Money Management | Vol. 33 No 9 | June 20, 2019 by FE Money Management

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Vol. 33 No 9 | June 20, 2019

EDUCATION

Teaching yourself about education

LIFE INSURANCE

Explaining the components of income protection

RATE THE RATERS

Why not litigate: Is ASIC ﬁnally growing teeth?

CountPlus acquires Commbank’s Count Financial BY MIKE TAYLOR

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SQM Research gets recognition from fund managers THE first part of Money Management's “Rate the Raters” annual survey, which aims to measure the sentiment among fund managers and how they feel about the research houses that rate their products, has confirmed that the traditionally strong position of the established research houses is no longer secure with smaller players, like SQM Research, gradually managing to receive more recognition. While big research houses continued to struggle with high staff turnover followed by replacements who were junior representatives with less to none practical experience, SQM Research was appreciated by fund managers for its ability to structure comprehensive reports and “ask the right questions”. The feedback from fund managers also showed a growing significance of ratings in a new and more fragmented environment, given the post-Royal Commission environment and general changes in the financial services industry. Additionally, fund managers stressed that research houses should offer more constructive feedback that would help managers move their ratings forward in the future. As far as the research methodology was concerned, raters should be more persistent around the consistency when it comes to the application of the methodology, the respondents say. At the same time, in order to improve their services, the research houses should stay focused on the Australian market and its requirements rather than transplanting models they use in overseas markets. Similar to the previous years, the raters were rated across six main categories which included the research methodology, rating satisfaction, transparency of the rating process, the quality of their personnel, the ability to provide an informative feedback as well as the accuracy of peer groups.

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Full feature on page 21

INFOCUS

THE Commonwealth Bank has sold one of its key wealth management assets, Count Financial, to associated firm, CountPlus. The transaction had been confirmed to the Australian Securities Exchange (ASX) and occured less than a decade after the Count business was sold to the Commonwealth by its founder, Barry Lambert, in a transaction valued at $343 million in 2011. It also came barely three months after the Commonwealth Bank’s decision to place its wealth management demerger on hold while it deals with issues resulting from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The two companies informed

the ASX that they had entered into an agreement which would see CountPlus pick up the business for $2.5 million describing CountPlus as the logical owner of the business. They said the Commonwealth Bank would continue to support and manage customer remediation matters arising from past issues at Count Financial, including after completion of the transaction and provide a $200 million indemnity to CountPlus for all claims notified within four years of completion. The Commonwealth Bank said it owned 35.9 per cent of CountPlus and intended to sell its shareholding down over time. The bank said that from a financial perspective, the transaction would result in it exiting a Continued on page 3

ASIC questioned on salaried planner consistency THE question of whether the Australian Securities and Investments Commission (ASIC) is being consistent in its handling of salaried planners employed by industry superannuation funds or their service providers has been raised by a number of financial planners. In particular, the advisers pointed to the manner in which superannuation fund salaried advisers were being paid out of the fund’s administration fees or investment fees, meaning that all members of the fund were paying for advice whether they had received it or not. The advisers raised the issue on the back of the latest announcement from ASIC concerning Commonwealth Financial Planning completing its enforceable undertaking relating to fee for no service. Continued on page 3

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June 20, 2019 Money Management | 3

News

ASIC initiates ground-breaking conflicted remuneration case BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has broken new legal ground by alleging breach of the conflicted remuneration provisions of the Corporations Act by a firm which advised clients to set up self-managed superannuation funds (SMSFs) to buy real estate marketed by a particular agent. ASIC said it had commenced civil penalty proceedings in the Federal Court against R M Capital Pty Ltd and its authorised representative, the SMSF Club Pty Ltd, in relation to accepting conflicted remuneration. The regulator said it was alleging that SMSF Club advised its clients to set up SMSFs then use their SMSFs to buy real property marketed by a real estate agent, Positive RealEstate Pty Ltd. It said it would be alleged that SMSF Club had referral agreements with Positive RealEstate and that RM Capital was aware of this referral agreement. “ASIC contends that, from December 2013 to July 2016, each time an SMSF Club client used their SMSF to buy a property marketed by Positive RealEstate, Positive RealEstate paid around $5,000 to SMSF Club. At times, Positive RealEstate paid these amounts

directly to SMSF Club, while at others it paid them to RM Capital who passed on the majority to SMSF Club,” the ASIC statement said. “ASIC alleges that the SMSF Club accepted more than $730,000 in conflicted remuneration from Positive RealEstate.” ASIC said that its case was that the payments could reasonably be expected to have influenced financial product advice given by SMSF Club to its clients, and so constituted banned conflicted remuneration under the

CountPlus acquires Commbank’s Count Financial Continued from page 1 business that in the current financial year was estimated to incur a posttax loss of approximately $13 million. Commenting on the transaction, CountPlus chief executive, Matthew Rowe told Money Management that his company had approached the Commonwealth and that while the transaction still required shareholder sign-off the board was very happy with the arrangement. He said the transaction would ensure continuity of business for both Count advisers and their clients. Lambert, who founded both Count and CountPlus, said that while

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he had not been involved in the transaction he was fully supportive of the outcome. “The need for professional financial advice has not reduced, it just needs to be more professional and more efficiently delivered,” he said. “Count has always been the home of the Professional Financial Adviser and with the changes taking place in the industry, CountPlus under the thought leadership of Matthew Rowe, and a strong board, combined with its Accountants’ succession model, is the natural home of professional advisers generally and Accountants in particular,” Lambert said.

Corporations Act. ASIC also alleges that RM Capital was aware of the payments and did not take reasonable steps to stop the SMSF Club from accepting them. ASIC contends that as the authorising licensee for SMSF Club, RM Capital’s failure to take reasonable steps to ensure SMSF Club’s compliance also breached the law. ASIC is seeking declarations of contravention, civil penalties and compliance orders against both RM Capital and SMSF Club.

ASIC questioned on salaried planner consistency Continued from page 1 In doing so, they pointed to the latest Financial Services Guides (FSGs) issued by two major industry funds – AustralianSuper and REST – which they said confirmed that financial advice salaries were being paid out of administration fees. The advisers questioned whether the use of the administration fund to pay the salaried advisers meant that members were paying for advice but not receiving it. The advisers described the ability of the industry funds to utilise their administration fees to pay salaried planners “discriminatory” and noted that ASIC had previously precluded the payment of external advisers under similar arrangements. They said they believed the bottom line was that superannuation funds which owned salaried financial planning businesses were benefiting from not having to deal with client ‘opt-in’ or deal with fee disclosure statements because their operating expenses were covered out of the investment fees

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4 | Money Management June 20, 2019

Editorial

mike.taylor@moneymanagement.com.au

TIME FOR ASIC TO END THE CHEST-BEATING

FE Money Management Pty Ltd Level 10

The Australian Securities and Investments Commission has done much post-Royal Commission chest-beating about pursuing litigation but it needs to translate that tough talking into positive results.

4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214

IN the aftermath of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Australian Securities and Investments Commission (ASIC) has been talking tough with the message being of an approach based on “why not litigate”. Looked at cynically, the regulator could be viewed as overreacting to the harsh criticism directed at it as a result of the Royal Commission which pointed to a number of instances where ASIC, in the past, was seen to have adopted a facilitative approach in dealing with the transgressions of financial services firms rather than having reached into the full armoury of its legal options. That point was further driven home by the comments of the Commissioner, Kenneth Hayne, who reinforced that the starting point for the regulator ought to have been that the law should be obeyed and enforced and that “adequate deterrence of misconduct depends upon visible denunciation and punishment”. Little wonder, then, that when ASIC chair, James Shipton, consulted with his senior executives about how the regulator should be seen to be dealing with

the Royal Commission’s criticisms they determined upon the “why not litigate” messaging with ASIC’s relatively new deputy chair and Queen’s Counsel, Daniel Crennan, later suggesting that there was likely to be substantially less use made of enforceable undertakings (EUs). It is in these circumstances that ASIC needs to be careful that it is not actually undermining one of its core legislative objectives as spelled out in the Australian Securities and Investments Commission Act 2001: “In performing its functions and exercising its powers, ASIC must strive to: maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy”. Arguably, by adopting a largely adversarial legal approach, ASIC is in danger of increasing costs and, by definition, putting at risk commercial certainty. What is more, ASIC’s senior executives should not be too quick to relegate the use of EUs in circumstances where the failures identified by the Royal Commission could be substantially attributed to poor administration and oversight

rather than the actual utility of EUs. And, as the Law Council of Australia earlier this month pointed out, it is not helpful or appropriate for a regulator such as ASIC which, like the Australian Taxation Office (ATO), has model litigant status to, on the one hand, adopt a “why not litigate” approach but on the other hand have a senior executive and lawyer questioning the manner in which complex issues are handled by the courts. Over coming months ASIC is expected to announce actions against individuals directly related to matters raised during the Royal Commission and, in a number of instances, the consequent court proceedings are likely to be long and complex. It is in this context that the Law Council was quite right to note that “threats to parties for exercising their legal rights have no place in our justice system, especially from a regulator entrusted with the important role of promoting the rule of law”. It is time for ASIC to cease its post-Royal Commission rhetoric and get on with the job of regulating.

mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi

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WHAT’S ON Mutual Capital Current and Leadership Symposium Future Leaders – Sydney, NSW VIC 26 June 2019 apra.gov.au/news-media/ events

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June 20, 2019 Money Management | 5

News

FPA urged Treasury to differentiate between large and small licensees BY MIKE TAYLOR

THE Financial Planning Association (FPA) earlier this year urged the Federal Treasury to redesign the proposed industry funding model and registry search fees for the Australian Securities and Investments Commission (ASIC) to ensure large bankowned licensees avoiding the need to levy smaller licensees were captured. In a submission to Treasury filed in February and made public recently, the FPA pointed to the intended funding model for ASIC’s monitoring of large licensees, noting it had two criteria – at least $1 billion in deposit products or at least 1,000 relevant providers. In doing so, the FPA said it was concerned that the criteria was set too high and “could be avoided by those entities subject to this extra type of regulatory oversight”. It then pointed to the wealth businesses owned by banks, AMP and IOOF and the use of multiple licenses. “As at June 2018, only one licensee met the criteria of 1,000 relevant providers,” it said. “This is partly due to the structure of the industry where it is very common for large institutions to hold multiple AFSLs all reporting to the parent company of the group.” “Similarly, the alternate criteria of holding a total value of deposits of at least

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$100,000,000,000, may capture some parent companies but not all,” the submission said. “For example …. while the Commonwealth Bank (CBA) may have a total of 1,557 advisers,

this advice is provided under five separate licensees.” It said that while CBA might meet the criteria of holding a total value of deposits of at least

$100,000,000,000, the licensees within the bank’s group wouldn’t. “There may also be some entities in the future, subject to this new additional ASIC activity that will not

meet either criteria,” the submission said. The FPA said it was suggesting that the criteria for the subsector for entities subject to “close and continuous monitoring

by ASIC” be clear to ensure it captured those subject to such activity without inadvertently applying to entities who are not imposed with the extra regulatory oversight.

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6 | Money Management June 20, 2019

News

TPB confirms 35 higher risk breach crack-down BY MIKE TAYLOR

THE Tax Practitioners Board (TPB) has flagged a crack-down on tax practitioners who have been failing in their own tax obligations, pointing to 35 specific investigations which might result in sanctions. The chair of the TPB, Ian Klug pointed to the 35 investigations into “higher risk breaches” while acknowledging that $40 million had been recouped in outstanding tax bills after the TPB commenced action against thousands of practitioners who had fallen behind in their own obligations. Klug said the TPB commenced 35 investigations into higher risk breaches, with a view to imposing sanctions,

including termination of registration. “The message to tax practitioners is clear – you need to act now to ensure your personal tax obligations are up to date,” he said. At the same time, Australian Taxation Office (ATO) assistant commissioner, Dana Fleming noted this was especially important for tax practitioners who acted as trustees for their own self-managed superannuation fund (SMSF). “This is particularly the case when some practitioners were found to be

Grattan stands by call to keep SG at 9.5 per cent acting as trustees of their own SMSF, with collective outstanding returns of over a billion Australian dollars in superannuation retirement assets,” Fleming said. Fleming said over 1,000 SMSF late returns had now been lodged by tax agent trustees, disclosing total assets exceeding $500 million. “We continue to target tax practitioners who fail their legal and ethical responsibilities and the ATO is separately pursuing agent cases, including debt recovery litigation and prosecution actions.”

Has advice debate been hijacked? THE Canberra bubble and self-interest groups have completely hijacked the advice debate and the subsequent decisions which have been made with no understanding of the consequent impact on consumers, their needs and affordability, according to financial planning business broker, Paul Tynan. Tynan warned that there was a danger that in a post-Royal Commission environment, the Australian financial planning industry would be a story of ‘haves’ and ‘have nots’. He said that the post-Keating era saw the rise of institutions moving into the advice space and a consequent clash of business models between short-term time horizons (banking) and long-term time horizons (advice) with the outcome being a lack of corporate governance, profit before clients and unethical business practices. “I am certain that the post-RC ramifications will be as equally devastating but the real victims will be the consumers,” Tynan said. “If all of the recommendations

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are implemented we will see advice become unaffordable to the majority of Australians.” “Australia will develop a two-tier ‘haves’ and ‘haves not’ advice structure, where a small minority will be able to afford advice and the majority unable to do so and all of these issues will be magnified within regional Australia where there will be a lack of advisers and a deficiency in connectivity,” he said. Tynan said Government, the Australian Securities and Investments Commission (ASIC) and the planning associations had been so consumed with conflicted remuneration that they had failed to understand why commissions were developed to be paid out of product and why this concept came about globally within financial services. “If the decision-makers were genuinely concerned about conflicted remuneration, they could have simply required every piece of advice to be in the best interest of the client and set level commission percentages,” he said.

BY HANNAH WOOTTON

THE Grattan Institute has stood by its position that the superannuation guarantee (SG) should remain at 9.5 per cent, saying that the “fear factory” of media predicting insufficient retirement income were basing their forecasts off modelling that had a “fundamental problem”. Grattan’s chief executive, John Daley, told delegates at the Actuaries Institutes’ Summit that the ASFA Retirement Standard’s was flawed in that it was based on the top 20 per cent of earners’ pre-retirement income, painting an unnecessarily grim picture of the retirement prospects of the remaining 80 per cent of workers. He also criticised the standard for indexing to wage inflation, arguing that “it just bears no resemblance to reality” and that retirement income modelling should instead track the CPI. “People typically spend less and less money in real terms as they grow older, but by inflating at wages, it [the Standard] looks like they’re spending significantly more later,” Daley said. Less holidays and activities and increased time in healthcare were reasons why spending decreased. These assumptions meant that the ASFA Retirement Standard actually improved the financial situation of most people in retirement compared to when they work, Daley believed. Industry consensus tended to be that the benchmark for sufficient retirement income should be at 70 per cent of preretirement levels. As such, the current 9.5 per cent SG rate met the needs of most retirees already, Daley said, reinforcing Grattan’s controversial stance that increases weren’t necessary. He also repeated the Institute’s position that an increase to 12 per cent would only substantially benefit higher income earners, with total superannuation balances for low income earners predicted to change only a little according to its modelling, and middle-income earners seeing almost no difference. David Knox, a senior actuary at Mercer and retirement income expert, took issue with the underlying presumptions made in Grattan’s modelling, however. It presumed both that people worked through to 67 years old and then lived to 92. It also had a bias toward both single retirees and homeowners, when Knox said that more than 70 per cent of people had a partner when they retired, and trends of declining home ownership were expected to continue. “I can guarantee that the assumptions in that model won’t bear out,” Knox said at the Summit. “Cameos are certainly useful but they only tell part of the story,” with individual circumstances, investment returns, longevity, inflation, and possible changes to tax and means test legislation all also having a bearing on retirement income outcomes. He also questioned Grattan’s reliance on retirees’ average income in their last five years before retirement as the basis for its modelling, saying that many people begin to wind down in these years. The two agreed on some key retirement income platforms however, such as the assets taper test of $3 a fortnight per $1,000 being too tough. They also agreed that renters in the private market needed more help in retirement, and that the aforementioned benchmark to sustain liveable standards for retirees was 70 per cent.

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8 | Money Management June 20, 2019

News

Scott Hartley signals Sunsuper departure BY HANNAH WOOTTON

SUNSUPER’S chief executive, Scott Hartley, has announced he will depart the super fund following the appointment of a successor, as he was looking for a new challenge following leading the fund’s immense growth over the last five years. Hartley said the decision to leave had been “agonising”, but that the time was right for both him and Sunsuper. Since he took on the role in late 2013, the fund had grown from a $25 billion fund with one million members to having over $66 billion in funds under management (FUM) and 1.4 million members. Sunsuper’s chair, Andrew Fraser, delivered

glowing praise for Hartley’s reign: “Scott and I have recently been discussing his plans and I know he has wrestled with this decision, but having achieved his ambitions for Sunsuper, I do understand his eagerness to take on a new challenge.” “Whoever secures his services will be the beneficiary of one of Australia’s most capable chief executives,” he added. “I’m pleased he will be staying on as CEO as we undertake a selection process to support a smooth transition. Scott’s commitment to continuing to serve will support the organisation into its next phase of success.” Egon Zehnder would lead the selection process for Hartley’s replacement.

AMP CFO to stay on to oversee ‘difﬁcult and complex’ life sale BY MIKE TAYLOR

OUTGOING AMP Limited group chief financial officer, Gordon Lefevre will remain with the company through the first half of the new financial year because of the complexity of AMP’s sale of its life insurance business to Resolution Life. The company announced to the Australian Securities Exchange (ASX) that Lefevre would be staying through the first half “to continue to drive the transaction with Resolution” noting the intention for John Patrick Moorhead to assume the CFO role. AMP said the separation of the life

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insurance business was proving to be “difficult and complex”. “AMP continues to deal with multiple regulators in different jurisdictions and with other challenging processes to achieve the conditions precedent for the transaction,” it said. “In some instances, these regulatory requirements have changed since the transaction was agreed. However, we continue to work towards the sale by the end of the third quarter of this year.” AMP said that during the transition period, Moorhead would assist the chief executive with the completion of AMP’s strategic plan and would commence as Group CFO on 1 October, 2019.

Suncorp super faces class action SUNCORP in facing a class action over payments to financial advisers. Law firm William Roberts Lawyers together with Litigation Capital Management announced they were working together to bring a class action against Suncorp Portfolio Service Limited as trustee responsible for the administration of superannuation funds which are part of the Suncorp Group. It said the proposed class action would be brought on behalf of members of Suncorp Super Funds to recover compensation for members whose accounts were impacted by charges used to pay conflicted remuneration to financial advisers from 1 July, 2013 to date. The law firm said the class action would allege that Suncorp Super executed agreements to entrench fees that would otherwise have become unlawful or unenforceable. It said that, in doing so, the action would allege that Suncorp Super breached its duties to avoid conflicts, act with due care and diligence and act in the best interest of its members and that it would seek compensation plus interest for affected Suncorp Super members for the Conflicted Charges. The law firm said it was not proposed that any financial advisers be included in the class action.

13/06/2019 10:41:16 AM

June 20, 2019 Money Management | 9

News RETIREMENT INCOME MONTHLY UPDATE

Help your clients ﬁnd their ‘mojo’ in retirement

Zurich completes OnePath acquisition BY MIKE TAYLOR

IT is now formal. Zurich has completed its acquisition of ANZ’s OnePath life insurance business. Zurich announced completion of the transaction and said that as part of the transaction Zurich’s existing independent financial adviser (IFA) and bank distribution channels in Australia would be broadened by a 20-year agreement with ANZ to distribute life insurance products through bank channels. It said this cooperation agreement would strengthen Zurich’s business by giving it access to ANZ’s customer base served through more than 630 branches, and additional capabilities in independent distribution channels. “After this acquisition Zurich will have a market share of around 20 per cent in retail life and six per cent in the local group life market,” the company said. Commenting on the transaction and its implications, Zurich Group chief executive, Mario Greco said the company was strengthening its business in Australia and could now engage with up to six million new customers with this acquisition of OnePath Life and the access to ANZ’s distribution channels. “Asia Pacific is a key region for Zurich and this deal adds further complementary products and additional bancassurance distribution capacity in the region,” Greco said. “OnePath Life’s retail business, focused on protection and savings products, is perfectly aligned with our strategy in life insurance and should further add to our strong cash remittances.” The company said completion of the sale would see Zurich acquire the OnePath brand and product range, along with more than 500 employees who had joined the Zurich Life and Investments team across Australia. It said that, as had been confirmed, Zurich intended to invest further in the OnePath brand and OneCare life insurance offering, and both the Zurich and OnePath brands and product sets continue to compete with – and complement – each other in the open market.

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WHEN preparing for retirement many Australians seek advice on how to fund their retirement. Many don’t however, stop and think about what life in retirement is going to look like and what they are going to do for the next 20-30 years. According to Retirement Coach at 64 PLUS, Jon Glass, “setting up to live a happy and fulfilling retirement requires more than just financial advice and choosing a hobby. It’s about creating new meaning and selfworth that lasts for the long and enjoyable decades of retirement”. While some retirees will have a clear idea of how they want to live their post-work lives and will quite happily slot into retirement, others may struggle. A change in routine, a loss of self-worth (previously defined by work) and a sudden change in lifestyle can create an absence of day to day meaning and purpose. This in turn can lead to confusion, melancholy, frustration, illness and even isolation from family and community. Retirement coaching can help pre-retirees and retirees find meaning and purpose in life after work. And before you say this all sounds rather ‘fluffy’, the fact is many retirees need help. They think that with the right financial plan in place everything else will just come naturally—and this is often not the case. “It’s good to have more money than less but it turns out that the emotional aspects of retirement are much bigger than this,” Glass says. In the US, there are a growing number of retirement coaches and Australia is starting to see the same. We have over five million baby boomers moving into retirement and the shift is no longer a destination, but a journey. The need for developing a plan for the non-financial aspects of retirement may potentially outweigh the need to prepare financially. The relationship between retirement coach and client is built on the same foundations as your client relationships: trust, effort and time invested. In fact, some advisers may play the role of the retirement coach themselves. What’s evident, however, is that a client’s purpose doesn’t simply just announce itself. It requires the coach and client to engage on an emotional level, for the right questions to be asked at the right time and for the client to speak their mind freely and without embarrassment. According to Peter Black, a Retirement Options certified coach at Peter Black Coaching, open-ended questions about the future can help your client clarify their options in retirement. For example, how will you replace the inherent benefits your business/career/job provides (i.e. identity, income, purpose, socialisation, time management and utilisation)? By engaging with and listening patiently to the individual (or couple), a retirement coach can help the client identify the lifestyle that meets their life goals, well-being and, ultimately, their happiness. If you’re not already fulfilling the retirement coach role, it may be something to think about doing yourself. Alternatively, you can outsource to an independent professional retirement coach as a valueadding service of your practice.

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13/06/2019 10:42:14 AM

10 | Money Management June 20, 2019

News

Ellerston Capital buys stake in Morphic

Peter Kell joins ratings commission panel

BY OKSANA PATRON

BY LAURA DEW

ELLERSTON Capital has announced it has acquired a controlling interest in Morphic Ethical Equities Fund’s (MEC) manager, Morphic Asset Management, which is a specialist investment manager in alternative strategies such as separately managed accounts (SMAs). Under the terms of the deal, Morphic would become a subsidiary of Ellerston, and Morphic’s founders, Jack Lowenstein and Chad Slater, would continue to run the funds while gaining access to Ellerston’s wider analyst pool and infrastructure. “We believe that under the wing of Ellerston, we gain access to Ellerston’s experienced investment team and we substantially improve our reach to investors whose aim is to build wealth by following the principles of socially responsible investing,” Lowenstein commented. According to Morphic Ethical Equities Fund’s chair’s JoAnna Fisher, the transaction was expected to be a positive development for the fund and would support the fund’s marketing efforts.

Former Australian Securities and Investments Commission (ASIC) deputy chair Peter Kell is joining a panel on licensee reporting set up by Adviser Ratings, his first role since departing the regulator last year. The licensee ratings commission is the first time the organisation has taken a position and conducted ratings itself. Kell joined ASIC in 2011 and was appointed as deputy chair in 2013 before resigning from the organisation last September, eight months before the end of his extended term.

During his time at ASIC he was heavily involved with the financial services royal commission, led legal cases against Westpac and National Australia Bank and was a key driver of financial sector policy. Prior to joining ASIC, Kell previously led consumer group CHOICE and was deputy chair of the Australian Competition and Consumer Commission (ACCC) Also joining the committee was Jerry Parwada, a professor of finance at the University of New South Wales, as chairperson and Janice Sengupta, former chief investment officer Asia Pacific at AON.

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Spitﬁre acquires Wealthtrac BY MIKE TAYLOR

FINANCIAL services technology platform company, Spitfire Corporation has acquired Wealthtrac. Spitfire said it had completed acquisition of the Wealthtrac business but declined to disclose the value of the transaction. In announcing the move, Spitfire said Wealthtrac had been operating for over 15 years, developing and distributing wealth products for selflicensed advisers during which time the company had grown to be the largest multi-dealer owned platform business in Australia, currently with over $2 billion in funds under

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management and in excess of 6,000 adviser clients. Commenting on the transaction, Wealthtrac chief executive, Matthew Johnson, said he was excited to be working with the Spitfire team which had built a leading global digital platform and was continually looking to improve the customer experience. “Importantly, this is also an exciting opportunity for our clients who will be able to offer an innovative solution that provides numerous benefits including access to multi-asset classes and best of breed reporting,” he said. Spitfire said the deal supported the company’s ambition to

enhance its distribution capability prior to a planned initial public offering later this year. Spitfire executive director, Laurence Milne said the company saw three key benefits for Spitfire from its acquisition of

Wealthtrac – an immediate boost to funds under management, the addition of substantial profitable revenue plus, the broad distribution network of self-licensed advisers who would support the firm’s future growth.

13/06/2019 4:06:41 PM

June 20, 2019 Money Management | 11

News The UK’s ‘existential crisis’ over Brexit BY LAURA DEW

BREXIT has thrown Britain into an ‘existential crisis’, according to deVere chief executive Nigel Green, as Prime Minister Theresa May steps down and there are yet more delays to the UK’s departure date. Economically, Brexit cost the UK economy £66 billion in less than three years, according to S&P Global Ratings, and confidence in the financial services sector was at an all-time low. Other businesses had relocated their work to European cities like Frankfurt and Amsterdam and there was a significant drop in the value of sterling which meant imports

were more expensive. Green, who leads the global financial advisory group, said: “Brexit has thrown Britain into a profound existential crisis. It has cost Britain three lost years of opportunity. “All of Parliament’s time and energy is vested in Brexit. It appears nothing else is getting done and so much needs to be done.” He described this period as ‘Britain’s lost years’ as the country’s future hung in the balance with minimal certainty over what Brexit would look like. The latest Brexit deadline for the UK to leave the European Union is 31 October, 2019.

“After three years, the uncertainty grows rather than recedes. Who will be the Prime Minister that will take the UK out of the EU. Will there be a second referendum and what would be on the ballot paper? Will Britain leave

with no deal? “With so many serious and farreaching questions hanging ominously unanswered—and more growing each week—Brexit Britain’s lost years are not even close to being over.”

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without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Past performance is not necessarily indicative of future performance.

Retail insurance laws to require greater diligence from sellers BY HANNAH WOOTTON

WHILE the bulk of the responsibility imposed by the new design and distribution obligations for retail insurance will be shouldered by insurers, those selling such insurance products to clients will still see an uptick in their obligations to consumers. The distribution obligations would apply to any person selling or distributing a retail client product to a retail client, which would include many Australian Financial Services (AFS) licensees, most especially underwriters. According to the Fold Legal, under the new regime product sellers would have to take reasonable steps to ensure their conduct was consistent with the target market determination (TMD) of the insurance. This would especially apply to restrictions or conditions in the determination. The TMD requirement was targeted at

09MM2006_01-19.indd 11

ensuring that products sold were aligned with the likely objectives, needs and financial situation of the clients forming their target markets. Insurers would also have to take more responsibility over sellers, with the Fold Legal explaining that they must take reasonable steps to ensure their products’ sale was consistent with the TMD, which could include monitoring and placing restrictions on sellers. “Insurers dealing with product sellers who have a poor track record of ethical and compliant sales conduct will need to do more to prevent mis-selling and promote compliance,” the firm warned. Product sellers would also have greater obligations should a client complain about a product, now being required to keep records of complaints they received and when these were reported to the issuer. Their record-keeping would additionally need to include steps they took as sellers to ensure

that the product was sold in a manner consistent with the TMD, and the dates that they reported information about significant dealings that weren’t aligned with the TMD. The Australian Securities and Investments Commission (ASIC) hoped that these records would give it easier access to information that would help assess the compliance of both insurers and product sellers with the new requirements. The Fold Legal clarified that these distribution obligations wouldn’t apply to referrers or to brokers who give advice to and place insurance on behalf of the client.

13/06/2019 4:06:53 PM

12 | Money Management June 20, 2019

News

Gold Coast planner banned for ﬁve years BY OKSANA PATRON

THE Australian Securities and Investments Commission (ASIC) has banned Gold Coast financial adviser, Daniel John Renneberg, from providing financial services for five years after the regulator found he had failed to act in the best interests of his clients. According to ASIC’s investigation, Renneberg, who was an authorised representative of Austplan at that time, received referrals from GM Homes Australia to help clients set up selfmanaged superannuation funds (SMSFs) to purchase an investment property. Following this, he advised clients to set up SMSFs with limited recourse loan arrangements that “were completely unsuitable and placed his clients in a vulnerable financial position”, the regulator found. “SMSFs are not for everyone and using an

SMSF to borrow money and buy a property is a high-risk strategy. ASIC will be looking very carefully at advisers who recommend this strategy and taking swift action where we see problems,” ASIC’s commissioner, Danielle Press, said. “Financial advisers must not rely solely on client direction when establishing an SMSF. They must adequately demonstrate why an SMSF is appropriate and why it is in their clients’ best interests.” Additionally, ASIC found other deficiencies in the financial services provided by Austplan’s representatives and was concerned about the firm’s ability to do all things necessary to ensure the advice provided by its representatives complied with the law. Renneberg was an authorised representative of Austplan, between March 2015 and June 2018, and its sole director when Austplan’s licence was cancelled.

Life insurers still suffering disability drag

Law will follow crypto sellers overseas, ASIC warns BY HANNAH WOOTTON

BY MIKE TAYLOR

THE profitability of disability insurance products continues to drag on the Australian life insurance industry, according to the latest data published by the Australian Prudential Regulation Authority (APRA). The March quarter data revealed a 65.1 per cent decline in net profit after tax for the year ended 31 March, with the major contributor being individual disability income insurance, which was down $219 million over the 12-month period while group disability insurance was down by $50.3 million. However, while the year on year data remained negative, APRA’s analysis pointed to an improvement in the quarter data, with net profit after tax at $523 million significantly up from the $529 million loss in the previous quarter. It said the main drivers for this quarterly improvement were favourable movements in financial markets along with “the discrete write-off of goodwill that negatively affected the results in the preceding quarter.”. The APRA analysis said risk products recorded a combined profit of $124 million for the quarter with Individual Lump Sum standing at $334 million; Group Lump Sum $59 million; Group Disability Income Insurance (DII) a $50 million loss; and Individual DII a $219 million loss. It said profits for Individual Lump Sum improved by $237 million over the quarter, caused by reductions in operating expenses and the effective movement in net policy liabilities. “On the other hand, Individual DII continued to report losses, driven by a significant reduction in discount rates and a recognition of persistent adverse claims experience,” the APRA analysis said. “For the 12 months to March 2019, risk products reported an aftertax loss of $94 million, significantly down from a profit of $1.3 billion. All risk products deteriorated, particularly Individual Lump Sum and Individual DII. This deterioration is mainly driven by loss recognition caused by persistent adverse claims experience,” it said.

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BUSINESSES offering initial coin offerings (ICOs) and crypto-assets need to ensure they’re complying with Australian consumer and corporation laws, and the Australian Securities and Investments Commission (ASIC) has cautioned that simply selling such products offshore won’t stop the regulator from enforcing business’ domestic obligations. The regulator yesterday updated Information Sheet 225 (INFO 225) to reflect that ICOs and cryptos often were or involved financial products that were regulated under the Corporations Act, as well as coming under the Australian Consumer Law’s misleading and deceptive conduct provisions. ASIC Commissioner John Price said that businesses offering cryptoassets or related services needed to undertake appropriate enquiries to ensure that they were complying with Australian law, and that the promotion or sale of such products to Australians offshore didn’t mean that our domestic laws didn’t apply. “Issuers of ICOs, crypto-assets and their advisers should not assume the use of these structures means that key consumer protections under Australian laws do not apply or can be ignored,” he said. Earlier this year, the Federal Treasury also found that many ICOs had turned out to be scams, warning that businesses needed to distinguish themselves from possible scams and carefully consider the information in INFO 225.

12/06/2019 3:57:43 PM

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This document has been prepared by Praemium Australia Limited (ABN 92 117 611 784, AFS Licence No. 297956) (‘Praemium’, ‘we’, ‘our’, ‘us’). The information in this document is general in nature and has been prepared without taking into account the financial situation and needs of any individual. You should refer to the relevant Product Disclosure Statement on our website, www.praemium. com.au, and consider obtaining Financial Product Advice before choosing to invest in any of our Products. While we have taken all due care in preparing this document, Praemium and its related bodies corporate and associates will not be liable for any loss, harm or damage suffered by any person arising out of or related to its content, except to the extent required by law.

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12/06/2019 1/02/2019 3:33:20 4:03:43 PM

14 | Money Management June 20, 2019

News

AMP to ‘vigorously’ defend super class action BY MIKE TAYLOR

AMP Limited has vowed it will vigorously defend a class action mounted over its superannuation products. The company announced to the Australian Securities Exchange (ASX) that it was subject of a superannuation class action filed against certain of its subsidiaries by Maurice Blackburn in the Federal Court in Melbourne. It said the action related to the fees charged to members and that the proceedings was on behalf of superannuation customers and their beneficiaries. “The proceeding will be vigorously defended,” it said.

Aurora wins against Primary in court BY OKSANA PATRON

THE NSW Supreme Court has delivered its verdict which states that Aurora Funds Management was not properly removed as the responsible entity (RE) of the Aurora Absolute Return fund (ABW) and, following this, Primary Securities was not properly appointed as the fund’s RE. The proceedings were commenced by Aurora in order to resolve the confusion as to the identity of the RE of the fund, caused by the conduct of Primary Securities which held the purported meeting earlier this year. Among the reasons, Justice Rees said that the members who purported to call the aforementioned meeting of 15 January had not

been identified as required by the Corporations Act and that 25 per cent of the unit holders in ABW had not received adequate notice of meeting. The orders have been stayed for seven days to allow Primary to consider whether to appeal: 1) Declaring that the meeting of the fund on 15 January 2019 was invalid, as were the resolutions passed at the meeting, and that Primary is not and never has been the RE of ABW; 2) Requiring ASIC to rectify its record of registration, so that Aurora is reinstated as responsible entity of ABW; 3) Requiring Primary to pay Aurora’s costs.

The performance of Aurora Absolute Return Fund since February, 2005

Source: FE Analytics

09MM2006_01-19.indd 14

Accountants seek voice in retirement advice provision ACCOUNTANTS have sought a place at the table when the Government initiates a review of the retirement income system, suggesting an essential element is proving access to affordable financial advice. The Institute of Public Accountants (IPA) welcomed a recent announcement by the Treasurer, Josh Frydenberg that he would be commissioning a review of the retirement income system which would be inclusive of the interfaces between superannuation, government pensions and taxation. Commenting on the move, IPA chief executive, Andrew Conway said the review was long overdue in circumstances where there was no well-defined view on what a retirement living standard should look like. “There is also the budgetary considerations of funding the age pension and superannuation tax concessions and ensuring that the system is sustainable going forward,” he said. “The need to encourage greater investment in superannuation to facilitate self-funded retirement is critical as Australia will not be able to fund government pensions in the future, especially considering our ageing population,” Conway said. “Different mechanisms need to be considered given the longevity risk when superannuation members retire. This includes the development of annuity type products.” However, he said there was significant complexity in the system with many competing interests, which all needed to be given due weight if Australia was to develop an equitable retirement income system. “For instance, we cannot ignore the findings of the Productivity Commission report which suggested reforms to benefit members through lower fees and higher investment returns could generate an extra $533,000 for a new job entrant today when they eventually retire,” Conway said “An essential element of this review will be to provide access to affordable financial advice, which is what public accountants, as trusted advisers, can deliver,” he said.

12/06/2019 3:50:16 PM

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The information on this page is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLCI) a member of the group of companies of National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (NAB Group). An investment with MLCI does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. You should obtain a Product Disclosure Statement (PDS) relating to the MLC Inflation Plus portfolios (ARSN 165 016 035; 165 016 151; and 117 295 315) and consider it before making any decision about whether to acquire or continue to hold those products. A copy of the PDS is available upon request through MLC Platforms and the MLC Investment Trust by phoning 133 652 or on our website at mlc.com.au/inflationplus. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. A150017-0519

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12/06/2019 22/05/2019 3:31:41 3:28:55 PM

16 | Money Management June 20, 2019

News

Bank satisfaction rises post-Royal Commission dip BY LAURA DEW

CUSTOMER satisfaction among the big four banks is improving for the first time since the Royal Commission, according to Roy Morgan research, although it remains below the rate prior to the inquiry. The organisation surveyed 50,000 consumers and found while satisfaction remained below pre-Royal Commission levels, it had risen 0.6 percentage points in the past two months. Commonwealth Bank had the highest satisfaction at 78 per cent, followed by Westpac and ANZ at 74 per cent and NAB at 72 per cent. The average satisfaction rating was 75.9 per cent compared to 79.2 per cent in January 2018. But these figures were well below satisfaction for smaller players with both Bendigo Bank and ING receiving a 90 per cent rating, perhaps because the smaller banks were less-targeted by the Royal Commission. When the big four were excluded, the average bank customer satisfaction rating rose to 83.8 per cent, down slightly from 84.9 per cent in January 2018. Roy Morgan industry communications director, Norman Morris, said: “It is not surprising

that over the last year there has been a decline in satisfaction of the big four banks following the high level of negative publicity generated by the Finance Royal Commission. “What we are seeing however are positive signs in improving customer attitudes towards their banks as adverse publicity declines and

findings are implemented by banks. “A major challenge remaining for the big four banks is to reduce the increasing lead that the smaller banks have in satisfaction. In order to do this it is important for the big four to understand the many factors that drive the level of customer satisfaction and advocacy in banks.”

IRESS acquires QuantHouse

Are fees too high?

BY CHRIS DASTOOR

BY OKSANA PATRON

IRESS has announced the acquisition of QuantHouse, an international provider of market data and trading infrastructure. The total of purchase price is up to €38.9 million on a debt and cash free basis, with a material portion that would be subjected to earnout performance criteria through to the end of 2021. Andrew Walsh, IRESS chief executive officer (CEO), said the provision of accurate timely and cost-effective market data through their software and to a range of clients is an important part of IRESS’ current and future business, and their growth strategy. “QuantHouse is highly complementary and strategically aligned to IRESS’ existing and future activities and to its international offering, including IRESS’ increasing focus on data,” Walsh said. “The acquisition will further strengthen IRESS’ international market data business and provide opportunities to achieve cost synergies and scale.” The acquisition will expand IRESS’ offering to clients globally and will meet client demand for increased channels of data beyond desktops. “In particular, the acquisition will allow IRESS to provide clients with real-time access to additional services, including international exchanges, with global MSCI coverage increasing from 52-75 per cent,” Walsh said. QuantHouse operates internationally, with a focus on Europe, North America and Asia, with more than 145 data feeds from exchanges and other data providers to clients globally. It is being sold by its co-founder and chief executive Pierre Feligioni, but he would continue to lead them within IRESS. All QuantHouse people, including senior management would remain a core part of the IRESS team.

THE majority of Australian active managers might be charging fees that are too high and smart beta investments strategies will continue to disrupt the active management, according to VanEck’s analysis. The report, entitled “When are fees too high? The potential impact of smart beta to disrupt active Australian equity strategies”, claimed that most Australian equity funds should be charging between 0.35 per cent and 0.65 per cent per annum, as most of their performance could be explained by factors which were also used in smart beta strategies. “Only those active managers who can demonstrate identifiable and persistent ‘real alpha’ will prevail,” Russel Chesler, VanEck’s director – investments, said. “Australian equity managers that continue to offer benchmark-like performance for high fees face some hard decisions. They must evolve to survive.” According to Chesler, active managers needed to better differentiate themselves and provide what smart beta could not. “Of this differentiation can’t be achieved, the investors will continue to question the fees they are being charged,” he concluded.

09MM2006_01-19.indd 16

12/06/2019 3:47:55 PM

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so you can give your clients even more value. For full details, contact your MLC Business Development Manager or visit mlc.com.au/wrap 1 Based on benchmarking conducted by Chant West. Cash account interest rates are as at 31 December 2018. Chant West is solely liable for this information. 2 Based on price changes across MLC Wrap Super Series 2 and MLC Navigator Retirement Plan Series 2 super products only. See the relevant Product Disclosure Statement (PDS) for further details. 3 Terms and conditions apply. Issued by National Wealth Management Services Limited ABN 97 071 514 264. The information in this flyer is correct as at 4 February 2019, but may change in the future. Interests in MLC Wrap Super and MLC Navigator Retirement Plan are issued by NULIS Nominees (Australia) Limited, ABN 80 008 515 633, AFSL 236465 as trustee of the MLC Superannuation Fund, ABN 40 022 701 955. Interests in MLC Wrap Investments and MLC Navigator Investment Plan are issued by Navigator Australia Limited, ABN 45 006 302 987. Before making a decision to purchase or continue to hold a product, you should read the relevant PDS or Financial Services Guide, which can be obtained by calling us on 133 652. The information in this document is general information only and doesn’t take into account your personal financial situation or individual needs. A150004-0519

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12/06/2019 22/05/2019 3:32:07 3:30:27 PM

18 | Money Management June 20, 2019

News

TAL offers training in FASEA ethics requirements Deakin unveils

accreditation of financial planning course

BY HANNAH WOOTTON

A major insurer is now also moving into the adviser education space as the deadline for compliance with the Financial Adviser Standards and Ethics Authority’s (FASEA’s) regime draws nearer, with TAL offering a training course on the Code of Ethics. Almost 500 advisers attended the first training course, run by TAL national technical manager, David Glen, showing the demand for greater resources and clarity around meeting FASEA’s requirements. The TAL training focused on helping advisers fulfil their education requirements under FASEA, as well as prepare for the mandatory exam to be imposed by the Authority. “Currently, there are very few resources available to support financial advisers in understanding the code of

BY CHRIS DASTOOR

ethics and how it applies to their day-to-day business dealings and customer interactions,” TAL head of licensees and partnerships, Beau Riley, said. “Through our TAL Risk Academy ethics course, we want to equip advisers with a solid understanding of the scope of the code of ethics and the procedures they need

to put in place to ensure they adhere to the code and demonstrate their adherence to others.” Under FASEA’s regime, advisers would have to complete nine Continuous Professional Development (CDP) hours in Professionalism and Ethics, as well as passing a section on ethics in the compulsory exam.

Industry funds become corporate super advice turnkey BY MIKE TAYLOR

THE industry funds’ financial planning footprint is expanding as a result of key outsourcing decisions being made by corporate superannuation funds. Superannuation outsourcing tender consultants confirmed to Money Management that industry funds emerged as the preferred outsource option for corporate superannuation funds in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Planning Industry, including for the provision of financial planning services. In many instances the financial planning beneficiaries were not just Industry Funds Financial Services but those self-licensed financial planners who had made it onto the panels approved by the winning industry superannuation funds. The continuing trend towards corporate funds selection industry funds for outsource arrangements was confirmed by both Deloitte and actuarial consultancy, the Heron Partnership, with Deloitte superannuation partner, Russell Mason, saying it reflected the evidence which was heard

09MM2006_01-19.indd 18

during the Royal Commission. Heron Partnership managing director, Chris Butler also confirmed that industry funds were tending to be the front-runners in the outsourcing tender stakes, with some corporate fund trustees specifying which retail fund providers should not be included in the tender process. Former Workplace Super Specialists (WSSA) chief executive, Douglas Latto said there was no doubt that industry funds had become frontrunners but said it was not just based on what had been heard during the Royal Commission but also on investment performance. “Investment performance is pretty important and ultimately tends to trump administration,” he said. The discussion around the success of industry funds in winning corporate superannuation outsourcing mandates came at the same time as the Australian Securities and Investments Commission (ASIC) announced that it had selected AustralianSuper as the default fund for its new employees. ASIC made the default fund selection in line with it having been removed from coverage by the Public Service Act.

DEAKIN University has become the first university in the world to offer a financial planning course with professional accreditation for estate planning. This offered a vital component to the industry that had continued to grow in-line with Australia’s ageing population. Deakin’s Graduate Diploma of Financial Planning was accredited by the leading international body for inheritance and succession planning, the Society of Trust and Estate Practitioners (STEP). Once students started the eight-unit course, they could apply to become an affiliate of STEP, becoming eligible for full membership after completion of their studies. Adam Steen, professor of practice in the Deakin Business School’s Department of Accounting, said the accreditation had been awarded to Deakin because of the quality of its depth and teaching. “The accreditation will allow qualifying Deakin graduates to become members of an international community of highly-qualified estate planning professionals,” Steen said. “It also opens up further professional development opportunities over the course of their career. Estate planning is a massive industry, and the fastest growing area in financial services, particularly with Australia’s ageing population. “The legislation around estate planning is also constantly changing, hence the need for professionals to engage in continuing education.” The need for STEP accreditation was due to the skills in law, accounting and financial planning required for estate planning. Michael Fox, head of the STEP Education Steering Group, said the accreditation provided a pathway to STEP membership for those who provide financial advice. “The evolution of the financial planning industry in the past few decades to move to more specialist areas such as estate planning is a crucial part in its development to becoming a true profession,” Fox said. “STEP’s main focus is to promote high professional standards, to provide educational and networking opportunities for its members, and to contribute to debate and public policy in its specialist field.”

12/06/2019 3:41:46 PM

June 20, 2019 Money Management | 19

InFocus

WHY NOT LITIGATE: EMPTY THREAT OR A SIGN OF A TEETHING TIGER? As the Australian Securities and Investments Commission shifts to a ‘why not litigate’ approach to pursuing breaches of financial services and corporate law, Hannah Wootton questions whether the regulator, based on its track record, can live up to this promise. THE AUSTRALIAN SECURITIES and Investments Commission (ASIC) may say it has toughened its enforcement approach, but its track record in securing the convictions and fines that matter suggest that, for now at least, these are empty words. In the wake of a damning Banking Royal Commission, in which ASIC chair, James Shipton, admitted the regulator should’ve pursued some matters more seriously and Commissioner Kenneth Hayne recommended that it toughen its approach to punishing wrongdoing, ASIC adopted a ‘why not litigate’ approach to pursuing legal penalties. The Commission took steps to act on this promise, too. It appointed renowned QC, Daniel Crennan, as its head of enforcement, although the barrister has admittedly since come under fire from the Law Council. It also upped the ante on its Australian Financial Services License (AFSL) suspensions; once seen as a soft response targeted at the small end of town, consecutive bans of five or more years show that ASIC is trying to show its teeth. However, it’s not really the sole practitioners or small AFSL practices that are committing the level of misconduct that ASIC has been accused of going soft on. Rather, it’s the big players, the banks and IOOFs and AMPs. And

ASSETS AND LIABILITIES OF AUSTRALIAN SECURITISERS

while ASIC’s fellow regulator, the Australian Prudential and Regulation Authority (APRA) has taken a heavy hand to IOOF since the Royal Commission, it remains to be seen whether the former will act with similar strength. The ‘why not litigate’ approach to litigating suggests that the courts will be seeing a lot more action from ASIC, both in civil and criminal matters, but the regulator’s bar as to what is a worthy penalty to seek or breach to prosecute has thus far been low. In the second half of last year, which is the most recent period for which enforcement outcome data is available for ASIC, the total value of the various financial impositions it made following legal breaches was worth less than $32 million. Less than half of this – $12.7 million – was for civil penalties imposed by the courts. The remainder was in infringement notices, compensation and remediation, and community benefit fund payments negotiated by ASIC. Nine court enforceable undertakings were also entered. From a criminal perspective, 76 criminal charges were laid as a result of investigations by the regulator, distributed amongst nine individuals. A further 185 people were charged in summary prosecutions for strict liability offences, meaning potential orders

by the court would be comparatively minimal to those imposed in indictable matters, for a total of 433 charges. For prosecutions resolved by the courts in this six-month period, ASIC achieved six custodial sentences, of which four resulted in imprisonment, and six non-custodial sentences. These are hardly the results of a regulator with teeth. There seems to be a certain lightness of touch in investigations leading to litigation, when you consider that in the same time period, ASIC commenced 75 and completed 57 investigations. Of course, this isn’t all the regulators’ responsibility. The decision to seek summary over indictable charges, for example, would likely be determined by the crown prosecutors or even legislation itself. The worthiness of some of the more developed investigations to be litigated may also have been small. For a regulator that is positioning itself to always seek litigation unless there is an active reason not to, however, these are hardly reassuring figures. The ‘why not litigate’ approach may not have been formalised at the time of these enforcements, but the Royal Commission was well underway and pressure on ASIC to seek stronger outcomes had been building literally for years.

Further, the law is in ASIC’s favour when it comes to these large prosecutions. Since the Banking Royal Commission started, moves have been made to enable the regulator to pursue harsher civil penalties and criminal sanctions against banks, their executives, and others who have breached financial services and corporate law. Cost shouldn’t be an issue, either. While these cases are expensive to run – a reason for pursuing enforceable undertakings in such matters previously cited by the regulator – both sides of the aisle in Canberra have made it clear that ASIC will get the backing it needs. Its removal from the umbrella of the Public Service Act to allow the Commission to compete with private firms for talent is proof that the Parliament intends to follow through with its promises of support, as does Treasurer Josh Frydenberg’s commitment of $404 million in additional funding for ASIC over the next four years. According to Crennan, this funding will be crucial to the Commission as it puts its ‘why not litigate?’ approach into effect, as well as enabling its deployment of enhanced regulatory approaches. What remains to be seen, is whether ASIC itself will be able to outgrow its own baby teeth to sink its fangs into the big end of town.

1.2%

1.6%

0.4%

increase of total assets and liabilities of Australian securitisers between Dec-Mar quarter

increase in long term asset backed securities issued in Australia

decrease of backed securities issued overseas as a proportion of total liabilities

Source: Australian Bureau of Statistics

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13/06/2019 11:57:49 AM

20 | Money Management June 20, 2019

Fact check

FACT CHECK:

VERDICT: PASS

FACT CHECK: K2 AUSTRALIAN ABSOLUTE RETURN FUND Laura Dew writes that the K2 Australian Absolute Return fund has seen mixed results after a decision to move to 70 per cent in cash. APPROACHING ITS 20TH anniversary, the K2 Australian Absolute Return Fund is taking full advantage of its investment mandate and preparing for a market downturn. It aims to deliver consistent absolute returns over the investment cycle by investing in undervalued companies, with a focus on capital protection during periods of market decline. The equities fund, which was launched in October 1999, has a flexible remit and can adapt its style depending on the market circumstances. In its product disclosure statement (PDS), the firm notes: “K2 has a flexible investment style as we believe there is no one uniform cycle across the investment universe. By adopting the most appropriate style (for example, growth, value, momentum or income) that is best suited to the current market conditions allows K2 to maximise risk-adjusted returns.” As well as its equity exposure, the fund has the ability to short sell when specific opportunities have the potential to increase returns, which the firm said was an additional

source of alpha, and to hedge currency as way of protecting offshore returns. It’s managed by K2 managing director Campbell Neal, joint chief investment officer David Poppenbeek and portfolio managers Josh Kitchen and Nicholas Leitl, who have over 100 years’ experience in the financial services industry combined. Assets are currently $144m, although this has been falling down from $246m a year ago. In light of the flexible mandate provided to them, the managers are utilising this and currently opting to hold a large proportion of the fund in cash. Within its remit, the fund can hold up to 100 per cent in cash if it is deemed appropriate and over the tenure of the fund, it has held an average of 28.3 per cent in this asset class. The weighting has been increasing steadily over the last 18 months and is now at 70 per cent, the highest since inception, which the firm said was “prudent” as a reaction to market performance as it believed a downturn was on the horizon and was also waiting for a rotation from growth into value.

The ASX All Ordinaries index has returned 7.3 per cent over one year, which K2 felt were unsuitable conditions for a value-biased fund. Given a target of the fund is to act with a capital preservation mindset rather than growth, it said many clients were not expecting it to “shoot the lights out” in terms of performance so they understood the managers’ choice. Nevertheless, the firm said it had increased its communication with clients to provide consistent messaging on the portfolio’s positioning and its PDS points out the potential risk level of the fund is ‘high’.

PERFORMANCE Since inception, the fund has performed strongly, beating both the sector and its ASX All Ordinaries index over the period. According to its mandate, it aims to achieve more than 10 per cent per annum over the long term; since its launch it has returned an average of 10.5 per cent per annum. In 2017/18, it returned 13 per cent, more than double the ACS Absolute Return sector average and placing it among the top funds of

Chart 1: Total return over ﬁve years of the fund compared to the ACS Absolute Return sector and the S&P ASX All Ordinaries index

Source: FE Analytics

09MM2006_20-39.indd 20

that year in its sector. However, markets recently have been less favourable for them with the fund losing 7.5 per cent over the past 12 months, according to FE Analytics. But K2 is far from the only fund to suffer in this period with the sector averaging returns of just 0.6 per cent. The fund steadily tracked the sector and benchmark for its first decade until March 2009, during the global financial crisis, when it pulled away and reported more volatile performance. While this is possible for absolute return funds, it is less desirable for those funds where ‘capital preservation’ is at the forefront. The gap between the fund and its indices widened further in 2016 and since January 2016, the fund has returned 14 per cent, three times less than the ASX All Ordinaries index returns of 41 per cent over the same period. Nevertheless, the firm is sticking to its guns regarding its cash weighting and any possible impact on performance. It said that, as a firm, it did not react to shortterm market noise and preferred to take a long-term approach to its investments which led to them concluding valuations were too stretched currently and a market downturn was expected. Performance had also improved, it said, following the Federal Reserve’s decision to raise the Fed funds rate to its highest-ever level of 2.25 per cent to 2.5 per cent in December. This was correct with the fund seeing positive performance of 4.06 per cent from the Fed’s meeting on 18 December to 11 June 2019, according to FE Analytics. Asked when it could change, the firm said the high level of cash could be in place for at least another six to 12 months until the portfolio managers found an appropriate market level to buy back in.

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June 20, 2019 Money Management | 21

Rate the Raters

SQM RESEARCH GETS RECOGNITION FROM FUND MANAGERS

While smaller and new entrants to the ratings market are shaking up the status quo, Oksana Patron finds that historic issues such as inexperienced staff and poor sector categorisation remain on fund managers’ minds. THE FIRST PART of Money Management’s 2019 Rate the Raters, which gauges fund managers’ sentiment toward the research houses that rate their products, has proven that recent changes across the financial services industry and the new postRoyal Commission environment

09MM2006_20-39.indd 21

have not spared the ratings sector, with traditional big players being gradually forced to give more space to smaller and new players. While some of the most established research houses chose to venture out and shop overseas to facilitate their expansion to offshore markets,

with Zenith announcing the acquisition of New Zealand’s leading research business, FundSource in May, smaller players like SQM Research continued to focus on growing their presence and awareness among local fund managers. As a result, the firm managed to earn

one of the highest ratings this year across three categories out of six. Fund managers appreciated SQM, which originally started as a property data business, for its senior staff with “the expertise to ask the right questions” and the Continued on page 22

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Rate the Raters

Continued from page 21 ability to structure comprehensive reports, in contrast to some larger players which continued to hire junior or graduate analysts and allowed them to look after the research side of their business. However, the results from this year’s survey have painted a quite different overall picture compared to previous years, as managers tended to articulate the individual strengths and weaknesses of each of the research houses rather than focusing on choosing winners and losers. Fund managers who responded to Money Management’s survey this year reiterated their earlier concerns, which traditionally revolved around high staff turnover at research houses coupled with staff replacements by junior representatives with significantly less experience, as well as the growing significance of ratings in a new and more fragmented market environment. At the same time, the research houses continued to be seen by managers as biased, as they often favoured the bigger household names and, in a few cases, it was reported that new strategies were put in the closest category instead of being paired with funds with similar objectives.

USAGE The results from the 2019 survey confirmed that not much has changed since last year and Lonsec and Zenith remained the most frequently used research houses, according to the fund managers who participated in the study. Some 86 and 84 per cent of respondents said they had received ratings from Lonsec and

09MM2006_20-39.indd 22

Zenith respectively. The data pulled from the survey also confirmed that Morningstar was the third most popular research house among interviewees, with 71 per cent revealing that they had their products rated by the firm. At the same time, both Mercer and SQM Research saw a somewhat smaller proportion of managers who shared their opinions with Money Management turning to them, with only just over half of them having declared they had ratings from these two assigned to its products in recent months.

METHODOLOGY When it came to evaluating the research methodology applied by each of the raters, managers stressed that it was the consistency and application of methodology that mattered most to them. Also, according to some fund managers, the research houses should stay more focused on the Australian landscape when developing and improving their research methodology instead of

“importing” models that they use in overseas markets. Having said that, the survey found that Lonsec, one of the most established research houses, suffered a downgrade in the eyes of fund managers who participated in the study. Although the firm continued to attract a high proportion of either “excellent” or “good” ratings across this category, with 87.5 per cent of managers describing its methodology in that way, it landed in second position. This means that Mercer jumped back to the top spot as the firm managed to attract a slightly higher number of respondents (89.3 per cent) who gave it a combined “excellent” and “good” rating. By comparison, Mercer won this category in 2016 by scoring the highest combined rating from 79 per cent of respondents. In the following years it was pushed down to the third spot, by Lonsec and Zenith. Following this, the methodology of SQM Research has been awarded with either “excellent” or “good” rating by 82.4

per cent of the fund managers who rated the firm in the survey, while Zenith was pushed down to the fourth spot this year due to a lower proportion of respondents rating the firm’s research methodology as either “good” or “excellent” (76.6 per cent). Additionally, Morningstar, which came fourth in this category last year, slipped further down and saw around 71 per cent of respondents depicting its methodology as above average.

RATING SATISFACTION This was the only category in which Lonsec emerged as a winner this year, with 42.6 per cent of respondents saying they were highly satisfied with a rating given out by the research house and describing it as “excellent”. The traditional winner of this category, SQM Research, dropped to second position with only 37 per cent of fund managers participating in the study describing their level of satisfaction from ratings the company granted to their

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June 20, 2019 Money Management | 23

Rate the Raters

products as “excellent”. In comparison, in 2018 and 2017 the firm scored the highest number of “excellent” ratings while in 2016 it came in closely behind winner Mercer. Things have changed for Mercer this year too, and the company saw only 32 percent of respondents rate it as “excellent” when measuring how they felt about its ratings. Zenith, on the other hand, was rated slightly higher in this category and landed one spot above Mercer, thanks to 34 per cent of respondents granting the Melbourne-based firm the “excellent” rating. Morningstar saw the lowest proportion of respondents who rewarded it with the “excellent” rating, with less than one third of fund managers participating in the survey describing their ratings from the company as such. Additionally, fund managers said that, in a few cases, research houses provided very little feedback on how they could improve their ratings and they were not always engaged in discussions over the overall outcome. On top of that, managers also reported cases where research houses delegated this task to their graduate analysts who had no experience through market cycles or took a negative view on the sector as a whole, which impacted the ratings for the individual funds.

TRANSPARENCY As far as the transparency category was concerned, respondents seemed to be divided between Lonsec and the much Continued on page 24

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13/06/2019 12:26:48 PM

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Rate the Raters

Continued from page 23 smaller SQM Research and could not deliver a clear picture on which research house offered, according to them, the most comparable levels of transparency of their ratings process. The two companies attracted a similar proportion of combined “excellent” and “good” ratings from fund managers, with over 83 per cent of them assigning such a rating with regards to their transparency. Close to 84 per cent (83.9 per cent) of fund managers who rated SQM’s transparency of the rating process assigned the firm either an “excellent” or “good” rating. At the same time, Lonsec snapped at SQM’s heels and scored a combined “excellent” and “good” rating from 83.3 per cent of respondents. However, in the absolute terms, it was Lonsec that scored the highest proportion of single “excellent” ratings, the survey found. Zenith came third with a slightly lower proportion of combined “excellent” and “good” ratings as close to 74 per cent of the fund managers who shared their opinions with Money Management this year decided to reward Zenith with the highest combined rating. Following this, less than two thirds of respondents (60.7 per cent) granted Mercer with the highest ratings across this category while Morningstar managed to attract the above average ratings from a bit more than half of respondents (55 per cent). The key take-away here for research houses was a need to provide fund managers with more constructive feedback and to become more responsive

09MM2006_20-39.indd 24

regarding the queries they had in the ratings process.

PERSONNEL This category was no different from the previous editions when fund managers flagged several issues. Although the level of experience and the quality of personnel continued to vary between the research houses, respondents confirmed a trend that indicated that raters continued to take on more junior staff with often limited knowledge around market cycles and/or fund management businesses and, most of all, with no practical experience in managing clients’ money. However, senior staff did not always guarantee the objective outcome either as there were a number of experienced professionals who exposed a pre-set bias, a few fund managers noted. On top of that, some respondents were concerned with a high turnover among employees working for the research houses and this was reflected in their ratings regarding personnel quality.

All in all, this year fund managers decided that Zenith’s staff represented the highest quality, with close to 70 per cent of respondents having rated its staff quality as above average. Last year’s winner, SQM Research, was pushed down to the second spot with close to 65 per cent of respondents awarding it the highest rating, followed by Mercer which saw 63 per cent of respondents rate the quality and experience of its staff as “above average” despite a drop from second position last year to the third place this year. Following this, only 52 per cent of fund managers who rated Lonsec’s staff in the survey decided to describe the quality of its staff as “above average”, while just 42.5 of respondents were of the view that the quality of Morningstar’s personnel was above the average.

FEEDBACK The survey found that, going forward, research houses will need to improve several things,

including their ability to provide managers with more constructive feedback which will consequently help them move forward the rating in the future. According to the survey, the raters will also need to expose greater willingness to be challenged on views and outcomes. When it came to the results, fund managers decided again in favour of SQM Research, whose feedback was voted the most valuable and supported by 61 per cent of respondents who described it as “excellent”. This was in line with last year’s results which saw a similar proportion of managers who participated in the survey (60 per cent) reward the firm with an “above average” rating. At the same time, 60.4 per cent of fund managers who shared their opinion with Money Management rated Lonsec’s feedback as “above average”. Interestingly, Zenith, which came third, saw its general feedback rated as above average by a significantly lower number

13/06/2019 12:27:00 PM

June 20, 2019 Money Management | 25

Rate the Raters

of respondents compared to SQM and Lonsec. According to the survey, only 42.6 per cent of all the received answers described its feedback as higher than average. Following this, both Mercer and Morningstar saw less than 30 per cent of all respondents, 29.6 per cent and close to 22 per cent respectively, give positive answers, indicating that a significantly smaller proportion of fund managers viewed their general feedback as above average.

PEER GROUP AND SECTORS Money Management this year again asked fund managers to rate the accuracy of peer groups and sectors selected by individual research houses which evaluate the performance of their funds. The data collected from the survey clearly indicated that SQM Research emerged as the strongest research house across this category. According to the study, 90 per cent of fund managers who rated SQM agreed that the firm chose the most accurate representation of the peer group. Following this, close to 82 per cent of respondents noted that Lonsec also did quite a good job and selected an accurate representation of the peer group, compared to only 74.5 per cent of respondents who were of a similar opinion with regards to Zenith. Furthermore, 72.1 per cent of the funds managers who took part in Rate the Raters survey said the same thing about Morningstar, and only 70 per cent felt that the peer group and/or sector selected by Mercer was the most appropriate one.

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13/06/2019 12:27:21 PM

26 | Money Management June 20, 2019

Education

TEACHING YOURSELF ABOUT EDUCATION As financial planners and advisers prepare for FASEA’s requirements, as well as sitting the first exam, more education providers have released details of what they’re offering but you’re forgiven for feeling overwhelmed, Chris Dastoor writes. LIKE COLUMBUS CHARTING unknown waters before discovering the Americas, financial planners have been drifting in the unknown as they navigate the changes the industry is undergoing as it professionalises. Help is needed and there are options out there for planners trying to discover the best solution to fulfil the education requirements.

MAKING A PLAN Brian Knight, chief executive of Kaplan Professional, says that Kaplan is trying to understand what the professional and personal commitments are for planners and assess how ready they are to study at a postgraduate level. “For the last 18 months or so, we’ve been working with licensees and advisers across the country and having one on one discussions on their experience,” Knight says. “We try to give everyone a personalised plan, we don’t charge for that and we’ve been doing probably thousands of them over the last eighteen months. “We work with the advisers to understand how many subjects

09MM2006_20-39.indd 26

they have to do, and when they should and can study.” There are two main goals they give to planners: get your studies done, which they have until 2023 to do, and pass the exam by 2020. “We recommend some pathways for them to do those things and so we work hard with them to make sure that they have a tailored plan,” Knight says. Stephen Glenfield, the Financial Adviser Standards and Ethics Authority (FASEA) chief executive, says the body encourages advisers to review the available tools on the FASEA website. They should also ensure they speak with their relevant licensees to ensure they know and meet the appropriate pathway to meet education standards. “The Standards Authority has provided the Financial Adviser Examination Guide on its website to assist with preparing new and existing advisers for the exam,” Glenfield says. “We encourage all advisers to review this along with the practice questions provided.” Glenfield says a continuing professional development (CPD) logbook template is also available on the website to assist advisers

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June 20, 2019 Money Management | 27

Education Strap

with collecting and maintaining of evidence of their CPD activities. There will also be options for planners who had received qualifications outside Australia that met the threshold for competency under the new system. “The Standards Authority is also providing a foreign qualification assessment service for individuals who have obtained their qualifications outside Australia,” Glenfield says. “Both existing advisers and new entrants to the industry can apply to have their foreign qualifications assessed to determine whether they meet the education standards.”

BEATING THOSE DEADLINES Glenfield says the deadlines for the industry to meet all FASEA requirements are imposed by legislation. “Recently, the Standards Authority announced a range of dates for advisers to select their own timing for sitting the exam component of the legislation, in order that they can meet the deadlines, based on their own unique circumstances, timing and geographical location,” Glenfield says. “Advisers are encouraged in the first instance to speak to their licensee for guidance on the appropriate pathway for their individual circumstances.” FASEA is also be planning to release an “Education Pathway” tool on their website. “This will assist advisers (and licensees) in understanding the particular education pathway that best suits their own circumstances,” Glenfield says. Knight says that since the

09MM2006_20-39.indd 27

deadlines have been legislated, it’s education providers’ job to help people meet them. “The issue with the timelines and deadlines is they’re very much focused at the front end,” Knight says. “Advisers have between one and eight subjects to do and they have until 2023, but they have to get an exam done early, which means they have to do some study,” Knight says. “Our view is that we have to try and make sure they’re able to meet that exam scheduling.” There are people who want to get it done early, which Kaplan is helping implement a realistic pathway for, but there are also people trying to delay it. “Certainly, we understand there’s people who would like to get an extension on the exam,” Knight says. “But in reality, if you just look at the whole timeline by 2023, you can meet that provided you have a real understanding and a clear pathway of what you want to do.” Adrian Raftery, associate professor of the financial planning program at Deakin University, says that when the deadlines were first introduced, they were reasonable, however delays by FASEA had made them unreasonable. “In April 2017 FASEA was created and at this stage we haven’t had the first exam, and yes, it will be at the end of this month, but the timing is horribly wrong,” Raftery says. “The end and start of a new financial year is always busy for advisers and the opportunity where they could’ve sat exams between January and May has gone for the year.

“Worst case scenario, I think it needs to be extended six months or realistically even 12 months because of the preparation time required.” Raftery says planners needed to be proactive in how they deal with the impending deadlines. “Talk to your dealer group, look at the FASEA website, ideally talk to FASEA—but it’s incredibly difficult to do so,” Raftery says. “Talk to the educators – most of them I know are quite willing to help.” Raftery says this needs to be planned now and not left to the last minute, regardless of the specific situation they’re in. “There will certainly be a large cohort leaving the industry, but even they need to start doing things themselves now and preparing businesses, training up their junior staff to take over.” Kaplan offered workshops for the exam, which Knight says was important to help make planners thoroughly prepared. “One of the things they shouldn’t rush into is just doing the exam straight away,” Knight says. “We prepared a really thorough program for them and I think we’re the only ones in the market that have an exam we’ve actually built. “It mirrors the FASEA exam in terms of the number of questions, timeline and exam conditions.”

WHAT TRAINING OPTIONS ARE THERE? Deakin is aiming to cover most of the areas available in the market, by offering bridging courses, approved degrees, and a Master of Business Administration with a financial planning specialisation. “We’ve tailored the graduate certificate of financial planning

“It’s not merely a box ticking exercise, it’s why we have recruited some of the best talents in our team to try and help the industry.” - Adrian Raftery, Deakin University around the three bridging courses around the capstone subject that others will need to do as well,” Raftery says. “We have an online CPD offering that’s out there in the market place.” Deakin has also been running a series of free webinars which Deen Sanders, the inaugural chief executive of FASEA, has helped present. Sanders recently joined the university’s faculty as an adjunct professor. “We will be running workshops to prepare advisers for the exam, we plan on doing that next year,” Raftery says. “But we wanted to wait until we saw some paperwork that came out from FASEA a few weeks ago.” Raftery believes that Deakin has a solution available to the marketplace of a high quality that will do its part of shaping the future of the profession. “It’s not merely a box ticking exercise, it’s why we have Continued on page 28

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Education

Continued from page 27 recruited some of the best talents in our team to try and help the industry,” Raftery says. As well as the contribution from Sanders, Deakin’s team included lecturers Marc Olynyk and Mike Kerry, Dr Campbell Heggen, and Professor of Practice Adam Steen. “We believe we have one of the world’s emerging behavioural finance academics in Campbell Heggert who’s worked with a lot of people in North America who are experts in the field.” Kaplan’s three bridging courses and the ethics subject are being purposefully built and they had also partnered with Deloitte and Deen Sanders. “This is about giving the best content in the world, it would have been easy for us to just use the courses we had,” Knight says. “But we decided to invest to give advisers something that’s actually going to be a benefit to them. “We’ve made sure the prices of the course will be affordable, we also have invested heavily to not just give ordinary content.” It’s not just traditional education providers offering assistance to advisers, either. Many industry players are seeking to get in on the action and offer a lending hand to their clients or colleagues who may be struggling with the new requirements. Leading insurer TAL, for example, recently ran a training session for

advisers on the Code of Ethics that the FASEA regime is imposing, as well as on the exam and education requirements. Almost 500 advisers attended the first session, showing the need in the industry for guidance on the reforms. “Currently, there are very few resources available to support financial advisers in understanding the code of ethics and how it applies to their day-to-day business dealings and customer interactions,” TAL head of licensees and partnerships, Beau Riley, said after the first session. “Through our TAL Risk Academy ethics course, we want to equip advisers with a solid understanding of the scope of the code of ethics and the procedures they need to put in place to ensure they adhere to the code and demonstrate their adherence to others.”

ACCESS TO INFORMATION Kaplan is one of the many institutions offering both online and face-to-face lectures, one of the ways it aims to serve all situations. “If you want to go to a face-toface lecture you can, but there are webinars in every subject and recorded lectures for those who don’t want to do them,” Knight says. “We have our bridging courses that are being built specifically for FASEA, and we have personalised and one-on-one adviser consultations, pathways

and study plans.” Given there will be people in the industry who have not studied for a long time, if at all, Kaplan has planned assistance for people who need help getting back into study-mode. “From things like how to take notes, prepare for exams, how to actually do an assignment, referencing, and then we run tutor hours and we have advisers to help them,” Knight says. Kaplan has courses designed to be done completely online, to give people flexibility to do it in their own time and at their own pace. To increase flexibility, they offer programs during six study periods in a year, as opposed to the traditional university semester or trimester models. “There are study groups people are assigned so they can work in groups and we have tutors assigned to them,” Knight says. “They can contact the tutor and get advice on any question they’re struggling with, we have discussion forums, so that offers a full experience designed to assist.”

20-24 June 2019

12-18 August 2019

19-23 September 2019

2020

2023

Exam sitting 1 (registration closed)

Registration for exam sitting 2

Exam sitting 2

Deadline to have sat the exam

Deadline to have achieved qualifications

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June 20, 2019 Money Management | 29

Women in Financial Services

THE NEXT GENERATION OF ADVISERS Hannah Wootton talks to a young industry leader and soon-to-be financial planning graduate, Azaria Bell, to find out what advisers can gain from going back to university. AZARIA BELL MAY only be in her early-20s, but she’s about to become what most advisers want to be: a financial planning university graduate. The aspiring adviser has not only received an impressive amount of industry recognition – being a finalist for the Money Management Women in Financial Services 2018 Young Achiever and winning the Financial Planning Association’s (FPA’s) 2017 University Student of the Year are two of her recent accolades – but she’s also on track to meet the Financial Adviser Standards and Ethics Authority’s (FASEA’s) incoming requirements before most planners much older than her. Considering Bell has just finished her bachelor degree – her final exam was, in fact, this month – Money Management sought her tips on how to navigate financial planning studies and why her degree will make her a better adviser.

BENEFITS OF HITTING THE BOOKS While advisers are probably sick of being told the benefits of the university education that many feel is being forced on them, Bell urges them to keep an open mind. “I think studying financial

planning, and doing a degree in general, teaches you discipline and the concept of short term sacrifice for long term gain,” she says. Bell also notes that while many advisers are well informed across their particular areas of expertise, they will still need to put in the hard yards to gain their degrees. “There is no doubt the majority of good advisers are knowledgeable on the subject matters they’ll be studying, however often at university, knowing the answer alone isn’t enough to succeed,” she says. “Utilise university resources including referencing tools and academic writing workshops, and don’t be afraid to learn from those around you,” Bell recommends. “The internet is full of great resources. In particular, I’ve found that YouTube has helped me greatly with study tips and concentration methods.”

THE SYNERGY OF ACADEMIC AND PRACTICAL EXPERIENCE Although many advisers understandably lament that their years of work experience should be better recognised by FASEA as comparable to what they’ll learn at university, there’s truth to the argument that they will gain more by undertaking both

““There is no doubt the majority of good advisers are knowledgeable on the subject matters they’ll be studying, however often at university, knowing the answer alone isn’t enough to succeed.” – Azaria Bell, Stonehouse Group and Griffith University graduate study and practice. Bell believes that her degree “taught me a lot of crucial information”. She now has a strong understanding of financial services legislation, for example, which she’s found isn’t something you deeply analyse in your working life on a daily basis. She also cites her degree as a good introduction to writing statements of advice and reports for clients that are easy-to-read, which is an area where clients often feel the industry can improve. At the same time however, Bell’s industry experience (she currently works at Stonehouse Group in Brisbane) has also been instrumental in her development. “It is easy to memorise numbers and concepts, but this information can be meaningless without real life context,” she says. “Working in the industry has been invaluable for learning the soft skills and developing an understanding of how our clients’ minds work. “Certain traits, such as approachability, empathy and confidence, can’t be taught … I’m not sure a textbook can prepare you for a client breaking down in tears in your office.” In this, the combination of her academic and practical experience has served Bell well: “Working and studying simultaneously helped immensely with understanding advice delivery,” she says.

OVERCOMING THE CHALLENGES OF STUDY As some advisers and industry groups have worried, going back to study will increase the

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AZARIA BELL

workloads of those already working. Indeed, Bell cites balancing university, work, and having a social life as the biggest challenge of her studies. “Add family commitments into the mix, and I imagine this gets even more difficult,” she says. “I understand for a lot of people, studying means taking a step back from work and reducing income. It is not easy, but it is important to keep the end goal in mind.” It’s little wonder, with these time commitments, that one of Bell’s main priorities now she’s finished her last exam is catching up on five years of Netflix! In this vein, the soon-to-be graduate reiterates the need for those studying to find time for themselves, too. “It is easy to have the pressures of study, work, and your personal life build up and have a negative impact on your mental health,” she says, adding that there’s no shame in reaching out for help if it all becomes overwhelming. And for the advisers who push through, she promises that “the feeling you get when you finish that last exam makes it all worth it”.

12/06/2019 3:35:22 PM

30 | Money Management June 20, 2019

Emerging markets

DOING GOOD TO DO WELL IN EMERGING MARKET DEBT As debt investors have access to a universe of unlisted private companies, Paul Lukaszewski writes that they can impact ethical change despite their lack of equity shareholders’ voting power. FIXED INCOME INVESTORS, especially emerging market debt investors, have been slower to adopt environmental, social and governance (ESG) and socially responsible investment (SRI) strategies, but the tide is clearly turning. As active managers, we have been making long-term investments principled on a comprehensive analysis of fundamental factors impacting a company, including the sustainability of its business model. What used to be seen as a tradeoff – generating attractive returns, reducing risk and doing the right

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thing – is now increasingly aligned. Modern ESG analysis arguably traces back to the United Nations (UN) Global Compact (2000) and the UN Principles of Responsible Investment (2005). These treaties helped establish the present framework for thinking about ESG factors. However, bottom-up, fundamental investors have applied many of them dating back much further. And much as ESG investment has been employed throughout the developed markets, we are seeing its growing significance across the world of emerging market debt. Integrating ESG analysis into our

research process is integral for us to develop a more comprehensive understanding of the risk/reward of each investment and in turn make better investment decisions. Empirical data increasingly shows that adopting ESG-driven or SRI strategies does not translate into lower returns, but can enhance investment outcome. This motivates more investors to use their capital to “do good” in both developed markets and emerging markets.

EMBEDDING ESG ANALYSIS First, governance has long been the focus of ESG investors. This

boils down to understanding and evaluating companies’ decisionmaking. Management teams have tremendous power when utilising the capital entrusted to them by investors, it’s critical that investors have confidence that decisions will be made with all stakeholders’ best interest in mind and that they will be treated fairly. Second, environmental considerations have risen in prominence in face of climate change risks. Carbon emissions have become front of mind after the 2015 Paris Agreement, but environmental considerations are

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Emerging markets

“The greater opportunity to make positive impact lies at helping less advanced companies along the earlier parts of their journey to sustainability.” - Paul Lukaszewski, Aberdeen Standard Investments far broader. The risks and opportunities a company is exposed to from long-term energy transition or its access to natural resources are other examples of important environmental factors savvy investors incorporate in their decision-making. Third, social factors can be a source of headline risk that can result in reputational damage and/or regulatory fines for companies, capturing negative behaviors such as predatory pricing, human rights violations or weak labour practices. Positive social policies such as positive community relations, workplace diversity and talent retention can be sources of long-term competitive advantage.

THE POWER OF ACTIVE ENGAGEMENT ESG is a journey, not a destination, and engagement is the mode of transport. Truly understanding a company’s ESG factors and advocating for positive changes requires substantive engagement. As long-term investors, we believe in being proactive partners with our investments. We are obligated to be responsible stewards of our clients’ money. Companies that take a proactive approach and develop more sustainable business models are expected to deliver better long-term

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investment returns. We often get asked if fixed income investors can affect ESG change without equity shareholders’ voting power. Our answer is a resounding YES! As debt investors, we have access to a universe of unlisted private companies, increasing the opportunity to have positive impact. Many new to ESG investment may focus solely on the bestscoring companies. This is shortsighted; the greater opportunity to make positive impact lies at helping less advanced companies along the earlier parts of their journey to sustainability. Given the positive correlation between ESG scores and credit ratings, this is also where we can find more attractive investment returns. Most importantly, you cannot have an impact without having a seat at the table. Exclusions can result in portfolios aligned with particular ethical criteria but eliminate the possibility of advocating for positive change. Emerging markets are broad and complex with far more forces at play that can influence the outcome of an investment. How does ESG engagement look in the real world? In Brazil, we engaged with a major food producer who is a large consumer of soya beans – the production of which is causing severe deforestation in some countries. As a result of our

engagement, this company established sustainable soya sourcing policies and procedures. In China, we engaged with real estate developers after reports that some homebuilders were using CFC-11 (a banned chemical under the Montreal Protocol) as a foam blowing agent for thermal insulation. Besides ensuring that our investments had remained compliant with rules and regulations, in some cases our engagement raised management awareness and triggered them to more broadly investigate their construction processes. The combination of active management and active engagement allows managers to urge companies to adopt more sustainable practices, identify companies whose ratings are likely to change, and adjust portfolios accordingly. In the emerging markets, there is a need to strike a balance between development priorities and sustainable investment practices. In many aspects the stakes for emerging markets countries and corporates are higher than their developed market counterparts. Much can be learnt from the latter, while there are the prospects for positive momentum in the emerging markets on ESG standards and practices are substantial with the help of asset owners and managers being actively engaged with businesses. Achieving better standards across ESG practices is a long game, but investors, including bond investors are able to affect change, however incremental.

PAUL LUKASZEWSKI

Paul Lukaszewski is head of corporate debt - Asia and Australia at Aberdeen Standard Investments.

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32 | Money Management June 20, 2019

Listed investments

ETFs V LICs: EXPLORING THE LISTED INVESTMENT MARKET There are no shortage of product structures for those looking to try their luck with listed investments. Balaji Gopal makes the case for exchange traded funds, one of many listed offerings now easily available to investors. YOU NEED LOOK no further than the growing list of acronyms describing product structures â&#x20AC;&#x201C; ETFs [exchange traded funds], ETMFs [exchange traded managed funds], LICs [listed investment companies], IMAs [individually managed accounts], SMAs [separately managed accounts], MDAs [managed discretionary accounts] - to see that the Australian investing landscape is becoming increasingly complex. And over recent years, individual investors have become increasingly comfortable investing using the Australian Securities Exchange (ASX) platform, through online brokers and via their advisers â&#x20AC;&#x201C; a factor which has seen listed investment choices begin to dominate the investment market. LICs have been available to Australian investors since the 1930s, while ETFs are a much newer phenomenon. In their relatively short history ETFs have become an attractive investment choice for Australian investors and advisers with assets entrusted to this category of funds now surpassing that of the LIC market.

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The LIC market in Australia now has 113 products and accounts for approximately $43 billion in funds under management (FUM), while there are now 194 ETFs listed on the ASX, managing more than $47 billion. This fits the global pattern of growth, with ETFs enjoying a stellar rise all around the world. There are now about 6,500 ETFs listed on exchanges around the world holding US$5 trillion in assets. But unlike other regions, much of the rapid growth of the ETF market in Australia has been driven by advisers and individual investors, particularly selfmanaged superannuation fund (SMSFs) investors. SMSFs currently represent close to a third of all ETF investors. According to Investment Trends, there were about 385,000 SMSFs holding ETF investments as at October 2018, representing about eight per cent of their overall portfolio holdings. The same research in 2018 showed LICs represented about five per cent of SMSF portfolios. The adoption of ETFs among planners continues to gain

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Listed investments Strap

momentum, with 53 per cent of financial planners providing advice on ETFs in 2018, up from 45 per cent in 2017. With so much change taking place in the listed investment space in recent years, you may be weighing up the relative benefits of different listed investment offerings for your clients – in particular, what ETFs can offer versus the more traditional LICs, being the two of the biggest categories of listed products. LIC and ETF structures have lots in common, and some factors which differ, so it’s well worth taking the time to do your homework with so much choice available.

SO, WHAT ARE THE SIMILARITIES? Both structures are listed investments, so they can be bought and sold on the stock exchange (note LICs are companies which issue shares while ETFs are trusts which issue units). Both vehicles generally offer low fees, and can be tax efficient choices, and both are pass through vehicles for franking credits. Investors pay brokerage fees when buying and selling both ETFs and LICs. But there are also differences and ETFs can offer significant advantages over LICs, based on three main factors valued by investors when making investment decisions – liquidity, transparency and diversification.

LIQUIDITY LICs are closed investments so they can’t issue more shares

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promptly in response to investor demand. This means an LIC’s share price may not accurately reflect the value of its investments and shares can trade at a premium or discount to the net tangible assets (NTA). ETFs are open ended, which means that demand does not impact the price of an ETF because the supply side is not fixed. ETFs can issue more units if there are more buyers and reduce the number of units if there are more sellers. ETF investors know that they can trade at a value close to the net asset value (NAV) of their investment. The reason ETFs can maintain prices close to NAV is that their portfolios are continuously available to external market makers. These independent and external market makers, arbitrage between the prices of units in the fund and the underlying securities in the portfolio which pushes prices towards the NAV and creates liquidity. LICs rarely trade at their NTA, often trading at a premium or discount, while ETFs remain steady around their NAV. So, if you buy into an LIC when the share price is at a premium to the NAV, you could be paying more than the investment is worth. And if you are then looking to sell when the share price is at a discount, you could find it difficult to sell at a favourable price, potentially diluting your gain. Of course, the opposite could be true, and you could benefit from buying at a discount and selling at a premium, but this doesn’t always hold true and some LICs have consistently traded at a

“The ability to trade close to the NAV at all times means investors can make decisions based upon their portfolio needs rather than whether the product is trading at a significant premium or discount.” - Balaji Gopal discount to their NAV for long periods eroding investor returns But the bottom line is that the LIC structure introduces a risk variable that’s outside your control. You can make the right call on an investment but if the LIC moves from premium to discount, you may not get the full rewards.

TRANSPARENCY Disclosure rules mean that for most ETFs, investors can view daily baskets to understand exactly which companies they are holding through their investment in that ETF. The basket also allows investors to calculate the NAV of the ETF, so they not only know exactly how much they should be paying, they also have a realistic chance of getting close to that level. The intraday NAV for Vanguard ETFs, for example, is updated on our website every 15 seconds. The ability to trade close to the NAV at all times means investors can make decisions based upon their portfolio needs rather than whether the product is trading at a significant premium or discount. With ETFs, performance is tied to the market and the trading of the

underlying securities, not demand for the product. LICs are not as transparent due to the nature of their investments and delays in disclosing portfolio holdings.

DIVERSIFICATION One of the primary reasons investors cite for their increasing appetite for ETFs is the diversification they offer at a low cost. And ETFs have served up an option which has proved particularly attractive to SMSFs who typically lack international equity and fixed income diversification in their portfolios. While an LIC typically invests in several listed companies, an equity index ETF may invest in most or all of the shares in global benchmark indices. This can vary from tens of individual securities, to thousands. The 194 ETFs available to Australian investors cover most asset classes and markets so you can easily tailor and adjust client portfolios to their needs using ETFs. Balaji Gopal is head of product strategy at Vanguard Australia.

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34 | Money Management June 20, 2019

Diversity

DIVERSITY: THE INVESTMENT EDGE Thereâ&#x20AC;&#x2122;s a business case for workplace diversity that goes beyond ethical arguments. Emma Pringle looks at how promoting women leads to better companies, meaning gender diversity is something savvy investors should look out for. WHILE IT SEEMS that we have entered a new period in history where equality through diversity is now an expectation, as investors it is important to look not only at the progress made but also to take time to understand why diversity is so important. Why is it such an area of focus? There is a business case for diversity, beyond it being the right thing to do. Taking gender diversity as an example, we can clearly see why even the most uncompromising investor can

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benefit from taking notice of how a company is addressing gender inclusion, as we move beyond accepting differences and celebrating them instead.

THE BUSINESS CASE Gender diversity has gained significant attention, with initiatives such as the 30% Club launching in Australia with the goal of achieving 30 per cent women on ASX 200 boards. As at December 2018, female representation on ASX 200 boards

reached 29.7 per cent from 19.4 per cent previously when the initiative first launched in 2015. Why do we care? Because increasingly, data is showing that more companies with greater workforce diversity have better profitability. A 2016 MSCI paper suggests that more gender diverse companies are able to harness higher levels of creativity to drive improved decisionmaking, suggesting better use of available talent, which benefits both the economy and companies.

Itâ&#x20AC;&#x2122;s not just about having more women, itâ&#x20AC;&#x2122;s also about where they are. In particular, there is increasing emphasis on having more women progress to levels where strategic decisions are made to directly influence business direction. McKinsey revisited the business case for inclusion and diversity and found that the relationship between diversity and business performance persists. Companies in the top quartile for gender diversity on

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Diversity

their executive teams were 21 per cent more likely to outperform companies in the fourth quartile in terms of profitability. Companies at the other end of the spectrum, with low diversity in management, may be penalised by their lack of gender representation. The greatest costs borne from gender bias are those of the opportunities forgone from the lack of diverse representation.

RISK REDUCTION How can diversity reduce risk? A diverse board introduces different styles of cognitive thinking to assist with problem-solving, ultimately minimising the risk of group-think. Studies have also found that having more women on boards and committees tends to be associated with greater transparency, enhanced earnings quality, and reduced probability of bankruptcy. However, while companies continue their focus on increasing diversity through new hires, there is also a challenge in promoting and retaining women and other diverse employees. One reason is explained by the latest Australian Workplace Gender Equality Agency (WGEA) scorecard showing the gap between male and female wage rates remains stubborn. The slow and incremental pace of improvement means women earnt on average 79 per cent of men’s full time total remuneration in 2018. On a global scale, it is estimated that the loss in human capital wealth arising from gender earnings disparity is $160.2 trillion – twice the value of GDP globally. These are the kinds of numbers that deserve attention from investors. At the very least, encouraging diversity may improve how a company is run, as was noted in

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“It is estimated that the loss in human capital wealth arising from gender earnings disparity is $160.2 trillion. These are the kinds of numbers that deserve attention from investors.” - Emma Pringle, BT

EMMA PRINGLE

the founding of the 30% Club where “a critical mass of three or more women can cause a fundamental change in the boardroom and enhance corporate governance”.

HOW TO INVEST IN COMPANIES THAT SUPPORT DIVERSITY If you are considering investing in companies that support diversity and inclusion, there are a number of ways to do this. Investing via a managed fund If you’re looking at managed funds, you may want to consider reviewing the policies and processes of the investment manager or fund provider to ensure they consider Environmental, Social and Governance (ESG) factors. Investing directly If you invest directly through the buying of shares, there are several tools that can help you understand a company’s approach to ESG, including diversity. For example, a range of sustainability scores are available from ESG data providers. These tools can help you consider the sustainability approach of companies when making investment decisions. It’s important to point out that

sustainability scores and data are not an evaluation of an investment’s financial performance, and do not provide an assessment of overall investment merit. Rather, they should be used in conjunction with other measures for a more complete approach to investment portfolio construction.

IN SUMMARY What investors are starting to realise is that the case for diversity is not just about social progression. Diversity can help deliver long-term sustainable profitability. As we have seen from the emergence of movements amongst our communities to campaign for better and fairer outcomes, this same discussion is being had with companies, encouraging them to increase diversity in their workforce. Where is this going? While awareness of the issue has undoubtedly increased, there continues to be a long path ahead as we begin to see benefits in areas beyond gender and racial equality, by being more inclusive for those of different abilities, religions, lifestyles and generations. Emma Pringle is head of customer governance and sustainability at BT.

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Life insurance

INCOME PROTECTION: WHY IS IT SO? The components of life insurance and income protection can seem like a maze. Col Fullagar turns the confusion to clarity by looking to the past to explain why each component is the way it is.

CARL SAGAN, THE American astronomer and science communicator, once famously said “you have to know the past to understand the present.” Carl’s sentiments very much apply when considering the derivation of various components of today’s risk insurance policies and the enquiring financial services mind will discover a galaxy of information simply by asking questions. So let the countdown begin …

10. WHY SHOULD PRE-DISABILITY EARNINGS (“PDE”) BE INDEXED? PDE is a defined term within income protection insurance policies that records the insured’s earnings prior to the sickness or injury causing total or partial disability. PDE impacts the benefit payable in a number of areas, including: • Within the partial disability formula, it is the benchmark against which an insured’s current earnings are assessed so that the partial disability benefit can be calculated; and • As part of an offset clause, it is often used to determine the maximum amount an insured can receive. Because PDE acts as a benchmark, if it is being compared to something that is subject to inflation increases, the real effect of PDE will be eroded over time unless it is also CPI indexed. Case Study Jim is an employed person. He suffers an illness and, as a result, his earning capacity reduces to 50

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per cent of his pre-illness level and, for the sake of this Case Study, it’s assumed that this reduction remains constant for the duration of his illness. Jim claims under his income protection insurance policy and is assessed partially disabled with a PDE of $10,000 a month. In Year One, as Jim’s earning capacity is 50 per cent of his pre-illness level, he will earn $5,000 a month. His partial disability benefit formula becomes: ($10,000 - $5,000)/$10,000 x the benefit amount ……. Jim receives 50 per cent of the benefit amount which equates to his reduced earning capacity; so far, so good. In Year Two, Jim receives a CPI salary increase (CPI assumed constant at 2.5 per cent); his earnings increase to $5,125 a month. His partial disability benefit formula becomes: ($10,000 - $5,125)/$10,000 x the benefit amount …… Jim receives 48.75 per cent of the benefit amount notwithstanding his reduced earning capacity is still 50 per cent. After only one year, Jim is in a prejudicial position. By Year 10, the benefit amount percentage has reduced to 36 per cent again, notwithstanding Jim remains 50 per cent disabled. There are two unfavourable outcomes from the above: • Jim is receiving less than his reasonable entitlement; and • Because of the above, Jim’s partial disability benefit plus his post-disability earnings soon become less than what he would receive if he stopped

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Life insurance Strap work altogether and claimed a total disability benefit. Not only does Jim lose but the insurer is at risk of doing so also. Protection for both parties is provided by increasing PDE by CPI increases so that its relative position to current earnings is maintained.

9. WHY IS 25 PER CENT OF THE TRAUMA INSURANCE BENEFIT AMOUNT SOMETIMES PAID ON DIAGNOSIS? Trauma insurance policies often provide for payment of 25 per cent of the benefit amount on diagnosis of certain insured events, well in advance of the definition being satisfied. This facility was introduced in the late 1990s with the catalyst of the declining of a claim for multiple sclerosis because the insured’s medical condition was not sufficiently severe to meet the definition. Insurer internal soulsearching followed. The initial concern was poor public perception but, of itself, this was considered insufficient cause to make a benefit payment. It was realised, however, that some trauma insurance insured events shared the following: • They were chronic by nature and experienced a relatively low early mortality rate, and thus would almost inevitably progress from diagnosis to meeting the definition; • There was no known cure and no indication of a cure in the short-term; and • The mere diagnosis of these conditions was itself a traumatic event that would expose the insured to additional medical expenditure and a likely lifestyle change – the underlying purpose of trauma insurance. The events included multiple sclerosis, Parkinson’s disease, muscular dystrophy, Motor Neurone Disease, cardiomyopathy, and others. To reasonably provide for the above, the facility to pay 25 per cent on diagnosis was introduced. The balance, plus indexation increases in the interim, was paid when the definition was satisfied.

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This facility overcame both the pragmatic and PR issues.

8. WHY SHOULD PRE-DISABILITY EARNINGS (“PDE”) HAVE A DEEMED MINIMUM VALUE? Case Study Jenni graduates and starts work on a salary of $80,000. She takes the advice of her financial adviser and purchases an income protection insurance policy for $5,000 a month. The next day, Jenni is badly injured. She is on a total disability claim for six months after which she is able to return to work parttime but because Jenni only worked for one day, her PDE is effectively nil. Jenni’s adviser, cognisant of the unique risk she faced, made sure her policy included a deemed minimum value facility whereby PDE was guaranteed to be no less than the annualized benefit amount ($5,000 x 12) divided by 0.75 (the insured per cent), i.e. $80,000. The equivalent problem exists if an insured receives a material increase in earnings, for example, via a promotion or a moving to a new employer on a materially increased level of earnings and the increase is insured. An additional benefit of a deemed minimum value, is that if a claim is lodged many years after the policy start date and proof of earnings cannot be provided, the deemed minimum value provides a built in level of protection. If earnings increase over time, pre-disability earnings would similarly increase thus rendering the deemed minimum redundant but, in the meantime, it plays a crucial role.

7. WHY DOES TRAUMA INSURANCE INCLUDE SOME DEFINED INSURED EVENTS BUT NOT OTHERS? Believe it or not, when trauma insurance was first made available in the 1980s, there was a logic underpinning the inclusion or exclusion of insured events. First, medical events for which death was certain were already covered under the terminal

“Over the ensuing years the logic fell into a black hole and has been all but lost, arguably resulting in a reactive design process that adds insured events and changes definitions in response to product research and opinion.” - Col Fullagar, principal, Integrity Resolutions illness benefit within term insurance; thus, they could be excluded from the trauma insurance product. Next, medical events needed to carry significant treatment and rehabilitation costs, and potentially give rise to a level of psychological and/or physical impact such that a change in lifestyle might be considered. And finally, the statistical benchmark for the definition of the insured event was set to approximate an 80 per cent, fiveyear survival rate or, in common language, whilst the medical event was serious and worrying, and would be expensive to treat, there was a good chance of survival. The importance of the above is that the consistent application of a logic within product design better enables an adviser to objectively match the client’s risk exposure to a solution. Unfortunately, over the ensuing years the logic fell into a black hole and has been all but lost, arguably resulting in a reactive design process that adds insured events and changes definitions in response to product research and opinion rather than focusing on need.

6. WHY ARE SOME PREGNANCIES INCOME PROTECTION EXCLUDED AND OTHERS AREN’T? Insurance is meant to cover a loss arising out of an unintended and unexpected event. For this reason, pregnancy was initially fully excluded as it was considered to be neither unintended nor unexpected; thus financial provision could be made for it both prior to and during the term of the pregnancy. Also, to

not exclude pregnancy, would open up the insurer to a significant, anti-selection risk. Whilst the above might hold some theoretical merit, at best, it only did so for ‘normal’ pregnancy; an abnormal and/or complicated pregnancy leading to an inability to work, was neither intended nor expected and thus should, based on the same logic, not be excluded. This issue was recognised and first provided for by adjusting the exclusion so that pregnancy was covered if ‘disability’ continuing for more than two months after the pregnancy ended either by way of birth, miscarriage, etc. The point being that any illness arising out of pregnancy that lasted for longer than two months would constitute an abnormality or complication. The exclusion was later simplified to ‘normal and uncomplicated pregnancies are excluded’ which meant, by default, abnormal and complicated pregnancies were covered with that cover being immediate.

5. WHY IS A FIVE-DAY RETURN TO WORK DURING THE WAITING PERIOD ALLOWED? Income protection insurance initially only provided for benefit payments if the insured was ‘totally unable to work’. As such, the waiting period required the insured to be ‘continuously’ unable to work for the entire waiting period. If the insured returned to work at, and for, any period of time, even one day, the waiting period would restart. Later partial and rehabilitation benefits were added to encourage an insured that wanted to work, Continued on page 38

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Life insurance could be quite different. For example, an insured may hurt their back but decide to soldier on in the belief or hope it will correct itself. A day or two later, they are still unable to work so contact is made with the doctor but the earliest appointment is several days hence. Thus, it might be up to a week before the requisite medical confirmation is obtained. If the benefit amount is $10,000 a month, a week means a loss to the insured of $2,500; a high price to pay for trying to do the right thing. A facility that enabled the start date of the waiting period to be backdated by up to seven days, subject to subsequent medical confirmation, covered off the above pragmatic issue.

3. WHY DO PDE DEFINITIONS SOMETIMES GO BACK THREE YEARS BEFORE THE POLICY STARTED?

Continued from page 37 and had a medical ability to work, to attempt to do so. It became clear, however, that there was little to encourage an attempt to work, especially during the waiting period, if to do so meant risking having the waiting period restart. A facility was therefore added enabling the insured to return to work for up to five days, i.e. one calendar week, without this impacting on the continuity aspect. If the attempt to work failed, the return to work days were added to the end of the waiting period such that the insured could satisfy a 30-day waiting period by being totally

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disabled for 30 out of 35 days. There have been various changes since then but the above was where it all started.

4. WHY CAN WAITING PERIODS START PRIOR TO A CLAIMANT ATTENDING A DOCTOR? Historically, waiting periods started ‘when the life insured attended a medical practitioner who confirmed totally disability’. This worked nicely for acute medical events such as a heart attack, stroke and broken legs, as these generally resulted in an immediate medical attendance. For people suffering from chronic conditions however, the reality

Way back when, the definition of PDE for agreed value policies was ‘the highest 12 consecutive months in the three years prior to disability’. In the late 1990s, an insurer launched a ‘true’ agreed value policy in which the definition of pre-disability earnings was the highest 12 consecutive months since the date 12 months prior to the policy start date. This not only covered the duration of the policy but also included the earnings declared within the application form. It was soon realised, however, that an insured on a partial disability claim in the first three years of the policy duration could be in a better position under the previous definition of three years prior to the date of disability. To overcome the anomaly, the definition became the highest 12 consecutive months since the date three years prior to the policy start date.

2. WHY WAS A SUPERANNUATION PROTECTION OPTION INTRODUCED? Prior to income protection superannuation protection options being made available, the maximum percentage of income that could be insured was 75 per

cent, with the reason being if, whilst on claim, an insured received more than 75 per cent of their prior earnings, statistics indicated that the motivation to return to work would diminish resulting in the number and duration of claims increasing to an unsustainable level. From the insured’s perspective however, if they only received 75 per cent of prior earnings, in many cases these funds would be spent on the ‘today’ expenses such as mortgage, food, utilities, education expenses and clothing. There would be little, if any, funds remaining for superannuation savings. If this continued through to the policy expiry at age 65, the claim benefit would cease and the insured would be left with deficient superannuation savings, with the deficiency being directly linked to the period of claim. The superannuation protection option was specifically introduced to overcome the above problem. In essence: • The 75 per cent standard benefit would protect current lifestyle; and • The 10 per cent superannuation protection option would protect future lifestyle by way of ensuring continuity of superannuation contribution. Because the funds in excess of 75 per cent were not immediately ‘available’ to the insured, motivation to return to work was theoretically not impacted.

1. WHY SHOULD MONETARY LIMITS WITHIN POLICIES BE CPI INDEXED? It is not unusual to see benefit limits with policies being expressed not as a multiple of the benefit amount but as a dollar amount, for example, within income protection policies, the death benefit is payable to a maximum of $60,000. In a similar way to point 10 above, which considered the indexation of PDE, if fixed dollar amounts within a policy are not CPI indexed their real value is eroded by inflation. Provision is easily made by referencing same within the introduction section of the policy, for example.

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Life insurance Thus, the logic is simple; access should be immediate rather than being contingent on the insured ‘receiving a disability benefit payment’ which, by definition, requires waiting until the end of the waiting period.

BLAST OFF …

COL FULLAGAR

0. WHY SHOULD INCOME PROTECTION INSURANCE REHABILITATION BENEFITS BE IMMEDIATELY AVAILABLE? The aim of these benefits is to reduce the amount of benefit payments by assisting and encouraging the insured to return to work. Rehabilitation 101 designates that, the sooner it begins, subject to medical sign-off, the greater the chance of a favourable outcome.

As per Carl Sagan, knowledge of the past provides an understanding of the present. However, whilst understanding aspects of the evolution of risk insurance products might serve to titillate the enquiring mind, there are compelling reasons to not only know and understand but to record. First, if the reasons for introducing a particular product feature are lost, the chances increase that the feature itself will also eventually be lost. Evidence to support this is the fact that, whilst the policy features detailed

above have existed in the Australian risk insurance market in the past, not all can be found in current retail products. Further, if the logic underpinning a product is set aside, the chances increase that the product will lose consistency and focus, making the role of matching solutions to needs, that much more difficult. But, most importantly, when advisers recommend a risk product, they do so based on their understanding of how the policy wording will be applied should a claim be made. If that understanding is forgotten, contemporaries to come may inadvertently rewrite history to fill the void in a way that suits their purpose, albeit that purpose was unintended. Col Fullagar is the principal of Integrity Resolutions. This is the 100th column he has written for Money Management.

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40 | Money Management June 20, 2019

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TAX ON SUPER DEATH BENEFITS: PAID TO ESTATE V BENEFICIARY Linda Bruce compares how superannuation death benefits are taxed when they are paid to an estate or a beneficiary. TWO OPTIONS ARE available when paying a lump sum superannuation death benefit to a SIS dependant who is a non-tax dependant, such as an adult child. The sum death benefit can be paid directly from the deceased member’s super fund to the beneficiary, or it can be paid to the deceased’s estate and then distributed to the beneficiary. In both cases, the tax-free

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component can be received tax-free while the taxable taxed element is subject to a maximum 15 per cent tax and the taxable untaxed element to a maximum 30 per cent tax. However, whether the lump sum death benefit is paid directly or through the estate can result in different financial outcomes for a non-tax dependant. As an example, this article uses the situation of a deceased member’s adult child

who is a SIS dependant but not a tax dependant to compare the different tax treatments and other flow-on effects.

WHO IS A DEPENDANT? The definition of a dependant for super law purposes (ie Superannuation Industry (Supervision) Act (SIS) dependant) determines whom the super fund can pay the deceased member’s

death benefit to, while for tax purposes (ie tax dependant) determines whether the taxable component of the lump sum death benefit is subject to tax. The starting point is to understand a beneficiary’s dependency status. SIS dependants The trustee can generally only pay a super death benefit directly to: • the deceased member’s legal

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Table 1: Tax on lump sum super death benefits

Recipient

Tax-free component

Taxable taxed element

Taxable untaxed element

Tax dependant

Tax-free

Non-tax dependant

Tax-free

Maximum 15 per cent

Maximum 30 per cent

personal representative (ie deceased estate), and/or • one or more of the deceased member’s SIS dependants, being the deceased’s spouse or de facto spouse, a child of the deceased (any age), a financial dependant of the deceased or a person who was in an interdependency relationship with the deceased. Where a member wishes for their death benefit to be paid to an adult child, the member can either nominate their adult child as a beneficiary to receive the death benefit directly from the fund, or direct their death benefit be paid to their deceased estate, and then to the child as a beneficiary through their Will. If an intended beneficiary is not a SIS dependant, the death benefit can be directed to the deceased estate (by making a binding or non-lapsing nomination to the legal personal representative). The deceased’s Will can then instruct the executor of the deceased estate to pay a death benefit to this beneficiary from the estate. Tax dependants A lump sum death benefit can be paid to a tax dependant tax-free regardless of whether the death benefit contains any taxable component. In contrast, the taxable component of a lump sum death benefit is subject to tax (see below 'Tax on lump sum super death benefits' for details) when paid to a non-tax dependant. A tax dependant can include the deceased’s spouse, de facto spouse or former spouse, a child of the deceased under 18 years old, a financial dependant of the

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deceased, a person who was in an interdependency relationship with the deceased, or a person who receives a super lump sum because the deceased died in the line of duty regardless of their relationship to the deceased. A financially independent adult child is generally regarded as a non-tax dependant, even if the adult child and the deceased parent were living together.

The rate of tax that will apply to the taxable component of a lump sum death benefit depends on the recipient’s tax dependency status and the amount of each element that forms part of the taxable component, as shown in table one. Note that the Medicare Levy is payable where the lump sum death benefit is paid directly to a beneficiary, but isn’t payable via deceased estate.

TAX ON LUMP SUM SUPER DEATH BENEFITS

Lump sum tax offset and maximum tax rate Where a lump sum death benefit is paid to a non-tax dependant, the taxable component (both taxed and untaxed elements) forms part of the taxpayer's assessable income. However, the taxpayer receives a lump sum tax offset, calculated by the Australian Taxation Office (ATO) and based on the tax return information, to ensure the tax payable does not exceed the specified maximum rates of tax. When a lump sum death benefit is paid to a non-tax dependant (directly or via the deceased estate): • if the taxpayer’s marginal tax rate exceeds the specified tax rate, the ATO will apply the lump sum tax offset to ensure that the taxpayer does not pay more than 15 per cent tax on

The trustee of a super fund needs to calculate the tax-free and taxable component when a lump sum death benefit is paid. The taxable component can be the taxed element, being the element the fund has paid tax on, or the untaxed element. The latter can occur if: • The death benefit is paid from an untaxed super fund where a fund has not paid any tax on the contributions or earnings; or • The lump sum death benefit contains an insurance payout and the fund claimed a tax deduction for the insurance premium where the member died under age 65. If the deceased member was 65 or over at the time of death, the untaxed element would be reduced to $0.

Table 2: Withholding rates for lump sum super death benefit paid to a non-tax dependant from the fund

Tax component of the lump sum death benefit

Age of the person at the date the payment is received

PAYG withholding rate (including Medicare Levy)

Taxable taxed element

Any age

17 per cent

Taxable untaxed element

Any age

32 per cent

the taxable taxed element and 30 per cent on the taxable untaxed element; or • if the taxpayer’s marginal tax rate is lower than the specified maximum tax rate, the taxable component of the lump sum death benefit is subject to the marginal tax rate. Who is the taxpayer depends on whether the death benefit is paid direct to the non-tax dependant from the deceased’s super or via the deceased estate. Please refer to 'Who is liable to pay tax on lump sum death benefits' section below for details. Order of including income subject to different tax rates Where a taxpayer has ordinary taxable income subject to their marginal tax rate and also receives a lump sum death benefit containing both taxed and untaxed elements subject to maximum tax rates, it is our understanding that the tax practice is to apply these steps to calculate the lump sum tax offset: STEP 1 Include the taxpayer’s ordinary taxable income subject to marginal tax rate. STEP 2 Add amounts taxed at a higher maximum tax rate, such as the taxable untaxed element of the lump sum death benefit that is subject to 30 per cent maximum tax rate. STEP 3 Add amounts taxed at a lower maximum tax rate, such as the taxed element of the lump sum death benefit that is subject to 15 per cent maximum tax rate. Continued on page 42

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Continued from page 41

WHO IS LIABLE TO PAY TAX ON LUMP SUM DEATH BENEFITS? Depending on whether a non-tax dependant, such as an adult child, receives the lump sum death benefit directly from the deceased’s super fund or from the deceased estate, the tax outcome can be surprisingly different for the beneficiary. Payment made directly from super fund A lump sum death benefit can be paid to a non-tax dependant beneficiary directly from the super fund if the beneficiary is a SIS dependant. This may be the case if the deceased made a binding or non-lapsing nomination to this beneficiary, or the trustee of the fund exercises discretion to pay the death benefit to this beneficiary. The trustee of the super fund must withhold tax on the taxable component of the lump sum as shown in table two. The non-tax dependant beneficiary then needs to declare the taxable taxed and untaxed elements in their tax return as assessable income. The amount withheld by the super fund becomes a tax credit to reduce the individual’s tax liability and can be refunded to the beneficiary if in excess. The inclusion of the taxable taxed and untaxed element in the individual

Table 3: Doris’ lump sum death benefit tax components

beneficiary’s tax return means the beneficiary will have higher assessable and taxable income in the financial year that the lump sum death benefit is received, which can have flow-on effects such as: • the Medicare Levy can apply to the increased taxable income; • the Medicare Levy surcharge can apply where the beneficiary does not have private hospital insurance; • reduction or elimination of the low-income tax offset, low income and middle income tax offset and seniors and pensioners tax offset; • impact on Government co-contribution and spouse contribution tax offset; • Division 293 tax; • reduction or elimination of Family Tax Benefit payments; and • increase in child care cost due to the potential reduction in Child Care Subsidy. Death benefit paid to non-tax dependant via deceased estate The trustee of a super fund can pay the deceased member’s death benefit to the deceased estate where: • the deceased member made a binding or non-lapsing nomination to their legal personal representative; or • a binding nomination was not

made and the fund’s default provisions require payment to the estate; or • the trustee exercised discretion to do so. The super fund will pay the entire death benefit as a lump sum to the deceased estate as it is not subject to PAYG withholding tax. It is then the responsibility of the deceased’s legal personal representative (ie executor of a will or the administrator in the case of intestacy) to pay tax on the taxable component of the lump sum when it is paid to a non-tax dependant from the estate. The executor or administrator must include the taxable taxed and untaxed elements in the deceased estate’s trust return as assessable income when these amounts are paid to a non-tax dependant. The same maximum tax rate and ordering rules mentioned in earlier sections apply. However, for tax law purposes the benefit is taken to be income in the trust to which no beneficiary is presently entitled, which means Medicare Levy is not payable when the death benefit is paid from the deceased estate to a non-tax dependant. The executor or the administrator must deduct tax from the taxable component of the lump sum before paying the death benefit to a non-tax dependant beneficiary. The beneficiary does not need to

Tax-free component

$100,000

Taxable taxed element

$200,000

Taxable untaxed element

$150,000

Total lump sum death benefit

$450,000

declare this income in their tax return, hence no increase in their assessable and taxable income. Example Phoebe (age 40) is a single parent with two young children under age five. Phoebe earns $40,000 per year from a part-time job. She is receiving full Family Tax Benefit Part A and Part B totalling around $15,000 per year. Phoebe’s mum Doris recently passed away. Phoebe is the sole beneficiary of her estate and the executor of her Will. Doris’ estate has very little income generating assets. The estimated annual income in her deceased estate is around $5,000. Doris was 63 at the time of death, and her super death benefit contains a death cover payout. The trustee of Doris’ super fund calculated the tax components of her lump sum death benefit as in table three. Doris didn’t bother making a

Table 4: Tax comparison of the two options

Option 1 – Phoebe pays tax

Option 2 – Deceased estate pays tax

Taxable untaxed element – $150,000

Given Phoebe’s other ordinary income pushed her to the 32.5 per cent tax bracket, the entire $150,000 is taxed at 30 per cent plus Medicare Levy = $48,000

(18,200 – $5,000) @ 0 per cent = $0 ($37,000 – $18,200) @ 19 per cent = $3,572 Remainder $113,000 @ 30 per cent = $33,900 Medicare Levy is not payable Total: $37,472

Taxable taxed element – $200,000

$200,000 is taxed at 15 per cent plus Medicare Levy = $34,000

$200,000 is taxed at 15per cent = $30,000 Medicare Levy is not payable

Total tax on lump sum death benefit paid to Phoebe

$82,000

$67,472

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death benefit nomination as in her mind everything would go to Phoebe anyway. Subject to the super fund’s governing rules, Phoebe potentially has two options: 1) request the super fund to pay Doris’ death benefit to her directly; or 2) request the super fund to pay Doris’ death benefit to her deceased estate and receive the lump sum through the estate. Phoebe is a non-tax dependant. With either option: • $100,000 tax-free component can be received tax-free and will not form part of the taxpayer’s assessable income; • $150,000 untaxed element forms part of the taxpayer’s assessable income but taxed at a maximum 30 per cent. This amount is regarded to have been received first before the taxed element; and • $200,000 taxed element forms part of the taxpayer’s assessable income but taxed at a maximum 15 per cent. This amount is regarded to have been received later than the untaxed element. Table four compares the amount of tax payable under the two options. With option one, Phoebe is the taxpayer. She needs to include the taxed and untaxed elements in her tax return which will increase her taxable income from $40,000 to $390,000 in the year the lump sum death benefit is paid. This means: • Phoebe needs to pay Medicare Levy on the entire $390,000 taxable income, including the taxable component of the lump sum death benefit payment; • Phoebe will lose the $15,000 Family Tax Benefit payments; • Phoebe cannot benefit from the low-income tax offset and the low income and middle-income tax offset; • Phoebe’s child care costs will most likely increase due to the

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reduction in her child care subsidy payment because of higher income level; • Phoebe will be subject to Division 293 tax on her concessional contributions, given her income exceeds the $250,000 threshold; and • If Phoebe were to make a non-concessional contribution, she would not be able to receive the Government co-contribution due to the increased income level. With option two, the taxpayer is the deceased estate (ie the executor pays tax on behalf of the estate) when the lump sum is paid from the estate to a non-tax dependant of the deceased. This means: • Medicare Levy is not payable. For tax law purposes the taxable component of a lump sum benefit is taken to be income in the trust (ie deceased estate) to which no beneficiary is presently entitled, which means Medicare Levy is not payable when the death benefit is paid from the deceased estate to a non-tax dependant; • When Phoebe receives a net of tax distribution from Doris’ deceased estate, she does not need to report this income in her tax return. As a result, her taxable income will remain unchanged at $40,000. The flowon effects due to the increase in her income level mentioned in option one won’t apply here; and • Doris’ deceased estate only has $5,000 of other income. This means the remaining $13,200 tax-free threshold can apply to the untaxed element and 19 per cent tax rate (rather than 30 per cent) applies to part of the untaxed element that does not take trust income to the next tax bracket. Linda Bruce is senior technical manager at FirstTech.

CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. 1. When paying a lump sum superannuation death benefit, which of the following beneficiaries do not meet the definition of a tax dependant? a) The deceased’s spouse b) A child under 18 years old c) A person who was in an interdependency relationship with the deceased d) An independent adult child 2. Is the following statement true or false? Medicare Levy is not payable when the death benefit is paid from the deceased estate to a non-tax dependant. a) True b) False 3. Which of the following is correct regarding a lump sum death benefit paid directly from a superannuation fund to a non-tax dependant beneficiary? a) The non-tax dependant beneficiary must declare the taxable taxed and untaxed elements in their tax return as assessable income b) The executor or administrator must include the taxable taxed and untaxed elements in the deceased estates tax return as assessable income c) The non-tax dependant beneficiary must declare the tax free, taxable taxed and untaxed elements in their tax return as assessable income d) None of the above 4. Which of the following payments/tax offsets would NOT be impacted by the inclusion of taxable component of a lump sum death benefit in an individual’s tax return? a) Family Tax Benefit b) Low income tax offset c) Seniors and pensioners tax offset d) Age pension 5. When paying a lump sum superannuation death benefit, which of the following beneficiaries do not meet the definition of a dependant for super law purposes (ie SIS dependant)? a) A child under 18 years old b) An adult child c) A person who was in an interdependency relationship with the deceased d) A sister of the deceased who was not a financial dependant or in an interdependency relationship with the deceased

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13/06/2019 12:13:20 PM

OUTSIDER

Money Management ManagementJune April20, 2, 2015 44 | Money 2019

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

Bazza shows that its all in the timing NOT lost on Outsider last week was the fact that his old mate Barry Lambert has an acute sense of timing. This was driven home by the fact that in 2011 Bazza flogged off Count Financial to the Commonwealth Bank in a transaction valued at around $343 million and, a mere 11 years later, CountPlus acquired Count Financial for a mere $2.5 million. It is not so long ago that

Bazza was a member of the board of the publicly-listed CountPlus and Outsider noted that he appeared to be well across the details of last week’s transaction albeit that he is these days far more focused on horticultural pursuits, specifically the growing of medicinal marijuana. Outsider happens to know that CountPlus chief executive and former Financial Planning

Association chairman, Matthew Rowe had been casting an acquisitive eye towards Count Financial for some time and had possibly learned from Bazza the art of timing. In Outsider’s view, the key to the transaction is not just the bargain basement price but the $200 million indemnity being provided by the Commonwealth Bank which will hold good for the next four years.

McMastering giving as good as you get OUTSIDER notes that former Dover Financial principal, Terry McMaster has joined battle with the Australian Securities and Investments Commission in the Federal Court over the status of Dover’s so-called “client protection policy”. Outsider also notes that the journalists covering the Federal Court proceedings have prefaced almost all their references to McMaster as being the man “who collapsed in the witness stand at the banking royal commission and was carted away by an ambulance”. Now your wiley old correspondent knows better than to predict the outcome of court proceedings, particularly when someone like McMaster is involved, but he suspects that if the former Dover boss has been in court then he is at least giving in the administrative areas of ASIC a rest with respect to Freedom of Information requests. It seems that while ASIC has been pursuing McMaster and Dover through the courts he has been pursuing ASIC with respect to its dealings with the media in relation to Dover and the manner of its closure late last year. Outsider believes that while McMaster may have collapsed in the Royal Commission witness box he will be mounting a vigorous defence in the Federal Court.

Million dollar entrée to some Miami vice AND here was Outsider thinking that Royal Commissions and an end to grandfathered commissions had spelled an end to financial advisers’ salad days. Well perhaps for some, but not others. While Outsider was bemoaning the onset of winter temperatures he heard tell that those planners who had become members of the Million Dollar Round Table were attending the group’s annual meeting in Miami Beach, Florida. But before anyone gets too judgemental about the MDRT boys and girls, Outsider wants to assure readers that it was not all play and no business for delegates who, in between accessing the beach, could attend sessions on

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advising clients, marketing, practice management, “top of the table” and “whole person”. And then, of course, there are the special sessions where people such as Vanessa Van Edwards – the “lead investigator at the Science of People – a human-behaviour research lab” will “turn the latest fascinating scientific research into practical strategies for professional success” while the man who created the world’s first Wi-Fi video doorbell, Jamie Siminoff, talks about “Mission to Disruption”. All in all, Outsider believes it provides justification for attending a conference in a venue “where tropics meet bigcity entertainment in this metropolis by the sea, where white sand beaches complement glittering high rises”.

"Mexico is the new China." Pippa Malmgren, former economic adviser to US president George W. Bush, to the AFR on Mexico's economic development.

"Public debate about the accuracy or otherwise of the 350 million pounds continues to this day." Boris Johnson's lawyers in a court document, after successfully dismissing the High Court case against him.

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