Money Management | Vol. 35 No 12 | July 15, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 12 | July 15, 2021

20

LEGAL

Changes to RSE licensees

EDUCATION

24

FASEA preparation

RATE THE RATERS

26

TOOLBOX

Property in SMSFs

AustralianSuper queried on data handed to The New Daily

BY JASSMYN GOH

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Zenith back on top AFTER last year’s indecisiveness, fund managers have voted for research teams’ stability and thorough processes this year, restoring Zenith to the top of the podium, according to the part one of Money Management’s 2021 Rate the Raters survey.

The study, which examined fund managers’ sentiment toward the research houses which rate their products, found Zenith had won the managers’ trust in five out of seven categories including its research methodology, personnel quality, feedback and the most accurate selection of the peer group and sectors used for evaluation of funds.

On top of this, Zenith had also managed to attract the highest number of fund managers of those participating in the study who had seen their products rated by this research house.

Sydney-based SQM Research came second as the firm earned the highest ratings from managers across two categories. The respondents decided that SQM had provided the highest level of transparency for its process and its ratings were deemed to be the most satisfactory.

This year’s study also identified the potential conflicts of interest which arose in the case of some raters who were, in fund managers’ eyes, gradually transitioning from research to asset management.

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Full feature on page 14

AUSTRALIANSUPER has said it would hand over members’ emails and first names if an arrangement with The New Daily were to go ahead but that was subject to advice.

During a Parliamentary hearing, AustralianSuper was asked by Liberal’s Julian Simmonds about what member information had been handed over to The New Daily.

AustralianSuper chief executive, Ian Silk, said currently the industry superannuation fund had not provided any information but that it had communicated to a number of its members that the fund was proposing to do so and that this enabled members to advise the fund if they did not want that to occur.

“Subsequent to that communication with members advising of that intention to provide material to The New Daily, APRA

[The Australian Prudential Regulation Authority] and OAIC [Office of the Australian Information Commissioner] have communicated with us and our current plan is to wait advice from OAIC before we execute,” he said.

“The motivation from AustralianSuper is one to enhance financial literacy of AustralianSuper members and secondly to extract member engagement benefits from it. We have been speaking to The New Daily about means to extend benefits that current recipients of The New Daily receive to a broader cohort of the fund’s members.”

Simmonds then asked: “Let’s say the arrangement continues, and you intend to continue with the arrange, what data would you be handing over?”

“We would hand The New Daily Continued on page 3

FASEA exam takers should not rely on licensee policies

BY CHRIS DASTOOR

FINANCIAL Adviser and Standards Ethics Authority (FASEA) exam takers need to understand their legal obligations in the Corporations Act, rather than what their licensee policies asked them to do.

Speaking at a webinar hosted by the Association of Financial Advisers (AFA), Amelia Constantinidis, FASEA standards director, said this had been an issue with key advice documentation and was an area of underperformance across all exams, not just the May exam.

“You might all think you know exactly what you need to do in terms of advice documentation and you probably do, but it needs to be related to the scenario provided in the exam,” Constantinidis said.

Continued on page 3

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July 15, 2021 Money Management | 3

News

AMP to sell AMP Capital GEFI to Macquarie for $185m

BY JASSMYN GOH

AMP LIMITED will sell its AMP Capital global equities and fixed income (GEFI) business to Macquarie Asset Management for up to $185 million.

The two firms had entered into a binding agreement and was part of AMP Capital’s strategy in preparation for its planned demerger from AMP during 1H 22, an announcement said.

GEFI currently managed around $60 billion in assets under management (AUM) and under the sale agreement AMP Capital’s capabilities in Australian and global listed equities and global fixed income would be combined with Macquarie’s public investment platform.

Post completion, the

investment teams focused on GEFI’s clients around the world, and other key staff would transfer to Macquarie. Macquarie Asset Management was expected to have around $720 billion in AUM

AustralianSuper queried on data handed to The New Daily Continued from page 1 members’ emails and first names,” Silk replied.

Silk said he did not have a deadline on when this would commence as the fund was waiting for the OAIC’s response.

Liberal’s Tim Wilson later asked whether AustralianSuper believed it was acceptable to “hand over private information of members to an entity which you can’t tell me is in the best financial interests of members to invest in?”

“I need to repeat two things – AustralianSuper believes the provision of The New Daily to members achieves two things. It enhances financial literacy as evidence by views expressed by recipients of The New Daily.

“It does aid in member engagement and member engagement plays to growing size of funds so we can use size and scale of the fund to the benefit of the fund’s members. There is a direct financial benefit to members in that sense.”

Wilson then pointed to top stories on the publication’s website which were on topics relating to the Olympics, the Sydney COVID-19 lockdown, Taliban fighters, the Suez Canal, and a grizzly bear in Montana.

“For a site that apparently is about financial interests, frankly it doesn’t seem that interested,” Wilson said.

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post transaction.

AMP Capital’s strategy was to focus on high-growth opportunities in private markets across real estate, infrastructure, and associated adjacencies.

AMP Capital was also in the process of transferring the multiasset group business to AMP Australia to create an end-to-end superannuation and investment platform business.

Commenting on the sale AMP acting chief executive, James Georgeson, said: “Our review of the GEFI business last year showed it had strong investment capabilities and performance but needed greater scale and broader distribution reach to compete effectively.

“Macquarie is a high quality and respected manager, with a complementary culture and capabilities, well-placed to develop the business and deliver continued strong investment performance for its expanded client base.”

FASEA exam takers should not rely on licensee policies Continued from page 1 “But I’d also encourage you to all understand your legal obligations stated in the Corporations Act rather than answering questions based on what your licensee policies are asking you to do.

“There are differences in some licensees in terms of what is the requirements of the Corporations Act versus what your licensees asks you to do.

“I’m not saying they’re wrong, but there are differences and we aren’t assessing you on your licensee policy, we’re assessing you on the legal requirements.

“What I’m highlighting here is not only the underperforming areas for the May exam, but we are seeing these trends across all exams.”

Another one of these trends was identifying breaches and what needed to be done in terms of reporting a breach.

“It’s not [only] your licensees job just to know what a breach is, when to report it and how to report it,” Constantinidis said.

“As an adviser, it’s your obligation to understand when you have breached, when you need to notify your licensee or who to notify and what they do with it.”

Then of course, there was

understanding the code of ethics and how it applied to different client scenarios.

“We really encourage you to look at our recent guidance materials that we provided, it does include the intent of each of the standards, how you look at it from an overall perspective but also how its applied to different scenarios,” Constantinidis said.

“The other key area is judgments and biases, so not only understanding client biases but also your own in terms of how you’re making decisions.”

David Glen, TAL national technical manager, said it was not necessary to learn everything off by heart but it was recommended for some fundamental issues and principles.

“That will stand you in good stead when you’re under exam pressure and you can recall those particular issues,” Glen said.

“Best interest is a fundamental that needs to be in the mind; don’t rely on the exam material. You’ll have to plough through tracks of corporations law to locate that and that’s not a good use of exam time.

“Safe harbour steps, code values and standards – those need to be embedded in the mind so you can recall those fundamental requirements quickly and efficiently.”

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4 | Money Management July 15, 2021

Editorial

jassmyn.goh@moneymanagement.com.au

REMAINING WITHIN THE ROYAL COMMISSION STANDARDS’ SCOPE

FE Money Management Pty Ltd Level 10

Any further requirements by the Government for the financial advice sector to lift standards could lead to advisers and potential graduate entrants moving the occupation into the ‘too hard basket’.

THE end of the financial year saw almost 550 advisers leave the industry in one week with industry experts believing there are still more large exits to come. Therefore, the Government would be wise to refrain from adding any more obligations to the industry that are not part of the Royal Commission.

The large exit right before the end of the year is mainly due to accountants relinquishing their limited licences as they deem paying the Australian Securities and Investments Commission’s (ASIC’s) ever-increasing levy to outweigh the benefits of providing personal financial advice.

With many potential selfmanaged superannuation fund (SMSF) members using accountants to help establish an account, this large hole created by accountants leaving the financial advice industry could lead to a decrease in the number of new SMSFs being set up.

ASIC’s levy has been the bane of the piling costs to advisers and the fact that the 2019/20 increase was due to declining adviser numbers does not do the Government any favours. Advisers will be watching to see what the levy will look like this year and will blame the Government for an increase in the levy if the reason is again advisers

Online 20 July aist.asn.au/events/ super-symposiums

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Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@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 Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au ADVERTISING Account Manager: Damien Quinn

leaving the industry.

Not only this, there are a cohort of financial advisers who believe once-off advice is unsustainable for their business due to the increasing compliance costs and this could lead to an even wider unmet advice gap.

ASIC recently presented an infographic of their findings about the advice landscape and the top impediment to providing limited advice was that it was ‘too costly to provide’.

The infographic was a culmination of submissions put forward to the regulator on its consultation on ‘Promoting access to affordable advice’ and the Government should be taking these submissions seriously given the vast number of advisers leaving the industry and the fact that too few Australians are being financially advised.

Further complicating the situation is the mound of compliance obligations coming up into place in the next few months.

While many university graduates are coming out of university with degrees that satisfy the Financial Adviser Standards and Ethics Authority (FASEA) requirements, industry heads have told Money Management that these graduates have not flowed into new starters within the financial advice profession.

This is why the Government needs to make sure what they are doing to lift standards does not go beyond the scope of the Royal Commission, or becoming a financial adviser will be placed in the ‘too hard basket’ for graduates and undecided current advisers.

Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Manager: Amelia King Tel: 0407 702 765 amelia.king@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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Jassmyn Goh Editor

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ACSI 2021 Annual Conference

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8/07/2021 4:04:40 PM

July 15, 2021 Money Management | 5

News

AFA hits back at regulators’ advice guidance

BY JASSMYN GOH

THE regulators’ guidance to superannuation trustees on advice fees contradicts what has been relayed to Senate Estimates, is excessive, and ignores the Privacy Act obligations, according to the Association of Financial Advisers (AFA).

AFA chief executive, Phil Anderson, hit back at the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) after the two regulators issued a joint letter addressed to super trustees on oversight of advice fees charged to members’ super accounts.

Anderson pointed to wording from the regulators that seemed to warn “trustees about trusting financial advisers”.

The letter from the regulators said: “Reliance on attestations by financial advisers or advice licensees that services have been provided has limitations due to the potential for conflicts of interest, so cannot in all circumstances be relied upon.

“We do not consider it sufficient to rely solely on statements from financial advisers or members

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that the sole purpose test has been met.”

Anderson also said the letter demonstrated the regulators expected trustees to review statements of advice (SoAs) which contradicted answers provided by APRA to Senate Estimates and ignored the Privacy Act. “In less than a month, APRA have gone from describing the situation in terms that they have not been prescriptive, to specifically stating that they have had expectations that trustees review SoAs,” Anderson said.

“In this letter, there is, at best, a cursory reference to privacy obligations. Is it really sufficient to have trustees communicate to their members that they may demand copies of documents that contain private personal information to prove that what clients have already consented to is okay?

“Not only do these requirements for trustees ignore the Privacy Act obligations, which is putting clients at risk, it is also excessive and will add significant administrative burden for financial advisers.”

Anderson said as recommendations of the Banking Royal Commission had been

implemented why did the regulators need to demand more to be required.

“Well, we would argue that the Royal Commission looked at this issue from an institutional perspective, not a small business financial adviser perspective, and in any case only 10 individual advisers were reviewed through the Royal Commission hearings and fee-for-no service was not a focus of these individual adviser matters,” he said.

“Whilst it is important to acknowledge that super fund trustees have more obligations than banks, it is illustrative to consider what the equivalent requirement would be if banks needed to do something similar. Can you imagine banks requiring gyms or streaming services to get client consents for direct debits signed every year and providing evidence of usage of these services?

“Is this really necessary and should it be the role of Government agencies to demonstrate such lack of trust in financial advisers who provide a critical service to the Australian population? It is appropriate that financial advisers and super funds both argue against this excessive, unnecessary, and costly interference.”

7/07/2021 1:53:13 PM

6 | Money Management July 15, 2021

News

Are part-time licences the key to retaining talent?

Platform satisfaction continues to decline

BY CHRIS DASTOOR

BY JASSMYN GOH

WITH more women joining the industry as financial planners, parttime licences might be the key to retaining talent in the industry as people balance work/family commitments.

Centrepoint announced a new fee structure in April, which would allow firms with more than one authorised representative (AR) to pay a pro-rata fee based on the days worked by the adviser.

Further, for advisers working part-time, variable costs including governance and research queries, along with technical and compliance support may be pro-rated according to the number of days worked.

Jon Silcock, Connect Financial practice principle, said he approached Centrepoint about this as he was about to lose a talented adviser who couldn’t commit to fulltime work and raising a family.

“Originally they didn’t have it and I simply asked; they were going to charge a full AR fee, we asked and it didn’t take long for them to think about it,” Silcock said.

“She works three of five days, so they said we’ll do three-fifths of the full fee.

“It’s just all part of being flexible and giving people opportunities – I’m not sure she’d even be working unless she could work part-time.”

That adviser was Amy Hoskins who said having the cheaper licence was the difference of her staying in the industry.

“I’ve been in the industry for 17 years now – and I enjoy my job – but as a woman and a mother flexibility is important between home and work life,” Hoskins said.

“This is the only role I’ve been in; if there wasn’t any flexibility and I had to do full-time work with a young family, I don’t know if I would’ve been able to manage that.

“I definitely need an employer that can accommodate return to

ADVISER satisfaction on their platform provider has continued to fall as there is significant room for improvement, according to Investment Trends.

The latest adviser technology report by the research house found 28% of surveyed advisers rated their main platform as ‘very good’, a fall from 30% last year. It said satisfaction had been on the downward trend since 2014.

Advisers did, however, remain highly satisfied with their main platform’s online transaction capabilities (49% rate it as ‘very good’), ease of use (44%) and level of fees (42%).

Investment Trends senior analyst, Bailey Hao, said: “The challenging business conditions brought by the pandemic has undoubtedly put pressure on platforms to maintain high service levels to advisers and their clients.

“While platforms serve advisers well in many areas, there is still significant room for improvement. Our satisfaction gap analysis highlights that adviser-facing support services should be a focus area – especially the call centre.

“Since advisers most prefer to turn to their platform’s call centre for their support needs, platforms must devote more attention to improving their contact centre experience given its integral role in lifting overall satisfaction ratings.”

The research house also found that Netwealth was the highest rated platform by overall satisfaction at (80%), followed by HUB24 (78%), BT Panorama (75%), CFS FirstChoice (73%), and Macquarie Wrap (73%).

Netwealth was also rated highest for ‘value for money’ and BT Panorama for best mobile access/app.

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work after maternity leave.”

Women were largely underrepresented in the industry and data from Wealth Data showed last year that women only made up approximately 20% of adviser roles.

“It’s important because more and more female financial planners are coming into the industry,” Hoskins said.

“And some might be putting off children because they don’t think they can get that return to work/ life balance.

“If a licensee can accommodate that, I think more people might join the industry.”

Paul Cullen, Centrepoint Alliance group executive advice, said it was never intended to attract advisers to switch licences but to keep them in the industry by offering them flexibility.

“We had a couple of firms talk to us and they had people who were looking for flexibility and reduce their hours for legitimate purposes,” Cullen said.

“Both cases were [about] looking after kids and they felt strongly about it, so we put our heads together and thought we should solve this.”

Over the years, Cullen said licensees had resisted the temptation to provide this as there

were fears the system could be abused for cheaper AR fees.

“We’re watching all the advisers leave the profession, so we had to come up with some solutions around keeping good people in,” Cullen said.

“The answer was to see if we can accommodate those couple of firms and come up with something they thought was reasonable.

“I’m sure over time we’ll get more traction with it, but the intention was to keep people in advice.”

The planning group also offered advisers taking maternity or paternity leave the ability to suspend fees for up to 12 months or pay a reduced fee if they wish to retain access to masterclasses and webinars and complete continuing professional development (CPD).

“I’ve had a conversation with another adviser whose partner is expecting in November and didn’t really know about it,” Cullen said.

“One issue we have is just around communications and making sure we’re out and about with our own network of advisers telling them its available.

“His wife works in the business with him so they might be able to do a tandem thing where on goes off for a period of time and flip it.”

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July 15, 2021 Money Management | 7

News

ESG-focused clients more likely to switch adviser

BY LAURA DEW

AS advisers detail a ‘scarcity of sustainability’, EY has found over a third of wealth management clients feel their adviser is letting them down on environmental, social and governance (ESG) issues.

According to a global wealth management report from EY, over three-quarters of Australian respondents had personal sustainability goals. However, 41% felt their wealth manager fell short in understanding these values.

The top three ESG issues identified by clients were climate change and carbon emissions, better worker welfare and human rights and air and water pollution.

“When it comes to sustainability goals, wealth providers’ understanding is failing to keep up with clients’ beliefs,” the report said.

“True, half of clients believe wealth managers understand their goals but 41% feel their provider could understand these goals better and 5% think firms don’t understand them at all.

“Wealth providers should note that 35% of clients who have sustainability goals are looking to switch wealth managers in the next three years, over twice as many as among clients without

MEETS

sustainability goals.”

Janus Henderson global head of portfolio, construction and strategy Adam Hetts previously said advisers struggled with a ‘scarcity of sustainability’ as there was a smaller universe of sustainable investments available to offer clients.

This was echoed by EY who said clients with sustainability goals were twice as likely to be open to using alternative investment which advisers may be inexperienced in using.

“Clients’ fast-evolving expectations raise challenging questions for wealth providers. For example, our research shows that clients with sustainability goals are twice as likely to use alternative investments, forcing providers to offer asset types that they may not have a proven expertise or track record with, creating a potential need for new and innovative partnerships with specialist providers,” it said.

Rita Da Silva, Oceanic wealth and asset management leader at EY, said: “Wealth managers should consider offering end-to-end ESG investing journeys underpinned by a broad choice of ESG investing options. Tailored guidance and advice, flexible educational options, supplemental research on important topics and clear accountability that links to their wider sustainability strategies will be key”.

AUSBIL ACTIVE SUSTAINABLE EQUITY FUND provides exposure to companies with a sustainable approach, satisfying a range of environmental, social and corporate governance considerations.

Invest today with tomorrow in mind.

Ausbil Active Sustainable Equity Fund as at 30/06/2021

3 months

6 months

1 year

2 year (pa)

3 year (pa)

Since inception (pa1) 13.14%

Portfolio

7.61%

9.07%

32.41%

15.65%

13.15%

Benchmark2

8.29%

12.90%

27.80%

8.62%

9.59%

9.87%

-0.68%

-3.82%

4.61%

7.03%

3.56%

3.27%

XS Ret

1. Inception Date: 31 January 2018

2. Benchmark: S&P/ASX 200 Accumulation Index

2020 WINNER

This information has been prepared by Ausbil Investment Management Limited (ABN 26 076 316 473 AFSL 229722) (Ausbil) the issuer and responsible entity of the Ausbil Active Sustainable Equity Fund (ARSN 623 141 784) (Fund). This is general information only and does not take account of investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Fund. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s product disclosure statement, available at www.ausbil.com.au. Past performance is not a reliable indicator of future performance. Performance figures are calculated to 30 June 2021 and are net of fees and assume distributions are reinvested. The Zenith Fund Awards were issued 30 October 2020 by Zenith Investment Partners (ABN 27 130 132 672, AFSL 226872) and are determined using proprietary methodologies. The Fund Awards are solely statements of opinion and do not represent recommendations to purchase, hold or sell any securities or make any other investment decisions. To the extent that the Fund Awards constitutes advice, it is General Advice for Wholesale clients only without taking into consideration the objectives, financial situation or needs of any specific person. Investors should seek their own independent financial advice before making any investment decision and should consider the appropriateness of any advice. Investors should obtain a copy of and consider any relevant PDS or offer document before making any investment decisions. Past performance is not an indication of future performance. Fund Awards are current for 12 months from the date awarded and are subject to change at any time. Fund Awards for previous years are referenced for historical purposes only.

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7/07/2021 1:39:10 PM

8 | Money Management July 15, 2021

News

69% pass May FASEA exam

BY CHRIS DASTOOR

THE May sitting of the Financial Adviser Standards and Ethics Authority (FASEA) exam has seen a 69% pass rate – the same as the previous sitting in March.

Over 14,850 advisers have passed the adviser exams held to date representing 74% of advisers on the Australian Securities and Investments Commission’s (ASIC’s) Financial Adviser Register (FAR).

Overall, 89% of advisers who had sat the exam had passed and 1,918 unsuccessful candidates had re-sat the exam with 65% passing at a re-sit.

Westpac to sell NZ life insurance business

BY JASSMYN GOH

WESTPAC has announced it will sell its New Zealand life insurance business to Fidelity Life Assurance Company for NZ$400 million ($373 million).

In an announcement to the Australian Securities Exchange (ASX), the bank said it would also enter into a 15-year agreement for the distribution of life insurance products to Westpac’s New Zealand customers.

The sale is expected to result in a posttax gain sale and add about seven bps to Westpac Group’s common equity tier 1 capital ratio.

The announcement comes weeks after the bank decided it would retain its New Zealand business and sold its Australian life insurance business to Allianz.

Westpac chief executive, Peter King, said the sale was the latest step in simplifying the business.

“Life insurance products are important for many New Zealanders and we are pleased to be entering a long-term partnership with a life insurance specialist to continue to help our customers protect themselves and their loved ones,” he said.

At 31 March, 2021, Westpac Life NZ had annual inforce premiums of NZ$149 million.

Fidelity Life Assurance Company was backed by cornerstone investor the NZ Super Fund.

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Around 74% of candidates sitting the exam for the first time passed the May exam (compared with an average of 82.4% across all exams).

The exam saw 1,894 advisers sit compared with an average of 1,437 across all exams.

Stephen Glenfield, FASEA chief executive, said: “Over 16,700 advisers have sat the exam with nine-in-10 demonstrating they have the skills to apply their knowledge of advice construction, ethics and legal requirements to the practical scenarios tested in the exam.

“FASEA congratulates successful candidates on completing an important component of their education requirements under the Corporations Act.”

Advisers facing unintended consequences of sustainability

BY LAURA DEW

ADVISERS are grappling with the ‘scarcity of sustainability’ in portfolios as they find a smaller universe of investment for clients seeking sustainable options.

In a panel session at the Janus Henderson conference, Adam Hetts, global head of portfolio, construction and strategy, said there were often unintended consequences which came from implementing sustainable options.

This included the smaller universe of investment options, the difference between traditional and sustainable portfolios and their respective performance and confusion for clients.

There were two types of advisers, he said, those which created separate sustainable models and those which tried to implement it

into their existing traditional ones.

Hetts said: “What we are seeing in the thousands of client portfolios that we work with every year is that these advisers are shifting from traditional mode which was how they used to view portfolios and implement their sustainable portfolios.

“There’s a tilt and there’s a major translation of these portfolios and that translation often results in these new risks that are things like regional biases, sector concentrations and style drift.

“The risk isn’t coming from the sustainability but it is coming from what we think of as the ‘scarcity of sustainability’. If you’re used to thinking about traditional portfolios and you’re transitioning to this sustainable version of investing, you have a small fraction of the opportunity set you have with traditional models.”

He gave the example of European equities where only 10% were classified as sustainable, which fell to 5% in the United States. For fixed income, they were likely to need more investment grade which meant higher interest rate risk. This left advisers with “limited building blocks” to select investments for portfolios.

“The biggest risk to me is, the short answer is just the headaches, it’s those inconsistencies and those unintended or unknown risks and it just creates different portfolios. It’s not good or bad; it’s just different. It creates more questions, it creates more confusion for clients going to their advisers,” he said.

8/07/2021 10:36:57 AM

July 15, 2021 Money Management | 9

News

Limited adviser losses create single-issue advice void

BY CHRIS DASTOOR

REGULATORY inflexibility for limited licence holders is to blame for the drop of selfmanaged superannuation fund (SMSF) accountant and adviser roles, according to the SMSF Association.

In the last week of June, the SMSF Adviser Network lost 91 roles, as licence holders had to make a decision for the new financial year over whether they would stay in the industry.

Overall, limited-advice roles that focused on SMSF advice had contributed to 23% of the loss of adviser roles over the financial year.

Peter Burgess, SMSF Association deputy chief executive and director of policy and education, said compliance costs had made it unrealistic to maintain a licence.

“What the figures are showing is that there is a reduction in the number of advisers, particularly those who hold a limited licence, and many of those are authorised to provide

SMSF advice under that limited licence,” Burgess said.

“There is various reasons for it, but I think the main reason is the cost – the compliance cost of continuing to provide advice has been increasing so it’s becoming increasingly difficult for advisers to be able to provide to clients in a cost-effective way.

“In our view, it is a problem losing advisers as it means it’s going to be even harder for individuals to obtain the advice they need, particularly around SMSFs.” Burgess said education requirements and being required to produce statements of advice (SoAs) were some of the costly factors that made in impractical for licence holders that focused on a limited scope.

“It’s a concern to us that we are seeing a reduction in the number of limited licence holders and it’s primarily due to the cost of providing advice for some of these advisers, it’s not the main part of their business,”

Burgess said.

“Having to comply with all the different compliance obligations is not something that’s cost effective for them to do.

“The [Financial Standards and Ethics Authority] FASEA exam itself covers a whole range of topics, many of those topics are not areas that limited licence holders necessarily focus on, so they have to invest quite a bit of time in having to up-skill for the exam which is a problem.

“They have to produce a statement of advice and that can be quite a time consuming and costly exercise for advisers to produce.

“That’s what is driving the costs here, the inability to provide single-issue advice or tailored advice around a specific issue that the client is seeking advice on.”

Burgess said they had made a submission to the Australian Securities and Investments Commission (ASIC) as part of the consultation on making advice more accessible.

Ongoing need to educate clients on value of advice

BY JASSMYN GOH

THERE is an ongoing need for financial advisers to demonstrate their value by educating clients on the benefits of the service, according to a report.

MetLife’s latest report on the value of life insurance found there was still confusion around the value of expert financial advice.

The report found 40% of consumers thought life insurance bought through an adviser was more expensive than a policy they could buy directly online or through a superannuation fund, and one-third of consumers believed the product was better quality.

“This is especially critical given three-in-10 consumers and fivein-10 small to medium enterprises reported they were considering either changing their current adviser, or ceasing to use one completely, citing high premiums, lack of affordability, no ongoing need for insurance or a lack of communication as their top reasons,” the report said.

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“Understanding of life insurance also remains low among consumers and SMEs. “The research found consumers and SMEs were willing to pay an average upfront fee of $1,700 for insurance advice. This is below the average cost to deliver quality financial advice, suggesting there is a critical need to retain commission-for-advice to support affordability and accessibility for Australians.”

It said to counteract this downward trend in the perceived value of financial advice and life

insurance, advisers could educate their clients on what they did and how they added value.

“Building trust is also key, so that clients equate the value of the advice with the value they receive from the financial products purchased,” the report said.

The report noted that reducing commissions would push up the direct cost of advice to consumers which would reduce access to quality advice. This would in turn could lead to: • Relying on off-the-shelf insurance products;

• Consumers with lower economics means would lose access to advice; • Most customers would not pay upfront for advice if the product was subject to an underwiring process and that could lead them to being denied access to the product; • Consumers on claim would lose support of their adviser during a difficult time; • Underinsurance rates might increase; and • Financial adviser businesses might become unsustainable.

“While different payment models apply around the world, no country that has a strong, voluntary, standalone life insurance system has banned commissions. The removal of commissions on life insurance in Australia would be a global first,” the report said.

“For all these reasons, MetLife firmly believes that consumers should have a choice of how to pay for life insurance advice; either fee-for-service or via commission.”

7/07/2021 1:38:37 PM

10 | Money Management July 15, 2021

News

Growth mindset neglected by advice firms

BY JASSMYN GOH

ADVICE practices should be focusing on business growth rather than concentrating solely on reforms, CountPlus believes.

CountPlus chief executive, Matthew Rowe, said the biggest challenge in the advice industry was “looking beyond the right here and now” as the past few years had led to a lot of reform fatigue.

“I think the biggest challenge facing advisers is having to think about a growth mindset. Over the last three to four years we’ve been in this war zone where advisers are getting smashed repeatedly by what’s been happening in our space,” he said.

“When you’re in that siege mentality, you don’t think about growth in your business.

Professional firms are like bananas, they are either only growing or ripening, not both.”

Rowe said the growth mindset was thinking about what the

business would look like in the next three to five years, what people were needed to achieve that, and what did the business need in terms of infrastructure, utilisation, and leverage models.

“Profitability within financial advice isn’t around products, rebates and subsidies, it’s now about how am I setting up a profit margin for a client, how am I have a leverage model with people and systems, and how am I utilising the resources that I’ve got to be profitable and sustainable in the future,” he said.

“Firms that are generating $300,000 to $400,000 in revenue

are going to struggle to be profitable in the new world of advice – they’re going to need to double that. So, it’s about having a growth mindset and the strong firms are the ones that can scale up and they’ll survive the next lot of changes.”

However, Rowe noted there were huge opportunities in the advice industry given the fact that there would be less advisers but a growing unmet need for advice.

“Those firms that can get through the next six to 12 months have huge opportunities. I’d love

advisers to look at the world a bit differently,” he said.

“Look beyond here and now and look at three to five years time which I know is hard because they’re getting smashed daily with all sorts of different things, but this is an exciting space to be in.”

On the efficiency side, Rowe said practices needed a tech stack and that there were a lot of fintechs in the industry that were “not more than a glorified spreadsheet”.

“If you break down your process – how your working papers work, your process at back end, even how much you can reduce the word count or text and advice document and generate efficiencies that’s the answer,” he said.

“It’s tech led but more importantly it’s led by your process review. But you can only do that when you have people in the biz that understand advice process and are willing to question and challenge how it’s always been done in the past.”

Pay rise for Magellan’s Douglass despite underperformance

BY LAURA DEW

MAGELLAN chair and lead portfolio manager, Hamish Douglass, has seen his remuneration increase to $2.73 million, despite underperformance of his Magellan Global fund.

In an announcement to the Australian Securities Exchange (ASX), Magellan said Douglass’ fixed remuneration had increased from $2.5 million to $2.73 million per annum from 1 July, 2021. It would also increase annually by 3% with the first increase to come into force on 1 July, 2022.

In 2016, his pay was moved from a salary of $1.2 million per annum to a salary of 1.5% of the average operating profit before income tax expense for the funds management segment plus short term incentive payments but then was changed back in 2018.

Since July 2018, Douglass had been receiving fixed pay of $2.5 million plus variable remuneration of up to 200% of his fixed remuneration based on the performance of the global equities strategy over a three-year period. The variable remuneration measures would remain unchanged from 2021 onwards.

However, his Magellan Global fund significantly underperformed in the past year

with returns of 5.8% over one year to 31 May, 2021, compared to returns of 24.2% by the global equity sector within the Australian Core Strategies universe, according to FE Analytics.

Douglass has acknowledged the fund missed out on the short-term rally caused by the vaccine trials last November but that the fund was a longterm offering and he was happy with the portfolio’s defensive allocations.

“Do I lose sleep over missing out on some of this short-term rally? No. We are never going

to bet on an oil strike or the equivalent, which is one way to see the vaccine results,” he said at the time.

Shares in Magellan Financial Group had also fallen 4% over the year to 1 July, 2021, compared to returns of 27% by the ASX 200.

However, shares had significantly outperformed over three years with the company seeing share price gains of 165% over three years to 1 July, 2021, compared to returns of 31% by the ASX 200.

Chart 1: Performance of Magellan Global versus sector over one year to 31 May 2021

Source: FE Analytics

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July 15, 2021 Money Management | 11

News

EOFY sees largest weekly adviser exodus at 549

BY OKSANA PATRON

THE last week of the financial year saw 549 advisers exit the industry, with losses dominated by accounting-based advisers as many believed paying additional fees outweighed the benefits of providing personal financial advice, according to Wealth Data.

The firm’s director, Colin Williams, said additional fees levied by the Australian Securities and Investments Commission (ASIC) was one of the key reasons accounting groups called ‘time on their foray into advice’ along with the need to pass the Financial Adviser Standards and Ethics Authority (FASEA) exam.

Williams also said that the data released on 30 June, 2021, was unlikely to have captured all the movement as licensees had up to 30 days to report changes in their adviser numbers.

“Given lockdowns and the need for licensees to work through the changes in what has been a busy week, we may see additional losses in next week’s reporting as licensees catch up,” Williams said.

Following that, AMP Financial Planning regained its top spot as the single-largest financial group in Australia, a status the group once lost at the start of the year to SMSF Adviser Network (SAN), owned by National Tax and Accountants Association (NTAA).

The week saw SAN lead the losses in adviser numbers recording a departure of 91 roles, and was followed by IOOF (-45), Easton Group (-32), AMP (-30) and Synchron (-27).

At the same time, IOOF managed to remain the largest license owner with 1,437 advisers ahead of AMP Group which stood at 1,367, and NTAA with 669 adviser roles.

Looking at the financial year as a

whole, the size of the industry dropped by almost 11% with a loss of 2,364 roles.

As far as peer groups were concerned, the investment advice group sector with advisory firms focusing on portfolio advice held up the best with a 2.2% drop in adviser roles, while the financial planning sector which includes firms with a focus on holistic advice was down by almost 10%.

At the same time, accountinglimited advice groups that mainly had a focus on limited self-managed super funds (SMSF) advice posted the highest fall in adviser roles at 23%.

The last week of the financial year also saw 24 licensees owners post growth with a total increase of 32 roles, 19 licensees closed which led to a total loss of 51 advisers, and two new licensees commenced out of IOOF-owned Lonsdale with a total of six advisers.

Westpac to remediate $87m to advice customers

BY CHRIS DASTOOR

WESTPAC will remediate customers of its financial advice business approximately $87 million for failure to notify them of corporate actions between 2005 to 2019.

Westpac’s advice businesses involved in the remediation include Securitor Financial Group Limited, Magnitude Group Pty Ltd and Westpac Banking Corporation (known as BT Financial Advice). These businesses ceased providing personal financial advice in 2019.

The compensation would be paid to affected customers who were former clients and held ASX-listed securities through platforms.

The remediation covered an estimated 328,000 potential missed corporate action notifications, which impacted approximately 32,000 customer accounts.

Westpac aimed to compensate most of the affected customers by the end of 2021.

Customers would also be informed of missed corporate action notifications where Westpac had determined that no compensation was payable.

Corporate actions covered a range of activities by publicly listed companies, which included buy backs, renounceable and non-renounceable rights issues, share purchase plans and takeovers.

The Australian Securities and Investments Commission (ASIC) said Westpac’s failure to notify customers of corporate actions meant customers could have missed out on various opportunities.

“These include purchasing additional shares often at

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a discount to the market price, the creation of temporary rights or options that can be sold for a profit, and the ability to sell shares and receive a benefit that can be tax advantageous depending on the shareholder’s circumstances,” ASIC said.

Danielle Press, ASIC commissioner, said: “Compensating customers affected by misconduct is a very important part of licensees’ obligations to act fairly, honestly and efficiently.

“We are pleased to see that Westpac has taken action to remediate affected customers regardless of how much time has passed.

“We encourage affected customers to engage with the communications from Westpac to understand how they were impacted and to seek further information from Westpac if required.

A spokesperson for Westpac told Money Management the bank apologised to any client of its former advice business who may be impacted by this issue and had a dedicated website with further information.

“Westpac reported this matter to ASIC in July 2019 and is remediating all impacted clients as appropriate.

The group disclosed that it had provisioned for the corporate actions matter in April 2020,” the spokesperson said.

ASIC encouraged all advice licensees and platform operators to consider their corporate action management arrangements and to ensure customers, who were entitled to receive notifications of corporate actions, were notified appropriately.

Sequoia moves into family office

BY JASSMYN GOH

SEQUOIA Financial Group has launched a family office to target local and migrant high net worth and ultrahigh net worth investors.

The Sequoia Family Office would service investors with investable funds of $5 million to $100 million and would include corporate advisory and compliance, business planning, and bespoke project management.

The business would expand its wealth management business and would be headed by Sophie Chen who had over 10 years of experience in providing services and advice.

In its announcement of the launch to the Australian Securities Exchange (ASX), Sequoia noted that it had acquired client books of Macro Investment Advisory and aimed to grow its funds under advice to $2 billion over the next five years.

The acquisition was expected to add over $200,000 to EBITA in the first 12 months of operation.

The purchase consideration of the acquisition was up to $600 million.

8/07/2021 3:55:37 PM

12 | Money Management July 15, 2021

InFocus

ADVISERS HURLED ‘UNJUSTIFIED ABUSE FOR POLITICAL GAIN’ It has been three years since the Royal Commission but, Chris Dastoor writes, financial advisers are still being held in poor light by politicians despite a low level of complaints against them.

THE BANKS HAVE left the industry, bad actors have been punished and numerous reforms have been brought in to lift standards, but at a time when adviser mental health is so low, politicians and media members have continued to paint advisers in a poor manner.

Last month, Labor opposed the bill to increase self-managed super fund (SMSF) members from four to six.

In doing so, Labor Senator Jenny McAllister, said: “That’s at the heart of our concerns about this bill, because the risk is that the people who will benefit most from these arrangements are financial advisers giving shonky advice – the kind of advice we’ve seen again and again and again, the kind of advice exposed in the Hayne Royal Commission.

“There are inadequate protections for consumers, and this bill further exposes people to these risks.”

However, data confirmed at the end of the financial year by the Australian Financial Complaints Authority (AFCA) showed adviserrelated complaints made up only around 1% of all complaints.

Labor’s attacks come despite an election around the corner and after a surprise loss in the 2019 election which saw its policies over franking credits and negative gearing put under the microscope.

Eugene Ardino, Lifespan chief executive, said the incident with Senator McAllister demonstrated some politicians still like to use the advice community as an avenue to hurl unjustified abuse for political gain.

“Then you wonder why advisers are leaving in droves,

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suffering from obscenely high rates of mental illness, as well as those who remain taking a conservative view of rules, raising fees to cover the costs of rocketing compliance requirements and being highly selective about the clients they choose to work with,” Ardino said.

Phil Anderson, Association of Financial Advisers (AFA) acting chief executive, said this had been going on for a long period of time, but it was difficult to push back on it during the Royal Commission.

“But that’s now three years ago and when you think about the hearings that went on in April 2018, it wasn’t representative of the entire adviser population,” Anderson said.

“There’s 10 individuals who were the focus of attention during those hearings – that’s not a basis to characterise an entire profession.”

Asked to reflect on those comments, Senator McAllister’s office said they felt it had been

taken out of context.

In a statement to Money Management Senator McAllister said: “Labor wants to ensure that all Australians have access to good financial advice. We’re on the side of financial advisers who want a better advice industry.

“The vast majority of financial advisers want to do the best for their clients. Labor wants to ensure those advisers can keep working on their clients’ behalf. We’ll advocate for reforms that do just that.”

Anderson welcomed that statement and said it was a fair recognition of how they wanted to work constructively with the adviser profession.

“This wasn’t the extreme example, it was just another example of what we’ve seen and it had become seemingly the way of dealing with things, particularly any legislative reform in the financial services space,” Anderson said.

“If someone disagreed with it, then the easy call-out was to say

this would benefit dodgy advisers, so it had become too easy in a political context to respond that way so that’s why we had to call it out.”

Dante De Gori, Financial Planning Association of Australia (FPA) chief executive, said financial planners had a statutory obligation in law to always work in the best interests of their clients and the entire profession should not be judged based on what a very small minority who had failed in their duty.

“It is time we recognise that any link to the misconduct of financial planners revealed during the financial services royal commission was not representative of the wider financial planning profession,” De Gori said.

The Coalition Government had been in power since Tony Abbott won the 2013 election and it owned all the reforms that had since been put in place.

Ardino said the Coalition Government would say they supported the accessibility of advice to average Australians but had not offered any substantive action or legislative change.

“I for one look forward hearing less about how the Government wants to make advice more accessible and seeing initiatives and changes that actually make it more accessible,” Ardino said.

“No doubt that the perceptions and understanding of the financial advice sector of both sides of politics need work and this is a great example of this.”

Despite the unpopularity of many of these reforms – like the Financial Adviser Standards and Ethics Authority, the code of ethics, and ongoing fee requirements – Labor had not presented an alternative.

8/07/2021 10:17:42 AM

SUPER

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2/07/2021 10:36:53 AM

14 | Money Management July 15, 2021

Rate the Raters

ZENITH BACK ON TOP After years of indecisiveness fund managers have voted for the stability of research teams while identifying potential conflicts of interest, Oksana Patron writes.

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Rate the Raters

THE FIRST PART of Money Management’s 2021 Rate the Raters survey, which aims to gauge fund managers’ sentiment towards the key research houses, has seen Zenith return to the top of the podium, after last year’s fund managers’ indecisiveness.

The 2020 survey delivered a mixed picture with managers being unable to decide an overall winner and opinions split between Zenith, SQM Research, and Lonsec.

This year, Melbourne-based research house Zenith won five out of seven categories as managers, who shared their opinion with Money Management, rewarded the firm with the highest ratings for its research methodology, personnel quality, feedback and the most accurate selection of the peer group and sectors they used for evaluation of funds and to provide a comparison base. On top of that, Zenith attracted the highest number of fund managers, of those participating in the study, who had their products rated by this research house in the past months.

At the same time, the fastgrowing North Sydney-based SQM Research was recognised across two categories as managers decided the firm had provided the highest level of transparency for its process and its ratings were the most satisfactory.

WHAT’S NEW? After the initial disruptions caused by COVID-19 last year, fund managers returned their focus this year to the longestablished issues that impaired

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their relationship with research houses. These included the raters’ coverage model, pricing and how the research houses approach and measure environmental, social, governance (ESG) attributes. One manager said that, while there was a high expectation of managers to have detailed policies in place with regards to the ESG, not all research houses applied the same approach within their own organisations.

The survey’s results also revealed managers’ issues with increased costs, from both platforms and research houses, and stressed the importance of an analytical approach, better presentation outcomes, regular reporting and depth of analysis from research houses.

At the same time, fund managers pointed to the potential conflicts of interest which arose in the case of some raters who were, in their eyes, gradually transitioning from research to asset management.

Following this, managers said they were expecting a wider coverage of managed accounts but, they warned, some researchers were already too focused on their funds management and separately managed accounts (SMA) capabilities and, due to the potential conflicts of interest, did not offer SMA multi-asset ratings.

Zenith was once again recognised by managers for the stability of its research team and low staff turnover, followed by high quality of its research, while Lonsec struggled the most with

the ongoing high turnover of senior analysts.

USAGE This year the results once again confirmed that Zenith and Lonsec were the most-frequently chosen research houses among fund managers, of those who have had their products rated by more than one rater. According to the data, Zenith came on top, as close to 95% of respondents confirmed their products had been rated by this research house, and was traditionally followed by Lonsec which saw a similar figure (91%) of those fund managers participating in the study who said they had received ratings from this research house.

Both SQM Research and the historically third most-frequently used research house Morningstar, which came third in 2020 and 2019, were almost on par this year as close to 70% respondents (68.5% and 68.6%, respectively) had their products rated by these two research houses.

At the same time, less than half of managers who chose to share their opinions with Money Management had seen ratings assigned to their products by Mercer.

METHODOLOGY As far as the research methodology was concerned, fund managers said that, although all research houses had ‘style biases’ and their processes were very different, they all added value.

However, while researchers continued to rate managers’

Continued on page 16

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16 | Money Management July 15, 2021

Rate the Raters

Continued from page 15 ability to enhance their process, managers revealed that some research houses were slow themselves in this department and were significantly lagging behind with their own processes.

Also, some raters exhibited a “demonstratable preference towards active managers within their research methodology and product coverage”, others lacked engagement with managers which led to outdated ratings, or did not fully understand the funds they were rating.

Additionally, their quantitative assessment often had a larger impact on their overall research methodology than the research houses stated, the survey revealed.

At the same time, some research houses were praised for their professional and thorough methodology, with a right amount of focus on risk for return, instead on over-concentrating on social obligations, as well as for drilling down deep into funds’ strategies and good rigour around their reviews.

Zenith managed to retain its top spot from last year and attracted the highest proportion of either ‘excellent’ or ‘good’

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ratings in this category from 90% of fund managers who rated its research methodology. SQM Research came second after having attracted an above average ratings for its methodology from 81.8% of respondents. The Sydney-based research house was closely followed by Mercer which saw its research methodology rated as either ‘excellent’ or ‘good’ by around 80% of respondents.

Similarly, the research methodologies of Lonsec and Morningstar were rated as above average by 77% and 52% of the study’s participants, respectively.

RATING SATISFACTION SQM Research once again confirmed its strength across this category, with the highest proportion (37.5%) of fund managers respondents who described their level of satisfaction from ratings the company granted to their products as ‘excellent’.

The firm earned the trust from managers thanks to its attitude, fairness and ability of managers to understand the process and how the research house went about deciding the rating. Some managers also appreciated the company’s “excellent

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July 15, 2021 Money Management | 17

Rate the Raters

understanding of property sector” and its specialist knowledge across the mortgage sector.

Following this, Zenith also retained its second position across this category, however with a lower proportion of managers (33%) who rated the firm’s rating quality as ‘excellent ’compared to last year (39%).

Lonsec, which was demoted to third spot last year, maintained this position with 31% of fund managers participating in the survey having described their level of satisfaction with Lonsec’s rating as ‘excellent’.

Mercer, on the other hand, saw the highest proportion of managers who rated its ratings’ capabilities as ‘average’ and only 17% of respondents described the company’s ratings as ‘excellent’.

Following this, Morningstar ended up this year with 76% of managers commenting on its ratings as ‘average’ and only 10.5% said that their level of satisfaction from the rating was ‘above average’.

TRANSPARENCY The managers decided that SQM Research offered the best transparency as the research

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house managed to attract the highest proportion of combined ‘excellent’ and ‘good’ ratings (82.9%) in this category, positioning itself well ahead of other groups.

At the same time, fund managers pointed out that transparency levels varied across the board. According to them, research houses should be more consistent with their messaging regarding their strategies and more precise around what would be included in the sector review.

The survey also found that research houses rarely offered feedback in terms of which aspects managers should improve in order to have their rating changed.

SQM Research was followed

by Zenith, which gathered a combined rating of either ‘excellent’ or ‘good’ from 76.4% of respondents, and Lonsec which saw its transparency rated as above average by around 65% of respondents.

Following this, Mercer came ahead of Morningstar, as 56% of fund managers participating in the study assigned an either ‘excellent’ or ‘good’ rating for its transparency while Morningstar

earned above average ratings from around 54% of respondents.

PERSONNEL Commenting on personnel quality and level of experience, fund managers once again named high staff turnover at some research houses as one of the key issues which impacted the quality of the reports and reviews. A number of managers identified Lonsec as one of the research houses struggling the most with high turnover of senior staff and said it saw “too many changes in the research team”.

Zenith, on the other hand, was appreciated for its low staff turnover and a stable team and “best overall combination of diligence and qualitative analysis”.

Also, according to managers, Zenith’s personnel represented the most satisfying level of competence and attracted the highest ratings in the study, as 81% rewarded it with ‘above average’ ratings in this category.

The second-best research house for highest staff quality was SQM Research, which gained positive feedback from 73% of respondents who said its staff were ‘above average’ levels.

Continued on page 18

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18 | Money Management July 15, 2021

Rate the Raters

Continued from page 17 Additionally, managers praised SQM’s research team for a high level of experience in portfolio management, quick turnaround and detailed reports.

Lonsec, which came third in this category, was recognised by less than half of all respondents (48%) who assigned it an ‘above average’ rating in this category.

FEEDBACK In terms of general feedback, managers pointed out that it was crucial for research houses to demonstrate high levels of engagement and be “direct and to the point”.

Zenith, which managed to earn the highest proportion of positive ratings in this category with the quality of its feedback being rated by 57% of respondents as ‘above average’, was described as “relatively good at it” by one manager. Other managers said Zenith’s high level of insight translated to the comparable level of feedback, making this research house’s feedback “the clearest”.

Across the same category, SQM Research received similar feedback from only a slightly lower number of fund managers, of those who rated its feedback,

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as 51% of respondents described the quality of its feedback as ‘above average’.

At the same time, Lonsec’s feedback was described as better than average by less than 40% of respondents, although some managers reflected on the fact that the firm has been working on improving its feedback.

PEER GROUP Lastly, when it came to the accuracy of the peer group and sector used by individual research houses to evaluate the performance of the funds, Zenith emerged as the strongest player.

Some 92% of respondents confirmed that the firm’s peer

group selection provided an accurate representation for their funds.

SQM Research arrived second with 85% of fund managers, according to data, being satisfied with its selection of the peer group. Lonsec, however, came in third place this year as only 78% of the managers participating in the study agreed the research house had done a good job and selected the most accurate representation of the peer group.

Further to that, Mercer’s selection of the peer group satisfied close to 67% of respondents while Morningstar’s selection was rated as sufficient by only 60% of those managers.

8/07/2021 2:18:40 PM

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20 | Money Management July 15, 2021

Legal

CHANGES TO RSE LICENSEES There have been numerous changes to the financial services obligations of superannuation funds, writes David Court, so trustees must know what is expected of them.

A NUMBER OF changes to the financial services laws have taken effect in 2021 which are of particular application to trustees of superannuation funds which are not self-managed superannuation funds (SMSFs).

For some trustees, this will mean coming under the financial services licensing laws for the first time.

This article looks at the various changes and considers their impact for trustees and their responsible managers.

WHAT IS A SUPERANNUATION TRUSTEE SERVICE? A “superannuation trustee service” has now been added to the list of financial services under Chapter 7 of the Corporations Act. A person provides a superannuation trustee service if the person “operates a registrable superannuation entity as trustee of the entity”.

While most other financial services are defined in terms of the attributes of the service that is being provided, a superannuation trustee service is defined purely in terms of the role of the provider.

Under the Superannuation Industry Supervision (SIS) Act, a person that operates a registrable superannuation entity as trustee of the entity is required to hold a Registrable Superannuation Entity (RSE) licence from the Australian Prudential Regulation Authority (APRA). In effect, if you hold an RSE licence then you are providing a superannuation trustee service and also require an Australian financial services licence (AFSL) from the Australian Securities and Investments Commission (ASIC).

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Trustees of SMSFs are not regulated by APRA and have always been exempted from holding an AFSL for any financial service provided in their capacity as trustee of an SMSF. These exemptions are not changing and what follows in this article does not apply to trustees of SMSFs.

WHAT IS AN RSE LICENCE? DO I NEED TO BE LICENSED? An RSE licence is not the same as an AFSL. An RSE licence allows an APRA-regulated trustee to operate a superannuation fund and is focused on prudential regulation. An AFSL allows a person to carry on the business of providing financial services by, for example, issuing interests in superannuation funds and is focussed on consumer protection. Trustees of superannuation funds that are not SMSFs are regulated by both APRA and ASIC. Prior to 2021, such trustees were required to hold an RSE licence from APRA and, in some cases, an AFSL from ASIC. All superannuation fund trustees that are RSE licensees are now required to hold an AFSL with an authorisation to provide a superannuation trustee service. An AFSL could also include other authorisations, such as providing financial product advice or dealing in relation to other financial products.

By creating this new category of financial service, the Government has broadened the scope of conduct covered by ASIC’s existing consumer protection powers.

This new type of financial service will capture all the activities in operating an RSE and ensure that conduct obligations in the Corporations Act – including the

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July 15, 2021 Money Management | 21

Legal

need to act efficiently, honestly and fairly – apply to the activities of RSE licensees. This means that ASIC will have a greater ability to regulate the conduct of superannuation fund trustees.

ASIC will also be given greater powers to take enforcement action under the SIS Act against unlawful and harmful conduct by superannuation trustees. This includes greater scope for taking action against trustees who may be in breach of the covenants in section 52 of the SIS Act.

LICENSING OF CLAIMS HANDLING AND SETTLING Another new financial service of providing a ‘claims handling and settling service’ has also been introduced and will be of direct relevance to superannuation fund trustees.

A core aspect of providing a superannuation trustee service is assisting members (and their beneficiaries) with death and disability insurance claims. This assistance to members and their beneficiaries may include the following types of claims handling and settling services: • Advising on how to make a claim, and the prospects of a potential claim; • Reviewing a member’s details to establish their eligibility to make a claim; • Lodging the claim with the insurer; • Communicating information from the member or beneficiary to the insurer, and vice versa throughout the claims process; • Reviewing the insurer’s decision and pursuing claims which have a reasonable prospect of success; and • Paying the benefits of successful claims in line with the fund’s rules.

Despite this being a new and distinct financial service, RSE licensees do not need to have an authorisation to provide claims handling and settling services on their AFSL. This is because the authorisation to provide a

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‘superannuation trustee service’ covers all conduct associated with operating a superannuation fund and, therefore, includes handling of death and disability claims.

That said, the obligations of other AFSLs with a separate claims handling and settling services authorisation will be relevant to understanding an RSE licensee’s obligations when assisting members and other beneficiaries with insurance claims and the type of experience that the responsible managers of the RSE licensee will need to show.

THE TRANSITION TO AFS LICENSING Since 1 July, 2021, all RSE licensees have been required to also hold an AFSL with authorisations to deal in superannuation and to provide a superannuation trustee service.

Public offer superannuation trustees that are existing AFSL holders with an authorisation to deal in superannuation were deemed to be authorised to provide a superannuation trustee service from 1 January, 2021, and do not need to make an application to ASIC for a licence variation.

However, non-public offer fund trustees are no longer exempt from holding an AFSL and will need to apply to ASIC for an AFSL to deal in superannuation and provide a superannuation trustee service.

Public offer superannuation trustees have also historically been the subject of ASIC relief from the need to hold an authorisation under their AFSL in order to deal in a financial product (other than an interest in the fund itself) in the ordinary course of operating the fund. That relief has now been extended by ASIC to apply to all RSE licensees until 31 December, 2022.

ASIC will be consulting with industry to determine whether the relief will continue to apply to all RSE licensees after that time.

WHAT DOES THIS MEAN FOR RESPONSIBLE MANAGERS? An AFS licensee must maintain the competence to provide the financial

services covered by the AFSL. ASIC assesses compliance with this obligation by looking at the knowledge and skills of the people who manage the financial services business – the ‘responsible managers’.

When applying for an AFSL a person must nominate responsible managers who: • Are directly responsible for significant day-to-day decisions about the ongoing provision of financial services; and • Together, have appropriate knowledge and skills for all of the financial services and products provided.

For public offer trustees, this initial requirement is not an issue as they will automatically receive their superannuation trustee service authorisation without having to apply.

However other trustees will need to show ASIC that they have managers with the appropriate knowledge and skills to provide superannuation trustee services.

In assessing applications for AFSLs for non-public offer trustees, ASIC has stated that they will take into account experience gained under the trustee’s existing RSE licence.

The initial appointment of responsible managers for RSE licensees is, therefore, unlikely to be a problem.

However, there is also an ongoing obligation for AFS licensees to: • Maintain adequate numbers of responsible managers; and • Maintain the competency of those responsible managers In this regard, ASIC expects AFS licensees to have measures in place to ensure that: • Organisational competence is reviewed on a regular basis and whenever responsible managers or business activities change; • The knowledge and skills of the responsible managers are maintained and updated; and • Records are kept showing compliance with those measures.

These ongoing requirements will apply to all RSE licensees and compliance systems will need to be updated to ensure that they cover them. They will need to include a training program to ensure that responsible managers maintain their knowledge and skills in relation to the provision of all aspects of a superannuation trustee service – including claims handling and settling services.

BREACH REPORTING CHANGES Under the SIS Act, trustees must report significant breaches of their RSE licence conditions to APRA, no later than 10 business days after becoming aware of a significant breach.

From 1 October, 2021, this timeframe will increase to 30 calendar days, in order to be consistent with the amended breach reporting timeframes in the Corporations Act that will come into effect from the same date.

The APRA Dual Reporting Framework will continue to apply, so trustees will be able to continue to report breaches to both regulators by submitting one report to APRA.

NEXT STEPS If you hold an RSE licence but do not yet hold an AFSL, then you will need to apply to ASIC for one.

All RSE licensees will also need to make sure that they have (and continue to have) sufficient responsible managers in place to maintain their competency to provide the authorised financial services under their AFSL. It will also be necessary to ensure that those responsible managers maintain their competency to manage the provision of those financial services.

RSE licensees should also update their breach reporting compliance procedures before 1 October, 2021, to reflect the changed reporting timeframe.

David Court is a partner at Holley Nethercote Lawyers.

8/07/2021 10:40:47 AM

22 | Money Management July 15, 2021

Property

SEEKING DRIVERS OF REAL ESTATE INVESTMENT Understanding different real estate sectors is critical at a time when real estate has been impacted by global structural changes, writes Dania Zinurova.

THERE ARE COMPELLING avenues to invest across various real estate sectors, including office, industrial and logistics, retail, student housing, healthcare, social and affordable housing, and disability accommodation. There are often emerging categories to monitor as well, such as multi-family housing. Investment opportunities in real estate are closely correlated to societal and economic trends, so marrying knowledge of real estate’s performance drivers with the macro environment and structural shifts is crucial.

For example, the shift in demand from bricks and mortar

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stores to online shopping experienced a surge during 2020, rapidly accelerating a trend that is already underway. This had negative impacts on retail, with foot traffic plummeting, but saw demand of industrial and logistics spike as retailers suddenly required significantly more warehouse space and distribution facilities. This trend also means that the more traditional retail sector is going through repositioning of some assets in terms of its offering. We now see more major shopping centres including a variety of tenants outside fashion retail such as medical centres, day care centres, and gyms in an attempt to attract

more customers and keep their footfall increasing.

FIVE FACTORS TO TAKE INTO ACCOUNT 1) The macroeconomic environment The state of the economy is an important barometer for real estate, as it impacts the spending and investing power of corporations and individuals.

Factors to take into consideration include unemployment levels, gross domestic product (GDP) growth, inflation, interest rate, infrastructure spend, income percentage change, consumer confidence and trade dynamics.

By assessing these factors, we can build a forecast model which helps predict with a reasonable level of probability how important elements of a real estate investment, like rental growth, might be impacted.

2) The state of the market Real estate, like any other asset class, has its own cycle. Identifying where the cycle is at is important for performance, generating returns and determining sustainability. We take into account yield/capitalisation rates, current rents, levels of incentives, vacancy rates, catchment area and quality of tenants.

For example, the office sector

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July 15, 2021 Money Management | 23

Property

Chart 1: Annualised income return for the period ending June 2020

in Australia was experiencing strong performance prior to the pandemic, but workforces moving to a work from home environment during and post-lockdown has been a significant challenge for the sector.

Now, we see that the assets are still expensive, but their return potential has decreased – rents are falling, the provision of incentives (such as rent-free periods or discounted rent) has increased and demand has weakened. When the cycle shifts, and prices start dropping to below their historic levels, there may be a compelling investment opportunity.

3) Societal trends Real estate is designed for social use, so of course, it is highly impacted and influenced by social trends. Large-scale trends, like demographic shifts, give indications of where demand will intensify and equally, where it will weaken.

One of the examples includes flexible office space – this was considered an emerging trend just three years ago and is now a well-recognised concept (think about companies such as WeWork, Regus, WOTSO Workspace and others). Last year, there was a surge in companies offering flexible office space to tenants like tech companies, start-ups and venture capital. We constantly monitor those trends and look at the fundamentals – the key is to find a trend which has long-term tailwinds given the illiquid nature of this asset class.

4) Investment characteristics There are a number of attractive investment characteristics for real estate, particularly diversification benefits. Traditionally, real estate has low correlation to equity markets and bond markets, meaning they do not typically move in the same cycles.

However, real estate can be positively correlated to inflation, meaning it has the potential to act as an inflation hedge. Rents are

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Source: MSCI, RIA

often linked to the consumer price index (CPI) especially in sectors like healthcare, creating the potential for positive returns during periods of rising inflation.

5) Implementation Implementation routes vary depending on the size of the investment, risk appetite and the level of governance. Real estate investments can be implemented via: investing in pooled funds, with minimum ticket sizes usually between $5 million and $20 million; investing in direct deals and co-investing, which requires a significant amount of capital; and setting up separate mandates, which requires strong governance and scale.

As such, retail investors often find it challenging to get access to investments due to large minimum ticket size requirements and complexity. Investors can gain access to real estate exposure through listed investment companies and real estate securities, and should be wary of factors like concentration risk – that is, exposure to one or few assets – when making a selection.

ANALYSIS IN ACTION Our assessment of real estate in the healthcare sector is an

“Retail investors often find it challenging to get access to investments due to large minimum ticket size requirements and complexity.”

– Dania Zinurova example of where understanding the various dynamics at play can spotlight an opportunity.

The healthcare sector has attractive characteristics – for one, it is less correlated to economic growth, GDP and unemployment levels compared to sectors like office, industrial and retail. This translates into growing rents (albeit at a gradual pace) with either fixed annual increases or CPI linked, high occupancy rates and long lease contracts of more than 10 years.

Leases are often structured as triple net leases where tax, insurance and maintenance cost is all covered by a tenant.

There are other social trends which indicate a long-term opportunity in the healthcare sector. Populations in developed countries worldwide, including Australia, face longevity risk in their ageing populations. This

contributes to a strong demand for healthcare related assets, while the current supply is limited.

From the valuation perspective, this sector appears attractive, and there is a good potential for further capital appreciation. The key for investors in this sector is to have the right network of contacts in order to source deals, given the restricted supply, and then the skill to manage those assets and the relationships with tenants.

Understanding what drives performance and valuation in real estate is critical to securing a compelling investment, especially at a point in history where social, structural and economic change is fuelling a unique opportunity set.

Dania Zinurova is portfolio manager at Wilson Asset Management.

8/07/2021 2:38:34 PM

24 | Money Management July 15, 2021

Education

AN EDUCATOR’S PERSPECTIVE ON FASEA With just a few months to go until the FASEA deadline, writes Brian Knight, even those who are considering leaving the industry would be advised to have an attempt.

THE MOST PRESSING issue facing the industry in the immediate future is the looming deadline of the financial adviser examination set by the Financial Adviser Standards and Ethics Authority (FASEA). The Federal Government recently announced they would grant an extension until September 2022 for advisers who had failed the FASEA exam twice.

We welcome any initiative that will provide assistance and support to advisers, especially those who genuinely wish to stay in the industry, and we remain committed to supporting all advisers to pass the FASEA exam.

However, it is fundamentally important to remember that if advisers haven’t sat the FASEA exam for the first time by the July sitting, then they cannot qualify for the extension due to the threemonth lock-out rule. This means they would then need to pass in one of the last two sittings of 2021 (September or November) without the option of a back-up re-sit. We know there are approximately 1,200 advisers who have sat the FASEA exam once and will need to sit again to qualify for the extension. There’s also some uncertainty around when the bill will be passed in parliament.

This means advisers should try and pass the FASEA exam in one of the remaining sittings this year and not soley rely on the extension.

With a number of advisers who still need to pass the FASEA exam, it’s more important than ever these advisers are encouraged to focus on their exam preparation as a matter of priority. We understand there are a number of advisers who are apprehensive about sitting a lengthy

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exam or have failed and may now be struggling with some self-doubt.

We also understand there are advisers who are adamant they don’t want to sit the FASEA exam because they’re going to exit the industry before the end of the year but we believe there’s one major incentive to have an attempt at passing the FASEA exam. This will extend an adviser’s timeframe until at least 1 January, 2026, meaning they will have more time to carefully consider what they want to do going forward, whether that’s completing ongoing study or thinking through succession strategies. It is vital advisers are in the best position they can be to make considered decisions about their future plans.

WHAT HAPPENS AFTER 31 DECEMBER 2021?

We feel there’s still a lot of uncertainty around what it means for existing financial advisers who have not passed the FASEA exam by 31 December, 2021, and don’t qualify for the September 2022 exemption. Once we reach this date, it may be difficult to ascertain which advisers are ceased on the Financial Adviser Register (FAR) because they’re on a ‘career break’ and which are ceased because they didn’t pass the FASEA exam.

This is because when an adviser is ‘ceased’ on the FAR, there’s no explanation for this status. We anticipate this may impact a number of education pathways and the licensee will ultimately be responsible for managing this process. The scenarios include: 1) If an adviser is on a genuine career break, they would complete the standard education

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July 15, 2021 Money Management | 25

Education Strap

requirements and be eligible for FASEA-approved recognition of prior learning (RPL) and complete the exam before re-authorisation; and 2) If an adviser is ceased because they have not met the exam requirement, they must restart as a new entrant. This means they must complete the professional year and hold an approved degree, while not being eligible for FASEAapproved RPL. Another perception is if an adviser does not pass the FASEA exam before the deadline, they may have the opportunity to stay in the industry as a business owner.

We feel anyone considering this should err on the side of caution.

Although it may seem reasonable in theory that a business owner would be responsible for the advice provided by employees, they would not be responsible for advice under the FASEA requirements. A business owner providing guidance to a junior adviser where neither parties have fully met the FASEA requirements would be an area of concern.

IS 1 JANUARY 2026 A FALSE SENSE OF SECURITY? While 1 January, 2026, may seem like quite a while away, what must be remembered is many advisers have to complete a graduate diploma, which encompasses eight subjects at the postgraduate level.

Many others have five or six subjects to do. Our statistics indicate advisers working full-time take approximately three years to complete a graduate diploma with a moderate study workload.

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It’s in advisers’ best interests to make this workload as manageable as they can. The earlier they get started, the more flexibility they have to balance their study with other business and life priorities. It also provides them more control over their pathway – they can adapt their study to suit their schedule and spread it out over a longer period. Work and family pressures are factors that will always need to be considered.

What happens if something arises and an adviser doesn’t have the capacity to study for a significant amount of time? Advisers shouldn’t want the weight of the education requirements hanging over them until 2025, which can feel like a false sense of security.

Those advisers with eight subjects only have to complete two subjects per year at a moderate pace and finish with a year to spare, if they start their studies this year.

Advisers who meet the education standard sooner than this will be better positioned to capitalise on the predicted economic upswing in a post-COVID environment, while being able to make the most of opportunities afforded by increased demand for financial advice.

ATTRACTING THE BEST NEW TALENT One obvious area of concern is the 10:1 ratio for advisers leaving the industry in comparison to those entering. Every obstacle can be overcome so we believe the government, licensees, industry associations and education providers should embrace the following themes together: • Better curriculum and different

BRIAN KNIGHT

education programs for new entrants, which are strictly focused on financial planning; • Recruit and train differently to provide new entrants with a more insightful and rewarding experience; • Think about the changing perceptions of a typical adviser and the demands of future consumers; and • Think about how financial advice can be positioned as an attractive proposition to school leavers and career changers and the competitive advantage it has over other industries.

We are working together with licensees and industry associations on an education model we believe will result in more equipped, experienced and qualified graduates to better meet the needs of both licensees and the Australian consumer. We look forward to releasing more information in the coming months.

THE IMPORTANCE OF CONTINUING EDUCATION Perhaps overlooked in comparison to other standards, continuing education will remain a key and ongoing component of the FASEA requirements. Once every adviser has passed the FASEA exam and met the education standard, continuing education will be seen as a differentiator because it will be a way for advisers to continually enhance their knowledge and skills in emerging and specialist areas throughout their career. This is why it is important that continuing

“It is vital advisers are in the best position they can be to make considered decisions about their future plans.”

– Brian Knight education is recognised as a much broader concept than just a ‘compliance tick’, so a commitment to lifelong learning must be encouraged throughout the industry.

It’s important to remember that an adviser’s professional development plan must identify areas for improvement in, and development and extension of their competence, knowledge and skills. As licensees are responsible for approving their advisers’ professional development plans, it’s imperative there’s a clear understanding of what counts as a ‘qualifying continuing professional development (CPD) activity’. With so much CPD offered across the market, often industry association approval doesn’t necessarily equal FASEA approval. Licensees and advisers must also be wary the CPD they’re completing isn’t just professional and technical reading because of the maximum fourhour cap that applies to that component of FASEA’s 40-hour requirement.

We look forward to continuing to collaboratively work with all industry stakeholders to ensure we’re able to find innovative and future-focused solutions that champion a positive and long-term future for trusted financial advice.

Brian Knight is chief executive of Kaplan Professional.

8/07/2021 10:42:04 AM

26 | Money Management July 15, 2021

Toolbox

USING PROPERTY IN AN SMSF

Property development might be an attractive option for self-managed super funds but it can lead to a compliance minefield if done incorrectly, Andrew Yee writes.

REAL PROPERTY INVESTMENTS continue to be a popular investment for self-managed superannuation funds (SMSFs).

The latest Australian Taxation Office (ATO) SMSF statistics (as of 30 June, 2019) found non-residential real property investments accounted for 9% of all SMSF investments by value, making it one of the top five asset classes held by SMSFs. Residential real property accounted for 4.8% of all assets by value.

Many SMSFs invest in business

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real property that are leased to businesses operated by the trustee/member. Quite often the SMSF acquires the property from the trustee/member under the exemption to prohibition of the acquisition of related party assets, afforded under Section 66 of the Superannuation Industry Supervision (SIS) Act. However, some difficulties arise when SMSFs decide they want to develop or improve their property investment, as property development can be an

uncomfortable fit with the strict compliance framework of an SMSF. Early last year, the ATO said it had noticed an increase in the number of SMSFs entering into arrangements to acquire property and develop it via a variety of different structures. It said that, while it recognised such investments could be made legitimately in an SMSF, it was concerned that in some cases “SMSF assets [were] used to fund property development ventures in a manner that is inappropriate for,

and sometimes detrimental to, retirement purpose”.

Property development, depending on the scale and nature of the development, can be viewed as running a business. While none of the relevant authorities specifically prohibit an SMSF from doing this, there are rules to follow, including whether the business activity breaches the SIS Act or causes an unfavourable tax treatment under the tax acts. The business must also be allowed under the trust deed of an SMSF

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July 15, 2021 Money Management | 27

Toolbox

and operated for the sole purpose of providing retirement benefits for fund members.

There are a number of different sections of the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994 (SIS), as well as the non-arm’s length income provisions of the Income Tax Assessment Act 1997 (Tax Act) and Part IVA of the Tax Act 1936, that SMSFs need to be cognisant of if they are considering property development.

SIS REQUIREMENTS The activities required to undertake the property development need to comply with the following SIS requirements.

1) The sole purpose test All superannuation funds, including SMSFs, must be maintained for the sole purpose of providing retirement benefits.

There may be questions from the ATO if: • The business being undertaken by the fund is usually considered a hobby; • The business has links to other associated trading entities; • A family member is employed by the business; and • The fund’s business assets are available for private use.

2) Financial assistance SMSF trustees are also unable to provide financial assistance to members or their relatives, including: • Selling an SMSF asset to them

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for less than market value; • Purchasing an asset from them above market value; and • Paying for additional services above those reaslistically required by the SMSF and/or paying above market rates for those services.

3) Related parties There are a number of sections of the SIS Act that refer to related parties, which any SMSF interested in property development needs to be familiar with as well.

We already mentioned Section 66 of the SIS Act, under which an SMSF trustee cannot acquire an asset from a related party unless it is an exempt asset such as “business real property”.

A member might consider developing their business real property after selling it to the SMSF but residential property would not be exempt unless the owner of the property is carrying on a rental property business.

It is not just the property itself which may get caught up in Section 66. According to SMSF Ruling 2010/1, if a related party builder supplies materials to the SMSF, that could be in breach of Section 66.

Instead, the SMSF would need to acquire the materials directly and the related builder would need to only provide the construction services – at a market value fee – using the SMSF’s materials. This could be expensive and impractical as often the builder is the best person to cost-effectively source materials and supplies.

With regard to related party investments, SMSFs cannot invest in a related party or related trust.

In addition, it cannot lend more than 5% of the total value of their SMSF to a related party. This applies if loans are made to related party developers or builders, or if investing in trusts and companies that will develop property.

4) Borrowings, mortgages and loans Funding can be an issue if an SMSF is to undertake a development or conduct a property development business.

Under the SIS Act, SMSFs are not allowed to borrow funds, other than some very limited exceptions.

Therefore, all development costs must be paid for upfront by the fund and cannot reimburse, say, a related party builder who has paid these costs on behalf of the fund.

The limited exemptions are contained under section 67A of the SIS Act, which provides for assets acquired under limited recourse borrowing arrangements (LRBA).

However, it is not possible to undertake a property development in a LRBA, even if there is enough liquidity in the SMSF to fund the development of the property itself.

In effect, this means that if the SMSF has purchased the property under an LRBA, it is must repay the loan in full, and transfer the property back to the SMSF from the LRBA holding trust, before undertaking any development activity.

SMSFs are also unable to provide loans under regulation

13.14 of the SIS Act, which states that SMSF trustees must not give a charge over, or in relation to, an asset of the fund. This includes “a mortgage, lien or other encumbrance”.

This is relevant where a property developer may require a mortgage over the land, or a guarantee from the landowner, in support of the developer’s loan from a bank to finance the development.

Also, development agreements may contain contractual terms which have liens or encumbrances over the land and prevents the SMSF trustee from dealing with the land.

5) Arm’s length dealings Section 109 of the SIS Act details how SMSF trustees must deal with related parties on an arm’s length basis. This is also designed to prevent benefits being taken out of a superannuation fund prior to retirement.

Consequently, the terms of any deals with related parties must be no more favourable than they would be if the two parties were unrelated. These transactions need to be documented with proof of payment at market rates, preferably by a third party.

POTENTIAL STRUCTURES We have examined the difficulties involved in property development for SMSFs and the rules and regulations to be aware of, let’s now look at some structures under which it may be possible for an SMSF to conduct, and Continued on page 28

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28 | Money Management July 15, 2021

Toolbox

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

1. Can an SMSF undertake a property development in a limited recourse borrowing arrangement? a) Yes, if the SMSF has sufficient cash to fund the development of the property without further borrowing b) No, it has to repay the property in full and transfer it back to the SMSF from the LRBA holding trust before it can develop it c) Yes, if it adds the funds needed to develop it to the LRBA d) No, the ATO is totally against SMSFs investing in property Continued from page 27 therefore invest in, property development.

While there are a number of structures through which it is possible to invest directly in property development, here are two that may be the most appropriate for an SMSF: 1) On its own The most basic approach is for the SMSF to invest directly in property development, assuming the fund complies with the SIS Act sections outlined above.

The benefits of this method include: • No need for other entities, which means less administration and lower costs; • The SMSF’s cash can be used for development; • Existing SMSF assets can be developed; and • Income and capital are taxed at concessional rates.

However, there are some shortcomings with this method which include: • SIS Act requirements can make development difficult; • There is no asset protection; • SMSFs cannot borrow to improve existing assets; and • Complications exist when using related party builders/developers.

2) Unrelated unit trust An unrelated unit trust may be a good option for property development by an SMSF. Unrelated means that the SMSF and its entities hold less than 50% of the shares in the unit trust, they do not control the decisions of the trust, and they do not have the power to change the trustee.

A key advantage is that trusts are not restricted by the same regulations as SMSFs. Unrelated trusts can: • Borrow; • Acquire multiple assets; • Carry out the development and improve/change the nature of any asset without restriction; and • Have their assets used as security for borrowing.

In addition, once a property is developed the asset can be held long-term or sold, and units in the trust will not be considered in-house assets.

It’s important for SMSFs, and anyone advising them, to realise that property development can become a compliance minefield within an SMSF, so they need to be across all the regulatory issues if they want to avoid an unexpected phone call from the ATO. Andrew Yee is director of superannuation at HLB Mann Judd Sydney.

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development of any kind 2. What are the advantages of property development through an unrelated unit trust? a) The trust can acquire and develop multiple assets b) The trust can borrow c) Its assets can be used as security for borrowing d) All of the above 3. What percentage of all SMSF assets does non-residential real property account for, according to the latest ATO SMSF statistics? a) 6% b) 7% c) 8% d) 9% 4. How much of an SMSF can its trustees lend to a related party? a) 15% of the total value of their SMSF b) 25% of the total value of their SMSF c) 5% of the total value of their SMSF d) Nothing 5. Could a builder that was related to one of the trustees in an SMSF provide services and materials to develop a property in an SMSF? a) Yes, if both the services and materials were at market value b) Yes, they could provide both at any price c) No, due to related party restrictions of the SIS Act they are not able to provide either

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/using-property-smsf

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

7/07/2021 3:41:14 PM

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30 | Money Management July 15, 2021

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Appointments

Move of the WEEK Kelly Power Chief executive CFS Superannuation

Colonial First State’s (CFS’) general manager, product, Kelly Power has been appointed as chief executive for CFS Superannuation.

In an announcement, CFS appointed a number of senior leadership roles to help strengthen capabilities and capacity as the business continued to prepare for sale completion and accelerated the

Software supported advice platform Lumiant has appointed ex-Midwinter chief executive Jeff Hall as a director, while Shadforth founding director David Haintz will join as an ambassador.

Hall would join the board as a director, where he would be responsible for guiding Lumiant’s commercial and operational direction.

Before his time at Midwinter, he had been a director at EY Consulting within wealth and asset management, a division director at Macquarie Bank for Coin Software, and a technology consultant with Accenture.

Haintz was appointed to the newly-created role of ambassador, where he would be responsible for helping to grow the brand in Australia and abroad.

He had previously been a director of the Financial Planning Association of Australia (FPA).

Former Ignition Advice chief executive, Manish Prasad, has taken a new role as head of asset management-Asia Pacific at Saxo Markets.

Based in Sydney, he would work with teams in Singapore and Hong Kong to bring the asset management offering to the region.

While Saxo already had a

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transformation of the business.

Power would retain responsibility for product and strategy, and it was intended she joined the board of the trustee, her role would also expand to include responsibility for CFS investments.

CFS also appointed Andrew Morgan as chief financial officer and would

presence as an online trading and investment specialist, this would be the first time it had offered asset management in the region.

As well as his role at Ignition, which he held from May 2018 to January 2021, he previously worked at KPMG where he led national business development in the wealth management space.

Fitzpatricks Private Wealth has appointment Daniel Proietto as Victorian regional manager to help create partnerships with financial advice professionals.

Proietto most recently acted as an independent business consultant, advising investment managers and assisting in client relationship management and business development.

He began his career with NAB in custodian services in 1997, followed by a posting with Xplore Wealth in 2008 as sales manager, progressing to the role of national business development manager in 2018.

AMP has appointed Michael Hirst as an independent, non-executive director to the AMP Limited board, effective from 1 July, 2021.

Hirst had over 40 years’ experience in board and senior executive leadership roles, and

also be responsible for the end-toend finance function and oversee fund services. Morgan joined from MLC where he held the same title.

Darren McKenzie was appointed as chief operation officer (COO) to oversee technology, operations and program management with a major focus on digitisation of the business.

was chief executive of Bendigo and Adelaide Bank from 2009 to 2018.

Before that, he had senior executive roles within the bank, as well as with Colonial Limited.

He was currently a nonexecutive director of ASX-listed investment company AMCIL Limited, private health insurer GMHBA Limited, and chair of small-to-medium business lender fintech Butn.

Lifespan Financial Planning has appointed Brian Long as senior investment specialist – managed accounts and a member of the Lifespan Investment Committee.

Long’s previous leadership positions included head of retirement for NAB Wealth and JANA Investment Consulting, national manager retirement at Colonial First State, and head of wealth management – Pacific at Mercer.

Eugene Ardino, Lifespan chief executive, said the addition of Long was all about increased support for Lifespan advisers in meeting the changing needs of their clients.

“Like Lifespan, Brian believes that there will be significant investment challenges in the future and as a result, advisers may seek to change client

portfolios more frequently to respond to increased volatility and to take advantage of new investment opportunities,” Ardino said. “Clients will also take an increased interest in understanding their investments.

A focus on client education will be essential.

Alphinity Investment Management has hired two senior fund managers for its global equities team.

Mary Manning would join the firm later this month from Ellerston Capital where she ran the Ellerston Capital Asia Growth and India funds and the Asian Investments listed investment company.

Prior to Ellerston, she had worked at Oaktree Capital and Soros Funds Management in New York and Asia.

The second hire, Trent Masters, joined from Global Evolution Capital which he founded in 2019 and where he managed a global absolute return fund. He had previously spent more than a decade at Colonial First State Global Asset Management.

Both Manning and Masters had over 20 years industry experience and Manning was previously nominated for Money Management’s Female Portfolio Manager of the Year award in 2020.

7/07/2021 11:43:52 AM

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25/05/2021 4:02:44 PM

OUTSIDER OUT

ManagementJuly April15, 2, 2021 2015 32 | Money Management

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

Closing the gap on buzzwords HAVING been around the industry for nigh on 40 years, Outsider has seen his fair share of buzzwords come and go around the office. Never a day goes by these days without him being asked to ‘join a huddle’, ‘hop on a Zoom’ or ‘touch base’.

But he was amused to see that someone had taken the time out of their day to compile an email to Outsider officially ranking the ‘jargon hall of shame’ for 2021.

What was the most-hated buzzword of 2021, you kindly ask?

This year’s winner was ‘cohort’ while ‘we remain cautious’ came in at ninth worst – a common phrase in many firm’s investment outlooks at the moment.

In a comment that could have well come from Outsider himself, the judges said: “[We remain cautious] are the most expensive and meaningless words in public relations and investor communications. Worse still, they are a statement of the utterly obvious in a world ravaged by a pandemic”.

Although Outsider thinks, as he sits in his home office and gazes down at Sydney Harbour out the window with a cup of Earl Grey in hand, surely the most-hated word of 2021 must be ‘lockdown’.

Feeling the SG pinch THE superannuation guarantee increase has come into effect from the beginning of this month and Outsider has noticed this has either been a call for celebration – or dismay – depending on how your salary is packaged.

For those who signed contracts “inclusive of super”, they have taken the burden of funding their own super increase.

Of the big four banks, ANZ was the only one that had some employees suffer this, while Macquarie Bank similarly did too.

However, the biggest victim was the executives of Qantas, including chief executive Alan Joyce, who were the only ones at the airline to include super in their total remuneration package – and Outsider is always quick to weep for any executive who misses out on the slightest remuneration increase.

But the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, had been quick to gloat that the Coalition “warned” us this would be the case.

“Despite months of Labor and Industry Super Australia denying the trade-off between super increases and take-home wages, the Government has always been aware that there is in fact a trade-off,” Hume said.

However, Outsider will also point out the Coalition have also been quick to gloat about the self-sustainability of the super system as presented in the Intergenerational Report, which is due to the boost in the super guarantee.

Of course, for Hume and other legislators, they will reap the benefits of consistent salary growth with a 15.4% super guarantee.

Funny how there doesn’t seem to be a trade-off for Persevering Jane.

Are you in the market for crazy?

EQUITIES? Bonds? Alternatives? If Outsider was to take investing advice from former Prime Minister Malcolm Turnbull, then perhaps the “market for crazy” is the best investment opportunity out there.

“I’m not exaggerating. So much of the Murdoch press – like Sky News in Australia and Fox News in the US – were trivialising COVID19, [they said] mask wearing with a ridiculous left-wing claptrap. That global warming is a hoax, that Donald Trump won the election,” Turnbull said.

Turnbull then mentioned the Qanon conspiracy which had now gained widespread mainstream media attention.

OUT OF CONTEXT www.moneymanagement.com.au

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For those unfamiliar (and Outsider envies you), Qanon is the conspiracy theory that alleges a global, cannibalistic paedophile ring conspired against Donald Trump as President. The appeal started online and the fanaticism has been compared to that of religious cults.

Now Outsider has led many cults in his time, but had never thought that he could use his media platform to broaden its appeal.

After several other failed investment ventures, perhaps Outsider can strike gold (sidenote: gold was one of those failed investments) by taping into the “market for crazy”.

Because based on what Outsider has seen in his life, “crazy” seems to be a very deep well.

"I am giving my advice. I am a doctor."

– Queensland chief health officer Jeanette Young

"Professional firms are like bananas, they are either only growing or ripening, not both."

– Matthew Rowe, CountPlus chief executive

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7/07/2021 1:37:15 PM