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MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY
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Vol. 36 No 4 | March 24, 2022
18
ALTERNATIVES
Accessing private equity
22
FINANCIAL ADVICE
Advisers’ role in retirement
Splitting super contributions
Unpacking the personal advice DDO carve-out
SMSFS
BY LIAM CORMICAN
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SMSFs and platforms: friends or foes? PLATFORM superannuation products are revolutionising the retail superannuation sector, offering an affordable level of investment freedom that has traditionally only been available to self-managed super funds (SMSFs). To get a greater sense of the sentiment from advisers, Money Management spoke to Mario Finocchiaro, national operations manager of Australian Mortgage and Financial Advisers, who said platform innovations may very well place pressure on SMSFs. He believed they allowed investors to take control of their super with potentially reduced fees. But there is no real consensus on what the future will look like and certainly no evidence to say it’s happening right now. Data from the Australian Taxation Office shows net SMSF establishments have risen from 5,867 in 2019-20 to 23,125 in 2020-21. SMSF Association deputy chief executive and director of policy and education, Peter Burgess, said: “For many investors, platforms are not a direct substitute or replacement for an SMSF so the growth of one doesn’t mean the decline of the other. There is a place for both and, in fact, the two can and do complement each other,” Burgess said.
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28
TOOLBOX
Full feature on page 14
FINANCIAL advisers that provide personal advice may not need to comply with the obligation to take reasonable steps to comply with the Target Market Determination (TMD) in theory, according to a regulatory lawyer. Speaking on a Stockbrokers and Financial Adviser Association (SAFAA) webinar, Corey McHattan, partner at Ashurst, said personal advice providers complying with best interest duties were effectively complying with Design and Distribution Obligations (DDO) in practice. Personal advisers that wished to provide suitable products outside of a TMD to a client would still need to be careful about
getting documentation right in case obligations needed to be proven in court later. McHattan said a carve-out had been introduced by the regulator addressing the concern that the obligation to question whether a client was within the target market for a product would constitute personal advice. The carve-out allowed advisers to ask for information solely to determine whether a person was in the target market then inform the person whether they were or were not in the TMD. “But then the problem is how do you prove that you’re using that information solely for that purpose?” McHattan asked. Continued on page 3
Managed account FUM rises to $131b BY LAURA DEW
FUNDS under management in managed accounts have risen to $131.6 billion as of the end of 2021. According to the Institute of Managed Account Professionals (IMAP) in conjunction with Milliman, funds under management were $131.6 billion at the end of December 2021. This was up by $21 billion from the 30 June, 2021. In the six-month period, there had been one new company added which took the total to 49 companies, ranging from large platforms, banks and individual licensees. Toby Potter, chair of IMAP, said: “The growth rate in managed accounts is accelerating to the point where it is approaching 40% per year. This growth is up from approximately 30% per annum as recently as June 2021. “The increased use of managed accounts – MDA and SMA - is a good thing not just for the value added in dollar terms, but because it is achieved through personal advice provided to clients. The value which the systematic approach of managed accounts embodies is even more critical in the worldwide crisis we are currently facing.”
17/03/2022 11:34:23 AM
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March 24, 2022 Money Management | 3
News
Ukraine war stokes stagflation concerns BY LIAM CORMICAN
ECONOMISTS and fund managers are forecasting a small fall in global growth following the invasion of Ukraine but have warned global gross domestic product (GDP) may get worse before it gets better. UBS had lowered its global growth forecast from 4.6% to 3.6% following supply chain disruption to the automotive industry and a 50% drop in trade volumes to Russia. With the investment bank estimating a -9.7% fall to growth in Russia, it said the 1% contraction in global growth would be highly dependent on where commodity prices settled and whether energy supply to Europe would be disrupted. “The shift in commodity futures since the invasion of Ukraine is likely to push the global inflation peak 1pp higher in 2022, and further erode real spending power of households,” it said. “In our most adverse scenario, global growth could fall further to just above 2% and Europe would enter recession.” Diana Mousina, AMP Capital economist, said the impact on global GDP was minimal because Ukraine
and Russia only made up 3.5% of global GDP in purchasing power parity terms. According to Mousina, the larger concern for global GDP would be the flow-on impact from the surge in inflation and the hit to consumer purchasing power in other economies, flagging the eurozone as the biggest worry. “The countries of the Eurozone account for 13% of global GDP so a significant change in Eurozone GDP would make a noticeable impact to global GDP.” AMP had already cut its global
Chart 1: Eurozone inflation measures
Source: Bloomberg, AMP
Unpacking the personal advice DDO carve-out Continued from page 1 “I’ve had a lot of discussions with the Australian Securities and Investments Commission (ASIC)… and it’s still not entirely clear to me.” McHattan said the safest approach was to ring fence the information and only use it for TMD interpretations and not for any other purpose like marketing. “That may seem like overkill, but to me, that’s really the only way you can be confident you can rely on the carve-out,” he said. “Otherwise, you do run the risk that the client will come along and say well, ‘but I answered all these questions, I thought the issuer or distributor was going to take into account my particular situations and needs’.”
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GDP forecast from 4.4% to 4% in light of the unfolding geopolitical situation. Despite the belief that inflation would remain high in the near term, David Eiswert, T. Rowe Price portfolio manager, said investors may need to operate in an unusual situation of falling inflation and rising interest rates. “Long term, we believe inflation will settle lower than in recent months, but still at higher levels than the period before the pandemic. The market remains mispriced for this environment.
“Aside from the very concerning humanitarian issues, the Russia/ Ukraine conflict has ramifications for future energy policy and nearterm inflation as energy prices spike. We have no certainty on how the current crisis in Ukraine will ultimately play out, but we will continue to monitor the situation.” Echoing Eiswert, Ben Powell, Blackrock Investment Institute, APAC chief investment strategist, said the spectre of stagflation had been raised, something that was not in play before due to the economy’s strong growth momentum. “We prefer to take risk in developed market equities against the inflationary backdrop of negative real bond yields,” Powell said. “We expect the global energy shock to hurt corporate earnings, especially in Europe. Recent market declines reflected this, we believe, and the region’s stocks are highly geared toward global growth. “We stay underweight government bonds. They are losing their diversification benefits, and we see investors demanding greater compensation for holding them amid higher inflation and larger debt loads. Within the asset class, we prefer short-dated and inflationlinked bonds.”
Clime commits to increasing adviser network BY LAURA DEW
CLIME Investment Management has committed to increasing its adviser network by 5-10% over the next calendar year as it receives an influx of enquiries. In its half-year results to the Australian Securities Exchange (ASX), the firm detailed plans for “growth in adviser recruitment with opportunities in acquisitions and joint ventures” in its 2022 outlook. Speaking to Money Management, chief executive, Annick Donat, said: “We are expecting adviser growth of 5% - 10% over the calendar year. “The Group is seeing an increase in enquiries from practices and boutique fund managers to join the group or use our AFSL services. Where there is a strategic fit, we will consider capital investment (subject to our due
diligence process).” Clime currently had $4 billion in funds under advice, up 6.4% from $3.7 billion at the end of June, and it noted it had seen increased activity across Madison Financial Group, which it acquired in June 2020. It added: “Both the current pipeline and level of interest from prospective advisers to join the Madison community is encouraging. Madison is anticipating reporting an increase in adviser numbers in FY22 despite the continuing decline in the industry. “The wholesale licensing and investment service is attracting high quality professional advice firms seeking support for their high net worth clients,” The number of advisers in the industry had been in decline with number of total advisers at 17,249, according to Wealth Data.
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4 | Money Management March 24, 2022
Editorial
laura.dew@moneymanagement.com.au
HAVE WE SEEN IT ALL BEFORE?
FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000
Editor: Laura Dew
This month’s announcement of the terms of reference for the Quality of Advice Review elicit a certain element of deja’vu among advisers.
Tel: 0438 836 560 laura.dew@moneymanagement.com.au Associate Editor - Research: Oksana Patron
THE TERMS of reference for the Quality of Advice Review, to be led by lawyer Michelle Levy, made for interesting reading this month regarding what had been included and excluded following the draft terms. On the table was principlebased regulation, simplifying documentation and streamlining regulatory compliance obligations. Off the table was professional standards for financial advisers and changes to the definitions of ‘retail client’, ‘wholesale client’ and sophisticated investors as well as the income and asset thresholds. With this Review coming not long after the Hayne Royal Commission, it is easy to see how advisers may feel like they have seen it all before and for them to question whether they should bother to make a submission. While associations are encouraging financial advisers to share their views and opinion, advisers themselves feel jaded and question whether their contribution will make a difference in the walls of Parliament House. Comments to Money Management from advisers
Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au ADVERTISING Account Director: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Director: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Junior Account Manager: Karan Bagai Tel: 0438 905 121 karan.bagai@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi
regarding the Review have included ‘too little, too late’, ‘putting the cart before the horse’ and ‘just gluing some bits back together’. Years of reviews and consultations have already taken place, resulting in strict regulatory and educational consequence not to mention adviser fatigue, so how will this review be different and will its recommendations come in force quick enough to prevent a total exodus of the industry? However, one cannot deny that the review’s aims and
ambition should be lauded. After all, it is quite clear that the advice gap is only getting wider, advisers are leaving the industry in droves, the compliance burden is significant for advisers and advice is costing more and more and out of reach for the general population. If this review is willing to explore these and can go some way to making improvements in the space then it will be a worthwhile endeavour.
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17/03/2022 10:49:07 AM
March 24, 2022 Money Management | 5
News
Synchron snapped up by WT Financial Group BY OKSANA PATRON
AUSTRALIA’S largest privately-owned financial adviser group, Synchron, has been acquired by WT Financial Group, creating a business with more than 600 advisers and $16 billion in funds under advice. WT Financial Group was the parent company of advice licensee and dealer group Wealth Today. The acquisition would be “highly synergistic and accretive to earnings” and on settlement, would see the company’s business-to-business operations to encompass Wealth Today, Sentry Group and Synchron. This would make WT Financial Group the largest independent advice network in Australia, the group said in the announcement to the Australian Securities Exchange (ASX). The move would add more than $360 million in-force annual insurance premium as well as more than $25 million of new insurance premium sales per annum. Following the acquisition, WT provided FY23
guidance of EBITDA (earnings before interest, taxes, depreciation and amortisation) of above $7 million and net profit after tax (NPAT) of $4 million. Synchron founders Don Trapnell and John Prossor would continue working in the business with Trapnell assuming the role of chairman of WTL’s Synchron subsidiary. The company explained that a total vendor consideration for the acquisition would be up to $7.96 million payable in a combination of cash and shares over two years, subject to various terms and conditions, and WT Financial Group would also assume liabilities of around $3 million and would expect to incur transaction and integration costs of between $1-2 million bringing the anticipated total value of the acquisition to $12-13 million. To assist with funding of the acquisition, WTL completed a placement on 11 March of 30.5 million new shares at $0.10 each to institutional and professional investors to raise $3.05 million, underscoring investor confidence in the
company and the financial advice sector. Commenting on the acquisition, WTL chief executive, Keith Cullen, said: “The acquisition cements WTL as the largest independent – or non-institutionally-owned, non-product producing financial adviser network in Australia establishing the right scale of operations to enable us to provide the critical supports advisers in our modernised industry demand. “Selling Synchron into WTL represents the next stage of growth for our company. With WTL’s focus on outcomes for its advisers, and its strong strategic direction, I am confident that the Synchron business will benefit from integration into the WTL business - with advisers from each of the cohorts benefiting from a broader base of personnel and programs to help support and grow their businesses,” Trapnell added. “Both myself and John Prossor are excited at becoming shareholders of WTL and we both look forward to contributing to the expanded group operations and to creating further value for all WTL shareholders”.
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This information was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714. This information is for advice professionals only. This information provided is factual only and does not constitute financial product advice. Before acting on it you should seek independent advice about its appropriateness to your and your clients’ objectives, financial situation and needs.
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16/03/2022 2:23:38 PM
6 | Money Management March 24, 2022
News
Industry reacts to Quality of Advice Review BY LAURA DEW
THE Government has been accused of ‘cherry-picking’ issues for the Quality of Advice Review as it reacts to the publication of its terms of reference. Financial services and superannuation regulation lawyer, Michelle Levy, had been appointed as reviewer and would assess how the regulatory framework could deliver better outcomes for customers. This included whether there were opportunities to streamline and simplify regulatory compliance to reduce costs and duplication, how to improve the availability and clarity of documents provided to consumers and whether parts of the regulatory framework had created unintended consequences. However, there were several proposed ideas which were excluded including income and asset thresholds for wholesale investors and financial services redress arrangements. Jane Rennie, general manager for external affairs at
CPA Australia, said: “We’d hoped the Terms of Reference would include some of the longstanding issues in the sector, such as the wholesale client and sophisticated investor thresholds. Unfortunately, these have been specifically excluded, to the potential detriment of these consumers. “The Terms of Reference cherry pick some issues while skating over others. We’ve tried this approach with financial advice before.” But Financial Planning Association of Australia (FPA) chief executive, Sarah Abood, said the review closely aligned
with the FPA’s suggestions and welcomed the opportunity for financial advisers to present their views. “The final terms of reference are sensible and closely align to the FPA’s vision for the review. “It is critical to have the view of all stakeholders in the profession included in the review, in particular financial planners and their clients who can provide real world, practical examples of how the current regulatory environment and requirements adversely impact the client experience.” John Maroney, chief executive of the SMSF Association, said:
“Affordability and access to advice is a significant issue so it presents an opportunity to investigate how the regulatory framework can deliver better outcomes for consumers by simplifying and reducing the cost of regulatory compliance”. Blake Briggs, acting chief executive at the Financial Services Council (FSC), said: “Michelle has been an active supporter of the advice industry, such as leading work on a range of wealth management issues across superannuation, life insurance and advice to lower compliance and operational costs for advisers. “The Quality of Advice Review is an opportunity to make advice affordable and accessible. “The design of the Life Insurance Framework will be an important part of this Review, as will the challenges of underinsurance and supporting access to affordable advice.” The public were invited to make submissions and a report would be provided to the Government by 16 December, 2022.
2022: the year of change for SMSFs BY LIAM CORMICAN
THIS year will be a year of adjustment and transition for the Self-Managed Superannuation Fund (SMSF) sector, according to the SMSF Association. Speaking to Money Management, Peter Burgess, SMSF Association deputy chief executive and director of policy and education, said the first major change that the industry was adjusting to was the extension of non-concessional bring-forward rules in the Income Tax Assessment Act, paving the way for the removal of the work test for individuals aged 67 – 74 from 1 July, 2022. “While these changes are not exclusive to the SMSF sector, they will undoubtedly have their biggest impact in the SMSF sector,” he said. “These changes, together with a reduction in the eligibility age for making downsizer contributions from age 65 to 60, will provide extra flexibility for older Australians to contribute to their super.”
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He said the SMSF sector was also eagerly awaiting the release of further details about the two-year amnesty period for legacy pensions and the residency rule changes announced in last year’s Federal Budget. “With a Federal election looming it’s unclear when these details will be released but it’s worth keeping an eye for these in 2022.” According to Burgess, it was important for SMSFs that held property to ensure any lease arrangements remained on commercial arm’s length terms and that those terms were properly documented. “Advisers and clients also need to be aware of the new rules which require company directors to obtain a Director ID,” he said. “Given around 65% of all SMSFs have a corporate trustee, a significant proportion of the SMSF population will need to take action by 30 November 2022, or much earlier if they are a newly-appointed director, to comply with the new rules.” Advisers and SMSF clients also needed to be
aware of the new Superstream standards for SMSF rollovers which have applied since late last year, Burgess said. “In order for an SMSF to now receive rollovers from an Australian Prudential Regulation Authority (APRA) regulated fund, the fund must be Superstream compliant.” Burgess said superannuation policy changes were inevitable with a change in Government. “A tightening of the contribution caps and a lowering of the Division 293 income threshold for taxing super contributions might be on the cards if Labor’s previous super policy is anything to go by. “The abolition of new limited recourse borrowing arrangements (LRBAs) is another possibility.” Shadow Treasurer Jim Chalmers ruled out putting a limit on superannuation balances or imposing an earnings tax on members’ retirement phase if Labor is elected, following industry calls to address extremely large balances.
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8 | Money Management March 24, 2022
News
Financial planning peer group the only segment with new licensees BY OKSANA PATRON
THE financial planning peer group continued to be the only segment that saw new licensees in the week to 11 March, while the total adviser numbers stabilised at 17,249, posting an insignificant drop from 17,251 the previous week, according to Wealth Data. The highest weekly growth belonged to Prosperity Wealth Advisory which commenced with seven advisers, after they had left the AMP Group’s Hillross. At the same time, Insignia ended
the week in the green with three more advisers, after having hired four and lost one to Count. As far as the losses were concerned, Escala saw a departure of six advisers, as according to the Australian Securities and Investments Commission’s (ASIC) Financial Adviser Register (FAR). However, according to Wealth Data, these advisers may have stayed within the company but were no longer providing retail advice. Following this, there were four licensee owners who had lost a net two advisers including Australian Unity, Fiducian and The
Loan Market group which continued to run down their adviser team, and a very long tail of 36 firms this week having lost one adviser, including one licensee down to zero advisers. However, the year-to-date data indicated that Insignia continued to lead the way down in terms of losses and was (-44) advisers down, making it a large gap compared to AMP which was down at 17. AIA continued to lose advisers and was now down 11 while Findex lost 10 advisers so far alongside FSSSP (Aware Super).
AFCA consults on proposed user-pays funding model BY LIAM CORMICAN
THE Australian Financial Complaints Authority (AFCA) is consulting on a proposed userpays funding model for complaints in which 98% of investment and advice members will only pay the annual registration fee of $376. AFCA said the model would reduce the burden on small members like financial planning firms and brokers, as well as other less frequent users of the scheme, through its user-pays approach and the buffer of five free complaints. AFCA chief operating officer, Justin Untersteiner, said the model would minimise the crosssubsidisation across sectors that had been occurring under the interim model put in place at AFCA’s inception in 2018. He said this was because it considered both the volume of complaints registered for a firm along with the time taken to resolve those complaints. “Our user-pays approach incentivises firms to use internal dispute resolution to decrease complaints to AFCA. Firms can absolutely significantly reduce their fees and charges through improvements to their own processes and procedures,” Untersteiner said. Under the proposed model, most of the 3,000 approximate investment and advice members (94%) would either experience reduced or the same total annual
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fees, with only 6% seeing an increase (largely due to their higher relative complaint volumes). The complaints authority currently had many investment and advice members who did not hold a licence but were registered as a credit representative. The vast majority of credit representatives would pay only $66 a year under the proposed model. AFCA chief ombudsman and chief executive, David Locke, told members: “It’s a fair, transparent and equitable model that is supported by strong data and modelling. “We have listened to what you have told us over the past few years and this has been used to
design a model that rewards good performance and early resolution, and apportions fees fairly based on use of AFCA’s services.” Under the user-pays model, firms would have control over the fees they paid by managing their complaints well, he said. The proposed funding model included a single registration fee, a simplified complaints fee structure and introduced five free complaints per year to all members. It removed the superannuation levy and would bring superannuation funds under the same fee structure as other AFCA members – with a positive or neutral impact for most superannuation members.
Under the proposed model, 66% of fees would be recovered from the 2.5% of AFCA’s members that represent 66% of all complaints received by AFCA. About 90% of AFCA members, covering banking, insurance, superannuation, investment, and advice, would see a positive or neutral impact on total cost with one in five experiencing a decrease in fees. Overall, 95% of licensed financial firm members of the AFCA external dispute resolution scheme would pay only their annual registration fee each year, currently estimated to be $376 for the coming financial year. Among authorised credit representatives, 99.9% would pay only $65.98 annually – steady with their annual membership levy. The proposed user-pays model emerged from a study of AFCA’s funding by PwC Australia that incorporated feedback from members, including submissions made to last year’s Treasury-led Independent Review of AFCA. AFCA had been seeking feedback on the proposed model from firms and industry groups in recent weeks and held member webinars. The organisation would be taking feedback from members during a six-week consultation period that was expected to end on 22 April. The model would then be put to AFCA’s independent board in May for a decision. Any changes would take effect from 1 July, 2022.
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March 24, 2022 Money Management | 9
News
Labor commits to ‘tweaking’ YFYS BY LIAM CORMICAN
LABOR would not make any “wholesale changes” to Your Future, Your Super reforms but has instead committed to tweaking aspects of it in response to emergent challenges that could be flagged by the industry. Speaking at a Financial Services Council (FSC) industry event, Shadow Treasurer, Jim Chalmers, said Labor would work in tandem with industry. “If problems emerge or challenges emerge, and we can be convinced that there is a tweak that’s necessary, then we will tweak it, but we don’t sit down working out how we can kind of begin again.” “A lot of the issues that we raised and dug in on frankly, the admin fees, the way that some of the investments were treated and measured, the investment penalties, some of those issues the
Government dealt with [and] that’s a good thing,” Chalmers said. A good example of the kind of tweaking that could occur, according to Chalmers, was Labor’s proposed changes to faith-based superannuation. If elected, Labor would make the Australian Prudential Regulation Authority (APRA) consider religious affiliations of super funds when applying the recently-introduced performance benchmark. Responding to the FSC acting chief executive, Blake Briggs’, comment thanking Labor for supporting the Government’s Retirement Income Covenant, Chalmers said Labor’s strategy had been to offer bipartisan support where it was warranted and to only “kick out” against the Government when needed. One of those examples, said Chalmers, was Labor’s push for the Government to follow the Superannuation Guarantee (SG) legislative
Would tax-deductible initial advice help the advice gap? BY LAURA DEW
MAKING initial advice tax-deductible would be a “no brainer” move by the Government to encourage people to seek advice. Jonathan Wu, executive director and senior financial adviser at SWU Invest, which recently set up an online investing service, said the burden of compliance on firms was not understood by the Government. Ahead of the election, Wu said he had not yet seen any proposals from the Government or opposition that he felt would improve the financial advice system. “Compliance is the biggest challenge and it is impacting firms’ bottom line, the number of people leaving the industry is astounding and the Government is not something concrete. “How can ongoing fees be tax-deductible but not initial fees. It is a no brainer move, it would be such an easy win and encourage people to seek advice.” He said people were still reluctant to seek advice or failed to appreciate its value and if they held off from seeking advice until retirement, this left them with minimal options to take. “There’s a portion of people who can’t afford advice and a portion who don’t understand its value. People don’t think they need financial advice until retirement or a life event triggers them to seek advice, it isn’t a life-threatening issue for them, but then they are stuffed as they can’t do much with their superannuation. People are not starting early enough and they could be using things like downsizer contributions.” He hoped the firm’s SWU Online Invest service would help people who were reluctant to seek advice by offering them a managed portfolio. “There are a lot of people who have generated a lot of cash during the pandemic and they are the demographic that won’t seek advice because they can’t afford it or don’t think it is valuable. They will only likely believe in it when they receive the transfer of wealth from their parents. “Hopefully our service will be an opportunity for them to get on the front foot and receive guidance.”
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timeframe which was slated to increase to 12% by 1 July, 2025. “A lot of the disagreements that we’ve had with the government, we’ve been on the same side as you.” Following signalling from the Government that it would restrict SG rises in the future, Senator Jane Hume, minister for superannuation, financial services and the digital economy, said late last year that the SG rise could not be changed without opposition support and “it won’t be because it is already legislated”.
Aussies prioritising advisers’ knowledge of responsible investment BY OKSANA PATRON
FOUR in five Australians want their money in superannuation, banks and other investments to be invested responsibly but, at the same time, believe financial service providers need to do a better job of meeting expectations, according to the Responsible Investment Association Australasia (RIAA). In its From Value to Riches report, the organisation said the appetite for sustainable and responsible investing continued to grow, up 28% from 2020, and this extended to their choice of adviser. In particular, the bar was high for financial advisers to be more knowledgeable about responsible investment which became more important than prioritisation of investment returns for the first time. Some 64% wanted their adviser to have knowledge of responsible investment, up from 54%, compared to 58% who prioritised investment returns. Almost half (47%) wanted their adviser to provide them with responsible investment recommendations and 43% wanted them to know which responsible products were independently certified.
The RIAA study results were consistent with the findings from the research from behavioural finance, Oxford Risk, which said that advisers who were unable to demonstrate adequate commitment to environmental, social, governance (ESG) investing could start losing clients. According to the RIAA’s study, 74% of Australians considered moving to another provider if they found out their current fund was investing in companies engaged in activities inconsistent with their values. Simon O’Connor, chief executive of RIAA, said: “Australians are demanding more transparency from their providers, with 75% wanting to know which companies their super fund, bank or other investments are invested in. They are attuned to the threat of greenwashing, and it is holding many people back, particularly when it comes to switching to an ‘ethical’ bank. “Independent verification of sustainability claims is becoming key to winning trust. Three-quarters of Australians say they would be more likely to invest in responsible investment products that have been independently certified by a third party.”
16/03/2022 2:25:18 PM
10 | Money Management March 24, 2022
News
BT clears up work test changes BY LIAM CORMICAN
BT has cleared up recent changes to the work test, confirming that it will no longer be required for non-concessional, bring forward non-concessional and small business contributions up to the age of 75. Speaking to Money Management, Tim Howard, BT advice technical and regulatory, said amendments to the Superannuation Industry (Supervision) Act (SIS) had made work test rules simpler for older Australians wishing to make contributions. The amendments had passed Senate in early February and received Royal Assent in February 22, to be introduced from next financial year, but Howard said he had received a number of enquiries from advisers about what the changes entailed. “There was no indication or commentary around the extension, it was expected that it would cover all voluntary member contributions and now we’ve seen the changes to the SIS regulations [so] we know it
BY GARY JACKSON
extends to that,” he said. “It’s made contributing easier, it’s made super fund trustees’ jobs easier in the simplicity and what they need to check to accept a contribution and it makes the planning opportunities better,” Howard said. He said the changes would benefit those with small businesses. “That’s historically been a challenge for small business owners that might sell the business one year, [they’re] no longer working [and they] want to make a large, small business Capital Gains
Tax exempt contribution the next year, but they’re no longer meeting the work test. “We now have certainty that they will be able to do that now.” Howard said members wishing to make a deduction with a member contribution would still need to meet the work test. “Those requirements have been moved into the Income Tax Assessment Act and will effectively be on the declaration that you sign when you lodge your notice of intent to claim a deduction with a super fund.”
Study calls for financial literacy shake-up A study from Griffith University has recommended financial literacy by taught in a standalone subject to high school aged students or, at the least, through a co-curricular program during pastoral care. Funded by Suncorp and the Financial Basics Foundation, the report’s findings were based on interviews and focus groups conducted at four Queensland schools in regional and urban areas. Speaking to Money Management, report co-author, Dr Laura de Zwaan, said one of the biggest takeaways of the report was that many students struggled to explain financial concepts such as compound interest, let alone the calculations that were currently included in their curriculum. The other big takeaway was that most students appeared to be good savers but upon further evaluation, they were passive rather than active savers. That was because discussions with older students who had expenses revealed they did not know how to moderate spending in order to save. De Zwaan said financial literacy was only taught in mathematics up to year 10 and in lower levels of mathematics in year 11 and 12 and that the way it was taught was not “entirely relevant”. “A lot of the students we’ve talked to say maths is
04MM240322_01-13.indd 10
Aussie funds hold up as market sells off in February
their least-favourite subject so it’s not a great place to house it if people are already disliking that particular subject,” de Zwaan said. “They might be teaching things like share prices, which is interesting as the kids always tell us they want to know about investing. But I think the way it’s taught isn’t going to connect with them because they’re not actually buying shares themselves at that age.” The report aspired for a standalone subject, or at the least, a co-curriculum program that could emulate what was seen in many states in the United States in which students learnt about basic financial literacy over several weeks during pastoral care or home room. De Zwaan said teachers could utilise information from the Australian Securities and Investments Commission’s (ASIC) Moneysmart website or invite in education organisations. “I think that it’s about harnessing what’s already out there and then bringing it into the schools,” she said. “The big thing I think we need to rethink is how we deliver it currently, and I think just moving that focus from calculations to concepts, because the kids can understand the concepts and if you have those stories to go along with them, then they’re going to get more out of it.”
AUSTRALIAN equity funds and those exposed to commodities such as gold and oil were best able to make money during February, when large parts of the market sold off after Russia launched an invasion of Ukraine. Global stockmarkets fell last month as investor concerns around inflation and rate hikes by central banks were overtaken by Russia’s decision to send troops into Ukraine. The international community responded with a series of sanctions against Russia. Global equities (represented by the MSCI AC World) ended February down 5.4% in Australian dollar terms, while Russian stocks lost more than 50%. The ASX 200 was up 2.1% for the month. This risk-off environment meant that most funds struggled to make returns last month. FE fundinfo data showed only one-quarter of funds for sale in Australia made a positive total return during February (466 out of 1,897 examined). The best result came from the Australian Core Strategies (ACS) Commodity & Energy sector, where the rising price of oil and other key goods such as wheat meant the average fund was up 4.9% over the month. It was followed by ACS Equity Australia Geared (up 2.8%), ACS Equity Australia Equity Income (2.7%) and ACS Equity Australia (1.6%). Just eight sectors (out of 36 in the ACS universe) saw their average member post a positive return last month, with the rest in the red. The heaviest average loss came from the ACS Equity Emerging Markets sector, down 6.6%, while ACS Equity Europe wasn’t too far behind with an average fall of 6.2%. When it came to individual funds, the highest return in February came from BetaShares Global Gold Miners ETF, which was up 11.8%, as investors returned to gold for its safe haven and defensive characteristics.
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March 24, 2022 Money Management | 11
News
ALRC needs to ‘tread carefully’ with simplifying Corporations Act: TAA BY LIAM CORMICAN
THE Advisers Association (TAA) says the Australian Law Reform Commission (ALRC) needs to “tread carefully” with simplifying the Corporations Act and continue to conduct wide-ranging consultation with stakeholders, including personal financial advice clients. Although, the association said it was broadly supportive of recommendations by the ALRC to rationalise the Corporations Act and Corporations Regulations, as it supported any changes to improve consumer understanding and confidence. Speaking in relation to the ALRC Interim Report, TAA chief executive, Neil Macdonald said: “We highly value the consultative approach being taken by the ALRC and commend the extensive work completed to date to identify the issues and proposed solutions to address the complexity of the current legislation and instruments”.
But the TAA’s submission called for detailed impact statements on a wide variety of stakeholders as, according to the association, financial adviser clients had very different needs to people who had only experienced product solutions, or who had never received advice. Macdonald said it might be prudent to wait until the delivery of Treasury’s Quality of Advice Review in order to avoid two sets of changes being implemented within a relatively short timeframe. “Let’s look very closely at the potential impact of any changes on consumers, advisers and other stakeholders before we leap,” he said. However, TAA was supportive of many ALRC recommendations, including the recommendation to
simplify the definitions of ‘financial advice’ and ‘financial product advice’. “We believe the time for separating financial advice from product is long overdue,” Macdonald said. “There has been far too much focus in the law on financial product, to the detriment of financial advice, for far too long.” TAA had made several other recent submissions, including to Treasury, the Australian Securities and Investments Commission (ASIC) and the Financial Services Council (FSC), calling for the separation of advice and product to better align with consumer expectations, reduce the risks of vertical alignment and recognise the changing operating environment of professional advisers. He said TAA firmly believed the term ‘general advice’ confused consumers and raised false expectations and assumptions that they had received advice when they had not.
ASIC releases final sitting dates for 2022 financial adviser exams THE Australian Securities and Investments Commission (ASIC) announced the dates for the next three sittings of the financial adviser exam which will be held in May, July and November, 2022. The dates for all remaining 2022 exam sittings were: Exam Sitting 17
Exam Date
May 2022
Thursday 12/5
Rising volatility brings new challenges
Friday 13/5 Saturday 14/5
BY OKSANA PATRON
INVESTORS need to be prepared to actively manage rising volatility as markets are currently facing significant uncertainty with a number of macroeconomic themes colliding, according to SG Hiscock & Company. This would also mean investors needed to factor in the likelihood of lower returns from equities. Hamish Tadgell, portfolio manager at SG Hiscock, stressed that even before the escalation of events in Ukraine, there had already been an increase in volatility as markets grappled with the tug of war between rising inflation concerns, monetary tightening, and post COVID economic recovery. Tadgell said the most important question was how much was related to event-driven and COVID-19 versus structural shifts. “The other question for companies is: will they continue to be able to pass on rising cost pressures to consumers? If inflation proves more persistent, and particularly food and energy prices remain higher, it could start to change consumer behaviour and weigh on economic growth,” he said. On top of that, historically speaking rising inflation
04MM240322_01-13.indd 11
episodes generally coincided with unexpected supply shocks and the COVID-19 pandemic arguably resulted in the biggest supply shock in history with the effective lockdown of all economies. “There is also growing evidence of structural changes driving inflation, including decarbonisation, rising popularist politics, greater government intervention and growing protectionism and geopolitical realignment. These are all inflationary and point to us entering a new higher inflation regime,” he added. “Investors need to be aware higher inflation and interest rates will have an impact on asset prices and returns from equities will likely be lower going forward. “The Ukrainian conflict, and sharp rise in commodity prices, also raises the question whether we are currently seeing peak inflation, and potential for the inflation narrative to take a breather. “Any near-term fade in inflation expectations would likely be positive for growth stocks given their sharp sell-off, whilst reopening will continue to provide tailwinds for cyclicals such as travel and energy stocks. Both scenarios are plausible, and support the argument for maintaining a diversified portfolio and need to actively manage risks.”
Monday 16/5 Enrolments for Sitting 17 open on 4 April, 2022 and close on 26 April, 2022. Exam Sitting 18
Exam Date
July 2022
Thursday 28/7 Friday 29/7 Saturday 30/7 Monday 1/8
Enrolments for Sitting 18 open on 20 June, 2022 and close on 12 July, 2022. Exam Sitting 19
Exam Date
November 2022
Thursday 3/11
Enrolments for Sitting 19 open on 23 September, 2022 and close on 13 October, 2022.
16/03/2022 7:14:12 PM
12 | Money Management March 24, 2022
News
RIC implementation pathway outlined by regulators BY LIAM CORMICAN
THE Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have issued a joint letter to all registrable superannuation entity (RSE) licensees on the implementation of the Retirement Income Covenant (RIC). RSE licensees would be required to formulate a retirement income strategy by 1 July, 2022, following the Government’s introduction of the RIC through legislative amendments to the Superannuation Industry (Supervision) Act 1993. “These legislative amendments are an important step in broadening industry focus beyond the accumulation phase to advance the decumulation, or retirement, phase of superannuation, and in encouraging RSE licensees to innovate to improve outcomes for their members in retirement,” the joint letter noted. APRA and ASIC said they did not intend to issue detailed regulatory guidance on how RSE licensees should implement the RIC, instead time
would be allowed for RSE licensees to drive their RIC strategic direction. The regulators said there were several steps that a prudent RSE licensee would take to implement their RIC strategy outlined in the table below: APRA and ASIC suggested RSE licensees embedded their RIC strategies in existing business planning and governance frameworks, risk management practices and controls, as well
as by assessing the adequacy of resources to support the retirement phase. “There may also be opportunities for RSE licensees to use their retirement income strategy to assist meeting other obligations, including the Design and Distribution Obligations,” they said. Although the RIC did not require RSE licensees to develop or offer retirement income products, APRA and ASIC expected RSE licensees to consider making changes to any existing retirement income product offerings. “A retirement income strategy may also include providing a range of assistance to members, such as developing specific drawdown patterns, providing budgeting tools or expenditure calculators, providing factual information about key retirement topics, and providing forecasts to beneficiaries during the accumulation phase about potential income in retirement,” the regulators said. APRA’s consultation on how the RIC could be integrated into the superannuation prudential framework was expected to commence later this year.
High inflation calls for investors to avoid ‘buying the dip’
Don’t bank on bonds to keep protecting portfolios: BlackRock
BY LAURA DEW
BY GARY JACKSON
THE Russian war with Ukraine will likely hasten the trajectory of stimulus and economic growth fading while input costs are rising, according to MFS. Rob Almeida, global investment strategist at MFS, said the trend for rising inflation was already underway before the invasion and would now be accelerated. Inflation in the US was already 7.5%, the highest it had been for 40 years, and 4.9% in the UK. This inflation impact would be particularly evident when considering energy and oil prices. “Any potential increase in oil prices will weigh on global growth and corporate profits. And given the high starting point for inflation (7.5% in the US and over 5% in Eurozone), I fear economic models may understate the impact of a further rise on overall inflation. He said the current situation also bucked the trend by being an environment where investors should avoid following the traditional adage of ‘buy the dip’. “For more than a decade, investors have been conditioned to “buy the dips.” But, until recently, we lived in a low-inflation world that gave central bankers tremendous latitude to come to the market’s rescue. “With inflation running in the mid-single digits and lower income cohorts having to choose between putting gas in their cars or food on their tables, we no longer live in that world. Inflation is becoming a political issue, and in the current environment, I think central bankers will need to act to aid Main St. (by reining in inflation) rather than Wall St.”
INVESTORS should be wary of using government bonds to protect their portfolios because rising inflation and the Russia-Ukraine conflict could erode their diversification benefits, according to BlackRock. Government bonds had traditionally been used to protect portfolios in times of market stress as they tended to rise when stocks were falling. Although this relationship had been tested in the past, government bonds had shown some of their traditional diversification properties since Russia started an invasion of Ukraine. However, the protection offered by bonds waned in the recent sell-off. Strategists at BlackRock said: “In the short period since the conflict started to escalate, government bonds briefly helped guard portfolios against some equity losses. Yet we see this diversification role as increasingly challenged due to supply-driven inflation and central banks’ higher tolerance of such inflation”.
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Research by the investment house found government bonds tended to have a negative correlation with equities – so offered the desired portfolio protection – when demand shocks dominated the market. However, the correlation turned positive when falls in the stockmarket were driven by supply shocks. “In other words, bonds are less likely to act as portfolio ballast during equity sell-offs in a world shaped by supply constraints – what’s happening now and we see persisting in coming years,” the strategists added. “The Russia-Ukraine war will have long-term humanitarian and geopolitical consequences. We see high energy prices as the main macro transmission channel – exacerbating supply-driven inflation in the near term.” Inflation had ticked up since the world opened up from the COVID-19 lockdowns as the supply of key goods ran into bottlenecks at the same time demand was rising.
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March 24, 2022 Money Management | 13
InFocus
SYNCHRON ACQUISITION BRINGS BENEFIT OF SCALE TO WT FINANCIAL Following the acquisition of Synchron, WT Financial Group has said it is set to become Australia’s third-largest adviser group by adviser numbers, writes Oksana Patron. WITH THE ACQUISITION of Australia’s largest independent financial planning group Synchron, WT Financial Group has said it will become the third-largest adviser network in the country, after AMP and Insignia (IOOF), in terms of adviser numbers. As AMP and Insignia were both institutionally-owned, this meant the newly-combined group would also be the largest independent advice network. This was the second significant acquisition for the firm, which already owned Wealth Today and bought Perth-based Sentry Group last year, bringing its adviser numbers to more than 600. According to Money Management’s 2021 TOP Financial Planning Group’s survey, Synchron, which was run by John Prossor and Don Trapnell, had more than 420 advisers on its books while data from WT Financial showed it had 220 advisers across 190 practices. WT Financial Group’s chief executive, Keith Cullen, said that when it came to acquisition the key thing for his company was to get the right scale to be able to underwrite the right level of staff to service the network. “[The move] makes us the biggest adviser network in the country, besides AMP and IOOF, and if you count them as product
SELF-MANAGED SUPER FUND DEMOGRAPHICS
producers and vertically integrated, it makes us the largest non-product producing dealer group in the country or pure dealer group. “With 600 advisers, there is enough opportunity in the business to underwrite really qualified and experienced people and I think we have done that and we’ve achieved that now,” he said. “Having said that, it does not mean we are not looking at further acquisition opportunities but they would really need to bring something significant to the table. “One of the key things with Synchron that we like a lot is they have these line of state managers, each in a different state and we really like that because we did not have it as we lacked that scale. Now with that scale in the whole group, the state managers will
work across the group and support advisers in their state. “So scale can deliver really good outcomes for advisers in terms of the access to resources. We are going to keep those adviser-facing brands but we will have people work right across the group, across all advisers to really get the efficiencies for both ourselves but also for advisers.” Cullen stressed that there were no plans of getting rid of individual brands and all the adviser-facing brands (Synchron, Wealth Today and Sentry) would remain. Commenting on Synchron’s acquisition, Cullen said he viewed the move as a sort of “transition to retirement plan” for both Trapnell and Prossor who would now own “a lot of WTL shares” and a move which would help them leave their legacy protected.
FIGURES: Total advisers: 610+ Funds under advice: $16bn+ Total value of acquisition: $12-13m
“I call it a sell-in rather than sell-out. They’ve really sold the business in a broader group and we are really excited to be able to tap their experience. “We have the highest regard for Don and John and we click because we all come to that business from the same perspective which is really focused on delivering for the advisers and helping them build their businesses while navigating that sort of new business environment.”
1.1m
61
46 years
Total SMSF members
Median age of SMSF members
Median age of newlyestablished SMSFs
Source: Australian Taxation Office
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14 | Money Management March 24, 2022
SMSFs
SMSFs AND PLATFORMS: FRIENDS OR FOES? With platform innovations providing new levels of optionality in superannuation, Liam Cormican examines whether they pose a threat to the popularity of self-managed super funds. PLATFORMS LIKE HUB24 and Netwealth are innovating the superannuation sector, giving users rich online trading and management functionality, and providing them with a level of choice larger than standard retail and industry funds. Platform super products like Netwealth’s Super Accelerator Plus and HUB24’s Super Fund Personal Super (Choice Menu) offer Australian retail clients the investment choice and flexibility that was once only found in selfmanaged super funds (SMSFs). So that begs the question, will
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super products offered by platforms eat into the market share of SMSFs?
A PICTURE OF THE INDUSTRY At 30 June, 2021, there were about 1.1 million members in SMSFs according to data from the Australian Taxation Office, compared to over 21 million member accounts in Australian Prudential Regulation Authority (APRA) regulated funds. Recent data from the Australian Taxation Office (ATO) shows the SMSF sector has
grown by an annual average of 1.7% in the five years to 2020-21 (Table 1). New funds in 2016-17 fell from about 30,000 to 20,000 in 2018-19 then increased again to 25,000 in 2020-21. On the other hand, SMSF windups rose from 13,691 in 201516 to 24,898 in 2017-18 then fell drastically from 15,956 in 2019-20 to 2,187 in 2020-21. SMSF Association deputy chief executive and director of policy and education, Peter Burgess, highlighted how 2020-21 saw the largest increase in new fund establishments since 2017-18
while wind-ups had also declined in recent years, throwing doubt on the idea that platforms were threatening SMSFs. “History shows that SMSFs have greater appeal during a crisis. It happened after the Global Financial Crisis (GFC) in 2008 and is happening during COVID-19. “The anecdotal evidence as to why this is the case is that in crises, people want direct control over their superannuation. The notion, especially after the GFC, that individuals would return to the sanctuary in the APRA-regulated superannuation system, just
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March 24, 2022 Money Management | 15
SMSFs
Table 1: Annual SMSF population, total gross assets and growth
wasn’t supported by the numbers.” Based on these ATO statistics, Burgess says there is no evidence that SMSFs are in structural decline. So, if there is no evidence of structural decline in SMSFs, as Burgess says, and no evidence of platforms impacting market share of SMSFs, is there any potential for impacts in the future?
PLATFORMS Platform super accounts target affordable price points and generally have a wide array of investment options, offering members the choice to buy and sell managed funds, managed accounts, exchange traded funds (ETFs), along with local and international securities in their super portfolio. Mario Finocchiaro, national operations manager of Australian Mortgage and Financial Advisers, says there is potential for platform innovations to place pressure on SMSF market share. “For many, having the ability to take control of their super is appealing, accompanied by the fact that you can choose your own superannuation investments also provides a sense of independence,” he said. “So, if you are committed, you have the time and you understand the risks then a SMSF may be the right vehicle to save for your future retirement. “However, platform innovations now allow you to take control of your super with potentially reduced fees. This hybrid solution will be attractive to those investors wanting to manage their own affairs in a simpler controlled environment. “These types of innovations may very well place pressure on SMSF’s market share.” Burgess takes a different stance.
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Net SMSF establishments
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
Establishments
25,312
21,723
20,341
25,332
30,306
32,760
Wind-ups
2,187
15,856
17,252
24,898
14,849
13,691
Net establishments
23,125
5,867
3,089
434
15,457
19,069
Annual SMSF population and assets
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
Total SMSFs
597,900
574,775
568,908
565,819
565,385
549,928
Total members
1,114,529
1,071,788
1,067,106
1,060,953
1,065,547
1,036,088
Total gross assets ($m)
$822,045
$741,859
$732,324
$693,674
$663,175
$592,524
Annual SMSF growth
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
Total SMSFs
597,900
574,775
568,908
565,819
565,385
549,928
Growth
4.0%
1.0%
0.5%
0.1%
2.8%
Source: Australian Taxation Office
“For many investors, platforms are not a direct substitute or replacement for an SMSF so the growth of one doesn’t mean the decline of the other. There is a place for both and, in fact, the two can and do complement each other,” Burgess said. “For example, some platforms can enable, or make it easier, for an SMSF to access investment markets which they may not otherwise have access to.” Matt Heine, joint managing director of platform provider Netwealth, said platforms instead should be considered as a tool for SMSF trustees to easily manage their investments, supporting the idea that platforms were complementing SMSFs. “We have found that this type of investment account is a useful option for SMSFs, so instead of replacing the SMSF, it is used by them to provide a centralised place for them to manage their
investments – the benefits include consolidated performance and tax reporting plus just simpler administration,” Heine said. “The investment universe available on platforms is also ever-expanding, so that account holders are able to buy and sell often hard-to-access investments, such as bonds and even international securities. “For younger investors considering SMSFs, which is certainly a trend we are seeing, they may however want to look at a platform’s super account, as many of the investments they are interested in, such as international technology stocks or ‘green’ ETFs are available, without the time and effort required to setting up and managing a SMSF.” Responding to Money Management, platform provider HUB24 said the question was not whether platform super funds would take over SMSFs, but rather how could platforms help SMSF
clients reach their retirement goals? “They provide transparency in their investment portfolio while also allowing SMSF members to access the benefits of investment choice, beneficial ownership, flexibility, tax optimisation and accessing timely professional portfolio management expertise.” Further illustrating its presence in the SMSF sector, HUB24 said SMSFs accounted for more than 25% of funds under management (FUM) on its platform and that its recent acquisition of SMSF administration software provider Class highlighted its commitment to the sector. Meanwhile, 41% of its active advisers have a SMSF client on the platform and SMSF accounts on the HUB24 IDPS (Investor Directed Portfolio Service) has been growing at an average of 20% per annum for the last three years. Continued on page 16
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SMSFs
Continued from page 15
DIFFERENCES Burgess said most individuals set-up SMSFs because of the investment flexibility and control they provide. He also said platforms continue to evolve but compared to an SMSF, they lacked the same level of investment flexibility and sense of control. “For example, platforms typically don’t cater for direct property investments which is a popular asset class for SMSF investors (around 20% of SMSFs hold real property in their fund),” Burgess said. He said platforms typically provide a menu of investment options which investors are required to choose from. “While many investment menus are comprehensive, they still may not provide access to specific investments that an SMSF member may want. For example, as at 30 June, 2020, over 23% of SMSFs have investments in unlisted trusts, 3% have investments in loans and just under 7% have investments in unlisted shares. “Platforms may impose restrictions on corporate action participation and they may also impose restrictions on how much can be invested in each asset as well as a requirement to maintain a minimum amount of cash in your portfolio at all times. “For many SMSF clients, having their superannuation investments registered in their name as the trustee of their fund, or in the name of their corporate trustee, provides the ultimate level of flexibility and sense of control.” HUB24 said SMSFs were popular for the control and transparency they offered
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members, but some challenges included administration and reporting, portfolio diversification, cost-effectiveness and access to international assets. “Through managed portfolios, advised SMSF clients can access cost-effective international asset exposure via managed funds, managed portfolios, direct international equities and low-cost investment options such as ETFs. “This investment choice offers SMSFs greater opportunities to achieve diversification within their investment portfolio and to capture the benefits of uncorrelated asset classes which can add to overall performance.” HUB24 said its managed portfolios offered “innovative functionality” such as tax optimisation which could add value to client portfolios. This was because it could provide the ability to choose and apply tax methods that best suited an investor’s individual tax circumstances, stock substitution and exclusion and provided greater flexibility to tailor a portfolio to the needs of the SMSF members while leveraging the expertise of professional portfolio managers. Heine from Netwealth said the differences between SMSFs and
superannuation funds were certainly narrowing, yet there would always be differences. “So depending on the individual needs of the investor, there will be a place for both,” he said. “For example, if the investor is looking to hold more exotic-like investments which a platform cannot hold in custody, like private equity or commercial property, the SMSF structure will be relevant. At Netwealth, we have designed our technology and account options to support the needs of investors either way.” For Finocchiaro, even though he believed there was potential for platforms to eat into SMSF market share, he also said there was a place for both when providing advice depending on the clients’ capabilities. “It really comes down to what’s in the best interest of the client. “What are the goals and objectives of the client? What would be the best option to achieve these goals? “But also, it’s about understanding the client themselves. Do they have the ability and required knowledge in dealing with investment markets, investment strategy and the account keeping requirements?”
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18 | Money Management March 24, 2022
Alternatives
A NEW SOURCE FOR PRIVATE EQUITY
What was traditionally the domain of institutional investors is now becoming accessible to retail investors thanks to lower fees and availability on platforms, writes Laura Dew. IN THE PAST, private equity funds were solely the preserve of institutional investors with long lock-up clauses and minimum investments reaching into the millions of dollars. However, a confluence of factors are changing that now
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with funds appearing on platforms and pressure from superannuation funds pushing down fees. This was coinciding with a boom in deals thanks to an accumulated $14 billion in dry powder since the pandemic. Private equity could add
diversification to a portfolio as an alternative allocation or form part of an equities allocation. It could offer higher returns, have lower volatility over an extended period and it was often uncorrelated with returns from market indices, experts said.
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March 24, 2022 Money Management | 19
Alternatives
“I’ve been in the industry for over 15 years and I’m not aware of there ever being more demand for private equity as there is now.” - David Grose, State Street According to alternatives manager Hamilton Lane, private equity on average generated an extra 83 cents per dollar invested since 2017 relative to public markets (Chart 1). David Grose, head of alternatives-Australia at State Street, said: “If you only invest in liquid markets then you’re missing out on a large part of value generation for a company. The company starts as an idea and ends up as Amazon and if you’re not investing in venture capital or private equity then you’re missing out on that value generation”.
PRIVATE EQUITY ENVIRONMENT Thanks to firms being unable to visit Australia in person due to the pandemic, there was a significant pipeline for private equity deals. Most deals in 2020/21 had been by domestic players and international deals were expected to speed up now the borders had re-opened after almost two years. This exacerbated the existing trend of companies holding off listing for several years in favour of private equity. Companies such as Spotify and Uber delayed listing while Elon Musk’s SpaceX, Australian graphic design platform Canva and payment platform Klarna were among those which still remained in private hands. Dania Zinurova, portfolio
manager for Wilson Alternative Assets, said private equity was the “best opportunity in alternatives right now”. “It is not the easiest for retail investors to access but that is the case for most alternatives. “Over the last two years, there has been $14 billion in dry powder accumulating that hasn’t been deployed and is likely to be deployed over the next two to three years.” Simon James, partner at HLB Mann Judd, said: “Companies are tending to do multiple raises and go from private equity to private equity before they actually list. People are IPO’ing much later nowadays. “We are getting private equity firms calling us all the time and wondering what businesses we are working with. Most of the private equity firms in Australia are growth-focused so its
businesses needing money to go out and make further acquisitions or develop new products as opposed to founders taking money off the table. “I would expect to see a higher percentage of private equity transactions over the next 12 months given the sentiment at the moment.” Growth-focused deals are those which invest in companies which are more advanced in commercialisation of products but still require high levels of investment. Other types include venture strategies for earlystage companies, buyout strategies and turnaround strategies for companies undergoing significant change. Zinurova added: “Listing is a time-consuming process, there are a lot of regulatory requirements and the market requires full transparency.
DAVID GROSE
Chart 1: Growth of $1
Continued on page 20 Source: Hamilton Lane data via Cobalt, Bloomberg, January 2022
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20 | Money Management March 24, 2022
Alternatives
Continued from page 19 “There is a lot of emphasis on growth and that is not always beneficial for the business and the service they provide.” “Some companies can also operate on a longer time horizon in the private markets than in the public ones as they aren’t required to report quarterly and there’s less short-term focus on their profitability and performance. When they are private, they can execute a strategy over a number of years without much concern about quarterly or annual fluctuations,” said Grose. This positive opinion of the market environment was echoed by Pengana chief executive, Russel Pillemer, who announced a one for five entitlement offer for its Pengana Private Equity Trust to raise $75 million earlier this month. The volatile market environment, he said, was making firms reluctant to list on public markets, creating great opportunities for private equity. “Now we are raising more cash to take advantage of opportunities, it is becoming more urgent in this environment as there are lots of deals taking place. With the oil price and the Ukraine war, markets are very skittish and no-one wants to be listing so if you have a chequebook on hand, then there are lots of good deals and we want to have cash on hand.”
TARGETING THE RETAIL MARKET With this strong pipeline for future deals, private equity funds were trying to broaden their investor base and lower fees to make it more accessible.
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Grose said the push for lower fees had been driven by superannuation funds where fee pressure and M&A activity were both hot topics. While it was not the ‘root cause’, it was one of a confluence of factors which were driving the move to broaden the investor base. “Traditionally, private equity managers in Australia have been very focused on trying to win investment from big institutions but fee pressure from super funds for greater fee transparency has meant they are very focused on headline fees rather than overall level of return. “The consolidation of big super funds also means they are probably doing more direct investment and putting larger allocations into private equity funds which gives them greater bargaining power. “So now there’s more focus
on GPs [general partners] to broaden the investor base beyond super funds and be part of a market that they haven’t worked with before. It is more common for them to target high net worth individuals and family offices but they are increasingly looking at how they can target retail investors.” While it could be challenging to target the retail market given the structure of the funds, firms were finding ways to work around that. The Schroder Specialist Private Equity fund, for example, was open-ended with monthly investments and quarterly redemptions while the Pengana Private Equity Trust was structured as a listed investment company (LIC). James Martin, head of international client solutions at Hamilton Lane, said it had always been tough for non-institutional investors to
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Alternatives
access private equity due to liquidity and minimum investment sizes but that this situation was changing. “When you look at typical fund structures, they have very long time horizons and you need a large amount to invest. So it’s been challenging and the typical investor has been large institutions such as superannuation funds or sovereign wealth funds. “But what we’ve seen in the last two years is more people from private wealth, family offices and even some retail vehicles who are making public markets more accessible.” Hamilton Lane’s Global Private Assets fund aimed to achieve capital appreciation over the medium to long term through investment in private assets. Private equity funds were also being added to platforms for the first time which was making more investors and financial advisers aware of them. The Schroders fund had a minimum investment of $20,000 and was available on multiple platforms including HUB24, BT Wrap and Netwealth while, the Pengana LIC, which was managed by US firm Grosvenor Capital Management, had a minimum of $10,000. This compared to $5-10 million for institutions on a typical private equity fund. However, while Grose agreed fees had been coming down, he cautioned this was not always the case for the retail investors who were more willing than super funds to accept a typical ‘2x20’ fee structure including a management fee and performance fee. “If you are a super fund and
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are saying you are going to write a cheque for $100 or $200 million then you are going to negotiate pretty hard on that. “The practical, sad reality is that the perception is retail investors or high net worth investors are less fee-sensitive and are more willing to accept a 2x20 fee structure. I’m not saying that’s a cynical attempt by managers to try to generate more management fees, I genuinely don’t think that, but if super funds are pushing hard on fees then managers are going to be thinking about where they can offset that a bit.”
CLOSED-ENDED VEHICLES Private equity funds were traditionally listed in the closedended space as they could go to their existing investors if they want to raise more money which allows them to implement longterm thinking (as is the action taken by Pengana). They were also easier for investors to exit as they could sell to another investor which allowed the strategy to not be eroded by redemptions. While Pengana was the only dedicated private equity LIC, there were others such as Bailador Technology Investments which invested in early-stage companies in a similar way to private equity. Ian Irvine, chief executive of the Listed Investment Companies and Trusts Association (LICAT) said: “This is a democratisation of what institutional and family offices were able to receive, it’s given access to retail investors and self-managed superannuation funds trustees. “LICs are particularly
attractive for SMSFs, especially those that are in pension phase because of their dividend and franked dividend characteristics so there a lot of SMSFs invested in LICs for that reason. “[In LICs] there’s still a strong base of domestic equities and a growing base of global equities but there has been a lot of growth in the alternative space, which has been difficult to retail investors to access until the last five years.”
DANIA ZINUROVA
FUTURE OUTLOOK Looking ahead, Martin said it was unlikely that private equity would ever become a mainstream asset class for retail investors as the complications were too great. “It’s a complicated asset class, there are some challenges to it. You need to be mindful that some of the risks inherent in the liquidity and work with a manager who has a longterm track record and expertise in thinking about portfolio construction, managing cashflow and diversification, these are all absolutely critical.” However, others were more optimistic about future fund launches taking place, particularly once a ‘dominant’ retail fund structure for private equity had emerged. “We could definitely see more funds in the future, I’ve been in the industry for over 15 years and I’m not aware of there ever being more demand for private equity as there is now,” said Grose. Irvine added: “I can’t say why we haven’t had more launches but I think there will be more in the future and I believe the closed-ended structure is ideally suited to this type of asset”.
17/03/2022 9:09:35 AM
22 | Money Management March 24, 2022
Financial advice
ADVISERS’ CHANGING ROLE IN RETIREMENT TRANSITION Transitioning from working to retirement is one of the biggest life changes and challenges most people will face, writes Richard Dinham. FOR MANY, APPROACHING retirement is a trigger for seeking financial advice, often for the first time. But the way people think about retirement is changing and the events of the past few years are leading people to place more emphasis on factors such as wellbeing, good health and life satisfaction. Obviously having enough money helps people achieve these things, but for many it is not their only driver, and financial advisers who want to provide the best assistance to clients during this difficult time need to understand what retirees in the 2020s are looking for, and their biggest concerns and challenges.
WHAT KEEPS RETIREES UP AT NIGHT? The reason that approaching retirement is the biggest trigger for seeking advice from a financial adviser (at 31.7% according to Fidelity International’s 2020 The Value of Advice report) is because a large chunk of pre-retirees are not particularly looking forward to it. They are concerned that once they stop earning an income there is the real possibility they could run out of money before they die. A detailed study was conducted by independent research firm MYMAVINS for Fidelity International which surveyed over 1,500 Australians over the age of 50 in September 2021. They found that over half of pre-retirees were not looking forward to retirement and two in five did not feel they were on the right track to be financially prepared for retirement. Only 10% of pre-retirees said they had an actual documented retirement plan, although three in five had some vague financial plans. When asked what they thought
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about when planning for retirement, many were just as focussed on how they would spend their time, where they would live, future health care needs and how to pass on their wealth, as they were on their financial situation. Chart 1 highlights the issues they prioritise. The changing nature of work means that many people are also looking to keep working until later in life in some capacity. The drivers of this are sometimes as simple as enjoying work or wishing to stay connected with others in the workplace. Financial need is also a reason for those with insufficient retirement plans, meaning some people just have to work longer to fund the retirement life they desire. The fact is that life plans often change through retirement. Losing a partner, facing a major personal health crisis or an injury that impairs mobility, can all impact on when and how you will enter retirement. It is interesting, but not surprising, that our research found those who felt in control of their retirement had higher measures of life satisfaction. Those who felt their retirement was completely out of their control rated their life satisfaction the lowest. An effective way retirees can avoid low levels of life satisfaction is to have a Plan B or contingency plan and be ready for something going astray. Those who are forced into earlier retirement, through events such as job loss or health issues, are likely to have a much more positive emotional journey if they have already identified a back-up plan.
HOW CAN ADVISERS BETTER SERVICE THEIR CLIENTS? Good financial advisers in the current environment will recognise that pre-retirees and retirees
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Financial advice require more than just a product solution. They need advice tailored to their particular circumstances and situation. The era of ‘set and forget’ once a client hits retirement is also gone. Clients require ongoing support and advice throughout retirement, especially when they experience major life events, like the death of a partner, or a major market or economic disruption. There are four areas that advisers can help their clients with building confidence and engagement with their retirement affairs: An Empowerment Framework: 1) System trust: Help clients understand the superannuation system and the wider financial system; make it more relatable 2) Self-empowerment: Help build ‘belief in self’ to give clients confidence and conviction in their own decision making 3) Self-efficacy: Belief in clients’ own ability to make effective financial decisions 4) Self-determination: Help create confidence to have conviction and will power to want to take control of finances
understand clients’ preferences and behavioural types to enable better targeted conversations. In our 2020 research report on the value of advice, we uncovered four clusters of client types. By understanding which particular cluster a client falls into, an approach can be tailored to better suit their needs. We labelled the four segments with ‘navigator’ styles – celestial navigators, GPS navigators, radio navigators and compass navigators.
THE FOUR NAVIGATOR STYLES
GPS navigators GPS navigators want to see evidence of the benefits a financial adviser can provide. Their levels of life satisfaction are not as high as celestial navigators, but they are typically wealthy, well-educated and
When it comes to engaging with clients, better-targeted conversations with them can be much more productive. It is therefore very helpful to
Celestial navigators Celestial navigators will usually see the bigger picture. They will welcome advice if a financial adviser can see the complexity of their affairs and value their knowledge. They are usually financially strong and are optimistic about the future. They have high levels of life satisfaction and financial confidence and low financial stress. They most value technical advice from a financial adviser and may not take kindly to behavioural and emotional suggestions, unless they are framed in the context of financial strategies.
Chart 1: What pre-retirees plan for in retirement
Source: Fidelity International "Retirement: The now and the then" report
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financially literate. They just tend to worry more. Financial advisers can help GPS navigators by reaching out to them as early as possible in their retirement journey. By doing so, they can help alleviate some of their concerns and add significant value from a wellbeing perspective. Stress testing retirement plans under various scenarios is a good way to instil spending confidence in a GPS navigator. Performance numbers can highlight what financial benefits are being delivered to the client, but it is also important to check in with GPS navigators to discover their emotional state around certain matters and how confident they feel about the future. By tracking their wellbeing, as well as their investments, a financial adviser can highlight their value beyond the cold hard numbers. Radio navigators Radio navigators are all about the connection. They are relationship driven and want to ‘click’ with their financial adviser. If trust is established with this kind of client, they will look to their financial adviser for assistance with most major financial decisions. Unfortunately, they also have very high financial stress which can sometimes have physical impacts. To allay some of these fears, advisers can use the trust placed in them to apply cognitive frameworks to enhance their wellbeing. This group can especially benefit from being included in the formulation of advice and also the cost benefit analysis of particular financial choices being suggested. By giving them this kind of control, their competence will build which will also lead to better financial confidence and a sense of control. Compass navigators Compass navigators may be the hardest group to engage under the traditional model of advice. This group tends to be highly educated and younger and don’t generally perceive the value in professional advice. They prefer to consume advice transactionally and are very digitally savvy. But instead of writing this group
RICHARD DINHAM
off, don’t forget that many of the children of existing clients could fall into this group, so there may be benefits to tailoring parts of a service offering to them. They are not interested in highcost advice, but they might engage with some low-cost, low-service digital advice. By providing the digital advice they are demanding at this stage of their lives, this group might be more willing to accept a more tailored and bespoke approach as they get older and closer to retirement. In summary, when financial advisers understand the drivers of life satisfaction and wellbeing, they can tailor and enhance their service offerings to bring about better outcomes for their clients. These drivers can be summarised as the Six C’s: circumstances, character, connection, control confidence and capability. When all of these six Cs are present in retirement, retirees are at their happiest. They are also best positioned to weather any unexpected financial shocks. The opportunities for financial advisers who get this right are significant. Our study found that most pre-retirees want assistance with transitioning into retirement, but only one in 20 are currently advised. By engaging with clients through a holistic approach, and also understanding a client’s particular ‘navigator’ style, financial advisers can have a positive and life-changing impact on people about to experience one of the most transformative periods of their lives. Richard Dinham is head of client solutions and retirement at Fidelity International.
17/03/2022 10:47:06 AM
24 | Money Management March 24, 2022
Asset allocation
EMBRACING ALTERNATIVES AMID MARKET TURMOIL
While markets are tense and volatile, writes Kerry Craig, the one thing the last few months has made clear is that alternative assets are an essential part of any asset allocation. NOT EVEN THREE months into the year and 2022 is breaking records, but for all the wrong reasons. The list of factors that have buffeted markets and frayed investor nerves is not getting any shorter and there is little solace found in the traditional safe havens.
A REMARKABLE START, FOR THE WRONG REASONS The dislocation in capital markets in the last few weeks has been remarkable. Equity markets across Europe are either in or close to bear market territory. The US benchmark, the S&P 500, is in correction territory and the technology-focused NASDAQ has, at times, been down more than 20%. Meanwhile, bond markets are once again proving that negative correlation to equities cannot be relied upon in times of stress. The yield on the US 10-year Treasury has increased by more than 50 basis
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points since year end, and the Australian 10-year government bond yield has increased by more than 80 basis points over the same period. The US MOVE index, which tracks volatility in the US Treasury market, is at its highest since the Global Financial Crisis (GFC), outside of the initial COVID-19 shock.
However, the greatest volatility is seen in commodity markets. The week ending 4 March, 2022 saw the largest move in Thomson Reuters Core Commodity Index since the mid-1950s. Trading in nickel was suspended for a period after a 250% intra-day move over the span of two days. Finally, the weekly
Chart 1: Global private capital fundraising
Source: J.P. Morgan Asset Manangement
change in the price of wheat in the first week of March was the greatest in 60 years. This was not how the year was meant to unfold. COVID-19 risks were fading and mobility data was indicating a return to normal across many developed economies. The re-opening was meant to create a burst of activity in the first quarter of the year, followed by more modest economic expansion. Meanwhile, inflation was meant to have peaked by now. However, the global macroeconomic outlook has coalesced around a redistribution of growth and an assessment of how strong any stagflationary impulse may be in different regions. In an environment where inflation is looking to be stickier, the growth risks are to the downside and the only certainty in public markets appears to be volatility. This is where alternatives assets come into their own as they can enhance returns while minimising
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Asset allocation downside risks in portfolios at a time when public markets are challenged to do the same.
HYBRID WORKING IN YOUR PORTFOLIO Hybrid, the buzzword being thrown around as we explore new working arrangements during and post the pandemic, can also be implemented in alternatives investing in these challenging times. Inflation rates are likely to be higher than expected just a few months ago and central banks are pursuing the normalisation of interest rates as the outlook for economic activity is moderating. All this points towards investment strategies that can deliver upside to returns while offering some downside protection. Investors have already been seeking out alternatives that can complement, or even replace public market, investments to boost returns, add income or increase diversification. In 2021, private capital fundraising amounted to almost US$1,400 billion, the most in a decade (Chart 1). This year will likely be another strong one. However, investors should look beyond the equity-like or fixed income-like attributes of alternatives and consider those hybrids alternative assets with similar characteristics of both equity and fixed income (Chart 2). At either end of the hybrid spectrum are equity-like hybrids such as private equity and non-core real assets. Meanwhile fixed income-like hybrids would capture subordinated credit and direct lending to real assets. In the middle there are the more pure-hybrid assets that offer return and diversification to public markets. The types of alternative that match these criteria are hedge funds and core real assets. Hedge funds can use the higher degree of dispersion in public markets to their advantage and tend to perform better when there is more volatility in equity markets. Meanwhile, their ability to short can prove to be a powerful diversification tool and historical data shows that when equity and fixed income markets are severely challenged, hedge funds can act as ballast in a portfolio.
Core and the extended core real assets are another asset that can be defined as being more like a pure hybrid given their income driven returns are often uncorrelated to public markets. Many of these types of assets have a yield that comes at a meaningful premium to the public bond market, despite having a counterparty risk that is relatively similar.
REFLATIONARY TO STAGFLATIONARY The inflation outlook has shifted from one of reflation to stagflation. While stagflation is not our base case in terms of the economic outlook, it’s hard to deny that inflation pressures will be more persistent and that the landing point for inflation is likely to be higher once all the temporary forces acting on prices have passed. Investors are now needing to position for something that has not been an issue for some time - higher, rather than lower, rates of inflation. There are assets within public markets that have some element of inflation protection. It’s said, for example, that inflation is good for stocks. Companies will adjust their selling price as input costs rise, passing on the inflationary impacts to end customers and protecting their bottom line. But in reality, inflation could be a lot more like chocolate to stocks. Too little and you’re not satisfied, too much and you start to feel unwell. This is because not enough inflation can signal weak demand but too much will see central banks increase rates, financial
conditions tighten and economic activity may slow and earnings expectations can fall. Then there are inflationprotected securities, but these types of assets will only offer upside should the rate of inflation prove to be higher than what was also priced by the instrument, and there is a lot already in the price. Gold has been a long-standing inflation hedge and a store of value. But it’s an expensive one given it offers no income and the price of gold would fall as real rates rise and investors seek out positive real yield assets elsewhere. While inflation could erode the purchasing power and value of income in portfolios, there are plenty of income-generating alternative assets that offer yields above the rate of inflation in Australia and capture the passthrough effects of rising prices to the cash streams that generate those yields. Real estate is one that many investors are familiar with, and rents are often linked to the rate of inflation. But it’s also an area where investors need to be careful to distinguish between demand that is strong relative to supply and where demand is challenged by structural issues. For example, the hybrid working model may be putting structure pressure on the demand for retail properties, while the demand for industrial and logistical real estate may be strong for this same reason. Infrastructure assets are another option where the cash flows will deliver inflation-adjusted
Chart 2: Opportunities in hybrids in 2022
income to investors as the pricing structure of many utilities are adjusted to the rate of inflation. It’s also worth noting that utilities are critical to the economy and spending habits do not change with the economic cycle. These less GDP-sensitive assets offer a layer of diversification against the economic cycle not found in public markets. Commodities are an obvious choice when it comes to addressing an inflation threat that is driven by rising commodity prices. Timber may not be the first commodity that jumps to mind but the price of timber is closely associated with prices in the broader economy given it is an input into a wide array of final products and economic sectors, from housing, furniture to packing materials. The store is in the stump, as the saying goes, and as timber prices rise so does the value of forestry, another incomegenerating real asset that can be considered when assessing inflation protection of alternative assets. Not to mention the clear benefits of carbon sequestration.
QUALITY AND CORE For both public and private markets, 2022 is about focusing on quality assets with strong fundamentals. This often implies the core parts of the alternative universe which encompass the ‘pure hybrid’ style of assets that mimic characteristics of equities and bonds. These assets often come with inflation-adjusted income streams from higher quality counterparties. Just like any investment, there are risks and trade-offs. With alternatives, that trade-off is often liquidity, as well as larger tail risks and the dispersion of returns across alternative asset managers. These trade-offs represent a lower hurdle in the current market environment and the troubled start to the year for public markets. When public markets are breaking records for the wrong reasons, private markets are likely to break them for the right ones in 2022. Kerry Craig is a global market strategist at J.P. Morgan Asset Management.
Source: J.P. Morgan Asset Manangement
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26 | Money Management March 24, 2022
Digital assets
USING DIGITAL ASSETS WITHIN AN SMSF Angus Crennan explains how self-managed superannuation funds can benefit from holding those assets which offer a perfectly negative correlation. DIVERSIFICATION IS THE gift of good portfolio construction: you get to keep high expected returns but can heavily reduce risk. Unfortunately, in an environment of central bank financial repression, where defensive asset classes are offering negative real returns, good portfolio construction is harder to achieve. Digital assets, with their volatility hedged out, represent a great opportunity.
THE CHALLENGES FACED BY SMSFS In Australia, established SMSFs have had the opportunity to invest in real estate at reasonable prices, which has proven to be an excellent investment offering growth and rental income. Equally, other SMSFs have built share portfolios at reasonable prices which offer both growth and dividend incomes. Concentrating in either asset class is a valid, if high conviction, investment strategy. Looking forward, however, SMSFs face a different investing environment. Firstly, interest rates will eventually go up, likely sooner than later. The value of any financial asset is the present value of its future cash generation and higher interest rates decrease the value of those future cashflows. In layman’s terms, higher interest rates are generally not good for shares and real estate. Add to that headwind very high valuations across shares and real estate and logic dictates it might not be an ideal time to allocate more to those asset classes.
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What would also make sense would be to introduce some diversification to complement the existing excellent exposures already owned. There is a science in diversification – essentially good diversification reduces risk without reducing return. What this means in practice is you need two pieces of diligence: firstly, potential investments could match your shares and/or real estate return generation, and secondly that potential investments would behave differently to your shares and/or real estate.
THE CORRELATION CONUNDRUM Let’s drill down a little further on the second point about behaviour. A good portfolio is like a marriage, when one partner is having a hard time then the other partner can balance that negative somewhat. The most commonly-used metric for calculating the ability to ‘balance’ a particular asset is correlation – if an asset is highly correlated with the rest of your portfolio it’s like a husband and wife who both get stressed at the same time. What we really want is uncorrelated assets which offer strong diversification benefits. Calculating correlation manually means dividing covariance by the product of the standard deviations. Financial software provides this information readily, or like everyone else in finance, you can use the ‘Correl’ command in Excel. The end result is going to range between -1 (perfectly negatively correlated) and +1 (perfectly positively correlated).
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DigitalStrap assets As the table below demonstrates, many of the investment options we would expect to have solid diversification characteristics in fact do not do so. For example, over the five years, real estate in the eight major Australian capital cities have had a near-perfectly positive correlation with Ether, the cryptocurrency used in the Ethereum blockchain. Even gold, which is a commodity and generally regarded as a good portfolio diversifier, had a positive 0.44 correlation with Australian shares and very strongly positive correlation of 0.74 with global shares over the period. Correlations of 0.4 and 0.5 are not what we want. What we really want is no correlation or, better still, negative correlations. Historically, we have utilised bonds for this purpose, however with inflation rising and expected to increase further, and central banks maintaining their financial repression, negative expected real returns is a heavy price to pay for your diversification.
SMSF’S INVESTMENT STRATEGY Portfolio construction challenges like those discussed above are addressed in an investment strategy, a document as important as a trust deed and one you will have a lot more control over. The first point to note is that SMSFs are required to have a documented investment strategy. This shouldn’t be viewed as a burden but rather as a way to utilise these structured governance responsibilities as opportunities and build good portfolio construction practices into your own financial wellbeing – after all an SMSF is all about choice and control. Every institutional investor will have a documented investment strategy incorporating
considerable analysis and discussion with stakeholders. Some of the points to address in your investment strategy: Risk appetite – Institutional portfolio managers begin here, for example what is the maximum amount I would be willing to lose in a ‘worst case’ stress test scenario? This is key information because a portfolio can then be built to maximise expected return without breaching that worst-case outcome. A simple approach to quantifying risk is standard deviation whereas a more detailed approach would be to model some scenarios using historic data to inform an expected shortfall. Return objectives – The returns generated over time will have an enormous impact on the purchasing power of a portfolio in the future. Investors demand more return for more risk, so for higher returns you will usually need to subject the portfolio to volatility and even the risk of permanent capital loss. A simple approach to expected returns is the average of past returns, a more detailed approach involves one or more valuations. Tax efficiency – Superannuation is an ideal environment to have investments in because of tax efficiencies. Volatility-inducing capital gains and losses realisation is generally less welcome than income.
DIGITAL ASSETS One approach which Balmoral Digital has pioneered for Australian SMSFs is to harness the famous volatility of digital assets and turn that volatility into an income stream. The first step is to complete due diligence on the digital exchanges and the digital protocols you are willing to invest in. The protocols selected need to have sufficient liquidity in Chart 1: Correlation of major asset classes
Source:Balmoral Digital
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matching derivatives to be able to hedge the risks. Earlier in the article, we mentioned seeking low levels of correlation to improve diversification, Balmoral’s portfolio is full of securities which are perfectly negatively correlated to the securities we own which makes our portfolio effectively delta neutral. Recall that investors demand compensation for additional market risks, by hedging out its market risks Balmoral removes the volatility of the underlying assets and the currency risk and thereby changing the risk profile of our portfolio into a very stable investment vehicle. Looking at the derivatives we utilise, many of those will pay us to take that position. For example, if we own Bitcoin then we can hedge that with a short Bitcoin futures contract. If we are taking the short side of a Bitcoin futures contract that allows another investor the chance to go long a Bitcoin futures contract, which is a leveraged play on Bitcoin. If investors are expecting Bitcoin to go up then it’s logical they will pay their counterparty (Balmoral) to take the short side of their trade. In this way, we remove our market risk and, in the process, turn that volatility into income generation. Finally, we have a proprietary database tracking historic rates counterparties have been willing to pay, across exchanges, for the various digital assets and their derivatives. When one of our investment positions is no longer generating the returns, we are seeking we can consider the expected return, the stability in historic returns and the liquidity available in alternate positions. This database ensures we look at the highest-returning opportunities for our investors first as we weed out those where there is insufficient stability or liquidity for our lower
risk profile investing strategy. There are a number of advantages under this approach: 1) Because digital assets are so volatile the return potential of our delta neutral approach is very strong. The strategy can deliver double digit returns and thus strongly contribute to investment objectives; 2) By hedging out all directional risks the fund removes market risks. This means the investor is not buffeted by digital asset prices going up and down, the extreme volatility they are so famous for. This characteristic combined with strong returns means the fund delivers very strong risk-adjusted returns, or Sharpe Ratio, a metric most institutional investors seek; 3) Because market risks are hedged the fund is uncorrelated with existing SMSF investments, such as real estate and equities. This means the Digital Asset Fund offers strong diversification characteristics, which will be a logical cornerstone of most SMSF investment strategies; 4) By exchanging the capital gains for income, the investment is better suited to the tax-favourable SMSF environment, whether that is in accumulation, transition to retirement or in drawdown phase. Instead of dealing with realised capital gains and losses, income received enjoys more favourable taxation treatment within the super environment; and 5) The fund offers SMSF investors a lower risk way of investing in the extraordinary growth opportunities available in digital assets. 6) Investors will benefit from the innate technological sophistication of the asset class. For example, Balmoral investors will have a mobile phone app showing the value of their investment in real time and offering direct connection to their investment manager. Angus Crennan is co-founder and portfolio manager at Balmoral Digital.
17/03/2022 12:05:57 PM
28 | Money Management March 24, 2022
Toolbox
COUPLES ADVICE ON CONTRIBUTIONS SPLITTING
Superannuation can be used each year to utilise tax and retirement savings, writes Tim Howard, so how can couples put theirs to best use to see the joint benefits? A PERSON’S SUPERANNUATION savings are accumulated at the individual level. While you can own an investment property, shares, or have a joint bank account with another person, your superannuation is unique in a sense that it is your benefit only, even if you can ultimately pass it on, in some cases tax-free, to a dependant beneficiary. So how can members of a couple effectively use the various tax and retirement savings benefits of super, to jointly benefit as they accumulate their retirement savings? What strategies can be
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employed that may help to reduce tax between members of a couple while boosting retirement savings, helping manage balances during periods away from work, and even help fund insurance premiums with pre-tax dollars? While an individual cannot split their accumulated retirement savings with their spouse, without removing and then re-contributing the amount to the super system, they can split certain contributions, where eligible and up to certain limits, with their spouse each year. When can this be done and who can benefit?
Firstly, a ‘spouse’ of a person includes another person (whether of the same or different sex) with whom the person is in a relationship that is registered under a law of a State or Territory, or another person who, although not legally married to the person, lives with them on a genuine domestic basis in a relationship as a couple. In addition, there are some age-based restrictions. While there is no age limit for the spouse initiating a contributions split, the receiving spouse must either be under their preservation age, or
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March 24, 2022 Money Management | 29
Toolbox aged between preservation age and age 65, and not yet retired. A spouse would be considered retired when they have reached their preservation age, and an arrangement under which they were gainfully employed has ceased, and they never again intend to become gainfully employed, either on a fulltime or part-time basis. The age-related conditions effectively prevent amounts being split to a spouse who has met a condition of release and would therefore be able to immediately access the contribution. Only certain types of contributions, known as ‘splittable contributions’, can be transferred to a superannuation account in the name of an individual’s spouse. A splitting amount can also be transferred to an account with the same or different trustee to where the individual currently has their super invested. Splittable contributions include such contributions as personal deductible contributions, employer contributions including the superannuation guarantee (SG), salary sacrificed amounts, or award and voluntary employer contributions such as payments to super to fund insurance premiums. It’s important to note that contributions splitting is also only available to members of accumulation funds and does not extend to defined benefit funds. When an amount is split to an eligible spouse, the amount known as a ‘contributions-splitting superannuation benefit’ is considered a rollover from the original contributing spouse over to the receiving spouse. The original contribution therefore counts toward the contributions cap of the spouse who received the contribution in the first instance. The rollover benefit to the spouse receiving the split will therefore be all taxable component, and a preserved benefit. To initiate a split, the individual must apply to the trustee of their super fund to transfer their eligible splittable contributions made in the previous financial year, or for the current financial year, but only when the member’s entire benefit
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is to be rolled over, transferred or otherwise cashed out. Offering contributions splitting is also at the discretion of the trustee, with only one application able to be made each year. The amount requested in the splitting application also must not exceed the ‘maximum splittable amount’. This amount differs between taxed and untaxed funds. For taxed funds, the maximum splittable amount is the lesser of 85% of the member’s concessional contributions for the year, and the member’s concessional cap for that financial year. An individual’s concessional contributions cap may be higher than the general concessional cap in circumstances where they are eligible to carry-forward their unused concessional contributions. Where an individual makes additional contributions under the carry-forward measure, the maximum amount they can split will include any carry-forward concessional contributions they may make. For untaxed funds, the maximum splittable amount is 100% of employer contributions (including any amounts salary sacrificed), however the split cannot exceed the concessional contributions cap for the year, which again includes an individual’s eligible carry-forward concessional contributions cap space. While such concessional contributions to untaxed funds count toward an individual’s contributions cap for determining amounts that can be contributed to a taxed scheme, these contributions are not capped when made to an untaxed scheme. From 1 July, 2017, you can no longer claim a deduction for personal contributions made to untaxed funds. So, what does an acceptable contributions splitting application look like?
Example #1 An acceptable application to split (taxed fund) Matt (44) had $25,000 in SG and salary sacrifice contributions made to his super account in the
2020/21 financial year. His total super balance as at 30 June, 2020 was $600,000. On 19 July, 2021, Matt provides a contributions splitting application to the trustee of his fund, requesting to split $20,000 with his spouse Hannah (42). Matt’s maximum splittable amount for the 2020/21 financial year is the lesser of: • 85% of his concessional contributions, and • His concessional contributions cap. Therefore, his maximum splittable amount is the lesser of: • $21,250 (85% of $25,000), and • $25,000. Matt’s request to split $20,000 with his spouse is accepted. Example #2 – An unacceptable application to split (taxed fund) Anne (52) had $20,000 in SG plus $10,000 in salary sacrifice contributions made to her super account in the 2020/21 financial year. Her total super balance as at 30 June, 2020 was $1,000,000. On 30 July, 2021, Anne provides a contributions splitting application to the trustee of her fund, requesting to split $30,000 with her spouse Jeremy (59). Anne’s maximum splittable amount for the 2020/21 financial year is the lesser of: • 85% of her concessional contributions, and • Her concessional contributions cap. Therefore, her maximum splittable amount is the lesser of: • $25,500 (85% of $30,000), and • $25,000. Anne’s request to split $30,000 with her spouse is not accepted. The window for lodging a contributions splitting application with the trustee is generally limited to the financial year immediately after the contributions were made. For example, an application for contributions made in the 2020/21 financial year would need to be accepted by the trustee by 30 June, 2022. There may also be some additional timing considerations to consider. For example, where the
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30 | Money Management March 24, 2022
Toolbox
CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit points, which may be used by financial planners as supporting evidence of ongoing professional development.
Continued from page 29 member also intends to claim a deduction for the personal super contribution they wish to split, it is essential the member provides the trustee with a notice of intent to claim a deduction for their personal contribution before they lodge their spouse contributions splitting application.
BENEFITS OF SPLITTING CONTRIBUTIONS What are some potential benefits of splitting contributions with a spouse? For couples in the accumulation phase of their working lives, spouse contributions splitting can be a great way to maintain their retirement savings during periods of time out of the workforce, such as when taking on carer responsibilities. For example, where one member of a couple is taking time away from work to provide care for younger (or older) family members, spouse contribution splitting can be a good way to continue to maintain a steady accumulation of their super with the assistance of a contributions split from their working spouse. Even when both members of a couple continue to work, where there is a gap in the level of income earned between one another, increasing the concessional contributions (such as through personal deductible contributions or salary sacrifice) of the higher income earning spouse and then splitting the benefit with the lower income earning spouse can increase the effectiveness of the tax deduction claimed. Perhaps even more beneficial is to incorporate such a strategy with assisting to tax-effectively fund the life, TPD or salary continuance insurance premiums in both members’ accounts. For those clients approaching retirement, managing total super balances (TSB) and personal transfer balance caps (PTBC) is also worth considering. Contributions splitting ahead of time can help, and not just for those approaching $1.7 million in super. For example, the work test exemption is only available for individuals with a TSB below $300,000, and you need a TSB below $500,000 to be eligible to carry-forward any unused concessional contributions. For those approaching the age when they are eligible for the Age Pension, continuing to accumulate super for the benefit of a younger spouse (who is yet to become eligible for the age pension) can result in a higher age pension entitlement for the older member of a couple when they become eligible. Similarly, where one member of a couple will meet a condition of release ahead of another, there may be an opportunity to have earlier access to concessional super benefits. Overall, considering managing balances between spouses as a whole, taking age, work status, future retirement intentions and health into account, can all be a good hedge against any future legislative change. As you can see, spouse contributions splitting can be a useful strategy to help open up some of the other benefits super has to offer between members of a couple. Tim Howard is technical consultant at BT.
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1. A member requesting a spouse contributions split must be of which age? a) Under 65 b) Under 67 c) Under 75 and still working d) Of any age 2. It is at the discretion of a fund trustee to offer spouse contributions splitting to fund members. a) True b) False 3. The window for lodging a spouse contributions splitting application with the trustee of the members super fund ends when? a) By the time the members tax return is due for the financial year of contribution b) By the end of the financial year following the financial year of contribution c) By the end of the financial year of contribution d) The application can be lodged at any time. 4. For taxed super funds, the maximum splittable amount is a) The lesser of 85% of the members concessional contributions for the year, and the members concessional cap for that financial year. b) The greater of 85% of the members concessional contributions for the year, and the members concessional cap for that financial year. c) The greater of 100% of the members concessional contributions for the year, and the members concessional cap for that financial year. d) The lesser of 100% of the members concessional contributions for the year, and the members concessional cap for that financial year. 5. The receiving spouse must be in order to receive a spouse contributions split? Fill in the blank by selecting the most correct answer. a) Under their preservation age and still working b) Under age 75 and gainfully employed on a full-time or part-time basis c) Either under their preservation age, or aged between preservation age and age 75, and not yet retired. d) Either under their preservation age, or aged between their preservation age and age 65, and not yet retired.
TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ couples-advice-contributions-splitting For more information about the CPD Quiz, please email education@moneymanagement.com.au
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March 24, 2022 Money Management | 31
Send your appointments to liam.cormican@moneymanagement.com.au
Appointments
Move of the WEEK Guy Debelle Deputy governor Reserve Bank of Australia
Guy Debelle, deputy governor of the Reserve Bank of Australia, exited the central bank and would be taking up the position as chief financial officer at Fortescue Future Industries in June. The move was a shock
decision as governor, Phil Lowe, was also set to end his term next September after seven years and Debelle had been viewed as the successor for the position. Debelle took up the position as deputy governor in September
2016 but had worked at the bank for 25 years in a variety of senior positions. He was also chair of the Council of Financial Regulators’ Climate Working Group, an area he would explore further in his new role.
First Sentier Investors appointed Yoshiki Ueno as deputy chief executive. Ueno had worked at FSI since August 2019 as head of US governance, based in New York, and worked closely on the US consultation and reporting process with FSI’s US parent companies. In his new role, Ueno would relocate to Sydney to support chief executive, Mark Steinberg, with the implementation of the firm’s strategy and act as a liaison to Mitsubishi UFJ Trust and Banking Corporation, where he had worked for 20 years. He would replace Yutaka Kawakami who would return to work in a new role at FSI in Tokyo.
consulting together with a passion for continuous improvement, Michael will bring energy and different strategic thinking to our business”.
Cbus said the new title clearly highlighted “that members are at the core of everything we do”. Half of the executives reporting to Cbus chief executive, Justin Arter, were female. This included chief technology officer, Mirella Robinson; group executive for brand engagement, advocacy and product Robbie Campo; and group executive for people and culture, Kristin Miller. Walker said: “Cbus has recognised the executive role that is member focussed and elevated the title to chief member officer. This is an important shift for Cbus and for women in senior roles”.
Accounting and wealth advisory firm, William Buck, appointed a director to lead its wealth advisory team. Michael Rees Evans joined the firm in February from financial advice firm EFS and had worked in financial advice since 2002. At William Buck, he would be responsible for driving the firm’s innovation and talent development strategies as well as their future capabilities in financial project management. Head of wealth advisory, Scott Girdlestone, said: “With his background in management
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WealthO2 made five hires to its firm in response to adviser demand for its tech solutions. The hires were across the firm’s distribution, risk, compliance and development teams. Justin Ahrens would join as head of risk, Kay Hurst would join as program delivery manager and John Shea would join as solutions architect. The distribution team would be boosted by Peter Panigiris from Lumiant and Dennis Cargill from BT Funds Management. Andrew Whelan, chief executive of WealthO2, said: “We are thrilled to announce these significant crossfunctional appointments which will play pivotal role in cementing our position as the first advice technology solutions company to focus on solving critical business issues across the end-to-end adviser experience”. Cbus promoted Marianne Walker to the newly-created role of chief member officer. Walker, who had been an executive since 2019, previously worked as group executive for member and employer experience.
Portfolio manager, Mike Younger, left REST Super after five years as in its Australian equities smallcaps team, joining Prime Value Asset Management as a senior portfolio manager. With more than 20 years’ experience in Australian equities with a particular focus on small-cap stocks, Younger had previously held roles as executive director and head of small-cap and mid-cap research at Goldman Sachs and was director and head of emerging growth research at Citigroup Australia. Prime Value Asset Management chief executive, Yak Yong Quek, said Younger would bring great research ability and
portfolio management experience to the investment team. “We continue to invest in our client offering; Prime Value Asset Management now has a dozen experienced portfolio managers with a strong track record, and excellent teamwork built around our high performing culture emphasising risk management,” Yong Quek said. Link Group appointed Jane Morwick to the role of general manager of services and transformation for its retirement and superannuation division. Morwick would be responsible for delivering superannuation solutions for its 10 million superannuation account holders and would lead Link’s digital transformation. “This part of the business plays such a critical role in engaging with members across multiple funds, and its ongoing success is based on the work you do every day in successfully engaging and supporting the member base,” she said. Morwick joined from AGL Energy where she worked as general manager of customer channels and marketing and had previously worked in senior positions at Australia Post, Shell, and ExxonMobil.
15/03/2022 5:25:36 PM
OUTSIDER OUT
ManagementMarch April 2,24, 2015 32 | Money Management 2022
A light-hearted look at the other side of making money
When does a tweak become a change? A picture paints a thousand words WHEN does a tweak become a change, Outsider wonders, and who decides when one becomes the other? Watching Jim Chalmers speak at the Crown Casino in Sydney was an interesting affair for Outsider, after first becoming lost trying to use the elevator. But there was one thing which stuck out and that was what did Chalmers mean when he said there would be ‘tweaks’ to the Your Future, Your Super (YFYS) reforms? Chalmers said Labor would tweak aspects of it in response to emergent challenges that could be flagged by the industry, but haven’t challenges already been flagged, Outsider wondered? There’s the claim from Chant West’s general manager, Ian Fryer, that the performance test had so far only applied to MySuper products which overwhelmingly had growthstyle portfolios and that conservative choice products would be challenged by YFYS.
And what about David Bell, executive director of The Conexus Institute, who said the YFYS comparison tool was flawed as it only relied on one metric? As for what Outsider thought of the Crown Casino in Sydney, he’d rather they didn’t try to reinvent the elevator by naming floors after restaurants with no indication of its level.
AT a recent event, the question arose about which movie best represented financial services. Was it perhaps the ‘Wolf of Wall Street’, the boozy, drugaddled biopic starring Leonardo DiCaprio as former stockbroker Jordan Belfort. Was it ‘The Big Short’, Matthew McConaughey’s insight into the confusing role of sub-prime mortgages leading up to the Global Financial Crisis? Maybe it was the original ‘Wall Street’, the movie that made thousands of men want to go out and become a trader to emulate Michael Douglas’s Gordon Gekko. One thing was for sure, Outsider noticed as he sat down for a movie marathon at home one weekend, none of the movies mentioned featured any women at work in them. One actress, Australia’s very own Margot Robbie, even features in both of the first two movies playing a similar blonde bombshell role in each. Outsider wonders, with a lack of visible role models portrayed the media, is it any wonder that women are less represented in the financial services industry? After all, one cannot be what they cannot see.
A crop top scenario IN yet another nod to the demise of office life following the pandemic, Outsider read how men’s suits had been taken out of the ‘basket of goods’ used to measure inflation in the UK for the first time since 1947. The basket, which was changed regularly, contained representative items acquired by households such as clothing, alcohol and household equipment. Men’s suits were first added in 1947 but were replaced this year by ‘formal jacket or blazer’, reflecting the
OUT OF CONTEXT www.moneymanagement.com.au
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"They say the definition of insanity is doing the same thing over and over and expecting a different result. That feels a lot like what's happening with this review." - CPA's Jane Rennie reacts to the Quality of Advice review
fact that many men were perhaps wearing a jacket on their Zoom meetings and favouring shorts on their lower half which was out of shot. While Outsider does traditionally favour a suit, he cannot deny he has partaken to more casual dressing during the working from home era. Another addition to the basket was ‘sport bras and crop tops’ and Outsider just hopes these weren’t a like-for-like replacement or else he is going to have a shock when he eventually returns to the office.
"People see finance as Wolf of Wall Street and greedy bastards." - Fidelity's Kate Howitt on why students are deterred from finance
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