be paid for year after year in order to continue cover. After the initial discount has exhausted comes the ‘sticker shock’ to the client when the real cost of the policy appears in years two, three or four. For a long time, advisers have found themselves wedged between a rock and a hard place – clients demanded the best upfront price, but it was the adviser who had to explain to disgruntled clients why their premium jumped after a few years. Although honeymoon discounts are hardly a new tactic, older clients often encounter a particularly nasty sting in the tail. Huge but transient first-year discounts encourage clients to switch providers every few years, but those clients can end up paying more over the life of a policy as they age and are re-costed for coverage. Health problems that arise a few years after a policy is issued may also make it harder for older clients in particular to find a new policy with the same pricing and benefits. Insurance companies must help advisers deliver what clients need, and short-term incentives are not in line with the need for life insurance to be ‘for life’. Regulation is also driving this long-term pricing that the general public and advisers alike deserve. The recent intervention by APRA into the Individual Disability Income Insurance market has sounded the death knell for cross-subsidisation and the disentangling of subsidies from income protection and other life insurance products, while ASIC seems intent on making advisers provide greater focus on long-term pricing in making product recommendations to clients. 2) Investment in automation and AI will pay off Disruption, driven by the uptake of AI integration, will continue unabated, enabling insurers to deliver a more responsive product through better technology.
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Insuretechs are helping insurance companies make improvements for consumers as well as creating opportunities for life insurers and advisers to offer a more personalised, digital product for their customers. Internet of Things (IoT) technology allows individuals to use data to inform pricing that accurately reflects the risk profile to the insurer. The policyholder who improves their health profile, for example, by clocking up steps on their pedometer walking to work, will benefit from lower premiums to reward their better lifestyle choices. Chatbots will continue to enhance the opportunities for consumers and insurers to engage. Technology is also emerging whereby claims will be submitted online, with medical evidence read and understood by AI engines and claims paid instantly with minimal human intervention. Insurer’s legacy systems are making it challenging for the older players to adopt the modern, flexible, adaptable systems that are now available through digital underwriting. The use of legacy systems and paperwork to underwrite means that the final quote an adviser gives a client often fails to match the final underwritten quote. The future promises immediate, unbiased digital underwriting that does not ever have a bad day. This will soon become commonplace across the market as established life insurers upgrade their technology. In the UK, consumers making life insurance applications can now answer one set of underwriting questions and receive binding quotes from a number of insurers and simply click on a ‘Buy Now’ button to complete their purchase through a data exchange. This has not only made insurance simpler to buy but has enabled insurers to grow their business and ultimately expand the market. Unsurprisingly, such online exchanges have existed for years in motor insurance but are now being used for life insurance. 3) Risk profiles will evolve Risk has historically been defined by an individual’s weight, age and smoker status but things are
about to get more personalised and premiums will soon be calculated using a raft of different data points. A 58-year-old 85kg non-smoking man can have a dramatically different life expectancy depending on factors such as the geographical area they live and their income. By using larger volumes of data available from new sources, life insurers will be able to predict life expectancy with a higher degree of accuracy, even on an individual basis. Risk factors such as lifestyle and socioeconomics will be considered and will allow for insurers to apply discounts or loadings and calculate a fairer premium. The dichotomy of chronological and biological age is no longer a futurist concept. The same data will also help insurers to incentivise people to change their lifestyle if their biological age predicts a shorter life than their chronological age. One example is facial assessment technology. This is already available and can accurately predict a person’s body mass index (BMI) and smoker status from a photograph taken by an app. 4) Dynamic policies will reflect the changing world we live in Much has been said about two major trends facing the life insurance industry – the ageing population and the rise of the tech-smart people who are largely yet to become engaged with the industry. Future policies will be constructed and sold with a different approach and the customer experience will be key to winning over the younger generation. It may be the case that insurers focus on one segment to differentiate. In the UK, a report just released by the All Party Parliamentary Group for Longevity found that as the UK population ages there will be very large increases in the number of cases of poor health over the next 15 years. In 2035 the report predicts that there will be twice as many cases of dementia, arthritis, Type 2 diabetes and cancers in people aged 65 and over as in 2015. It also predicts that in 2030, 70% of people aged over 55
will have at least one obesityrelated disease. Our ageing population is subject to changing threats and heightened risks which have an enormous impact on life insurance. New products will emerge to deal with these changing circumstances. It is not just the demographic groups that will drive change in the way that life insurance is structured. Environmental factors will also mean that products will need to be recalibrated to take their influences into consideration. It will be impossible for life insurers to ignore these trends. 5) Advice takes pole position Currently, commissions are paid on the sale of products and, as a result, the adviser’s relationship with the customer can be transactional. The future of financial advice lies in providing exceptional personalised advice of the highest quality that ensures customers have the best possible product, or combination of products, to suit their circumstances. This is being aided by the postRoyal Commission environment where the industry is eager to meet Hayne’s demands for cultural and technological transformation that puts the customer first, simplifies products and makes it easier for people to understand the benefits available to them.
THE LIFE INSURER OF THE FUTURE For life insurance to be ‘future proof’, it is important that the industry anticipates the forces driving change and invests in solutions to these challenges. Insurers that lead the industry will respond to these challenges with new technology that improves transactional efficiency; with customer-focused products; through an open dialogue with advisers and their clients; and, through having an informed view of changing industry, technology and customer dynamics will solidify their position in the future Australian life insurance market. Chris Powell is managing director and chief executive at Integrity Life.
19/02/2020 11:45:53 AM
32 | Money Management February 27, 2020
Toolbox
UNDERSTANDING BUSINESS INSURANCE
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Toolbox
Business owners or self-employed individuals in Australia present an opportunity for advisers to engage with customers who may have a greater net-worth and need for financial advice, writes David Glen. BUSINESS INSURANCE ADVICE has grown significantly as a new avenue for financial advisers. While there are more than 2.3 million actively-trading businesses in Australia, research indicates that less than 20% of Australian businesses are equipped with a succession plan. This underinsurance gap presents an ideal opportunity for financial advisers to fulfill their best interests duty and add value to their customers.
THE IMPORTANCE OF BUSINESS INSURANCE We all hope for an accumulation of wealth after a lifetime of hard work and diligent saving. For many business owners, their wealth is tied up in the business, and we need to protect this valuable asset. Few business owners think about the fate of their business in the event of their death or disability because they are often too busy running their businesses to think about broader strategic and risk issues. Our role as risk advisers is to challenge businesses to think about succession risk and embark on the succession planning journey.
SUCCESSION PLANNING Crucial questions which need answering include the following: • Who will pay for the business owners’ share of the business in the event of their death or disability? • Who do the business owners want to follow in their footsteps? A succession plan increases the chances of a business’ survival when the owner chooses to leave on a voluntary basis, or their involvement is sadly terminated by death or disability. The succession planning development process begins with a discussion between the adviser and the business owner about their
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future business plans. The discussion then focuses on the points of vulnerability of the business and the business owner.
WHAT ARE THESE POINTS OF VULNERABILITY? Points of vulnerability include the following: • Loss of revenue in the period following a business owners’ death or disability; • Additional cashflow pressures caused by creditors such as suppliers who perceive a credit risk following a business owners’ death or disability; • Foreclosure on a bank loan by a bank anxious to protect amounts advanced by it pursuant to an overdraft facility; and • Stress between the deceased business owners’ family and the surviving proprietors over the future direction of the business. In the absence of a succession plan, there may not be a shared vision for the future. Business owners and their advisers should conduct regular reviews of the business and the owners’ personal affairs to identify points of vulnerability and devise solutions that eliminate or reduce the risk associated with these points of vulnerability. There are a number of strategies and solutions which can be put in place to reduce or eliminate these risks.
ASSET PROTECTION Asset protection is also known as Business Loan Protection, Debt Guarantor Protection or simply Debt Protection. Asset protection ensures that the business borrowings (and/or owners’ guarantees) can be extinguished or reduced in the event of death or disability. Asset protection is important because the death or disability of a business owner may put a significant strain on the ability to
repay business borrowings. There is a risk that the lender will call in the loan if they are not comfortable that the business can sustain the debt, and for secured loans, this may result in the sale of business assets or the business owners’ personal assets. Ownership The entity that owes the debt generally owns the policy – the entity will then use the insurance proceeds to repay the debt. In limited circumstances, it may be preferable to have the life insured own the policy and gift the proceeds to the business entity. This strategy needs to be considered by the client’s taxation advisers as there may be issues with gifting and commercial debt forgiveness. Tax The premiums are generally not tax deductible being capital expenditure. In terms of the claims proceeds, life policies are tax exempt if the policy owner is the original owner of the policy, or received the rights or interest in the policy for no consideration. Total and permanent disability (TPD) and trauma policies are exempt if the recipient is the ill or injured party or a defined relative. Defined relatives of a person are defined as: a) the person's spouse (including de facto partner); or b) the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or adopted child of that person, or of that person's spouse; or c) the spouse of a person referred to in paragraph (b). The above exemption is not available to corporate entities. Where capital gains tax (CGT) is payable, consider grossing up (100/ [100-r]) where r = marginal tax rate expressed as a percentage – for
example, a company with a 30% tax liability and $1 million death cover would be grossed up to $1,428,571.
REVENUE PROTECTION Revenue protection is also known as key person cover or key person revenue cover. Revenue protection ensures that there is sufficient income for the business to meet its obligations in the event of the death or disability of a key income generating person. Key person cover is not black and white – the important question is who can be considered a key person for revenue protection. Generally, a key person possesses proven knowledge and/or experience in a specified field of expertise; performs important tasks or processes; and/or has valuable personal and/or business contacts. There are two main ways to calculate the relevant sum insured for revenue protection: the replacement cost method and the revenue protection method. Ownership Revenue protection policies would typically be owned by the entity that operates the business and employs the key person. Where businesses are operating multiple entities, it is important to determine the flow of income and expenditure to ensure the correct ownership of revenue policies. Where a discretionary or unit trust operates the business, the policy owner should be the trustee of the trust. Tax IT 155 states when cover is being obtained for revenue protection purposes, the associated premiums are tax deductible. In terms of the claims proceeds, the insurance proceeds will be assessable to the policy owner. Continued on page 34
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34 | Money Management February 27, 2020
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. 1. The three basic needs that typically apply in business risk mitigation outlined in the presentation are: a) Look left, look right, then look left again b) Fact find, SoA, business will c) Asset protection, revenue protection, ownership protection d) Life, TPD, trauma Continued from page 33
OWNERSHIP PROTECTION Ownership protection is also known as equity succession or buy/sell cover. Ownership protection ensures the smooth succession of ownership between shareholders in the event of the death or disability of a business owner to provide business continuity post a trigger event. It also ensures that sufficient funds are available to compensate the family/estate of the life insured for the transfer of the life insured’s share in the business to the surviving business owners. Ownership For buy/sell cover, the policy is generally owned by the individual/entity that owns the equity. Each business owner will own their own policy to value of their equity. The claims proceeds will be paid directly to the departing business owner as compensation for the disposal of their shares which will be transferred to the surviving business owner. The buy/sell agreement will generally provide the legal mechanism to ensure the transfer occurs. Tax In terms of how the premiums are funded, there are generally two ways they can do it: 1) The clients could treat the premiums paid in respect of the policies as a tax deductible employee benefit and subject the premiums paid to FBT; or 2) The premiums could be treated as the provision of a non-deductible shareholder benefit. The clients should seek taxation advice on which approach best suits their circumstances. The claim proceeds should be free of CGT in the case of a death claim, provided that the recipient is the original owner of the policy. The TPD claim proceeds should also be exempt under this structure. There is an exemption in the CGT legislation which exempts claim proceeds provided that they are received by the injured/ill person, a relative, or a trust of which the injured/ill person is a beneficiary.
ADDITIONAL RESOURCES The risk of death and disability confronts everyone, and business owners have special needs in this area. Through appropriate risk mitigation strategies, we can prevent the loss of wealth and destruction of lifestyle which often accompanies death and disability and help create more sustainable futures for our business-owning customers. David Glen is national technical manager at TAL.
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2. What ownership structure is typically used for asset protection? a) Owned by the entity that owns the debt b) Insurance trust owned c) Cross owned d) Self-owned 3. What definition best describes revenue protection? a) Ensuring that there is sufficient income for the business to meet its obligations in the event of death or disability of a key income generating person b) Ensuring the business has adequate general professional indemnity insurance c) Ensuring there is sufficient capital to repay any debt including proprietor loans d) Having the business bank account invested in cash or fixed interest 4. Generally speaking, the taxation position on insurance policies for revenue protection is: a) The premiums are not deductible, and the proceeds are not taxable b) The premiums are tax deductible, and the proceeds are taxable c) The premiums are tax deductible and subject to FBT, and the proceeds are taxable d) The premiums are not tax deductible, and the proceeds are taxable 5. What is the CGT exemption for life insurance policies held outside of superannuation? a) The benefit must be received by the ill/injured party or a defined relative b) If the business does not claim a tax deduction for the premium, then no CGT will be payable c) There is no exemption for life insurance policies owned for business risk mitigation purposes d) The owner must be the original owner or acquired the rights for no consideration
TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ understanding-business-insurance For more information about the CPD Quiz, please email education@moneymanagement.com.au
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February 27, 2020 Money Management | 35
Send your appointments to chris.dastoor@moneymanagement.com.au
Appointments
Move of the WEEK David Neal Chief executive IFM Investors
IFM Investors’ has appointed Future Fund chief executive David Neal as its new CEO, replacing Brett Himbury. The Australian global fund manager’s chair, Greg Combet, said Neal was equipped to steer the firm through its next chapter of global growth. “I am so pleased we have se-
Former Macquarie senior investment specialist, Teiki Benveniste, has been appointed as the head of newly-created alternative investment manager, Ares Australia Management (AAM), which was formed as a strategic joint venture between Ares Management Corporation and Fidante Partners. The new manager, who would aim to become one of Australia’s leading credit and alternative assets managers, would coordinate investment management of both retail and institutional investor capital from Australia and New Zealand for Ares’ credit, private equity and real estate strategies. In his new role, Benveniste would also serve as a liaison with Fidante Partners, which would provide product distribution, local fund reporting and back office administration, the firm said. California-headquartered, Ares Management Corporation, is a global alternative asset manager and has currently US$144 billion of assets
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cured the services of Neal – he is a superb leader and an investment professional with a highly successful record. He will continue the global evolution of IFM Investors consistent with our purpose – to deliver strong net returns to the millions of members of our super fund, pension fund and institutional investors,” Combet said.
under management, with 20 offices across the US, Europe and Australia. Reinsurance firm Pacific Life Re Australia has appointed Martyn Gilling as head of client solutions, responsible for the company’s market strategy and sales. He had over 30 years’ experience in the insurance industry in Australia, Canada, the UK, the Caribbean and Latin America. Before joining, he was working for Reinsurance Group of America (RGA) in Canada as vice president of business development. He had previously held roles at RGA Australia, MLC, CommInsure and Swiss Re, and was a fellow of the Institute of Actuaries of Australia. Iress has appointed Trudy Vonhoff and Michael Dwyer as non-executive directors to its board. Vonhoff had over 20 years of experience and is currently a director of Credit Corp Group
and Cuscal Limited. She has also held directorships at AMP Bank, Ruralco Holdings Limited, Tennis NSW, and the Westpac Staff Superannuation Fund. She has also held senior executive roles at Westpac and AMP across retail banking, finance, risk, technology and operations, and agribusiness. Dwyer had over 35 years of experience in super and investment and was chief executive of First State Super for 14 years. He is currently a director of TCorp, WSC Group, the Global Advisory Council of Tobacco Free Portfolios and the Sydney Financial Forum, and is a life member of the Association of Superannuation Funds of Australia and the Fund Executives Association. Health services industry superannuation fund HESTA has appointed Josh Parisotto to lead their advice and education service. He joined from VicSuper
where he was executive manager, distribution and takes on the leadership of their advice and education function from Matt Halpin. Industry stalwart Don Trapnell has stepped back from day-to-day involvement in the running of the risk-focused dealer group he established, Synchron. The company announced a ‘major management reorganisation’ stating that Trapnell would be stepping back to focus on his responsibilities as an executive director with former CommInsure senior executive, Ian Knight, moving up to head day-to-day operations as general manager, operations. In other elements of the reorganisation, Synchron head of compliance, Michael Jones, had been promoted to general manger, legal and compliance while Synchron practice development manager, Alison Massey, has been promoted to head of compliance – advice assurance.
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OUTSIDER OUT
ManagementFebruary April 2, 2015 36 | Money Management 27, 2020
A light-hearted look at the other side of making money
Slow and steady?
From the corner office to the corner jail cell
OUTSIDER had a good chuckle when he was sedately walking down George St in Sydney and saw a large advertisement covering the side of one of the city’s brand-new trams, excuse me, light rail. The ad in question was from First State Super and left no one in any doubt that the big super fund, which boasts more than a few NSW public service members, was investing in the light rail. “Oh boy” Outsider thought as he wondered if First State Super had anticipated the light rail breaking down on its very first day, significant delays, or the fact that people were walking faster than the light rail was actually moving. According to the fund, it has a 62.5% stake in the light rail and was one of the most significant direct investments the super fund had made. First State Super chief executive, Deanne Stewart, said the fund’s primary objective was to deliver the best possible long-term sustainable investment returns and as a responsible owner it could do this while being “a genuine force for good in our community”. At least, Outsider thought, First State Super’s investing team was likely to be faster moving than the Sydney light rail. Outsider is not opposed to infrastructure investments and he believes superannuation funds have a role in funding community assets but he was just thinking about which super funds were less than impressed by the return on their investment from the Sydney East-West tunnel?
IT is well known there are bad apples in financial services and Outsider is always delighted when the appropriate punishment is meted out. Thus, Outsider felt a sudden surge of schadenfreude when he read that the ex-chief executive of investment giant PIMCO, Douglas Hodge, had been sentenced to nine months in prison for bribes totalling US$850,000 ($1.26 million) over 11 years. Hodge, you see, joined the likes of celebrities Felicity Huffman and Lori Loughlin in the college admission scandal having paid bribes to get at least four of his seven children into top universities, and also attempting to do so with a fifth child. He paid $325,000 to a tennis coach for his son and daughter to enter Georgetown University and paid $525,000 to have another daughter and son admitted to the University of Southern California as soccer and football recruits. The fifth child was denied admission based on his academic qualifications. Knowing Hodge abused his privilege leading to less fortunate and deserving
candidates of university sports missing out, Outsider was pleased to note that the judge added to the sentence two years of supervised release, a $750,000 fine and 500 hours of community service. While Hodge’s sentence was the harshest so far of all involved in the scandal, Outsider wonders how much time Hodge will actually spend looking at the four walls of his jail cell. Outsider, for his part, recognised that Outsider Jnr, like his dad, lacked any sporting prowess which might have warranted the paying of bribes.
Is FASEA imposing water torture? OUTSIDER knows that advisers have had to jump through hoops since the Royal Commission, especially the new education requirements. Outsider recently got wind of the FASEA exam conditions and was surprised (but should not have been surprised) that it too had hoops. Namely, a water hoop. Advisers sitting the exam are not allowed to have water bottles on their desks for the 3.5 hour exam. They have to raise their hand, ask for permission, walk to the back of the room, locate their similar looking bottle, and then take a chug. Or, there is a water fountain.
SMSF
OUT OF CONTEXT www.moneymanagement.com.au
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"If you make a prediction long enough, no one will remember anyways so you can be bold." - Michael Rice, Rice Warner executive director, at the SMSF Conference
Advisers have been rightly outraged by this disruption for an exam that has already added a huge amount of stress to their lives. Perhaps FASEA believes they will write answers on their bottles despite it being an open book exam, or maybe that advisers will be drinking other clear liquids – maybe that might help them navigate the convoluted exam questions! Outsider is just happy he does not have to ask for permission for access to drinking water in his day-to-day life – which by the way is recognised by the UN as a human right to have access to safe water.
"I swear I will pretend to be really really interested." - Delegates swear an oath, at the SMSF Conference
"People are tragically living longer and longer and this is a source of retirement stress." - Michael Blomfield, Investment Trends chief executive, at the SMSF Conference
Find us here:
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Learn more at fidelity.com.au Fidelity Global Emerging Markets Fund (Managed Fund) (ASX: FEMX) now trading on the ASX. The Zenith Fund Awards were issued 11 October 2019 by Zenith Investment Partners (ABN 27 130 132 672, AFSL 226872) and are determined using proprietary methodologies. The Fund Awards are solely statements of opinion and do not represent recommendations to purchase, hold or sell any securities or make any other investment decisions. To the extent that the Fund Awards constitutes advice, it is General Advice for Wholesale clients only without taking into consideration the objectives, financial situation or needs of any specific person. Investors should seek their own independent financial advice before making any investment decision and should consider the appropriateness of any advice. Investors should obtain a copy of and consider any relevant PDS or offer document before making any investment decisions. Past performance is not an indication of future performance. Fund Awards are current for 12 months from the date awarded and are subject to change at any time. Fund Awards for previous years are referenced for historical purposes only. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Investments in small and emerging markets can be more volatile than investments in developed markets. Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters and seek financial advice before acting on the information. You also should consider the Product Disclosure Statements (‘PDS’) for respective Fidelity products before making a decision whether to acquire or hold the product. The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. ©2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.
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