Money Management | Vol. 33 No 3 | March 14, 2019 by FE Money Management

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 33 No 3 | March 14, 2019

INVESTMENT CENTRE

Global ﬁxed income hangs in China/US trade balance

FUNDS MANAGEMENT

The case for performance fees

TOOLBOX

Means testing for lifetime income streams

Is advice really advice without a product recommendation?

LIFE/RISK

BY MIKE TAYLOR

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Insurers clearly signal their backing for life/risk advisers THE major life/risk insurers have made clear they see financial advisers as being integral to the industry and have sent a clear message that any move to eliminate life/risk commissions after the 2021 review of the Life Insurance Framework (LIF) should be carefully thought through. Senior executives within TAL, MLC Life Insurance In and Integrity Life have all made clear they have concerns about the consequences of ending life/risk commissions. TAL chief executive, Brett Clark said the company believed that community access to high quality financial advice and that, regardless of the remuneration framework, a vibrant financial advice sector supporting well informed customers was essential. Clark said the LIF reforms had set out a commission framework to properly balance and align customer and adviser outcomes and that TAL support that framework. “Any further changes beyond the scheduled 2021 review need to be examined carefully,” he said. Integrity Life chief executive, Chris Powell said life insurance products were complex and not well understood by consumers and on that basis professional risk advisers played a key role in analysing the life insurance needs of the consumer and recommending appropriate products and levels of cover based on the

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specific needs of their client. Powell said that while it might be true that there was always an element of conflicted remuneration in any commission, it was also true that Australians were unlikely to place the same level of value on the advice provided if they were required to pay for it separately. “Thus, any proposal to remove commissions completely is likely to significantly reduce the levels of professional life risk advice taken up by the community as a whole,” he said. “Integrity Life strongly believes the decision to receive commissions or reduce them and move to a fee for service model is best resolved through transparency and agreement between the adviser and their client.” MLC Life Insurance’s chief customer officer, retail and group insurance, Sean McCormack said the company supported a sustainable advice model and that currently, commissions – as a part of LIF – were an important part of this model. “We support the LIF review by ASIC scheduled for 2021 and commend Commissioner Hayne on his recommendation that this review be continued. Our fear is that, without a robust alternative approach, reducing commissions to zero has the potential to push access to advised insurance out of reach for Australian’s on middle incomes.”

Full feature on page 14

A NEAR TWO decade-old legislative drafting decision needs to be corrected before product can be properly and permanently separated from advice, according to former dealer group chief executive and current adviser group board member, Paul Harding-Davis. Harding-Davis, who was part of the industry response to the Financial Services Reform Act process said that the problem lies in the fact that, at law, there is no financial advice unless it relates to the recommendation/sale of a product, “To put it bluntly - there is no such thing at law as financial advice unless there is a recommendation (sale) of a product,” he said. “It’s been around for so long that few people seem to understand what is ‘advice’ in terms of the Corporations Act.” Harding-Davis cited RG 36.19 which defined financial product advice as: “A recommendation or a statement of opinion, or a report of either of those things, constitutes financial product advice under s766B if: it is intended to influence a person or persons in making a decision about a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products, or could reasonably be regarded as being intended to have such an influence;” “Advice, as is clear, is actually defined as Financial Product Continued on page 3

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FPA’s CRC sanctions two planners, including chapter chair BY MIKE TAYLOR

AT the same time as the Financial Planning Association (FPA) puts in place the necessary infrastructure to become part of a code monitoring body, its Conduct Review Commission (CRC) has imposed immediate sanctions against two member financial planners, one of whom was a Certified Financial Planner (CFP) and FPA Gold Coast chapter chair. At least some of the issues which gave rise to the CRC action related to the FPA’s arrangement with building industry fund Cbus. The FPA said that its independent disciplinary body had determined that FPA member planners, Matthew Brown and Dianne Bainbridge had breached the FPA’s Code of Professional Practice and because neither than opted to appeal the CRC’s decision there sanctions would apply immediately. It said that, effective immediately, Brown’s FPA membership and CFP designation had been

suspended for two years including rights and privileges while, separately, Bainbridge had her FPA membership and Financial Planner AFP designation suspended for six months. The FPA said Brown’s details had been removed from the FGPA Find a Planner director and that he had been stood down as the Chapter Chair of the Gold Coast Chapter Committee. It said that following a review of advice provided as part of the Cbus FPA Professional Practice Referral Program, the FPA initiated a complaint and investigation relating to the advice and conduct of Brown in August 2017. In October 2018, the CRC panel determined he breached the FPA Code in seven of the 14 instances of alleged breaches. The FPA said the CRC had asked Brown to submit details of the steps he would take to improve advice practices and systems. If the reported improvements were not satisfactory, Brown is to undertake further training and

education. He had already refunded the affected clients in a matter approved by the FPA when he first became aware of the concerns raised. Bainbridge has had her FPA membership and Financial Planner AFP® designation suspended for six months by the CRC, including rights and privileges, following a complaint raised by a former client in November 2017. Bainbridge’s details have also been removed from the FPA Find a Planner directory. The FPA investigated the alleged conduct and the matter was referred to the Chair of the CRC in July 2018. In November 2018, the CRC panel determined that Bainbridge had breached the FPA Code, with sanctions being handed down in December 2018. She will undertake additional training and education in management and risk management. During the suspension period the FPA will undertake a compliance review of Ms Bainbridge’s client documentation. Bainbridge has already paid the FPA costs and expenses related to the matter.

Don’t politicise the RC says FPA’s De Gori

Is advice really advice without a product recommendation? Continued from page 1 Advice, and requires the recommendation (selling?) of a financial product,” he said. “As an aside, it is worth noting that this only relates to financial products. A Gold Ingot, or a specific residential property come under the Real Assets definition and are not covered by this definition.” “Given that the product recommendation is usually the least value add of the whole 12-13 step financial advice process, it is arguable that the most valuable parts of financial advice do not even require authorisation or registration,” Harding-Davis said. He said that rather than commentators and others being surprised that advice is intertwined with a product, they should be shocked when it is not given the law. Harding-Davis said that, in these circumstances, he believed it would be difficult to fix the underlying problems with advice without actually fixing the underlying regulations.

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THE recommendations of the Royal Commission including the ending of grandfathering should not be allowed to become a political point-scoring exercise in an election year because it risks turning a roadmap to higher standards and professionalism into a blueprint for destruction, according to Financial Planning Association (FPA) chief executive, Dante De Gori. And while De Gori acknowledges that the FPA has an official policy of removing grandfathered commissions over a three-year transition period, that does not mean it supports the fees paid by clients simply being utilised elsewhere by product providers. In a column published in this edition of Money Management, De Gori argues that with the benefit of hindsight it may have been better to extend the Royal Commission’s work by six months rather than push it out into an election battleground. Looking at grandfathering, the FPA chief executive said there were two potential scenarios to consider – the first being what happens when the grandfathered commissions end. “The primary outcome is that the financial planner will no longer receive

that payment – but that doesn’t mean the client will stop paying it. That fee may still be charged and will go somewhere, just not to the financial planner,” he writes. “Secondly, there’s the risk that clients (as a result of legislation forcing product providers to close products) will simply be moved from one product that is paying a grandfathered commission to another product that does not, but which may not be in their best interest. The client impact of forcing a change of product could lead to tax and capital gains tax liabilities, or loss of social security benefits in some cases.” “We must remember ending grandfathered commissions will also affect investors who do not have, or no longer have, a financial planner — unless the cost of product fees are reduced to reflect the end of commissions,” De Gori writes. He said there were just two examples of the tangible, real implications of political point scoring over a complex issue. If the recommendations were made without an election looming, perhaps the right consultation, collaboration and consideration would be invested before making loose legislative declarations.

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Choice wants voice on RC rectiﬁcation taskforce BY MIKE TAYLOR

CONSUMER group Choice wants a voice on a Treasury taskforce, funded by the Government, to implement the policy reforms recommended by the Banking Royal Commission, arguing that self-regulation has failed. At the same time, the consumer group pointed to the exit of the major banks from the financial planning industry and has argued that they may be replaced by smaller groups less

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capable of compensating consumers. In a pre-Budget submission filed with Treasury, Choice has claimed it is essential that consumer groups are recognised as “key stakeholders”. “What is clear from the evidence of the Royal Commission is that self-regulation - that is, banks writing their own unenforceable rules - has demonstrably failed and has led to widespread consumer harm,” the submission said. “Well-funded

industry lobbyists will seek to hijack the policy process, and water-down consumer protections” evidenced by the industry’s attempts to water down the Future of Financail Advice (FoFA) changes and the voluntary nature of the Insurance inside Super code of conduct. “It is essential that consumer groups are supported to take the lead in this reform process and that Treasury resources allow for time to engage with consumer groups and properly review

industry claims,” the Choice submission said. On the question of funding a compensation scheme of last resort, Choice pointed to the heightened risk of “an environment where large financial providers with significant capital holdings move away from the advice sector”. “Taking their place is likely to be a series of smaller advice businesses who is many cases will not have the resources to compensate consumers for improper advice which leads to loss,” it said.

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News

Planners to be rated on quality of advice BY HANNAH WOOTTON

ADVISER Ratings has responded to the Royal Commission by establishing a new financial adviser rating system, which would be overseen by industry heavyweights, including former Australian Securities and Investments Commission (ASIC) chair, Peter Kell, and former Financial Adviser Standards and Ethics Authority chief executive, Deen Sanders. The rating system, to be launched later this year, would focus on quality of advice. It would provide information to consumers, advisers, industry regulators, and product developers, with Adviser Ratings noting that the latter would have a greater shared responsibility with advice channels once the Design and Distribution Obligations and Product Intervention Powers Bill currently before Parliament passes. Kell would sit on an external ratings committee (ERC) that would ensure the rating system was managed according to a reputable

governance regime. Other members would be Jerry Parwada, professor of finance at UNSW Business School, Paul Coughlin, former global head of credit ratings at S&P, and Janice Sengupta, former Aon, Asia Pacific chief investment officer. The ERC would be supported by an external panel, which Adviser Ratings said “may grow over time as evolution of the sector demands new specialist experience”. In addition to Sanders, who was now a partner at Deloitte, the panel would include Tom Reddaliff, Encore Advisory Group director and chief executive, and Michelle Cull of Western Sydney University’s School of Business. “The Royal Commission advocates for increased information disclosure however the challenge for consumers is processing this deluge of information. This necessitates a carefully thought out and regularly updated summary measure of quality,” Parwada, who would be the ERC chair, said.

“A key differentiator of the proposed rating methodology is that it will be backed up by a standing research capability designed to stress test the factors predicted to influence quality of advice as well as keep track of changing dynamics in the industry.”

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News

ClearView removes advice cross-subsidies TPB focuses

on higher-risk practitioners

BY MIKE TAYLOR

CLEARVIEW has signalled its intention to end the cross-subsidisation of its advice groups on the basis of fundamental changes it sees occurring within the industry in the wake of the Royal Commission. The publicly-listed insurer, which operates ClearView Financial Advice, Matrix Planning Solutions and LaVista licensee solutions and boasts more than 200 planners, used an investor briefing to point to the changes it sees occurring in the financial planning industry. Pointing to the strategic nature of its LaVista licensee solutions offering, the ClearView briefing said: “We’re seeing vertical disintegration across the industry with some institutions voluntarily selling or spinning off their wealth businesses”. “At the same time many professional financial advisers are agitating for greater independence by leaving institutional dealer groups and gaining their own Australian Financial Services License,” it said.

BY ANASTASIA SANTORENEOS

ClearView said operational efficiency would become another attractive component of the LaVista offering, as the overhaul to commissions and other ‘conflicted remunerations’ were ultimately removed. “The future state for dealer groups requires the removal of cross-subsidisation between the manufacturer and advice business and replacement of grandfathered commissions and

rebate revenue streams that has driven economic value in the industry for some time,” it said. “ClearView is focused on supporting financial advisers through an industrial strength back office to help make their practices compliant and more efficient either when they are licenced by our dealer groups or alternatively where they operate their own licence.”

The hard data on getting and retaining an AFSL AT the same time as advisers debate the issue of self-licensing in the wake of the Royal Commission, the Australian Securities and Investments Commission (ASIC) has signalled that getting and keeping an Australian Financial Services License (AFSL) is no easy task. The regulator released its latest report on licensing and professional registrations and in doing so pointed out that less than half of the 2,879 applications considered in the period between July, 2017 and June, last year, were approved. As well, ASIC’s executive director, assessment and intelligence, Warren Day said that over the same period, 12 AFSLs and 12 Credit licenses were suspended and approximately 15 per cent of the 191 AFSLs and 319 Credit licences were cancelled at the initiation of ASIC. Day pointed out that ASIC’s licensing function provided a first gateway to ensuring applicants

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met minimum standards and that the regulator was seeking to help protect consumers by ensuring an appropriate level of scrutiny was applied to the applications. The ASIC report said that in 2017-2018, ASIC considered approximately 2,879 applications, with 60 per cent relating to AFSL applications, 29 per cent relating to ACL applications and the remaining 11 per cent relating to professional auditor registrations. Of the 2,879 total applications, 48 per cent (1,383) were approved, with 62 per cent of those applications approved in a form other than applied for by the applicant. Of the 1,383 approvals, 44 per cent were AFS licence approvals and 52 per cent were credit licence approvals. ASIC assessed 329 applications for professional registration of auditors, of which 59 per cent were approved (comprising four per cent of all approvals).

THE Tax Practitioners Board (TPB) has reported a positive response to its compliance strategy, which was announced in December last year, with over two thousand tax practitioners updating their tax affairs since that time. Secretary and chief executive of the TPB, Michael O’Neill, said while most tax practitioners recognise the important of complying with the law and maintaining ethical standards, the Board remained concerned about some practitioners who failed to meet their own tax obligations and participated in high-risk behaviours. “We’re now focused on those higher-risk practitioners who’ve failed to comply with over 1200 lodgement cases and others with $90 million in outstanding debts to the ATO,” he said. Such ‘high-risk practitioners’ are those who inflate work related expenses, support the black economy, or who are involved in deliberate fraud and evasion activity, according to the CEO. “We will also investigate unregistered service providers and bring matters before the courts.” The TPB flagged it would initiate around 30 investigations in an effort to sanction those practitioners who fail to comply with their legal and ethical responsibilities.

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News

Sunsuper launches advice fee caps BY OKSANA PATRON

ONE of Australia’s superannuation funds, Sunsuper, has announced the introduction of financial advice fee caps to ensure that financial advice remains affordable. The initial fees would be limited to the lower of $4,400 or 2.2 per cent of balance (inclusive of GST) and restricted to only being payable once every three years, with the cap for the ongoing fees to be lowered to $6,600 or 1.1 per cent of balance per annum (inclusive of GST) and payable monthly for a maximum of two years. The fund said that it started working with external financial advisers a few years ago to offer both advisers and clients the flexibility of charging and paying fees for financial advice related to a client’s Sunsuper holdings directly from the client’s account. Sunsuper’s head of advice retirement, Anne Fuchs said that these new advice fee caps would be more consistent with a duty to act in their members’ best interests. “We believe these caps will strike a balance between preventing members’ balances being eroded by ongoing fees while at the same time allowing financial advisers to deduct fees for the quality advice they provide,” Fuchs said.

“The Royal Commission has put a spotlight on the advice industry and highlighted community expectations in relation to advice fees. We anticipate that other super funds will be reviewing their trustee obligations around advice fees and will follow suit in implementing such caps.” The new caps came into effect on 25 February, 2019.

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News

Chartered Accountants confirm FASEA approach BY MIKE TAYLOR

CHARTERED Accountants Australia and New Zealand has admitted advocating to the Financial Adviser Standards and Ethics Authority (FASEA) for the educational and ethical standards required of Chartered Accountants to be recognised. The CA ANZ made clear its position in a preBudget submission which also argued that the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry represents an incredible opportunity for reform. On the question of FASEA the submission

said that Government and regulators need to foster a new sense of professionalism in the financial planning sector in the wake of the revelation at the Royal Commission. “This stance is reflected in our recent dealings with the FASEA where CA ANZ has advocated for the educational and ethical standards required of Chartered Accountants to be recognised,” the submission said. However, it also suggests that the final report “deserves careful scrutiny and a wellconsidered response, not a political bunfight”. “The Federal Budget provides the ideal platform for such a response to be unveiled by the Treasurer,” the CA ANZ submission said.

ANZ ends single governance and accountability structure ANZ has moved to end its single governance and accountability structure in Australia. In doing so, the big banking group announced a key change to its management structure which will see current group executive, Mark Hand and Maile Carnegie sharing responsibility for the financial performance of the company’s business in Australia. It said Hand had been appointed Group Executive Australia Retail and

Commercial Banking alongside Carnegie to take on an expanded role as Group Executive Digital and Australia Transformation. Commenting on the move, ANZ chief executive, Shayne Elliott said the continued transformation of Australia made it clear that retaining a single governance and accountability structure was no longer suitable given the size and complexity of the challenges facing domestic banking in Australia.

TAL and Suncorp acquisition complete TAL Dai-Chi Life Australia has finally finished its acquisition of Suncorp’s Australian life insurance business. “The integration of Suncorp’s Australian life business will commence immediately, and we are confident that the team will deliver an efficient transition, alongside strong business performance, and customer and partner outcomes during the integration period,” TAL Group chief executive and managing director, Brett Clark, said when announcing the acquisition was complete. “We are very excited to bring the TAL and Suncorp life businesses together. This acquisition provides us with a strong base for continued growth and reflects our ongoing commitment to offering Australians a range of life insurance options to meet their diverse needs,” he said. The acquisition would see TAL acquire not just the Suncorp brand, but also brands such as AAMI, APIA and GIO.

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News

Ending grandfathering has positives for some

WAM Capital posts $91.5m loss for H2

BY MIKE TAYLOR

PUBLICLY-LISTED platform provider, HUB24 has pointed to some positives from the Royal Commission and the impending removal of grandfathered commissions. In an investor briefing accompanying the release of its half-year results, HUB24 said the removal of grandfathered commissions was expected to release funds under advice (FUA) from legacy products and that approved products lists (APLs) might be opened up to specialist platform providers. The company also pointed to compliance and regulatory pressures leading major institutions to review their advice practices and recent research pointing to advisers leaving the larger institutions to become self-licensed or join non-institutional dealer groups. “It also shows that two-thirds of the growth in adviser numbers are into non-institutional dealer groups which further increases demand for specialist platforms,” it said. “Now that three out of our major banks have announced plans to exit wealth we anticipate further escalation of these trends throughout this period of disrup-

tion,” the HUB24 analysis said. It also said that the traditional financial services segments were recovering, with stockbrokers embracing annuity-based income models to better service clients, including through financial advice that utilised platforms and managed accounts.

“Further, financial advisers are now able to more efficiently manage directly-held assets, previously the domain of stockbrokers, overlayed with professional management (managed portfolio),” the analysis said. “HUB24 expects to benefit from both these trends.”

Fiducian grows planning footprint THE financial planning subsidiary of publicly-listed vertically-integrated financial services group, Fiducian, has added around $216 million in assets under advice via the acquisition of six financial plan-

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ning businesses. The company announced that Fiducian Financial Services had added the six new franchised offices over the past few months, including a Wollongong business which accounted for around $80 million in funds under advice. In line with the company’s long-standing policy it did not name the businesses but Fiducian’s head of business development and distribution, Jai Singh said that eight new qualified financial planners had satisfied Fiducian’s strict selection process. The company’s announcement said the acquisitions were part of Fiducian’s ongoing strategy to expand its quality financial planning network around Australia.

WAM Capital has reported a $91.5 million operating loss after tax for the six months to December, 2018, as the investment portfolio went down 9.3 per cent and led to a reduction of $132 million in assets. The company said in a statement issued to the Australian Securities Exchange (ASX) that its investment portfolio cash level was currently 35 per cent lower compared to 43.9 per cent on 31 December, 2018, as it reflected the change in the outlook. WAM Capital’s chairman and chief investment officer, Geoff Wilson, said the firm’s market outlook at the end of 2018 was extremely bearish due to signs that the US Federal Reserve would raise interest rates in 2019 and quantitative tightening (QT) would continue at unprecedented levels while leading economic indicators were pointing to a slowing global economy. He stressed that the combined impact of these factors on equity markets would have been brutal. “This did not occur and the major turning point in January was the unexpected about-face of the US Federal Reserve, holding interest rates for the foreseeable future and indicating that QT might be over,” Wilson explained. “This change in approach provided equity markets with strong support.” Despite the volatility in the market, WAM Capital declared a fully franked interim dividend of 7.75 cents per share, currently representing an annualised dividend yield of 7.2 per cent, the firm said.

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Editorial

mike.taylor@moneymanagement.com.au

HAYNE’S FINDINGS IMPORTANT BUT NOT WITHOUT FLAW

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775

The chief executive of the Financial Planning Association (FPA), Dante De Gori is absolutely right to urge the major parties against turning the final recommendations of the Royal Commission into a political football, although he is very likely wasting his breath.

mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au

THE 2019 FEDERAL Election is shaping as being one of Australia’s most antagonistic and financial planners and others in the financial services industry should brace themselves for a tough time as both sides of politics seek to prove themselves more virtuous than the other in terms of both the calling of the Royal Commission and how they will act on its findings. That is why De Gori was also right in suggesting things might have been better if the Royal Commission had run another six months if only to keep it off the election agenda. But there exist a number of other very good reasons why the major political parties should tread carefully around the Royal Commission as an issue. Quite simply, while the Commissioner, Kenneth Hayne, identified some significant issues and made some astute recommendations, he was not entirely infallible. As good as the lawyers and other Royal Commission support staff proved to be, it is clear that they did not always appreciate the nuances associated with a legislative framework which evolved through

different political regimes and through policy pivot points such as the Future of Financial Advice (FoFA) and the Life Insurance Framework (LIF) and which in many respects remains a work in progress It is in these circumstances that the Association of Financial Advisers (AFA) policy director, Phil Anderson has made some valid points about what he sees as having been gaps in the comprehension of counsel assisting, while industry veteran and former dealer group chief executive, Paul Harding-Davis, has provided a reminder of the realities contained in a Corporations Act which, reflecting the antecedents of the industry, connects advice to product. In circumstances where both sides of politics have rushed to largely endorse the findings of the Royal Commission and in the case of the current Treasurer, Josh Frydenberg, committed to almost unquestioning implementation it is little wonder that the likes of the De Gori, Anderson and Harding-Davis feel more than a little concerned. The findings and recommendations of Royal Commissions are rarely, if ever, implemented in full and there is a

good reason they are not. Quite simply, implementation can be a complex task requiring considered examination of existing norms and the avoidance of unintended consequences. Then, too, the Royal Commission has referred a number of issues to the regulators for possible prosecution and any sensible adviser to Government will know the embarrassment which will follow if legislative change is put in place but the courts find in favour of the defence rather than the prosecution. Kenneth Hayne is a highly experienced and distinguished jurist who has done a fine job within the terms of reference and the timeframe handed to him but his findings should not be regarded as infallible and I am sure he does not regard them as being so. Politicians should not seek to leverage the Royal Commission for political gain but should, rather, give the recommendations their considered attention outside of the tumult of acrimonious electioneering.

Mike Taylor Managing Editor

Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@moneymanagement.com.au Journalist: Anastasia Santoreneos Tel: 0438 836 560 anastasia.santoreneos@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi

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7/03/2019 3:41:11 PM

March 14, 2019 Money Management | 13

InFocus

DON’T LET POLITICS GET IN THE WAY OF GOOD REFORM In a sea of reform recommendations for the banking and financial services sector, a looming election may see politicians skim across the surface on matters that deserve a deep dive, says CEO of the Financial Planning Association (FPA), Dante De Gori CFP. THE BEST AND worst thing about the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is that it happened in an election year. However, its recommendations are receiving attention by voters and aspiring policy makers, more than the myriad of other interrogations into the sector over the past 12 months alone. If used for political point scoring, however, it will not be a roadmap to higher standards and professionalism, but a blueprint for destruction. Debating complex issues through a lens of re-election is short sighted. The issues here are serious, for both the public and the people working with them on their financial futures. There is a vast ecosystem of astute, ethical financial services professionals who are continuing to do right by their clients, and will continue to do so. What is of concern is the 80 per cent of Australians who do not receive financial advice will potentially be more cautious about doing so in the future, which will be a poor outcome for Australians. The debate around the removal of grandfathered commissions is a prime example of what will occur in Canberra when the report’s recommendations are used as a political football. The Government’s response to the Royal Commission recommendation, is to phase them out by 2021. Labor now proposes the date for banning grandfathered commissions be moved to a year earlier. To be clear, the FPA has had as its official policy that the removal of grandfathered commissions needed a transition period and

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recommended 3 years. FPA member research by CoreData in 2018 tells us 8.3 per cent of adviser-practice cashflow is still derived from grandfathered commissions, and that figure is declining — any new business started after 1 July 2013 cannot have grandfathered commissions at all thanks to the FOFA reforms. When we formally responded to the Royal Commission’s inquiry into banning grandfathered commissions, we supported the change and provided five conditions to be met. The first two conditions were that the change is in the client’s best interest – that is, no client will be worse off – and commission payments are refunded into client accounts and not retained by the product provider. There are two potential scenarios to consider. The first is what happens when the grandfathered commissions end.

The primary outcome is that the financial planner will no longer receive that payment – but that doesn’t mean the client will stop paying it. That fee may still be charged and will go somewhere, just not to the financial planner. Secondly, there’s the risk that clients (as a result of legislation forcing product providers to close products) will simply be moved from one product that is paying a grandfathered commission to another product that does not, but which may not be in their best interest. The client impact of forcing a change of product could lead to tax and capital gains tax liabilities, or loss of social security benefits in some cases. We must remember ending grandfathered commissions will also affect investors who do not have, or no longer have, a financial planner — unless the cost of product fees are reduced to reflect the end of commissions. These are just two examples

of the tangible, real implications of political point scoring over a complex issue. If the recommendations were made without an election looming, perhaps the right consultation, collaboration and consideration would be invested before making loose legislative declarations. Whatever discomfort may now be felt across the financial landscape as a result of the implementation of the recommendations will only be magnified if the issues are politicised and treated as currency in Canberra. With the benefit of hindsight, it may have been better to extend the Commission’s work by six months rather than push it out into an election battleground. However, now that the recommendations have been made, it is of the utmost importance that legislative changes keep the customer’s best interest in sight at all times.

6/03/2019 4:49:35 PM

14 | Money Management March 14, 2019

Life/Risk

LIFE/RISK 2019: CONSOLIDATION, REGULATION AND A ROYAL COMMISSION Major banks and AMP Limited have exited life insurance, significant consolidation has occurred and the Royal Commission has delivered a verdict but, as Mike Taylor writes, they represent only a part of the challenges facing the life/risk sector. RELATIVE TO OTHER sectors of the financial services industry, Australia’s life/risk insurers emerged from the Royal Commission largely unscathed but that does not mean they are not facing significant challenges in the months ahead. The major changes impacting life/risk insurers in the aftermath of the Royal Commission will be the likely changes to the Corporations Act, which will see claims-handling treated as a financial product and limits likely to be put on direct, phone-based sales regimes but, beyond that, the challenges are largely commercial rather than regulatory. And those commercial challenges are pressing in on the life insurers notwithstanding the changing competitive dynamics driven by the Commonwealth Bank’s ongoing sale of CommInsure to AIA Australia Limited, TAL’s justcompleted acquisition of the Suncorp Life business and Zurich’s on track acquisition of the ANZ OnePath life insurance business. On top of that, Integrity Life has now entered the market with objectives in both the advised and group life space. These factors must also be weighed against the seemingly doubtful future of Freedom Insurance Group which closed down much of its phone-based life/risk sales in the aftermath of its appearance before the Royal Commission and found its restructuring options limited when

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the Bank of Queensland declined to sell its St Andrews Business. At the time of going to print, Freedom remained in trading suspension on the Australian Securities Exchange having announced in late February that its preparation of its half-year accounts was ongoing and that it was in discussions with key stakeholders regarding its financial position. At the same time as Freedom seeks to sort out its position, the latest data published by the Australian Prudential Regulation Authority (APRA) has served to underline the commercial challenges facing the big insurers. The December quarter data revealed that total entity net profit after tax was a loss of $519 million, with Individual Lump Sum risk products contributing a profit of $10 million, Group Lump Sum contributing a profit of $19 million, Group Disability Income Insurance contributing a profit of $9 million and Individual Disability Income Insurance contributing a loss of $260 million. In the 12 months to 31 December, net profit after tax was $593 million, with Individual Lump Sum Risk products contributing a profit of $408 million, Group Lump Sum Risk products contributing a profit of $101 million, Group Disability Income Insurance contributing a profit of $57 million and Individual Disability Income Insurance contributing a loss of $474 million. The APRA commentary noted that the industry’s after-tax loss of

6/03/2019 4:52:12 PM

March 14, 2019 Money Management | 15

Life/Risk $519 million was significantly down from a profit of $189 million for September, with the main drivers of the loss being adverse movements in financial markets in the December quarter which negatively impacted life insurers’ investment revenue, along with an increase in expenses caused by a discrete write-off in goodwill for one insurer. It said that next to the write-off, individual risk products comprised the bulk of this loss, continuing the negative trend seen in the preceding four quarters with the largest drop in profits being in Individual Lump Sum (from a profit of $111 million to a profit of $10 million), caused by reductions in both net policy revenue and investment revenue, as well as an increase in tax outlays. Reflecting some of the commercial realities confronting the sector, ClearView announced in mid-February that it would be introducing a new pricing structure

which reflected “the realities of underlying claims experience (across the industry), the economic environment and an aim for ClearView to be more consistent in its competitive position across the range of benefits”.

WHAT ARE THE CHALLENGES? Conscious of the APRA data and some of the changes to premium pricing regimes, Money Management went to each of the major life insurers and asked them what they believed were the major issues confronting them as they moved deeper into 2019. TAL chief executive, Brett Clark referenced the need for the insurers operating in the sector to pursue sustainable change. “The life insurance market in Australia continues to undergo generational change and rapid transformation. These changes

are driven by changes in consumer expectations and behaviours, the regulatory environment and the competitive landscape,” he said. Referencing the recent issues discussed before and after the Royal Commission, the TAL CEO said the industry had spoken for many years about putting customers first and customers in control but while some progress had been made, more was necessary. “We need to work harder to build trust and confidence in the community, with our customers and financial adviser partners,” he said. “Alongside these ambitions, it is important that industry focus is on implementing the change required to ensure long term sustainability of the life insurance industry which is vital to the community and economy.” For its part, MLC Life

Insurance’s chief customer officer, retail insurance, Sean McCormack described the industry as being in a turbulent period and facing a number of fundamental challenges, including regaining customer trust in the aftermath of the Royal Commission, high levels of regulatory scrutiny and dealing with the challenges facing financial advisers. We believe the life insurance market is set for significant innovation over the next five years, particularly in technology and transformation to overhaul legacy systems, which is where we are focusing our attention. We think companies that don’t do this will struggle to compete and attract new customers. Despite all this change, what hasn’t changed is the need that Continued on page 16

In your clients’ moment of need, we’re here. In 2018 alone, we paid $1.4 billion in claims. Because we’re here for your clients when they need it.

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6/03/2019 4:52:30 PM

16 | Money Management March 14, 2019

Life/Risk Continued from page 15 Australians have for insurance and the security, protection and peace of mind that it provides. The chief executive of relatively new entrant, Integrity Life, Chris Powell agreed with TAL’s Clark that one of the challenges confronting the industry was responding to the recommendations of the Hayne Royal Commission. “Fundamentally, this is about culture as every one of Hayne’s recommendations are based upon the six behavioural norms outlined in the Royal Commission report,” he said. “Changing behaviours means changing cultures. This is a big piece of work for large institutions and one that will take time to effectively put in place. Board’s will need to measure and monitor progress.” As the CEO of a new player in the space, Powell also pointed to technology and the fact that many large, established players would need to follow the lead of MLC Life Insurance and actively start replacing their old legacy systems. On the broader question of the changing shape of the industry, he said that the integration of acquisitions would be a challenge for the acquirers, while on the regulatory front the Government’s recently-introduced Protecting Your Super initiatives and the Productivity Commission’s recommendations would see superannuation fund trustees and their insurers implementing further compliance measures and making tactical decisions around strategy.

INDUSTRY CONSOLIDATION. IS IT OVER FOR NOW? According to Integrity Life’s Powell the recent flurry of merger and acquisition activity in the life/risk space is probably over but that does not mean the consequences have fully revealed themselves. “Based on the current landscape, it appears that the consolidation and/or sale of bank owned insurers is nearing completion,” he said.

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“With the sale of AMP Life to Resolution, the withdrawal of AMP from writing new business will dramatically alter and further concentrate the Life Insurance industry. It is also yet to be seen how advisers will respond to the AMP book effectively being placed into run-off,” Powell said. “Consolidation of several of the largest life insurance institutions will mean that both consumer choice and customer service will likely be reduced in the short term.” “New players will provide fresh alternatives in products and services, but it will take time for them to be accepted by advisers, superannuation funds and corporates. There are also several new distributors in the market that may challenge for market share,” he said. TAL’s Clark described recent merger and acquisition (M&A) activity in the domestic life insurance market has been unprecedented noting that the competitive landscape has been rapidly re-shaped through multiple transactions, including TAL’s own acquisition of the Suncorp Life business. “This activity has been driven by a combination of factors, including a local and global shift toward specialisation in financial services, a more complex operating environment requiring scale to compete, and access to capital to support sustainable growth,” he said. “Life insurance businesses require capability and capital today to support promises to customers for many years to come. Without scale and access to capital it is difficult to see how businesses can continue to invest to meet customer, community and regulatory expectations. Financial services and life insurance are long term businesses requiring long term commitments. This has been proven in both global and Australian markets time and time again.” MLC Life Insurance’s McCormack said the company expected the consolidation to continue, with a greater presence

of foreign-owned life insurers in Australia, and fewer but bigger players. “The middle-tier of life insurers is disappearing, and new players are entering the Australian market,” he said. “We think this will be good for competition and, ultimately, better for customers, because running a stable, sustainable life insurer requires significant investment and scale.” “MLC Life Insurance was one of the first of the recent divestments of life companies, when we became a member of the Nippon Life Group of Companies in 2016. That’s enabling us to invest significantly in our people, processes and technology and, therefore, be better able to compete with our more established competitors. Our customer will be major beneficiaries of this thrust.”

WHAT IS THE FUTURE OF DIRECT LIFE SALES? Given the problems confronting Freedom Insurance Group, Money Management asked each of the major insurers whether there was a future with respect to direct life/ risk, with each of them giving a qualified answer of “yes”. McCormack said he believed there was a future for direct life insurance, especially in the Consumer Credit Insurance (CCI) market. “Direct life and CCI products fill a consumer need that is only going to grow if the Royal Commission recommendations are implemented as Commissioner Hayne intends,” he said. “Clearly, work needs to be done on the model of how direct life products are offered to customers

but we think this is not only possible, but a good thing,” McCormack said. “We have long believed it is not ok for consumers to be contacted when they have not expressed any interest in a product. There are alternative distribution models which operate safely within both regulatory and community expectations and the Royal Commission gives an opportunity for these to come to the fore.” TAL’s Clark also suggested direct life had a future but only within certain structures. “The ASIC Direct review and the Royal Commission have exposed practices in the direct life insurance channel that resulted in poor customer outcomes. These issues must be fundamentally addressed by industry,” he said. “However, the direct life channel can be a convenient and accessible way for some customers and customer segments to buy life insurance. Most well-developed financial services and product markets have some form of direct channel for consumers, and it would seem strange that life insurance would be an exception. Integrity Life’s Powell believes direct life risk sold via warm leads and high-pressure outbound sales techniques is dead together with products that do not have adequate claims risk to the insurer but he sees other avenues for direct sales. “However, this does not mean that all direct sales will cease,” he said. “Direct sales in response to advertising, whether they be whitelabelled or not, will likely continue.”

6/03/2019 4:52:48 PM

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INVESTMENT CENTRE a part of

GLOBAL FIXED INCOME HANGS IN US/CHINA TRADE BALANCE Anastasia Santoreneos writes that while global fixed interest markets were volatile over 2018, signs of progress with US/China trade negotiations could see credit spreads rally further off the back of a strong January. GLOBAL FIXED INTEREST markets had a rocky 2018, driven by the US Federal Reserve hiking cash rates and the US/China trade war, and while January saw the asset class rally, a positive turn in global politics could see the asset class soar further. Real Asset Management’s Michael Frearson says the increased risks to global trade and fears over the pace of US Fed interest rate tightening weighed on markets last quarter, and global growth has clearly slowed while, simultaneously, the volatility of the fixed interest market spiked. Despite the uninviting market, investors found some solace in high-quality sovereign debt, which rallied during this period. Credit spreads similarly spiked, particularly in the lower quality high-yield segment, according to Frearson. Trade issues have flowed through to material changes in the near-term outlook for global growth, he says, and its impacting both developed and

developing economies, with rapid downgrades in outlooks taking place in central banks and the IMF. Data from FE Analytics shows the Fixed Interest – Global Bond sector has returned 3.12 per cent for the year to last month’s end, 3.47 per cent for the three years to last month’s end, and 3.53 per cent for the five years to the same date. Taking it to a fund level, the CFS High Quality US High Yield fund was the top performing fund for the year to last month’s end, returning 14.47 per cent in that period. It was followed by the CFS US Short Duration High Yield fund and the CFS US Select High Yield fund, which returned 14.27 per cent and 14.01 per cent respectively. Whilst the top funds had a bias towards the US, the Colchester Emerging Markets Bond fund, which aims to generate income by investing in government bonds and currencies in emerging markets, also sat in the top 10 funds for the 12 months to last month’s end.

Chart 1: The performance of the top global bond fund as compared to the ﬁxed interest – global bond sector average for the three years to date.

Source: FE Analytics

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This particular fund had a bias towards Latin America, with Mexico, Colombia and Brazil featuring heavily in its top 10, followed by securities in Thailand, Malaysia, South Africa and Russia.

THE OUTLOOK FOR 2019 Going forward, Frearson expects that, given the flow of economic data increasingly highlighting a global slow down, the rally in risk assets will pause in the coming months as investors re-assess the outlook for growth and inflation. “Credit markets have rallied strongly during January on speculation the trade negotiations are going well, while sovereign yields have remained relatively stable,” he said. But, should a trade agreement be reached without negatively impacting global growth during 2019, Frearson said there is room for credit securities to rally further. Turning away from the US and China and towards Europe, the economic outlook there is similarly weak with the uncertainty around Brexit continuing. “Markets will continue to be impacted by qualitative tightening which is likely to increase volatility,” he said. “We remain cautious about the medium-term global outlook expecting volatility to return to more normal levels after [over] five years of benign market volatility across all asset classes.” Domestically, the sovereign yield curve appears to have rallied too far in the short-term, and Frearson expects ten-year bond yields to drive back

ANASTASIA SANTORENEOS

towards a 2.3 per cent to 2.5 per cent range.

FIXED INCOME SWEET SPOTS According to Frearson, a weak December for credit sectors has provided a valuation opportunity, even post the 2019 rally in credit spreads, but he advises investors to carefully select their securities given the outlook for slowing global growth. “We are seeing attractive opportunities in global USD capital securities as well as domestic markets,” he said. “This is particularly evident in the Australian bank capital securities markets with major banks recently issuing longerdated capital notes at 4.0 per cent plus gross margins.” Frearson said the high-quality end of the Australian securitisation market also appeared to offer value after some slight credit spread widening last year, but he was cautious on the outlook for domestic sovereign bonds given the strong rally over recent months.

6/03/2019 4:58:25 PM

INVESTMENT CENTRE

a part of

ACS CASH - AUSTRALIAN DOLLAR

ACS EQUITY - AUSTRALIA EQUITY INCOME

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0.27

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111

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1.95

2.03

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-7.96

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103

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2.03

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-2.53

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158

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0.14

1.98

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115

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115

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12.79

103

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1.81

-7.71

11.85

130

T. Rowe Price Asia Ex Japan ATR in AU

4.3

-5.59

11.6

118

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3.66

-6.44

11.18

103

Crown Rating

Risk Score

ACS EQUITY - AUSTRALIA

Fund name

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5.89

-1.46

18.65

109

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5.72

2.38

18.26

118

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5.96

-0.99

18.1

109

Macquarie Australian Small Companies ATR in AU

5.74

1.85

17.77

118

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3.27

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16.66

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3.31

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13.64

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0.06

-3.46

12.98

107

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4.97

4.19

12.68

109

Pendal MicroCap Opportunities ATR in AU

4.12

-4.2

12.16

CFS Colonial First State Wholesale Australian Small Companies ATR in AU

5.49

3.45

11.95

110

Crown Rating

Risk Score

ACS EQUITY - EMERGING MARKETS

Fund name

Ausbil Australian Geared Equity ATR in AU

9.36

-6.55

17.05

Dimensional Australian Value Trust ATR in AU

5.09

-0.99

Maple-Brown Abbott Australian Geared Equity Wholesale ATR in AU

6.84

CFS Colonial First State Wholesale Geared Share ATR in AU

Crown Rating

Risk Score

Fund name

224

CFS Realindex Emerging Markets A ATR in AU

5.6

-0.22

18.13

15.73

114

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6.16

-3.64

17.18

102

-8.24

15.34

187

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5.79

-7.01

16.22

119

7.9

-0.34

14.25

229

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3.78

-3.67

14.79

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4.46

-1.19

13.81

110

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6.1

-2.31

14.46

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4.41

0.81

13.78

101

OnePath Wholesale Global Emerging Markets Share ATR in AU

6.43

-1.54

14.19

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4.45

-1.33

13.64

110

GMO Emerging Markets Trust ATR in AU

6.02

-2.43

14.02

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3.41

-6.39

13.46

113

Schroder Global Emerging Markets Wholesale ATR in AU

5.28

-6.04

13.92

105

Solaris High Alpha Australian Equity Inst ATR in AU

4.65

2.62

13.41

107

Russell Emerging Markets A ATR in AU

5.12

-8.34

13.73

100

Macquarie Wholesale Australian Equities ATR in AU

4.51

0.6

13.24

102

Macquarie True Index Emerging Markets ATR in AU

5.12

-4.76

13.72

103

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Crown Rating

Risk Score

6/03/2019 4:58:42 PM

INVESTMENT CENTRE

a part of

ACS EQUITY - GLOBAL

ACS EQUITY - SPECIALIST

Fund name

Pengana High Conviction Equities ATR in AU

2.25

8.88

22.02

151

BT Technology Retail ATR in AU

7.01

13.04

19.53

155

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14.75

-6.59

18.67

243

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7.28

8.72

16.22

139

Hyperion Global Growth Companies B ATR in AU

5.39

17.65

17.41

120

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8.43

5.38

16.18

167

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3.39

7.74

15.92

105

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6.07

-4.83

13.02

103

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10.82

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151

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7.83

-4.5

12.82

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113

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7.28

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13.83

111

3.91

11.51

10.62

134

Antipodes Global Long Only I ATR in AU

CFS Wholesale Global Health & Biotechnology ATR in AU

3.36

-1.31

13.75

3.62

-0.73

10.22

101

Nanuk New World ATR in AU

4.9

-0.88

13.71

110

Platinum International Technology C ATR in AU

Loftus Peak Global Disruption ATR in AU

3.84

2.08

5.95

109

7.77

4.67

13.67

147

CFS Colonial First State Australian Share Growth ATR in AU IML Industrial Share ATR in AU

2.31

-2.06

5.86

Crown Rating

Risk Score

Crown Rating

Risk Score

ACS EQUITY - GLOBAL SMALL/MID CAP Fund name

Supervised The Supervised ATR in AU

2.91

-2.59

14.12

102

Crown Rating

Risk Score

ACS FIXED INT - AUSTRALIA / GLOBAL Fund name

IOOF MultiMix Diversified Fixed Interest ATR in AU

1.1

2.72

4.15

Crown Rating

Risk Score

Yarra Global Small Companies ATR in AU

6.46

1.78

11.38

111

Bell Global Emerging Companies ATR in AU

3.75

8.85

11.29

102

Pengana International Ethical Opportunity ATR in AU

1.48

0.6

10.8

PIMCO Diversified Fixed Interest ATR in AU

1.01

3.51

3.85

Fiducian Global Smaller Companies and Emerging Markets ATR in AU

5.19

-4.55

10.46

Macquarie Dynamic Bond ATR in AU

0.99

3.77

3.8

Dimensional Global Small Company Trust ATR in AU

6.09

-1.04

10.15

112

PIMCO Diversified Fixed Interest Wholesale ATR in AU

3.46

3.79

Pengana Global Small Companies ATR in AU

2.59

-7.64

9.97

Onepath Wholesale Diversified Fixed Interest Trust ATR in AU

0.98

3.35

3.61

Mercer Global Small Companies Shares ATR in AU

7.36

0.92

9.49

116

UBS Diversified Fixed Income Fund ATR in AU

0.7

3.68

3.59

Microequities Global Value Microcap Ordinary ATR in AU

3.54

2.31

9.43

Aberdeen Standard Diversified Fixed Income ATR in AU

0.96

3.27

3.47

OnePath Optimix Wholesale Global Smaller Companies Share Trust B ATR in AU

5.12

-0.97

9.27

107

CFS FirstChoice Wholesale Fixed Interest ATR in AU

0.99

3.81

3.32

AMP Capital Specialist Diversified Fixed Income A ATR in AU

0.86

3.28

3.21

AMP Experts' Choice Diversified Interest Income ATR in AU

0.85

3.32

3.17

ACS EQUITY - INFRASTRUCTURE Fund name

Crown Rating

Risk Score

Macquarie Global Infrastructure Trust II A ATR in AU

35.08

29.87

Macquarie Global Infrastructure Trust II B ATR in AU

34.83

29.46

150

5.03

12.67

Lazard Global Listed Infrastructure ATR in AU

6.27

152

Fund name

DDH Preferred Income ATR in AU

0.48

3.76

6.75

IOOF Income ATR in AU

0.37

2.73

4.12

Legg Mason Western Asset Australian Bond X ATR in AU

0.62

5.51

4.03

BlackRock Enhanced Australian Bond ATR in AU

0.65

5.47

3.86

The Trust Company Bond ATR in AU

0.69

2.6

3.77

Macquarie Core Australian Fixed Interest ATR in AU

0.58

5.43

3.76

Morningstar Australian Bonds Z ATR in AU

0.76

5.17

3.72

Legg Mason Western Asset Australian Bond A ATR in AU

0.59

5.13

3.69

AMP Capital Wholesale Australian Bond ATR in AU

0.6

5.18

3.68

OnePath ANZ Fixed Income ATR in AU

0.63

5.43

3.61

Mercer Global Unlisted Infrastructure ATR in AU

3.09

RARE Infrastructure Income ATR in AU

8.09

11.42

11.49

Redpoint Global Infrastructure Retail ATR in AU

6.76

8.04

11.32

107

Redpoint Global Infrastructure ATR in AU

6.7

7.28

10.55

107

BlackRock Global Listed Infrastructure ATR in AU

4.16

18.63

10.54

CFS Colonial First State Wholesale Global Listed Infrastructure Securities ATR in AU

7.21

Macquarie Hedged Index Global Infrastructure Securities ATR in AU

6.62

03MM1403_14-29.indd 19

12.7

3.47

6.09

11.94

10.38

10.08

ACS FIXED INT - AUSTRALIAN BOND

Crown Rating

Risk Score

6/03/2019 4:59:00 PM

INVESTMENT CENTRE

a part of

ACS FIXED INT - DIVERSIFIED CREDIT

ACS FIXED INT - INFLATION LINKED BOND

Fund name

Bentham High Yield ATR in AU

3.43

0.47

8.38

Bentham Global Income NZD ATR in AU

PIMCO Global RealReturn Wholesale ATR in AU

1.28

2.16

5.1

0.81

4.3

8.26

Ardea Real Outcome ATR in AU

0.59

2.97

4.51

Premium Asia Income ATR in AU

1.86

0.16

8.2

Ardea Premier Australian Inflation Linked Bond ATR in AU

Bentham Syndicated Loan NZD ATR in AU

1.14

4.8

3.25

1.45

5.19

8.04

Ardea Wholesale Australian Inflation Linked Bond ATR in AU

DirectMoney Personal Loan ATR in AU

0.68

1.11

4.52

3.06

8.24

7.66

Bentham Syndicated Loan ATR in AU

Mercer Australian Inflation Plus ATR in AU

0.74

2.75

2.95

1.69

7.09

Bentham Global Income ATR in AU

0.95

-0.08

6.67

0.92

3.3

2.9

Pimco Capital Securities Wholesale ATR in AU

Morningstar Global Inflation Linked Securities Hedged Z ATR in AU

3.13

-3.51

6.04

1.13

4.93

2.69

CFS Wholesale Global Credit ATR in AU

Macquarie Inflation Linked Bond ATR in AU

1.51

2.91

5.36

1.05

3.67

2.1

Firstmac High Livez Wholesale ATR in AU

Aberdeen Standard Inflation Linked Bond ATR in AU

0.36

4.66

4.94

Crown Rating

Risk Score

Crown Rating

Risk Score

ACS PROPERTY - AUSTRALIA LISTED ACS FIXED INT - GLOBAL BOND

AU Property Securities Growth Units ATR in AU

6.15

16.62

13.58

144

Crown Rating

Risk Score

Fund name

PIMCO Emerging Markets Bond ATR in AU

4.44

-3.95

7.79

Charter Hall Maxim Property Securities ATR in AU

3.48

10.59

11.23

PIMCO Emerging Markets Bond Wholesale ATR in AU

4.43

-4.07

7.72

Resolution Core Plus Property Securities A PF ATR in AU

6.56

13.04

10.5

107

Invesco Senior Secured Loans ATR in AU

2.19

1.25

6.25

Macquarie Property Securities ATR in AU

6.41

14.86

10.31

116

Invesco Wholesale Senior Secured Income ATR in AU

12.16

10.23

1.22

6.17

AU Property Securities Ordinary Units ATR in AU

4.25

2.15

Mercer Emerging Markets Debt ATR in AU

2.25

6.48

10.21

1.71

0.76

6.14

Crescent Wealth Property Retail ATR in AU

Pimco Income Wholesale ATR in AU

6.41

14.59

10.18

116

1.95

1.96

6.07

Macquarie Wholesale Property Securities ATR in AU

Russell Global Bond AUD ATR in AU

5.86

8.06

10.07

108

0.78

6.55

5.16

OnePath Optimix Wholesale Property Securities Trust B ATR in AU

Legg Mason Brandywine Global Opportunistic Fixed Income X ATR in AU

6.58

13.27

10.07

109

3.33

-0.7

5.15

UBS Property Securities Fund ATR in AU

6.22

12.97

10.02

Brandywine Global Fixed Income Trust X ATR in AU

Ironbark Paladin Property Securities ATR in AU

2.94

0.29

4.97

Russell Global Bond NZD ATR in AU

0.78

6.54

4.96

Fund name

APN Asian REIT ATR in AU

4.07

17.05

11.74

Risk Score

Premium Asia Property ATR in AU

6.39

-4.06

11.56

144

Crown Rating

Risk Score

Fund name

ACS FIXED INT - GLOBAL STRATEGIC BOND

ACS PROPERTY - GLOBAL Crown Rating

Risk Score

Fund name

Dimensional Global Bond Trust NZD ATR in AU

1.07

8.22

5.28

Resolution Capita Global Property Securities Hedged II ATR in AU

10.83

5.9

10.08

Pimco Dynamic Bond C ATR in AU

1.01

2.03

5.2

10.47

9.17

9.78

Pimco Dynamic Bond Wholesale ATR in AU

Advance Global Property ATR in AU

0.99

1.9

5.1

9.66

217

Dimensional Global Bond Trust AUD ATR in AU

1.2

3.86

3.63

CFS Colonial First State Wholesale Geared Global Property 24.03 -2.14 Securities ATR in AU

JPMorgan Global Strategic Bond ATR in AU

8.43

11.32

9.59

1.76

-0.19

3.62

IOOF Specialist Property ATR in AU

IOOF Strategic Fixed Interest ATR in AU

10.52

9.02

9.58

0.37

2.62

2.61

Principal Global Property Securities ATR in AU Resolution Global Property Securities A PF ATR in AU

10.73

6.42

9.51

Resolution Global Property Securities B NPF ATR in AU

10.83

5.88

9.48

6.5

12.12

9.47

Australian Unity Strategic Fixed Interest Trust Wholesale ATR in AU

0.29

T. Rowe Price Dynamic Global Bond ATR in AU

-0.81

1.97

0.16

2.58

1.92

Crown Rating

Perpetual Private Real Estate Implemented Portfolio ATR in AU

The tables and data contained in the Investment Centre are intended for use by professional investors and advisers only and are not to be relied upon by any other persons.

03MM1403_14-29.indd 20

6/03/2019 4:59:16 PM

March 14, 2019 Money Management | 21

Fact check

FACT CHECK:

PASS LEVEL: A+

JP MORGAN EMERGING MARKETS OPPORTUNITIES Anastasia Santoreneos writes that the JP Morgan Emerging Markets Opportunities fund is sticking to its objectives, and is all the better for it. EMERGING MARKETS have been an asset class that’s difficult to succeed in, but JP Morgan’s Emerging Markets Opportunities fund has broken the mould and met its objective set out in the fund’s product disclosure statement (PDS): to provide long-term capital growth by investing primarily in an aggressively managed portfolio of emerging markets companies.

CAPITAL GROWTH OVER THE LONG-TERM From the outset, the Emerging Markets Opportunities fund is off to a good start with a five (out of five) crown rating. It’s co-managed by three longstanding JP Morgan employees, Richard Titherington, Anuj Arora and Sonal Tanna and benchmarked against the MSCI Emerging Markets Index. The fund’s PDS doesn’t specify what exactly constitutes a long-term investment horizon, but suggests investors should have one in mind when investing. What’s generally suggested as a long-term horizon is at least over three years. Plugging in the minimum investment amount, which is defined by the fund as $25,000, into FE Analytics, investing in the fund would have returned investors $27,311 over three years, and $27,225 over five years. So, while the figures aren’t particularly high, the fund is indeed producing capital growth over what is normally seen as a long-term horizon. It’s prudent to also acknowledge that the aforementioned amount is only calculated on the income earned off the fund over those periods, and is not adjusted to growth reinvested in the fund. Turning to the fund’s returns,

03MM1403_14-29.indd 21

it has outperformed its benchmark consistently for the last five years, three years and year to date, and has continued to do so in the six months, three months and month to date. Across five years to date, the fund returned 10.56 per cent as compared to the index, which returned 10.03 per cent. It returned 19.94 per cent across three years compared to the index, which returned 16.48 per cent, and, whilst it dropped in the year to date to 0.57 per cent, it still managed to preserve more capital than the index, which dropped to -1.52 per cent.

EXPOSURE TO EM COMPANIES According to the fund’s objective, it must invest in only emerging markets companies. The Emerging Markets Opportunities fund invests wholly in the fund’s underlying sub-fund, which is essentially exactly the same, and therefore to look at what this fund invests in, we must look at what the sub-fund invests in. According to FE Analytics, the fund and its underlying sub-fund have met this requirement, with the top two holdings of the sub-fund being Tencent Holdings and Alibaba, which are both Chinese equities, and both massive players in the EM space. Taiwan Semiconductor Co, Samsung Electronics, Ping An Insurance and AIA Group similarly feature in the fund’s top ten holding, and are all also big Asian players in the EM space. Looking at it from a regional breakdown as well, the fund invests primarily in the Pacific basin, followed by the Americas, Europe Ex UK, Asia Pacific, the money market, South Africa, and the Middle East/Africa.

TALKING STRATEGY The firm’s investment specialist, emerging markets and Asia Pacific (EMAP) Equities, Alexander Treves, said the defining features of the fund were its value and quality tilt, and it’s a strategy its managers don’t intend to change given their long-term approach. At a country level, Treves said Brazil was the top contributor, with an overweight exposure to the market adding value to the fund as equities and the Brazilian Real rallied on the back of Bolsonaro, “a market-friendly candidate” winning the presidential election. Commodity names helped performance, including the largest producer of long steel in the region, Gerdau, and oil producer, Petrobas. At the sector level, stock selection in financials contributed to returns, with the fund’s only Saudi Arabian exposure, Al Rajhi, being the top contributor. And the fund’s high conviction strategy is nothing short of thorough, with Treves pushing AIA as an example of the manager’s rigorous stock selection process. “At the country level China currently fares well,” he said. “We believe the macro environment is

improving: domestic policies appear to be more closely coordinated this year on both monetary and fiscal fronts.” At the stock level, Treves also said AIA ticks boxes, given the company “meets a growing regional need for insurance as consumers become wealthier and as penetration rates for financial services rise.” Currently, the fund is overweight China, and within China, it prefers internet and insurance stocks. Financials as a sector remain the largest overweight in the portfolio, consisting of insurers and regional banks. “While global growth is decelerating, it is still healthy,” said Treves. “The primary risks to EM performance over the next year haven’t changed: a more rapid slowdown in global growth, led by the US; a dollar surge; and risk aversion.” “Our analysts’ expected return signals currently suggest plenty of opportunity in our asset class. We remain constructive and continue to see opportunity in the value space and explore high quality investment ideas that fit our approach.”

Chart 1: Performance of the fund as compared to the MSCI Emerging Markets Index and the ACS Equity – Emerging Markets sector average

Source: FE Analytics

6/03/2019 4:45:21 PM

22 | Money Management March 14, 2019

Regulation

A TICKING CLOCK: SMSFs AND MIFID II REGULATORY REQUIREMENTS The deadline for obtaining a Legal Entity Identifier is imminent, Chris Donohue warns, and selfmanaged superannuation funds trading European assets and OTC derivates need to be prepared. NOTWITHSTANDING ANOTHER EXTENSION of relief by the Australian Securities and Investments Commission (ASIC), the deadline for legal entities, including self-managed superannuation funds (SMSFs), to obtain a Legal Entity Identifier (LEI) is fast approaching. A LEI is a 20-digit, alphanumeric code that enables identification of legal entities participating in certain financial transactions. Indeed, a range of Australian financial services entities including funds, brokers/traders as well as trustees of SMSFs

03MM1403_14-29.indd 22

- may be unable to transact non-exchange trade instruments such as CFDs and FX from April 1, 2019 if they don’t have a LEI. Considering there are some 600,000 SMSFs in Australia, and that perhaps 5-10 per cent of them trade OTC instruments such as CFDs, there are potentially between 30,000-60,000 funds that are impacted by the deadline. So what is a LEI? Essentially, the LEI is a unique identifier that was conceived by the G20 post the Global Financial Crisis (GFC) to improve market transparency, particularly for complex derivative transactions; this data

is maintained in various repositories for central bank and regulator access. The Financial Stability Board (FSB) oversees the data and also uses it to ‘take the temperature’ of global markets and risk conditions.

THE IMPACT OF MIFID II The LEI is a key component of European Markets in Financial Instruments Directive (MiFID II) reporting regime, that came into effect in Europe on 3 January 2018. MiFID II reporting was introduced in Europe also following analysis of the cause of the GFC. It had the aim of

providing greater transparency in transaction identification and, therefore, strengthening investor protection for those undertaking a range of transactions. In line with this, LEIs are a global identification standard introduced in response to regulators’ requirements to identify counterparties in a range of cross border financial transactions. With over 1 million LEIs issued in over 200 countries and territories, they are now the globally preferred identifier for entities entering into financial transactions, regardless of

7/03/2019 12:12:46 PM

March 14, 2019 Money Management | 23

Regulation

“Despite being a EU requirement, MiFID II may impact all financial services entities globally as European based brokers may have satellite offices around the globe that adopt the parent’s compliance regime.” - Chris Donohue, chief executive, APIR jurisdiction, although the application of the LEI does vary between jurisdictions. For instance, under MiFID II in Europe, the LEI is required for both exchange and OTC transactions. In Australia, by contrast, it does depend on who you are transacting through, although ASIC has stated that regulations will require a LEI to be used for all OTC transactions from 31 March 2019. Irrespective of the OTC requirement, many brokers in Australia still require clients and entities to provide LEIs regardless, particularly those that have a European based parent. While the impact of MiFID II is well understood by the Australian institutional funds market, it is less well understood by trustees of SMSFs and their advisers. The question asked by many of them is: How can a Eurozone requirement possibly impact financial transactions taking place in Australia? In fact, despite being a EU requirement it may impact all financial services entities globally as European based brokers may have satellite offices around the globe that adopt the parent’s compliance regime. So, while the MiFID II reporting regime cannot directly regulate Australian entities - it can affect the way they are required to

03MM1403_14-29.indd 23

transact. It certainly impacts any Australian entities wanting to transact with certain European counterparties, including SMSFs. LEIs are not utilised in a uniform way around the world, clearly Europe appears to be the leading the way as a result of MiFIDII, but other jurisdictions such as India and the United States are using them for different purposes.

MOVING FORWARD Looking ahead, the Global Legal Entity Identifier Foundation (GLEIF) is working with digital certificate providers (a digital certificate is an attachment to an electronic message used for security purpose) to enhance the authentication characteristics of the certificate by including LEI information on the certificate. This is an extremely exciting non-financial utilisation of the LEI. Although it sounds complicated and onerous, obtaining a LEI is a one-off exercise, and once a SMSF obtains a LEI, the identifier stays with it for the entirety of its existence. While it will inevitably be seen by some as an increased layer of regulation and administration, there has in fact been a longstanding need for a globally uniform system of legal entity

identification, and the LEI requirement goes a long way in addressing this. At its core, identifiers such as the LEI are a ‘building’ block for facilitating a number of financial stability objectives. These include: supporting the aggregation of risk positions and financial data, assisting in the assessment of micro and macro prudential risks, facilitating order resolution, assisting in containing market abuse, and further facilitating straight through processing. Identifiers are likely to play an increasing role in safeguarding the financial services ecosystem in the future, particularly in light of the findings of the Royal Commission. Already in Australia, APIR and SPIN codes – which provide the identification standard for our managed funds and our superannuation funds – together

with global identifiers such as International Securities Identification Numbers (ISINs) and LEIs – have shown they have a vital role to play. They assist in facilitating the continued growth of the Australian wealth management industry as well as ensuring the smooth integration of Australian financial products into the global industry and regulatory framework. As the Australian financial system faces increased pressures of global regulatory harmonisation, product identifiers will continue to move beyond being a useful way to categorise and monitor financial products, to be an integral part of the compliance and risk management framework. Chris Donohoe is the chief executive of APIR.

WHAT IS A LEI? The legal entity identifier is a 20-character alpha numeric code that uniquely identifies legally distinct entities that engage in financial transactions. The technical specification for the LEI is OSO 17442. The LEI code is associated with certain reference date for each entity. LEI codes have been issued to over 1 million entities in more than 200 countries and territories. Chart one provides an example. Chart 1: Example LEI for ABB Secheron SA, Switzerland

Source: APIR

7/03/2019 3:21:40 PM

24 | Money Management March 14, 2019

Funds management

THE CASE FOR PERFORMANCE FEES JD de Lange writes that high performance fees in themselves aren’t a problem, but that paying high fees for poor performance is. HIGH FUND MANAGEMENT fees are always a topic of hot debate, especially in recent years as interest in low-fee, passive funds continues to rise. The argument is reasonable, but it seems the focus is often too narrowly focused on high fees alone. We believe the issue is a little more complex and it’s not high fees themselves that are the issue, but rather paying high fees for poor performance. And rightly so. Like many things in life paying fees isn’t necessarily a problem, provided you receive good value for money. When structured correctly a performance fee can make sense for the investor in a fund and the

03MM1403_14-29.indd 24

manager of that fund. Why? Because it ensures true alignment of interests between the fund manager and the investor. Some would argue this is the only way you can ensure true value because if the manager doesn’t perform they don’t get paid. After all you can get market-like returns for a very small price from a passive index-tracking fund. In order to work, performance fees need to be properly structured. You don’t want to see performance benchmarks set too low and you certainly don’t want to pay for performance that is simply regaining earlier poor performance. We believe a fair performance fee structure should

incorporate a high watermark because this ensures the investor doesn’t have to pay a performance fee until past periods of underperformance have been regained. We feel that reflects real value for money. But we also believe in choice and it’s why we offer two classes of the Allan Gray Australia Equity Fund – Class A units which charge a base fee and a smaller performance fee, and Class B units which charge zero base fee and a higher performance fee. Class B units mean you can get the index return for free and only pay for outperformance i.e. if the Fund performs in line with the index, the S&P/ASX 300

Accumulation Index, or underperforms, then the fund fee is zero and we pay the running costs. The fees kick in only when the Fund starts to outperform the benchmark and this is then shared with the investor at a ratio of 65 per cent to the investor and 35 per cent to us with the fees calculated on a high watermark basis. Typically Class B units are an alternative for investors who are sceptical of the ability of active managers to outperform the market over the long-term. If the Fund only tracks, or underperforms the index the investor pays zero fees. If the Fund outperforms the index, the investor is in profit and only then

6/03/2019 4:50:12 PM

March 14, 2019 Money Management | 25

Funds management

“A fair performance fee structure should incorporate a high watermark because this ensures the investor doesn’t have to pay a performance fee until past periods of underperformance have been regained.” - JD de Lange, chief operating officer, Allan Gray

do they give up a portion of the gain as a fee. Everyone’s perception of value for money is different. We give our clients a choice when investing in our flagship Equity Fund. They can invest in exactly the same Fund, but choose the fee structure that best suits their needs. Whichever fee class they choose, at least they know their interests and those of their manager are aligned. A poor manager can destroy a lot of wealth and fees are only one part of that. Fees are just the cost of doing business with that manager. They do not indicate value for money in any shape or form. There’s a lot of debate around this, but we are confident this structure makes us much more aligned with performance and our clients’ interests than merely growing assets.

03MM1403_14-29.indd 25

There’s currently a perception in Australia that low cost or low fees is good in financial services. We think the conversation should be about value for money, not cost. After all you can’t expect the world if you’re not prepared to pay for it. It’s not the structure or pricing you offer that matters, but your performance and whether that’s sustainable. In a low interest rate, low-inflation environment, investors and planners are looking for costeffective ways to access markets and saving on fees is, on face value, an easy way to boost returns. However, we would argue that investors should be looking at total returns, after fees. Low cost isn’t necessarily better. Surely it is performance that counts. Because after all the damage of poor performance and unnecessarily high fund manager

fees can make a huge difference to one’s retirement savings over the long term. So what is an investor supposed to do? Their homework but there is no shortcut. You can buy the market through an index fund but the only thing you can be sure of is that you will get the return of the market, minus the fee for the passive manager. However, if you buy an active manager, you are buying its people, process and philosophy. The result of these three things working together makes up the product. Critically they are three features which can be replicated for long-term consistency. JD de Lange is chief operating officer of Allan Gray.

6/03/2019 4:50:22 PM

26 | Money Management March 14, 2019

Life insurance

THE ENTWINED TWINS OF TRUST AND INTEGRITY Much has been written about trust since the Banking Royal Commission’s final report, Chris Powell writes, but how can life insurers help advisers respond? THE LIFE INSURANCE sector survey conducted by PricewaterhouseCoopers in 2016 revealed that only 42 per cent of current life insurance policyholders believed that, if they made a claim, their insurer would pay it out. Thinking about this in a different way, consider if just under half of all airline ticket holders did not believe their flight would reach its destination without crashing. No one would fly anywhere. In the financial services sector, this lack of trust was reinforced by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hearings in 2018. Of course, the hearings featured purposeful examples of where the industry failed, rather than highlighting that well over 90 per cent of all claims on life insurance policies are paid out. So why is there such a disconnect between life insurance policy holders’ perception and this reality? I believe the answer lies within the entwined twin pillars of integrity and trust. Certainly, the Hayne Royal Commission was a long time coming. The report’s recommendations will perhaps accelerate changes that had already started in the sector, particularly

03MM1403_14-29.indd 26

around corporate governance and advisers’ business models.

THE CHALLENGE FOR ADVISERS Undoubtedly, financial advisers now find themselves in particularly challenging times. The latest research from CoreData has found that amongst people who were abreast of the Royal Commission findings, levels of trust in financial planners dropped from 60 per cent (where 100 per cent is complete trust) to 35 per cent in the third quarter of 2018 and is currently at 36.6 per cent, well below pre-Royal Commission ratings. Hayne’s enquiry shone a spotlight on where the financial services industry fundamentally lost sight of what’s most valuable: the public’s trust, and the CoreData figures suggest advisers have work to do in this regard. I believe life insurance companies, as partners with advisers, have a role to play in supporting advisers navigate the evolving industry. Moreover, I am passionate about the opportunity for insurers to partner with advisers to achieve our mutual goal of rebuilding Australians’ trust in the sector. Having thought deeply about trust and its twin, integrity, this is how I believe financial services

6/03/2019 4:48:28 PM

March 14, 2019 Money Management | 27

Life insurance Strap

business can orient themselves to rebuild trust: 1. Always act with integrity This translates into corporate cultures that are based on doing the right thing by employees, customers and stakeholders. Courage is fostered, promises are kept, honesty and honour are the organisation’s touchstones. Most importantly, staff incentives support and drive the right behaviours. For example, people matter. At Integrity I personally interview each new team member to ensure alignment with our corporate values. The catalyst for creating a new life insurance company was to act differently to what we had sometimes seen in the industry. Our team is a collection of industry stalwarts that are driven by always doing the right thing. I’m passionate about protecting and growing that culture as I believe that the right people will keep the company true to its purpose. 2. Ask how we can make it easier for customers to do business with us Listen to customers (advisers and their clients) and question the internal status quo. New world companies have fundamentally changed consumers’ expectations of the relationship they should

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have with their service provider. Relevant products, increased transparency and providing customer-centric services that exceed expectations demonstrates that insurers understand and assist their customers, which is key to building trust. This feedback Integrity received from advisers and clients on their frustrations in dealing with life insurers, which identified 16 major pain points, formed the starting point in building our systems and processes. These included a lack of transparency on product and price, opaqueness around product features, ancillary benefits and calculation of premiums, duplication of information in the application process, inefficiencies in navigating application forms, and wasted time when making changes to the application. By uncovering what advisers’ and clients’ pain points are, insurers can make it easier for customers to engage with them and thus start to rebuild trust. 3. Treat everyone with fairness and respect Building trust comes from treating others with respect and fairness. For insurance companies, our employees notice, our customers notice, and our intermediaries notice when we are living to these

“For insurance companies, our employees notice, our customers notice, and our intermediaries notice when we are living to these standards, or not. One of the quickest ways to destroy trust is to be out of alignment with customer and community expectations.” - Chris Powell, managing director, Integrity Life standards, or not. One of the quickest ways to destroy trust is to be out of alignment with customer and community expectations. Perhaps the greatest test of a life insurance company’s respectfulness and fairness is at claims time. One way we can show this is by providing insurance benefits that demonstrate our care and respect for our policy holders as they deal with challenging life events. We must each play our role helping Australians have better outcomes, particularly when they face life’s unexpected challenges. This year presents an opportunity for us to set a new course as an industry, where some may struggle but where those that act with integrity will be trusted and ultimately flourish. Chris Powell is the chief executive and managing director of Integrity Life.

6/03/2019 4:48:38 PM

28 | Money Management March 14, 2019

ESG investing

COMPANIES, INVESTORS AND THE GLOBAL COMMUNITY ALL STAND TO GAIN FROM ESG INVESTING

In the global economy, corporate sustainability and the implementation of ESG are already driving tangible benefits, but Ingrid Dyott believes that there’s no shortage of future opportunities. IN RECENT YEARS approaches such as environmental, social and governance (ESG) investing, impact investing and sustainable investing have become almost mainstream in the investment world. And demand for such strategies continues to grow, as illustrated in chart one. But this doesn’t mean that there isn’t more that can be done to develop and improve ESG approaches. Indeed, it is still a relatively new area in many ways. Consider that just 20 years ago, environmental considerations were

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a non-starter in investment analysis. My first job out of college was at a small research boutique that analysed companies based on non-traditional measures of corporate performance, including environmental impact. I still remember a phone call that I made years ago to the Investor Relations group of a major public company. When I asked for environmental information I was told, “You must have the wrong number”. Not only did organisations not see the need to provide such information, but they were almost never asked for it.

INVESTMENT RESEARCH Today, of course, such information is almost standard for any company analysis. At the same time, the way that environmental issues are analysed and incorporated in investment decisions has also changed. For instance, looking at investor concerns around climate change, the industry has for many years focused on carbon emissions measurement and reporting. The engagement with company managements then evolved to considering the use of

renewable sources of energy and/ or the establishment of energy efficiency initiatives in place. Today, the conversation has evolved to considering implications on business growth from scenario analysis around science-based targets. Perhaps the biggest change for today’s analysts is that, practically speaking, they now have access to a bigger toolbox. Investors’ growing awareness of the relevance of ESG issues has spurred more corporate disclosure and fueled the

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March 14, 2019 Money Management | 29

ESG investing

availability of new ESG data sets. While the industry still lacks standardized disclosure across the board, today, 85 per cent of our investment holdings publish sustainability reports, offering a wide range of metrics. We have embraced new sources of information, but we also recognize that each new data point demands a nuanced evaluation to best understand how it fits into our assessment of investment suitability. There are no simple formulas and no shortcuts.

A FUNDAMENTAL APPROACH At its core, fundamental research entails an essential focus on investigative hard work: financial analysis, management interviews, and the study of end-markets and competition. It is important to question company management teams about their commitment to, and execution of sustainability programs: Which policies and incentives are in place to encourage good behavior? To what degree does the board exercise oversight? Company on-site visits are an essential ingredient and help provide a real sense of corporate culture at the heart of an organisation. Indeed, engaging with companies beyond the formal data is more meaningful than the data itself. Active managers, due to their deep knowledge of companies, their business practices and industries, play a key role in the ability to engage with company management around the ESG data points. Engagement with

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companies on material ESG issues is a core value-added proposition of active management that can positively influence corporate behaviors and drive sustainable long-term value for investors. Although the broad lines of investigation have not changed, our understanding of what is material and what constitutes leadership within an industry is always advancing. It used to be that having an environmental policy showed leadership. Now, leaders are innovators, willing to set science-based emissions reduction targets, for example. In my experience, investment insights come from layering and integrating the most relevant and material information on top of a solid analytical framework. That’s how we can identify areas of structural growth and financial durability in an increasingly resource constrained world.

LOOKING FORWARD It’s fascinating to think about what the next 20 years might hold for ESG investing. The world is changing rapidly through technology and innovation. At the same time, Pew Center estimates that we could add over 1 billion to the world’s population in the next 20 years, and World Bank points to GDP growth in developing countries outpacing developed. This translates into demand for better standards of living for more people globally. There is no doubt that corporations that address the unmet needs of society, while adapting operations to meet the increased demand for sustainability, will fundamentally be advantaged. It will be a

“It is important to question company management teams about their commitment to, and execution of sustainability programs: Which policies and incentives are in place to encourage good behavior? To what degree does the board exercise oversight?” - Ingrid Dyott, portfolio manager, Neuberger Berman necessity for investors to think critically about these issues. We are also seeing the role of activist investment manager develop, and this is will becoming increasingly important in coming years. Investment managers are seeking to drive change through investments, taking an active approach that allow for deeper shareholder engagement with management in a continuous, rigorous fashion within the context of broader financial and industrial considerations. Engaging in constructive dialog with portfolio companies on

material ESG issues is a core valueadd of active management that can positively influence corporate governance and drive long-term, sustainable value for clients. Ultimately, the success of sustainability endeavors has to be grounded in integrity. When goals are based on shared principles applied consistently, then companies, investors and the global community all stand to gain. Ingrid Dyott is co-portfolio manager of the of the core equity and sustainable equity strategies at Neuberger Berman.

Chart 1: Demand for ESG-Related investments continues to grow in the U.S.

Source: U.S. SIF, The Forum for Sustainable and Responsible Investment 2018 Trends Report

6/03/2019 4:51:03 PM

30 | Money Management March 14, 2019

Toolbox

MEANS TESTING FOR LIFETIME INCOME STREAMS Minh Ly breaks down the new means testing rules for lifetime income streams, which have now been legislated by Parliament. LEGISLATION FOR THE new social security means test rules of lifetime income streams (contained within the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018) passed parliament on 14 February, 2019 and received Royal Assent on 1 March, 2019. These new rules present

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significant opportunities for retirement income advice, both before and after 1 July, 2019. The new income and assets test assessments for lifetime income streams will commence from 1 July, 2019. Grandfathering provisions will apply to lifetime income streams that commence prior to this date. The new rules will not apply to

fixed term annuities and income streams, account-based pensions, defined benefit income streams or asset-test exempt income streams (for example term allocated pensions).

INCOME TEST The new rules will assess 60 per cent of payments from lifetime income streams under the income

test. For example, where a lifetime income stream pays income of $5,000 p.a., $3,000 p.a. will be assessed under the income test. For deferred lifetime income streams purchased using superannuation, the assessment will apply once income payments commence, i.e. no income assessed during the deferral period.

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March 14, 2019 Money Management | 31

Toolbox Chart 1: Comparison of old and new asset test assessment rules

Source: Challenger Assumptions: Based on a Challenger Lifetime annuity Flexible Income option (complies with CAS) and Regular Income option (with a withdrawal guarantee of 100 per cent at year 15 and does not comply with CAS) for a 66-year old male with an investment amount of $100,000.

ASSETS TEST For new lifetime income streams that meet the Capital Access Schedule (CAS) in the Superannuation Industry (Supervision) (SIS) Regulations (introduced as part of the “Innovative Superannuation Income Streams” Regulations) and where the individual has reached their ‘assessment day’, 60 per cent of its purchase amount will be assessed as an asset until the age of 84. After this, the assessment reduces to 30 per cent of the purchase amount for the rest of the person’s life. The assessment day is a new concept that is designed to determine when the new rules will apply to lifetime income streams. The definition is quite complex however for many retirees, this will generally be the day the income stream is purchased. If the new lifetime income stream provides a surrender value and/or death benefit above the CAS, the assets test assessment will be based on the greater of: • The amount assessed as above (60 per cent until age 84 with a minimum of five years, 30 per cent thereafter); • Any current or future surrender value above the limits in the CAS; and • Any current or future death benefit above the limits in the CAS.

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COMPARING THE CURRENT MEANS TEST RULES WITH THE NEW RULES Chart one compares the current assets test assessment over time with the rules applying from 1 July 2019. The new assets assessment provides an initial concession under the assets test and maintains this concession for a period of time before providing a further concession in the future. However, unlike the current rules, the assets assessment will never reach nil. These differences mean assets tested part pensioners who incorporate a lifetime income stream into their retirement portfolio from 1 July, 2019 will likely experience higher Age Pension entitlements in the early years when compared to incorporating a lifetime income stream today.

Chart 2: Linda and Leon’s projected retirement income under the current rules

Chart 3: Linda and Leon’s projected retirement income under the new rulesw

A PRACTICAL APPLICATION Consider Linda and Leon (both age 66) who retired with $300,000 each in superannuation. They are balanced investors with a 50/50 growth/defensive asset allocation. In addition, they have $50,000 in the bank for liquidity and personal assets of $20,000. They desire $60,000 p.a. income to fund their retirement but as a Continued on page 32

Source: Challenger Retirement Illustrator (beta version) July 2018 Assumptions for charts one and two: Values are in today s dollars. Rates and thresholds at 1 July, 2018. Account-based pension growth assets return 7.70 per cent p.a. and defensive assets, 3.70 per cent p.a. before management fees of 0.80 per cent and 0.60 per cent respectively. In addition, platform fees are assumed to be 0.50 per cent. Challenger Liquid Lifetime annuity (Flexible income option) quoted on 14 August, 2018, monthly payments, maximum withdrawal period, CPI indexation and nil adviser fees.

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32 | Money Management March 14, 2019

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. John is 68 and uses $200,000 to buy a lifetime annuity on 1 July 2019. This annuity complies with the Capital Access Schedule (CAS). What will be the assessed asset value under the assets test? a) $200,000 until age 84 and then $120,000 thereafter b) $80,000 until the annuity ceases c) $120,000 until age 84 and then $60,000 thereafter d) Nothing will be assessed under the assets test Continued from page 31 minimum, they require $42,000 to meet needs and essentials. They have allocated $75,000 (25 per cent of their portfolio) each to a lifetime annuity to help fund their needs and essentials for their lifetimes. This also ensures they’re never solely reliant on a single source of income, i.e. the Age Pension. Chart two projects their retirement income under the current rules and chart three under the new rules. Under the new rules, Linda and Leon experience a higher Age Pension entitlement in the early years ($4,680 higher in the first year) due to the immediate assets test concession. However, this is offset by a lower Age Pension entitlement in the later years due to a higher income test assessment, for example $1,615 lower at age 76. Regardless, in each scenario their retirement outcomes are broadly similar, with an additional layer of lifetime income in addition to the Age Pension to meet their ‘needs’ and their account-based pensions depleting by age 95.

STRATEGIC OPPORTUNITIES PRIOR TO 1 JULY, 2019 The commencement date of 1 July, 2019 for the new rules as well as grandfathering provisions for existing lifetime income streams creates some immediate strategic opportunities. Income tested clients The first opportunity is available to income tested pensioners or asset tested pensioners who will become income tested over the short term. For these clients, and where appropriate, commencing a lifetime income stream prior to 1 July 2019 can provide better Age Pension outcomes as the income test assessment under the current rules (based on a deduction amount) are generally more favourable than the new assessment. Clients who prioritise capital preservation over income The second opportunity is available to clients who prioritise access to capital, instead of higher income throughout retirement, and are looking to use a lifetime income stream that features liquidity greater than the amount allowed by the declining capital access schedule. For these clients, accessing lifetime income streams that offer a withdrawal value higher than the declining capital access schedule before 1 July, 2019 (and grandfathered under the current rules) can provide higher Age Pension outcomes. Where such an income stream was used on or after 1 July, 2019 any higher withdrawal/death benefit value will be assessed under the assets test instead of any current declining assessment or the 60 per cent/30 per cent assessment under the new rules. Minh Ly is technical services manager at Challenger.

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2. Mary, age 70 is considering buying a lifetime annuity for $100,000 with regular income of $6,000 per annum. How much will be assessed under the income test in the first year if she bought the annuity before and after 1 July 2019? Assume that the regular payments remain the same before and after 1 July. a) $ 0 if she bought it before 1 July 2019 and $3,600 if she bought it on or after 1 July 2019 b) $382 if she bought it before 1 July 2019 and $3,600 if she bought it on or after 1 July 2019 c) $ 382 if she bought it before 1 July 2019 and $2,400 if she bought it on or after 1 July 2019 d) $ 382 if she bought it before 1 July 2019 and $0 if she bought it on or after 1 July 2019 3. In the case study, Linda and Leon’s Age Pension entitlement at age 76 was lower under the new rules from 1 July 2019 compared to the current rules. This is because the income test assessment of their annuity was less favourable under the new rules. a) True b) False 4. Tom age 66 is receiving a part Age Pension and is planning to work part time for another 5 years. He buys a deferred lifetime annuity with a deferral period of 5 years using his superannuation on 1 July 2019. How will his annuity be assessed under the income test? ssessable income will be based on the deeming rules a) A b) No assessable income during the deferral period. 60% of the regular payments assessed as income after the deferral period o assessable income during the deferral period. Amount of c) N regular payments above the deduction amount will be assessed as income after the deferral period d) None of the above 5. Existing social security means testing rules based on the deduction amount apply to lifetime annuities that are: a) Purchased before 1 July 2019 b) Purchased before 1 July 2019 and where the person is receiving a social security pension urchased before 1 July 2019 and where the person is at least Age c) P Pension age d) Purchased before 1 July 2019 and where the person is below Age Pension age

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ means-testing-lifetime-income-streams For more information about the CPD Quiz, please email education@moneymanagement.com.au

7/03/2019 3:23:16 PM

1ST AUGUST 2019 FOUR SEASONS HOTEL

WOMEN IN

FINANCIAL SERVICES

AWARDS 2019 Recognise those who inspire

NOMINATIONS NOW OPEN! The future of the financial services sector relies upon the next great leaders to forge the way. As research continues to show the value of a diverse leadership team, it is increasingly important to encourage and reward women in the industry for leading, innovating and mentoring the next generation. Money Management and Super Review will recognise the determination, commitment and amazing achievements of women in financial services with its seventh annual Women in Financial Services Awards. Help us recognise these amazing women by nominating: wifsawards.moneymanagement.com.au

CATEGORIES Achievement Awards • Female BDM of the Year • Financial Planner of the Year • Innovator of the Year • Investment Professional of the Year • Marketing and communication of the Year

• Funds Management

Executive of the Year • Life Insurance Executive of the Year • Superannuation Executive of the Year

Advocacy Awards • Pro-Bono of the Year • Mentor of the Year • Employer of the year • Advocate of the year Overall awards • Rising star • Woman of the year *

*WINNER WILL BE PICKED BY MONEY MANAGEMENT AND SUPER REVIEW AND ANNOUNCED AT THE WOMEN IN FINANCIAL SERVICES AWARDS NIGHT 2019 ON 1ST AUGUST 2019.

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6/03/2019 10:54:54 AM

34 | Money Management March 14, 2019

Send your appointments to anastasia.santoreneos@moneymanagement.com.au

Appointments

Move of the WEEK Suzanne Smith General manager, superannuation Australian Prudential Regulation Authority

MLC Life Insurance confirmed that its chief customer officer, Suzanne Smith departed the insurer to become a senior executive with the Australian Prudential Regulation Authority (APRA). Smith, the current Money Management and Super Review Women in Financial Services Woman of the Year, has been

Global investment manager, Insight Investment, expanded its Australian team with the appointment of Amy Clements as product specialist. Clements transferred to Sydney after six years at Insight’s London-based headquarters where she worked with institutional clients and investment consultants. In her new role, she would support the continued expansion of Insight’s fixed income, currency and multi asset investment capabilities in the Australian market, building awareness with asset consultants, research houses and investors. Bruce Murphy, director Australia, New Zealand, said Insight’s structure evolves in line with the needs of clients, and as part of this process, the firm aims to promote internal hires into new roles across the globe. “Professionals like Amy are fundamental to the success of our client relationships and to our continued growth in the Australian market,” he said.

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appointed general manager, superannuation (specialised institutions division) at APRA. Smith joined MLC Life Insurance in 2015 and would be replaced by Sean McCormack who would carry out the role alongside his current role to become chief of group and retail partners.

The former chief executive of major insurer TAL, Jim Minto was appointed as the deputy chairman of Equity Trustees. The company announced to the Australian Securities Exchange (ASX) that Minto, who is currently a non-executive director, had been appointed to the deputy role under chairman, Jeff Kennett. Confirming the appointment, Kennett said Minto had brought particular expertise in trusteeship and understood from experience how to grow shareholder value while maintain a healthy corporate culture and excellent client service. FinClear announced it added Nick Avery, Peter Martin, Allan McGregor and Colwyn Eckles to its team, following on from a year of 120 per cent growth in staff. Avery would join the firm from Bridges Financial Services, where he was head of stockbroking, and, in his new role, would be head of equity solutions.

Martin would join after 14 years at State Street and more than 23 years in the industry, and would take on the role of equity finance trader. McGregor had 14 years’ experience in sales and team leadership, most recently with AstraZeneca, and would become head of sales and business development. Eckles would join the firm following roles at Mercer, ANZ and boutique practices, and would take charge of the portfolio review function, Managing director, David Ferrall, said being an “alternative” to traditional firms in a time when those firms are under a lot of pressure has worked well for FinClear in terms of attracting talent. SuperFriend strengthened its insights and evaluation function with the appointment of Renada Lee as impact manager, insurance and Jamie Swann as impact manager, superannuation.

In their new roles, Lee and Swann would be working to expand upon the research already undertaken by SuperFriend, and to enhance the scope of mental health and wellbeing insights across Australian workplaces. Lee would join the firm from the Workplace Gender Equality Agency where she managed their dataset, and, prior to that, she worked with public sector organisations and market research agencies on research and evaluation projects. Swann would join the firm from VicRoads, where he contributed to a program of strategic research and data collection, and, prior to that, he worked with WorkSafe Victoria. SuperFriend chief executive, Margo Lydon, said the appointments would bring a wealth of experience, which would build on the firm’s movement to raise awareness of mental health and wellbeing in Australian workplaces, and develop strategies to create change.

7/03/2019 12:22:24 PM

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6/03/2019 12:11:56 PM

OUTSIDER

ManagementMarch April 2,14, 2015 36 | Money Management 2019

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

No lift-off delivered by Spaceship

Kell, Zinn and the familiar faces at Adviser Ratings OUTSIDER was pleased to see his old mate and former Australian Securities and Investment Commission deputy chairman, Peter Kell, bob up as part of an external ratings committee for Adviser Ratings. Given some of the consumer group antecedents of Adviser Ratings, Outsider reckons that Kell will be feeling pretty comfortable in the new role given his former life as the chief executive of consumer group Choice. If Outsider remembers correctly, one of the prime movers behind the establishment was Christopher Zinn who was, in another life, media spokesman and campaign chief for Choice albeit that Zinn was more interested in adviser commissions than comparing the consumer utili-

ty of electric kettles. But before Outsider points too many fingers at the consumer group backers of Adviser Ratings he’ll also acknowledge that Money Management's founding editor and television breakfast personality, David Koch is one of the company’s directors and is listed as a media adviser. Then, of course, joining Kell on the external ratings committee is Outsider’s fellow fedora wearer, erstwhile Financial Adviser Standards and Ethics Authority (FASEA) chief executive and current Deloitte consultant, Deen Sanders. Putting rating advisers to one side, Outsider reckons the guys at Adviser Ratings make for a pretty decent coffee club – sustainably grown, of course.

OUTSIDER usually steers clear of people handing out brochures on the street and, to be fair, those handing out the brochures usually steer clear of Outsider because his portly build and surly demeanour openly suggest he is not going to sign up to a gym any time soon. Thus, as is his habit, he gave a wide berth to the young women and men handing out brochures which appeared to relate to joining Spaceship Super on the basis that he is closer to decumulation than accumulation when it comes to superannuation and because he remembers Apollo 13 and has concerns that anything relating to a spaceship might also involve stratospheric fees. Then, too, Outsider remembered that Spaceship had last year come to the notice of the Australian Securities and Investments Commission over misleading claims around its GrowthX option which the regulator found was 79 per cent invested in index-tracking funds. So, all things considered Outsider figured that even if he was inclined to join a fund called Spaceship it seemed unlikely his balance would reach new heights if the underlying investments simply hugged the index. But, of course, the young astronauts from Spaceship did not even try to give him a brochure observing that he was clearly not “the right stuff” and so he remained grounded again.

Horses for courses, bankers for banks

OUT OF CONTEXT www.moneymanagement.com.au

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OUTSIDER can think of few personalities more different than Ken Henry and Phil Chronican and so he expects significant cultural change at National Australia Bank now that Chronican has taken the chair. Where Henry reflects his background as an economist, an academic and a public service mandarin, Chronican is more the quintessential banker having cut his teeth at Westpac during some of its more challenging days, as well as at ANZ. Outsider also notes that Chronican,

while he may be filling in as NAB chief executive, was savvy enough not to have sought full-time appointment to the role possibly because he has been at close quarters to the changing of the CEO guard at three of the major banks – Westpac, ANZ and NAB. While Ken Henry’s star may not currently be in its customary ascendancy, Outsider senses that with significant changes likely to occur in Canberra later this year he would do well to dustoff his credentials for the day when tax reform is placed back on the agenda.

"I worry they are not applying a diversity lens across what they do."

"It would be an economic leap in the dark."

- Nicola Wakefield-Evans, chair of The 30% Club, tells the ABC the Coalition's statistics on women in its ranks aren't acceptable.

- Prime Minister Scott Morrison fears for what a Shorten Labor government could turn out to be.

Find us here:

7/03/2019 3:52:25 PM