Money Management | Vol. 35 No 16 | September 9, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 35 No 16 | September 9, 2021

ESTATE PLANNING

Plans for advice practices

16

ADVICE

22

Efficient review meetings

SMALL CAPS

28

TOOLBOX

ESG and greenwashing

Advice industry still owes ASIC $2.4m for FY2019-20

BY JASSMYN GOH

THE corporate regulator has revealed there is $2.4 million in outstanding levies from the financial advice sector for the financial year 2019-20.

In answers to questions on notice, the Australian Securities and Investments Commission (ASIC), said the total amount of regulatory costs to be recovered for the year was $59.59 million.

This was up from FY2018-19 costs

of $34.07 million, and FY2017-18 costs of $28.26 million.

There were also outstanding amounts of $285,000 for FY2018-19.

The outstanding amount was calculated after approved waivers had been taken into account.

ASIC noted for FY2019-20 the median levy for licensees that provided personal advice to retail clients on relevant financial products was $3,926 and the average levy was $18,762.

ASIC to go hard on super funds that overpromise

BY CHRIS DASTOOR

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The opportunity in IPOs FOR small-cap fund managers, their aim is to seek out those companies at an early stage which are going to grow into large, successful businesses.

But managers were divided on whether their hunt included those companies which were looking to list on the market.

After a sluggish 2020 thanks to the pandemic, there had already been 61 initial public offerings (IPOs) in the first half of 2021 according to HLB Mann Judd, particularly in the small-cap space.

Some fund managers thought that IPOs presented a great opportunity to “get in early” while others wanted to watch from the sidelines until it had a clear track record. All agreed they could be risky and required more due diligence than the average stock.

Richard Ivers, portfolio manager at Prime Value Asset Management, said: “It needs to be an attractive price, you need to be able to see the financials in detail as there can be tricks in how they phrase things, talk to customers and suppliers, it is a good sign if the owner isn’t selling equity. They can be high risk and need more due diligence but the price you pay should reflect that.”

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Full feature on page 14

THE Australian Securities and Investments Commission (ASIC) will be monitoring all communication from superannuation funds, not just those that failed the Your Future, Your Super (YFYS) performance test, with a focus on specific disclosures being made to members.

Speaking at the Australian Institute of Superannuation Trustees (AIST) Superannuation Investment Conference, Jane Eccleston, ASIC senior executive leader for superannuation, said the regulator would act if it saw false, misleading or deceptive conduct in these disclosures.

“We’ll be looking at the underperformance notifications that funds send to members, as well as other performance disclosure measures, including disclosures made by funds that passed the test,” Eccleston said.

“For those of you working in investments, I would encourage you to think about the claims your funds are making about performance.”

Eccleston said investment professionals were often in the best situation to judge whether a claim was misleading or otherwise inappropriate.

“For instance, an investment professional within a super fund would know instantly that a 5% return over the past financial year Continued on page 3

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September 9, 2021 Money Management | 3

News

AFSLs paying finfluencers questioned by ASIC

BY JASSMYN GOH

SOME Australian financial services (AFS) licenses who are paying finfluencers to promote their products on social media are being “engaged” with by the corporate watchdog.

The Australian Securities and Investments Commission (ASIC) said in a question on notice from the Standing Committee of Economics that it was reviewing select finfluencers to understand their business models and how the financial services laws applied to their activity.

ASIC’s review included social media platforms such as Facebook, Reddit, Instagram, YouTube, and TikTok. “We are monitoring developments in this space and commencing engagement with finfluencers to understand their business model and how they are considering the application of the licensing framework in the Corporations Act,” it said.

“We are also engaging with selected AFS

licenses who are paying finfluencers to promote their products on social media, including TikTok.” ASIC noted increased levels of retail investor participation and interest in

investment was to be encouraged but it needed to be in an informed, safe, and sustainable way.

“However, some of the finfluencers appear to be providing advice and are getting paid by other financial product providers to promote their products,” it said.

“As most finfluencers do not hold an AFS license (and not subject to an exemption) they are not subject to the requirements that apply to licenses – including having adequate arrangements to manage conflicts of interest or to provide financial services efficiently, honestly and fairly.

“We are concerned that inexperienced investors may be increasingly acting on financial advice from unlicensed providers.

This may result in conflicted or poor advice being provided to users who may suffer financial loss. It also provides finfluencers with a competitive advantage as they are not subject to the costs and burden of regulation that other AFS licensees are required to comply with.”

Magellan makes first investment in Amazon

BY LAURA DEW

MAGELLAN has made its first investment in Amazon after exiting an 8% position in Chinese technology firm Tencent.

The firm had recently significantly reduced its weighting to Tencent and Alibaba and imposed risk controls to prevent holdings to Chinese companies from getting too large.

In its Magellan High Conviction fund, managed by Hamish Douglass and Chris Wheldon, this included exiting exposure to Tencent and heavy reduction of its exposure to Alibaba.

In an investor webinar, Wheldon said the fund had instead made its first investment into Amazon at the start of August after watching its valuation for a long time. This was the first time any of the firm’s funds had held the stock.

The fund historically had a large weighting to internet firms with 51% weighted

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towards internet and e-commerce companies.

“Tencent is an incredible business but it is exposed to regulatory risk and we will not speculate with investors’ money if we can’t determine where the ball will land and will not tolerate elevated risk,” Wheldon said.

“We have followed Amazon for a long time but have had questions over its valuation.

Recently, we have done thorough valuation work on it internally and this coincided with the Tencent reduction.

“It is a highly profitable business with access to secular growth opportunities in e-commerce and cloud computing and is now trading at an attractive price.

“These are evolving markets and Amazon is set to benefit from these tailwinds in the future, it is not only already the clear leader but is strengthening its position by reinvesting in its services and features.”

Shares in Amazon rose 8.9%

since the start of the year but were down 0.8% over one year to 1 September, 2021.

While the fund exited its exposure to Tencent, it retained a small position in Alibaba as, like Amazon, this was focused on cloud computing.

“We still like Alibaba but our 5% weighting is much smaller than in the past, Tencent and Alibaba are fundamentally different businesses,” he said.

“They are both large Chinese technology companies but Tencent has a large social media and gaming presence whereas Alibaba is about cloud computing which we don’t think is exposed to the same risks.

“We are still comfortable with its prospects but our conviction has declined given recent events and there are a wider range of possible outcomes.”

Magellan was not the only company to be cautious about China as Munro Partners had also exited all of its China exposure.

ASIC to go hard on super funds that overpromise Continued from page 1 is not something to crow about,” Eccleston said.

“But it might be less obvious to someone who is in marketing whose frame of reference is a term deposit.

“Claims about performance that confuse or mislead may give rise to legal consequences or reputation risk and don’t promote confidence in situation.”

Eccleston said the regulator wanted to highlight the importance of considering consequences for consumers in their day-to-day work.

“We want to see superannuation funds operate in a way that’s fair for members and promotes confidence in superannuation,” Eccleston said.

“This week there has been a lot of focus on the performance test and performance issues generally.”

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4 | Money Management September 9, 2021

Editorial

jassmyn.goh@moneymanagement.com.au

GOVT NEEDS TO EXPLAIN YFYS PERFORMANCE TEST NUANCES TO MEMBERS

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000

The ‘pass’ or ‘fail’ mark of a superannuation fund can be construed as a rubber stamp of approval or disapproval from the Government so it is on them, along with super funds, to explain what the test actually means.

Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Associate Editor - Research: Oksana Patron

The Government’s Your Future, Your Super (YFYS) performance test is problematic and the Government needs to properly communicate to Australians what the test actually means for them.

Given the test was part of the Government’s YFYS regime, it can easily be construed by the public that any superannuation fund that received a ‘pass’ mark was given the rubber stamp of approval by the Government.

This is why it is not only on super funds to ensure their engagement is high and communication is clear and information is provided to members of a ‘failed’ fund but also on the Government.

Clearly the goal was to make the test simple enough for members to understand but the reality is that fund performance is much more nuanced than just a ‘pass’ or ‘fail’.

It looks at only one period of time, and does not include lifecycle design, active or passive investments, environmental, social, or governance factors, or insurance.

Not only this, there were some funds that ‘failed’ the test but delivered higher returns than

Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Features Editor: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au News Editor: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au ADVERTISING Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Manager: Amelia King Tel: 0438 879 685 amelia.king@moneymanagement.com.au Junior Account Manager: Karan Bagai Tel: 0438 905 121 karan.bagai@moneymanagement.com.au

others that ‘passed’ the test.

Without proper communication to members by both the Government and super funds about the nuances, there could be very grave consequences such as members losing a specific type of insurance that is actually in their best interest, or exiting a fund that was providing good returns.

If the Government does not communicate these nuances to the public then they could see themselves walking back on another regime they have established.

Let’s not forget the current government is walking back on its own industry funding model on the advice industry which has seen a 236% increase in the corporate regulator’s levy over the last three years.

While they are “making good” with the levy relief in place and now reviewing the model after three years of implementation and strong objections from the industry, it would be in their interest not to have to do the same with the YFYS performance test.

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Reproduction in whole or in part is not allowed without written permission from the editor. © 2021. Supplied images © 2021 iStock by Getty Images. Opinions expressed in Money Management are not necessarily those of Money Management or FE Money

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2/09/2021 2:23:38 PM

September 9, 2021 Money Management | 5

News

Episodic advice can’t be ‘cut down’ version of advice

BY JASSMYN GOH

EPISODIC advice to fill the unmet financial advice need might not be financial advice in the holistic sense given a “cut down” version of advice would cost just as much as holistic advice to service due to rising compliance, according to IOOF. IOOF chief executive, Renato Mota, said episodic advice, scaled advice, or financial wellbeing services could include coaching or budgeting and needed to be largely digital in nature and have a much lower price point.

“Financial wellbeing is not a cut down version of advice because I think if you look at it as a cut down version of advice you end up with a problem that it’s actually still too expensive to service,” he said.

Mota said the industry needed to start with a blank sheet of paper on what this kind of advice looked like.

“If you’re starting from scratch, with a view of helping to coach people helping to

improve literacy, helping them make better decisions in a digital native way, how would you do it?” he said.

“You can still help people with the skills we have – you just can’t get into their personal circumstances, and you can’t provide strategy or product recommendations. But there’s still a lot you can do.

“Product recommendation is not at the heart of financial wellbeing or financial advice.

What is, are decisions that we can control in respect to financial affairs.”

Mota said this included understanding financial affairs, coaching, budgeting, understanding risk profiling, and helping people engage and have more confidence around their financial affairs.

“For many people financial wellbeing could be the difference between getting something or getting nothing at all,” he said.

“I think getting something will help them will help build their confidence, and possibly over time then choose to engage with advice.”

He said a lot of this episodic advice, or financial wellbeing service, would be delivered digitally such as podcasts or webinars.

Mota noted IOOF had established an incubator business that looked to explore how this service could work.

“With our business now, with MLC, we’ve got a million unadvised members in our products, so we can digitally engage with them. There’s a lot of things that can be done – we can partner with our self-employed advisers in doing that,” he said.

“We can make the content more geographically based, and actually look into thematics that are more relevant to some geographies for some professions than others.

There’s a lot of ways you can customise this content in a way that is more meaningful to the client and actually engages with our community.”

Mota said the firm would launch the first version of its incubator financial wellbeing business later this year.

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1/09/2021 3:03:33 PM

6 | Money Management September 9, 2021

News

13 MySuper products fail YFYS performance test

BY JASSMYN GOH

THIRTEEN MySuper products have failed the Australian Prudential Regulation Authority (APRA) performance test as part of the Government’s Your Future, Your Super (YFYS) reforms.

APRA assessed 76 MySuper products with at least five years of performance history against the objective benchmark.

APRA executive board member, Margaret Cole, said: “Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them. “...Products that failed the test [APRA] has requested they provide a report identifying the causes of their underperformance and how they plan to address them. Trustees have to monitor their products closely and report important information to APRA – including relating to the movement of members and outflow of funds.”

However, the Association of Superannuation Funds of Australia (ASFA) warned that some of the funds called out by the test were in fact good products that had delivered “excellent” returns to members over a long period of time.

It said to treat the benchmark results with “extreme caution”.

ASFA chief executive, Dr Martin Fahy, said: “This is a retrospective, relative performance assessment where the so-called underperforming products are compared against top performing products. Any product that falls 0.5% below the median is labelled as failing. What the published test results don’t tell members is why, and by how much, their fund has failed the test.”

ASFA noted the results were potentially confusing as some products with high average returns over 7% failed the test while other products with different asset allocations that also returned 7% had passed.

“This is the tyranny of benchmarks. They fail to take account of risk, lifecycle, or environmental, social and

BY LAURA DEW

governance considerations and instead they preference hugging the index,” he said.

“No one test is perfect but this one ranks products on only one measure, when there are other important factors to consider, such as appropriate levels of risk for different age groups, insurance coverage and whether you align with a fund’s investment ethos on issues such as climate change.

“Habitually underperforming funds should undertake an orderly exit and consumers should be protected during that process. But this test doesn’t do that. Instead, it sets an arbitrary bright line and removes from the process any role for judgment by our regulators.”

WTL Financial Group posts $3.28m NPAT loss

BY OKSANA PATRON

WTL Financial Group, the Australian Securities Exchange (ASX) listed parent company of national financial planning group Wealth Today, has reported a net profit after tax (NPAT) loss of $3.28 million for FY21.

In an announcement made to the ASX, it said this was due to the accounting for one-off write-downs and provisions which valued $2.89 million, compared to an NPAT loss of $594,000 in FY20.

The group said it had taken steps to restructure its balance sheets as of June 30, 2021, to “ensure that it has a clear runway to deliver in FY22.”

WTL also reported a 6% growth in revenue and other income to $13.56 million, with B2B revenue going up 24% year-on-year to $10.45 million while recurring and repeat revenue represented 86% of that ($9.01 million).

At the same time, earnings before interest, taxes, depreciation, and amortisation (EBITDA) stood at $36,000 as compared to $1.02 million in FY20, which was in line with previous guidance, the group said.

With the acquisition of Sentry Group now completed, WTL said it expected a significant increase in revenue to

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Calls for YFYS test to be extended to all super funds

$70 million in FY22 while NPAT was expected to be north of $2 million.

“In large parts the past three and a half years of restructuring has meant short-term financial outcomes have had to take a back seat to more strategic longrange thinking to ensure we recapture long-term value from our IP and assets,” WTL managing director, Keith Cullen, said.

“Adopting this approach has however seen us emerge as a disrupter – rather than simply being ourselves disrupted by the incredible structural shifts in the financial advice sector as the profession modernises.”

In June, WTL announced the acquisition of its industry peer, Sentry Group, a move which would see the combined entity to have around 275 advisers. It also had further plans to have more advisers than the average mid-tier sized financial group through organic growth and potential acquisitions.

“This is a highly complementary and transformational acquisition that brings great scale and efficiencies and delivers an expanded board and management team,” Cullen said.

THE release of the Your Future, Your Super performance test results are an “important first step” but $56 billion is still held by underperforming funds.

Some 13 superannuation funds failed the performance test, which covered MySuper funds, which accounted for 1.1 million members and $56.2 billion in assets.

In a joint statement, Treasurer Josh Frydenberg and minister for superannuation, financial services and the digital economy, Jane Hume, said the test had already had a positive impact as eight underperforming funds had left the market since the announcement of the test.

But industry associations have expressed concern about those super funds which were currently excluded from the performance.

Eva Scheerlinck, chief executive of the Australian Institute of Superannuation Trustees, said: “While it’s important to be performance testing MySuper funds, we need to recognise that this is the sector that generally outperforms other types of super funds where millions of members currently languish.

“More than one-third of super savings are currently excluded from scrutiny and disclosure and these members have no way of knowing whether their fund would have failed the test.”

Bernie Dean, chief executive of Industry Super Australia, said: “Performance tests will be another tool consumers can use to find out if they are in a dud fund or a good one.

“But with the loopholes in the test still allowing dud funds to go on taking profits, it’s even more important that Australians find a highquality fund run to only benefit them, with low-fees and good returns.

“Any fund that failed the test while creaming profits off the top should have to justify how it is in the best financial interest of their members.”

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September 9, 2021 Money Management | 7

News

‘Sticky’ customer base to help wealth platform pricing pressures

BY LAURA DEW

Only 60% pass July FASEA exam

BY CHRIS DASTOOR

A new low of 60% have passed the July Financial Adviser Standards and Ethics Authority (FASEA) exam.

There was 30% of candidates that were re-sitting the exam compared to an average of 20% in recent exams.

Over 18,140 advisers had sat the exam in total with over 16,030 having passed.

There were 14,070 passes recorded on the Australian Securities and Investments Commission (ASIC) Financial Adviser Register (FAR), as well as 1,650 ceased who could be re-authorised, and 310 new entrants that could be authorised.

Overall, 88% of advisers who have sat the exam have passed with 1,932 unsuccessful candidates who had re-sat the exam doing so with a 65% pass rate.

Of first-time sitters, 69% of candidates sitting the exam for the first time passed the July exam, compared with an average of 81% across all exams.

There were 1,963 advisers sat the exam compared with an average of 1,474 across all exams.

Stephen Glenfield, FASEA chief executive, said: “FASEA encourages unsuccessful candidates and future candidates to access the range of tools available to assist advisers preparing for the exam, FASEA provides preparation resources, including practice questions online.

“Feedback received from past re-sit participants of the exam indicated these resources were useful for their preparation.”

WEALTH platforms are likely to come under pricing pressure in the future but the impact could be lessened by the “sticky” customer base they hold, according to Lakehouse Capital.

In its Small Companies fund, its largest holding was Netwealth which had returned 93% in FY21 thanks to increased funds under administration as a result of asset growth, new client wins and new assets from existing clients. This was among five holdings in the fund which had returned more than 50% during the year.

Chief investment officer, Joe Magyer, said he continued to be optimistic on the stock in the face of potential pricing pressure as it had a “sticky” client base.

“The consensus view is that Australian wealth platforms will continue to face pricing pressure in the years to come, which is true in some senses but also ignores the incredibly sticky nature of existing clients, network dynamics, and the optionality around price increases as Netwealth scales,” Magyer said.

“For example, not only does a growing client base attract a larger pool of investment managers who want to get their funds on the shelves, the pricing power that platforms have with those managers rises exponentially with scale.

“We think Netwealth has a longer growth runway ahead than the market fully appreciates. The business has gained more in net flows to its platforms than any other platform in the market for four straight years, moving from the tenth-largest platform to the sixth, and yet still only has around 5% market share. We don’t see any reason for Netwealth’s market share gains to slow down either given the increasing market preference towards independent platforms.”

A second financial that had done well for the stock was Pinnacle Investment Management which had risen 213% over the period. Magyer said he expected the firm would try to build on its successful Australian distribution model, where it acts as distributor for asset managers such as Antipodes and Hyperion, overseas in the US and the UK. “Pinnacle has established offices in Japan, the UK, and the US in recent years, opening the door for distributing Australian investing IP and applying the Pinnacle model of backing promising boutiques in those markets as the firm recently did with a London-based emerging markets manager,” Magyer said.

“International [distribution] will be a slow burn as building out distribution takes time but we think the optionality in those markets is very much real and promising.”

Chart 1: Share price performance of Netwealth and Pinnacle during FY21

Source: FE fundinfo

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SCAN TO FIND OUT MORE

1/09/2021 3:05:03 PM

8 | Money Management September 9, 2021

News

ASIC levy reduced by Government

BY CHRIS DASTOOR

THE Federal Government will provide temporary relief to financial advisers by reducing the Australia Securities and Investments Commission (ASIC) levies charged for FY21 and FY22.

This relief would see ASIC levies charged for personal advice to retail clients restored to their FY19 level of $1,142 per adviser for the next two years (FY21 and FY22). The flat per licensee charge would remain at $1,500.

Treasurer Josh Frydenberg said: “While this relief takes effect, Treasury will also review ASIC’s Industry Funding Model, to ensure it remains fit for purpose given structural changes taking place in the advice industry.

“Through our efforts, the Morrison Government is easing cost pressures on financial advisers at a time when they need it most, while ensuring Australians have access to more affordable system.”

These changes included the single disciplinary body and the compensation

scheme of last resort, which were currently working their way through the legislative system and would rely on industry funding.

The FY21 ASIC levy was expected to $3,138 per adviser, plus the flat fee of $1,500 – an increase of $712 from the previous financial year.

Senator Jane Hume, Minister for Superannuation, Financial Services and the Digital Economy, said the ASIC levy had been the biggest issue raised by advisers to her.

“In 2020, during the worst days of the pandemic, thousands of Australians turned to their financial advisers,” Hume said.

“For so many Australians, considered advice from a professional and experienced adviser was what helped them through the worst of the COVID-induced recession.

“Ensuring that Australians can continue to access high quality, professional and affordable financial advice is so important as we emerge from the pandemic.”

Hume said this was in line with the Government’s broader program improve regulatory alignment and cut red tape for

Centrepoint/Clearview entity to have over 500 advisers

financial advice businesses.

“These changes will relieve advisers so they can focus on giving financial advice, while Australians can be confident that they will always receive affordable, high-quality advice,” Hume said.

“I want Australian households to have access to affordable, high quality advice, and this measure will take us one step closer on that journey.”

Millennials and females driving ETF growth

BY LAURA DEW

BY OKSANA PATRON

THE announcement from Centrepoint to buy Clearview’s advice business may bring the total number of advisers for the combined entity to over 500, making it one of the largest groups in the country by adviser numbers.

Centrepoint, which had seen good growth in terms of adviser numbers in 2021 among the larger licensee owners with over 50 advisers, owns Alliance Wealth and Professional Investment Services (PIS) which jointly had 336 advisers, according to Wealth Data’s analysis of adviser movements based on the Australian Securities and Investments Commission (ASIC’s) Financial Adviser Register (FAR).

At the same time, Clearview Group held two Australian Financial Services licences (AFSLs) operating under its umbrella, Matrix Planning Solutions and Clearview Financial Advice, which jointly had over 170 advisers on its books.

Taking this current data into account, it would mean that new entity would have over 500 advisers, which would make it the fifth-largest financial planning group in the country by adviser numbers, after IOOF (1,439), AMP Group (1,320), SMSF Adviser Network (671) and Easton Group (548).

However, when analysing the figures, it should be stressed that Centrepoint had an extensive number of advisers who were self-licensed and used their services which additionally gave the firm benefits of scale.

Wealth Data’s director, Colin Williams, said Clearview,on the other hand, had a total of 179 advisers listed via ASIC’s FAR and only an additional 106 selflicensed advisers using their services.

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EXCHANGE traded fund (ETF) investors are expected to approach gender parity in the next five years as the number of female investors steadily grows.

According to a demographics report

by State Street, which launched the first two ETFs on the Australian Securities Exchange (ASX) 20 years ago, one in four ETF investors were female now.

This compared to just one-in-10 in 2001 and State Street said women could be close to achieving gender parity for ETF adoption in the next five years.

“Young women are the fastest growing cohort of ETF investors in Australia, showing that the gender investment gap may be closing,” it said.

“The trend is gathering pace, thanks to lower barriers to entry. It has never been easier for anyone to invest in an ETF.” This echoed wider research by the ASX in March which found women had comprised 45% of total new investors in the past year.

ETF investors had an average of $170,000 invested, the third-most popular behind Australian shares and investment properties.

The impact of the pandemic transcended gender as 47% of new ETF investors were millennials compared to 24% in 2001. The proportion of Gen X investors had fallen from 45% in 2001 to 23% in 2021.

However, baby boomers had maintained an aversion to the vehicles with the proportion of ETF investors being largely unchanged over the 20-year period, rising only a small amount from 24% to 25%.

State Street head of SPDR ETF Asia Pacific distribution, Meaghan Victor, said: “Better financial education and improvements in technology have helped make ETFs more accessible to younger Australians. Millennials are the ETF generation of the 2020s.”

When it came to returns from the first two ETFs, the SSgA S&P ASX 200 returned 413% while the SSgA S&P ASX 50 returned 384%, since inception to 25 August, 2021.

This compared to returns by the Australian equity sector of 379%, according to FE Analytics.

Over the one year to 25 August, 2021, the ASX 200 fund returned 26.1% while the ASX 50 fund returned 25.5% compared to sector returns of 26.8%.

1/09/2021 3:05:24 PM

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10 | Money Management September 9, 2021

News

IOOF looks to turnaround MLC Wealth

BY JASSMYN GOH

IOOF is looking to breakeven its recently bought MLC Wealth, which has been losing $70 million a year, by 2024.

IOOF chief executive, Renato Mota, said IOOF’s goal was to arrive at one business model that would support self-employed MLC advisers that was sustainable and did not rely on other subsidisation from other parts of the group over the next three years.

“We need to increase the revenue pool and we need to reduce the costs. There has been historically a lack of economic accountability because that we’re used to being subsidised there’s a lack of accountability around how we’re using resources and making sure that those resources are translating into valuable outcomes for advisers,” Mota said.

Mota said he expected more self-employed advisers to join IOOF due to its differentiated proposition.

“There aren’t many institutional groups supporting self-employed

advisers anymore. I still believe that a large part of the community looks to partner with a large organisation with resources, who’s prepared to continue to invest and help improve the way we deliver advice,” he said.

“We’ve attracted some, we’ve lost some, we do think we might lose some more as we get closer to the Financial Adviser Standards and Ethics Authority [FASEA] deadline.”

Mota noted that the result of 135 advisers leaving its self-employed network during the FY21 was less

than they expected (140) and was a result of some advisers looking to create their own business model, and that some advisers were not meeting or not being prepared to meet IOOF’s governance standards.

“Over the last two years, we’ve upgraded our audit standards and there are just certain threshold or consistency of behaviour that we felt that wasn’t in line with our expectations,” he said.

He said IOOF had reached a point where the firm was at critical mass in terms of scale and that the acquisition focus had turned into an organic growth focus that revolved around engaging with clients and building strength in its reputation.

“We’ve got circa 2,000 advisers making us one of the largest in the country so we don’t need to get bigger for bigger sake,” he said.

“We need to make sure we’ve got a business model that can contribute a high quality model and grow off a strong basis. Our focus is getting the model right and we’re confident we will grow but we don’t have an explicit number to target.”

Count Financial ups incentives to attract quality advisers

BY LAURA DEW

COUNT Financial has revealed it is offering fee discounts of $10,000 to $15,000 per adviser in order to attract quality advisers to the business and compete against rivals as adviser departures weigh on its financial year results.

It saw net profit after tax (NPAT) of $1.09 million, down from $1.78 million in FY20, with significant changes in the second half of the year as grandfathered revenue dropped from $3.2 million in FY20 to $0.13 million, its company results said.

Some 76 advisers left the business, including 10 in June, while it onboarded 56 new advisers which brought the FY21 total to 248, 89% of whom had passed the Financial Adviser Standards and Ethics Authority (FASEA) exam. The total was 20 advisers less than in FY20.

Advisers produced 17,690 advice documents, up 46% from 12,158 in FY20, which worked out to be an average of 71 per adviser.

It also alluded to “competition” with rivals to recruit quality advisers, saying: “Competition by some players to recruit quality advisers has included significant fee discounts and other incentives.

“To effectively compete in the current dynamic

16MM090921_01-12.indd 10

market, fee discounts ranging from $10,000 to $15,000 per recruited adviser for six to 12 months have been provided. Given the short-term nature of these fee discounts we have made this trade-off against shortterm earnings to build a stronger cohort of quality advisers with a medium and longer-term perspective.”

It said there was a pipeline of 69 firms and 199 advisers with total potential gross business earnings The combination of factors meant a clear earnings ‘run rate’ for the business would not be seen until 2H22 or 1H23.

In his shareholder letter, CountPlus chief executive, Matthew Rowe, said: “There is a supply-side constraint in financial advice, but we believe there is a growing unmet need for quality financial advice in Australia. A repurposed Count Financial stands ready to take advantage of the increase in consumer demand for high-quality financial advice in Australia.

“Timing of adviser departures weighted to the first half, short-term onboarding fee discounts and the cessation of grandfathered revenue all show a business in transition, but with a persistent focus on longer-term strategic growth objectives.

“It is our view that Count Financial has the potential to become a significant contributor to the earnings of CountPlus in the medium-term.”

Practice development overshadowed by regulatory ‘noise’

BY CHRIS DASTOOR

REGULATORY “noise” is the biggest challenge to business growth in the advice industry and statements of advice (SoA) are the most burdensome compliance regime, according to a panel of advisers.

Speaking at the Money Management practice management webinar, Jill Tunkin, Lifespan Financial Planning national practice consultant, said practice development and management was being overshadowed by compliance and noise.

“There’s a lot of regulatory change in the industry and that creating a lot of noise coming through which is easy to allow you to lose sight of practice management and the benefits it can provide,” Tunkin said.

“Licensees are more focused on regulation chaos rather than growing and developing their business; tech seems to be a real trial and error exercise and advisers are left to solve these issues themselves.”

Tunkin said the SoA was the most burdensome compliance regime – and there was no shortage of competition for that title.

“If you just look at what’s on the table at the moment with regulation change – you’ve got opt-in, ongoing fee arrangements, fee disclosure statements (FDS), fixed-term agreements, consent, breach reporting and DDO [design and distribution obligation] requirements – so that’s just a list of what’s on an adviser’s plate at the moment and that’s creating a lot of fatigue,” Tunkin said.

“At the end of the day, all those burdens seem to fall on the planner – the advisers need to work through the changes, they need to understand them and how it flows through the value chain in their practice.”

1/09/2021 10:49:15 AM

September 9, 2021 Money Management | 11

News

NGS Super/Australian Catholic Super cancellation leaves question mark over future mergers

BY LAURA DEW

No feedback to be given for YFYS performance test

BY JASSMYN GOH

THERE have been eight superannuation fund merger announcements since the start of 2021 but the cancellation of the NGS Super and Australian Catholic Super indicates it is not always a smooth process.

NGS Super and Australian Catholic Super said their planned merger was no longer in the best interest of clients as the regulatory and commercial environment had changed since the initial announcement in August 2020.

The Australian Prudential Regulation Authority (APRA) had previously indicated that it was “not convinced” by all the planned mergers of super funds, particularly when it was between two small funds.

This contrasted with a smaller fund being acquired by a larger player such as Hostplus and Australian Super, which were among Australia’s largest super funds, acquiring Statewide Super and LUCRF Super respectively.

The mergers that were confirmed this year so far were Hostplus and Statewide Super, Australian Super and LUCRF Super, QSuper and Sunsuper, LGIAsuper and Energy Super, Hostplus and InTrust Super, EISS Super and TWU

Super, Toyota Super and Equipsuper, and Tasplan and MTAA. There had also been discussions between Sunsuper and Australian Post Super, Aware Super and VISSF, and Hostplus and Maritime Super.

The Your Future, Your Super reforms, which came in force in July, would also continue to drive mergers in the space in order for funds to have the scale to carry out innovation in product and service offerings.

A report by KPMG, earlier this year, said that mergers were the number one challenge in the super space for 2021, which would be driven by maturing regulatory

settings, business model sustainability, separation and integration, globalisation and rising member expectations.

This would culminate in the rise of the mega fund (over $100 billion) and a widening gap between the sub-mega funds (over $50 billion) and those which were smaller than that.

The five main mega funds would be the newly-merged QSuper/Sunsuper/Australian Post Super, AustralianSuper, IOOF and MLC, AwareSuper, and AMP which could expect to account for 47% of assets under management in the future.

Value in separating policy renewals from annual reviews

BY CHRIS DASTOOR

SEPARATING the annual review from policy renewal and rewrite dates is a way to help simplify the advice process for clients, according to business marketing firm StepChange.

Speaking at a Zurich/OnePath webinar, Kathy Rhodes, StepChange marketing strategist, said this could help decouple those elements of the process.

“Do the review several weeks in advance, making sure that when the review reminder arrives, you’ve already got them locked in and committed to understanding the need for that,” Rhodes said.

Rhodes said this would help deepen client relationships during the annual review process.

“Perhaps you want to re-establish why cover was taken out in the first place or perhaps it’s an opportunity to reinforce the value of your advice,” Rhodes said.

16MM090921_01-12.indd 11

“Maybe you need to explain complex or new recommendations. Perhaps based on your think/feel/do you want to go beyond compliance obligations and deepen client comprehension, and education.

“It’s important to remember that you’re not dealing with creatures of logic but creatures of emotion, we are all human.”

Rhodes said this was also an opportunity to provide clients with additional advice.

“Perhaps they’re only interested in a certain subsection – are you doing scaled advance right now and you want to make that full advice?” Rhodes said.

“Maybe you’re looking to get referral commitment, rather than just a loose promise that they will arrive.

“Maybe you want to lock in another 12 months of working together, offer value beyond your advice or you want to move that client into another usually higher value segment.”

THE Government’s Your Future, Your Super (YFYS) performance test will not disclose the value of the superannuation fund’s mark and will only indicate a “pass” or “fail”.

The Australian Prudential Regulation Authority (APRA) updated its frequently asked questions on its YFYS performance test and said it would publish the results on its website on 31 August, 2021, after all registrable superannuation entities (RSE) were notified of their result on 30 August, 2021.

“For each MySuper product a “pass” or “fail” result will be published; the value will not be disclosed,” APRA said.

This would mean that funds would also not know how much they failed by.

RSE licensees that failed would need to notify their beneficiaries within 28 days. However, in “exceptional circumstances” such as a merger a consideration might be given to deferring the notice.

“Their request must be sent to both their responsible supervisor at APRA and to the Australian Securities and Investments Commission (ASIC) through the ASIC Regulatory Portal,” it said.

“ASIC will be the lead agency in considering requests and will consult with APRA prior to making a decision.”

1/09/2021 10:49:25 AM

12 | Money Management September 9, 2021

InFocus

IS TIKTOK ADVICE ANY BETTER THAN ‘THE MAN DOWN THE PUB’?

While finfluencers are on the rise and targeting younger investors, this presents an opportunity for advisers to help investors separate the information from the noise, writes Laura Dew. FINFLUNCERS ARE PRESENTING a worrying trend in the financial services space given their rising presence during the pandemic which is leaving investors at risk.

These social media influencers use platforms like TikTok and YouTube to post financial content to viewers and the regulator is concerned they may qualify as unlicensed financial advice.

On TikTok, the hashtag #personalfinance had received over four billion views as users logged on to find out the latest about investments and cryptocurrency.

This was particularly the case as the pandemic caused an upswing in younger or less experienced investors accessing the stockmarket and exchange traded funds (ETFs).

According to the Australian Securities Exchange (ASX), a quarter of people who began investing on an exchange in the last two years were under 25. Some 41% of under-25s wanted to receive their investor education from YouTube and 18% received information from social media, it said.

As a result, the Australian Securities and Investments Commission (ASIC) was taking a look at the space and considering how it could ensure investors avoided receiving unlicensed advice from these sources.

It said: “Since March 2020, ASIC has seen a significant escalation in

20 YEARS OF ETFs

complaints about unlicensed conduct, including complaints about unlicensed financial advice being provided through websites, social media, cold calling and seminars.

“ASIC is concerned because consumers unknowingly receiving unlicensed advice do not have the same protections afforded to them under the law when they receive advice from licensed providers.”

Offering unlicensed financial advice was an illegal practice and could lead to a $133,200 fine and a prison sentence.

But the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, said there was always an element of ‘buyer beware’ with investments and likened it to speaking to a person in a pub or a taxi driver. She also pointed out it was engaging young people with their finances.

The difference to a man in the pub however, critics countered, was that many finfluencers actually made money from their posts through advertising, affiliate links and branded merchandise.

Speaking in the House of Representatives, Labor MP Julian Hill said: “Everyday Australians are being left to look to social media and TikTok influencers.

“These ‘influencers’ are taking kickbacks, that is what the Government is leaving people to, and it is a return to the bad old days of commission.”

Another problem for advisers that was pushing younger investors into the arms of social media was the high fees incurred when seeking financial advice. According to the Financial Planning Association of Australia (FPA), the average initial cost of setting up a financial plan was around $3,300 and then about

$4,300 annually to receive ongoing advice which was far beyond the reach of under-25s.

But it did present an opportunity for advisers to demonstrate their value and help give clear information, even if that meant going on social media themselves. It could also present opportunities to target clients of the future.

Stuart Holdsworth, chief executive and director of investment proposition innovation at Financial Simplicity, said: “Fininfluencers have less expertise but they can be influential, it is a challenge to separate the noise.

“There are great opportunities for advisers to become a trusted source now for consumers who feel overwhelmed and don’t know what is right. It is about helping clients to understand and rationalise which is a very important skill.”

Bronwyn Yates, director and head of business solutions at Russell Investments, said: “This is an opportunity to tap into a different market and support financial education. We are already seeing some advisers engaging with clients of the future through education so that they are ready to take advice later.

“This has been through scaled education programmes or others are on social media where they have their own profile and are building a community as a runway for future client growth.”

2

223

$116.5b

ETFs in August 2001

ETFs in July 2021

Current value of ASX ETFs

Source: ASX Investment Product Summary, as of 31 July 2021

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14 | Money Management September 9, 2021

Small caps

THE OPPORTUNITY IN IPOs As initial public offerings recover after a slowdown in the pandemic, particularly in the smallcap space, funds are divided in their support of them, Laura Dew writes.

THE NUMBER OF initial public offerings (IPOs) has got off to a flying start this year but, with many opportunistically fundraising after benefiting in the pandemic, small-cap fund managers are divided on whether they will participate.

One of the benefits of investing in small-cap funds is the ability for them to back early-stage companies which might lead to future growth. Successful IPOs in recent years have included Afterpay, CSL and Tyro Payments.

As well as Australian listings, the Australian Securities Exchange (ASX) is also a fertile ground for smaller overseas companies to list such as ResMed, Life360 and Auckland International Airport.

According to the latest HLB Mann Judd IPO report, there were only 74 IPOs in 2020 with 84% taking

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place in the second half of the year and they raised a total of $4.9 billion. This was down from $6.9 billion raised in the previous year.

But, in 2021, the first half of the year alone had seen 61 IPOs taking place which raised $2.9 billion compared to $132 million in the first half of 2020, just 3% of the annual total. A further 42 were proposed for the rest of the year seeking to raise $1.25 billion.

The small-cap end of the market, those under $100 million, was particularly active with 48 new entrants which raised $462 million. The main contributor to this was the materials sector which had 26 small-cap listing take place in the six-month period.

“IPO activity to date in 2021 has been driven by favourable macroeconomic and capital market conditions, combined with

strong investor sentiment,” said Marcus Ohm, partner at HLB Mann Judd.

One reason for the increased volume of small-cap listings was that the ASX had a far smaller market cap needed to list, which made it more favourable than global exchanges. To list on the ASX 300, a company only needed a market capital of $446 million.

An ASX IPO investor update said: “A technology company with a minimum market capitalisation of $120 million will gain entry to the S&P All Technology index. The S&P/ASX 300 index requires a minimum market capitalisation of $446 million and the S&P/ASX 200 index requires $1.6 billion.

“By contrast, a company needs a minimum size of $7 billion to be included in the FTSE 100 index in the United Kingdom. Or $21.8

billion for inclusion in the S&P 500 index and $31.1 billion for inclusion in the NASDAQ 100 index in the United States.

“The result is small and mid-cap listings in Australia have greater opportunity for index inclusion compared to larger offshore exchanges.”

But while the small-cap space was particularly active, small-cap fund managers were divided in whether they were a good idea to support. Some felt it was an opportunity to get in on a great stock at an early date while others felt they were too risky and wanted to watch their progress first to see if they met their targets.

Richard Ivers, portfolio manager of the Prime Value Emerging Opportunities fund, said the firm regularly looked at IPOs and thought they were a “great

1/09/2021 9:30:22 AM

September 9, 2021 Money Management | 15

Small caps opportunity”.

“We regularly look at them. You can find some great businesses especially if they are looking to raise money for growth, it can be a great opportunity to accelerate that business,” Ivers said.

But Victor Gomes, senior portfolio manager of the Eiger Australian Small Companies fund, said the lack of track record for these type of stocks meant he shied away from investing in them, despite any potential early gains.

“We rarely tend to do IPOs as there are so many small-caps stocks in the universe which have a long track record and they are much lower risk than the new entrants,” Gomes said.

“You find you are only told the good news but not the bad and they don’t have a track record. We shy away from them unless it looks particularly compelling, we are very cautious.

“We prefer to see them trade for at least six months, even a year, before we look at them even if that means giving away the initial outperformance in the early days as that is the riskiest stage. By waiting longer, we are able to assess their track record and see if they have met their targets.”

He said the one major IPO that the fund had backed was of WiseTech, which listed in April 2016 and raised around $168 million. At the time, the software firm was described as a being a “rare standout” as it was already a global and profitable business.

Since IPO, the firm had returned 1,102% compared to returns of 87% by the ASX 200.

FIVE IPO TIPS FROM OPHIR ASSET MANAGEMENT • Who is the vendor? Do your due diligence on the directors and see how much is being sold down by the owners.

• Who is the broker? Do they have experience in the IPO market and how much ‘skin in the game’ do they have?

• Who are the buyers? Is there strong demand for the listing or is it funded by overseas hedge funds?

• When is the IPO? Is it taking place when the market valuation is at a cyclical high?

• How much is it? Does the valuation model indicate you might be overpaying and have you checked their financial performance and future targets?

The reason, Gomes said, that Eiger made an exception for this stock was that it was listing in order to raise capital to increase its credibility and acquire other companies.

While Ivers was optimistic about the opportunity for IPOs, he did agree with Gomes that due diligence was needed.

“The time is compressed with an IPO so we look for businesses that we already know and where we can speak to people and make a decision quickly,” Ivers said.

“It needs to be an attractive price, you need to be able to see the financials in detail as there can be tricks in how they phrase things, talk to customers and suppliers, it is a good sign if the owner isn’t selling equity. They can be high risk and need more due diligence but the price you pay should reflect that.”

Andrew Mitchell, senior portfolio manager at Ophir Asset Management, said: “IPOs are subject to the same investment process that we put every

Chart 1: Share price of YouFoodz and Adore Beauty versus ASX 200 since start of 2021 to 27 August 2021

company through. This sees a strong focus on earnings and its sustainability.

“We particularly look at the business model, the industry structure, its returns on capital, as well as how clean the balance sheet is and the quality of its management team.”

COVID-19 IMPACT The reason behind a company choosing to list was a big factor in fund managers’ decision whether to back an IPO as there were some companies which had been listing opportunistically, particularly in the aftermath of the pandemic.

Ivers said: “There have been a lot more IPOs this year but some have been listing based on shortterm factors because of COVID-19 so you would have to look at the sustainability of earnings there”.

Two examples of this would be online cosmetics company Adore Beauty and food manufacturer YouFoodz which had benefitted from the stay-at-home rules during the pandemic and subsequently listed in October 2020 and December 2020 respectively.

YouFoodz, which listed at $1.50 per share, never reached those highs again and eventually received a takeover bid from HelloFresh in July. Meanwhile, Adore Beauty began trading at $6.92 per share when it listed in October 2020 but had fallen 30% since then (Chart 1).

“These companies experienced extraordinary growth through COVID as they had a captive audience but to be successful, they would need a repeat customer base not just one-off customers during a

pandemic. They were priced to perfection and never got off their IPO price,” said Andrew Mouchacca, portfolio manager of the Flinders Emerging Companies fund.

A good reason for a company to list would be if they were trying to access capital to grow their business and Mouchacca said the firm had participated in four IPOs in 2021.

“Small caps are an aspirational asset class, these are companies which are trying to access capital in order to grow their business and become large caps. Those are the ones we want to identify early in order to get the best returns,” he said.

“There are some which might list in order to access liquidity and those are less attractive to us.”

ADVISING CLIENTS Marshall Brentnall, director and financial adviser at Evalesco Financial Advisers, said he relied on the asset managers to make the decision about IPOs rather than investigate them himself which left him free to focus on the financial advice.

“We have had some who invested in IPOs such as Medibank and Telstra or because they’ve heard about it through their work.

“But we want to implement longterm strategies that are repeatable in order to give clients a consistent outcome so we don’t do many tactical, opportunistic trades.”

If he was choosing a small-cap fund, he avoided those which invested in particularly small companies as it could be hard for the manager to get out and meant there was limited liquidity.

Other problems could also arise if a small-cap fund participated in seed funding.

“Some funds will participate in seed funding ahead of a company’s IPO, and if they then encounter redemptions then those unlisted assets can end up becoming a much larger part of the fund than they expected,” Mouchacca said.

“Seed funding increases the risk as you can’t control when they list, at least with an IPO then we don’t have to be an activist investor and aren’t stuck in an investment where we can’t get out.”

Source: FE fundinfo

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2/09/2021 9:07:16 AM

16 | Money Management September 9, 2021

Estate planning

ESTATE PLANNING NOT JUST FOR CLIENTS While financial advisers help clients with their estate plans, they would do well not to forget their own especially if they own their advice practice, Jassmyn Goh finds.

ONE OF THE few positives to come out of the COVID-19 pandemic is that the feeling of uncertainty has led people to address setting up or updating their estate plan which otherwise would have fallen into the “I’ll get to it later” basket.

While financial advisers should be discussing estate plans with their clients, they should not forget about their own estate plan either especially if they own their practice.

This, Succession Plus chief executive, Craig West, said was something advisers often overlooked for themselves plus the fact that estate planning was a topic people generally avoided “People tend to think ‘I’ve got plenty of time, I’ll sort that out later on I’m only 50 and I’m not going to die till I get to 75’. But then, of course, you could get hit by a bus, or have a serious illness, or get COVID-19 and suddenly it’s an urgent problem,” West said.

“As soon as that happens, you can’t do anything about it. By definition, you can no longer do an estate plan.”

ESTATE PLANNING FOR ADVICE FIRMS West said estate planning for small businesses was very different to those for people who worked on a salary for a company, owned a property, and had an investment portfolio.

Small businesses, like adviser-owned practices, often included more stakeholders such as shareholders, employees, suppliers, and banks.

“Estate plans for advice businesses need to consider all the stakeholders as it’s not enough to say ‘pass all of that business across to, like in a normal real estate plan, my spouse’,” West said.

Spouses, he said, might not be qualified financial planners and they might not want to own the business as they might be doing something completely different.

“The big problem that comes up with estate planning for business owners is the funding question. You suddenly have a business that’s got clients that need to be serviced, it’s got bank loans that need to be repaid, etc. and the principal is now by

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2/09/2021 11:01:50 AM

September 9, 2021 Money Management | 17

Estate planning

definition no longer around,” West said.

“Therefore, bank guarantees are a problem, and the licencing might be a problem. Then it comes to how do they continue to deliver the advice to clients? If I was the licensee and I’m now no longer with us, that’s a problem.

“I think the key thing really is to start to think through all of these potential issues well before you start to worry about what’s going to happen. As part of the estate planning process, you need to look at the business and the risks that go with business.”

West said the first area to tackle was a shareholder agreement if there were multiple shareholders of the business. The agreement needed to cover what would happen if someone could not work, how shares were paid out, and in turn how that would be funded. Insurance policies were also an important step in the estate plan.

“I’ve worked with a couple of financial advice firms which were very good at getting this [insurance policies] right for their clients, but not so great at getting that right for themselves. This tends to be an area people don’t want to talk about or think about and everybody believes they have plenty of time to sort out their estate plan,” he said.

With advisers leaving the industry due to education requirements, there were issues arising with advisers who decided to stay on in the industry to run or manage advice practices but were not licenced to give advice.

“What happens if that person falls off the perch? What’s the solution then? What does that mean for the other people that are employed in the business? Your estate plan at that level needs to consider those other issues,” West said.

“What happens with the estate plan for your key adviser? If I’m not licenced, for whatever reason, it means I have to have a licenced adviser working for me. Well, what happens if they get hit by a bus? Suddenly you’ve got a business with all these clients that need help and you’ve got no-one licenced do it. You need to think about that and all of those different levels.”

WORKING TOGETHER However, West said the most common error that was made when drawing up estate plans was when it was worked on in isolation by advisers, accountants, and lawyers rather than the three parties working together.

“The best outcome is when you get all three of those people in the room working out ‘What

outcomes do we want? What do we legally need to document to make it happen? What does the funding look like from an insurance/financial advice point of view? How do we make sure we’ve got the valuation right from an accounting point of view?’,” he said “When those three are coordinated, you can get some much, much easier, cleaner and simpler results. Unfortunately, they’re often done in isolation and that’s the worst mistake you can make.”

HLB Mann Judd’s estate services director, Robert Monahan, said the role of the adviser was to advise the client on various options they had as far as their clients’ financial situation was concerned.

Advisers also helped lawyers in explaining the client’s financial situation, what their assets were, and how they were structured, rather than the client explaining it in their own words.

“If I recommend changes to the structuring, then I copy the adviser into that and I always encourage clients to authorise me to give copies of the estate planning documents to their adviser so that the adviser knows what’s going on,” Monahan said.

He noted that advisers should be asking their clients to have

CRAIG WEST

Continued on page 18

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2/09/2021 11:01:58 AM

18 | Money Management September 9, 2021

Estate planning

Continued from page 17 copies of who a client’s enduring power of attorney is so that it was understood who would make decisions.

“Quite often, adviser checklists would ask the question to the client if they had an enduring power of attorney. If the client says yes that box is ticked.

But what the adviser should be doing is asking the client, ‘well, can I have a copy of it?’

“I also encourage advisers to read the document and ask themselves ‘is this going to work for my client?’.

“So many times I’ll see a situation where a couple, for instance, have appointed each other but have no backups in place. So, I’d say to advisers, look, if you see that a couple are appointing each other but there’s no substitutes you should draw that to their attention.

“The adviser is not going to do the legal work but the adviser can identify it and say ‘I think you should talk to the lawyer about that because if you’re both in an accident this is not going to work’.”

Monahan said he encouraged advisers to have some knowledge of estate planning to enable them to get the relevant information needed for an estate plan.

Recent data by Colonial First State found that estate planning was the third most-common query from advisers as more advisers looked to assist clients in this area.

“The lawyer doesn’t have to do it all and the financial adviser can’t do it all but they should work together and to achieve the best result,” Monahan said.

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THE OVERSEAS TRIP UP Equity Trustees head of equities, Chris Haynes, said one of the biggest issues with estate planning was not preparing clients on outcomes, such as tax implications, and having overseas executors.

With more people looking to move overseas either for a period of time or permanently, Haynes said part of an estate plan was who should be an executor.

“Having an overseas executor makes it a little bit more difficult and has a large effect on the tax side of things,” he said.

“While the residency of the person writing the will has absolutely has no effect, it is important to have a good think about who your executor is, particularly where they live, where they are, and where they might live.

“Estate planning is looking into the future so if you’re overseas or you have children that are overseas or could have their residency changed, there may be issues. That’s definitely something to consider.”

Similarly, there were different tax rules for estates with overseas beneficiaries compared to those with beneficiaries in Australia.

Monahan said he was often asked by advisers on this issue, and it was happening more often as people had children that were working overseas more frequently. However, advisers would also have to know how to ask those kinds of questions.

“A good financial adviser should not only get information on their client’s assets, liability and their structures, but also an idea of their family because that’s very relevant to estate planning,” he said.

“The other advantage, and this is sort of a side benefit to good advisers, is advisers who are proactive with their clients, as far as estate planning goes, tend to have a stronger relationship with their clients and it is also less likely that the clients might want to move to another adviser. Good advisers also involve the next generation.”

2/09/2021 11:02:14 AM

EVERY GENERATION LEAVES A LEGACY FOR THE NEXT. WHAT’S YOURS? Working with our clients and their advisers since 1888, providing bespoke estate planning, executor and trustee services for people invested in taking care of the future.

Contact us to find out how we can work with you.

1300 133 472 eqt.com.au

Equity Trustees Wealth Services Limited (ABN 33 006 132 332) AFSL 234528 and EQT Legal Services Pty Ltd (ABN 32 611 391 149) are part of the EQT Holdings Limited (ABN 22 607 797 615) group of companies, listed on the Australian Securities Exchange (ASX:EQT). This communication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice which takes into account an individual’s specific objectives, financial situation and needs. Copyright © 2021 Equity Trustees, All rights reserved.

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30/08/2021 3:03:16 PM

20 | Money Management September 9, 2021

Fixed income

THE TAPERING HEADACHE With inflation rising, global central banks are being forced to rethink their monetary policy actions and are likely to begin tapering soon, writes Kerry Craig.

NO ONE WAS expecting fireworks from the Jackson Hole symposium in August, and they didn’t get any. The message from US Federal Reserve (the Fed) chair, Jerome Powell, was more or less the same – it’s time to ease back the throttle on bond purchases.

Tapering bond purchases is just the first step in the long journey of policy normalisation but it’s not likely to be one that trips the markets.

Powell couldn’t front run the rest of the rate setting committee at the Fed by signalling something that wasn’t already agreed. But

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what he did do was solidify the consensus view that tapering would begin this year. More importantly, he separated the Fed’s views on drawing quantitative easing to a close from how it views the path for interest rates.

The Fed is not the first to start down this path, but it is the most important one. The Reserve Bank of Australia (RBA) has already outlined its very flexible approach to reducing bond purchases, the Bank of Canada began its tapering months ago, meanwhile the Bank of Korea recently became the first major emerging market central

bank to raise interest rates.

However, the Fed’s actions are more significant given it will impact the risk-free rate against which nearly all the world’s assets are measured.

September is the next opportunity for the Fed to reinforce its messaging and provide greater clarity to markets about what to expect. However, this may not be the meeting where tapering is formally announced. Waiting until later in the year, most likely November, means a couple more months to be sure the US economy is on the right path, as well as clarity on

the potential impact of further fiscal stimulus.

One of the most significant changes from the COVID-19 experience has been the marriage of monetary and fiscal policy and the willingness of governments to pursue expansive monetary policy, even as the economic outlook improves. In the US, the US$1.2 trillion ($1.6 trillion) infrastructure spending bill and a US$3.5 trillion bill aimed at boosting social initiatives are slowly making their way through Congress. The funding of this spending will be split between changes to corporate and

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September 9, 2021 Money Management | 21

Fixed income

individual taxes as well as increases to the government deficit. But the net effect – if the bills pass as planned – will be positive for the US economy.

The taper itself may be rather mechanical once it begins, given the lead time to prepare markets for the change and the uncertainty that could be created in communicating changes. With details pending, the most important aspect is whether the pace of reduction is palatable to the market. Reducing bond purchases

by US$12 billion to US$15 billion per month seems broadly acceptable.

It’s important to note that when the Fed does start tapering, it isn’t withdrawing liquidity from the system, it’s just adding it at a slower pace. Assuming that the Fed reduces bond purchases by US$12 billion to US$15 billion per month starting in January next year, this still means that the Fed will purchase between US$420 billion and US$540 billion in Treasuries and mortgage-backed securities in 2022. Even when quantitative easing comes to an end, the Fed will still be purchasing bonds to ensure that its balance sheet doesn’t shrink.

Once the taper starts, attention will quickly turn to what is likely to happen when it ends.

Two questions in particular will matter: whether the US economy will be in the right state to raise interest rates, and can the Fed really raise interest rates more than just a few times before the economy runs out of steam.

The answer to the first question is a resounding yes.

When the Fed embarked on its last tightening cycle in 2015, the economy was in good shape, but things are stronger today, thanks to a government willing to spend to boost the recovery. In 2015, the unemployment rate averaged 5.3%, inflation averaged 1.3% (as measured by the core personal

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consumption expenditure (PCE) deflator, the Fed’s preferred measure) and economic growth was 2.7% for the full year. Looking at J.P. Morgan’s forecasts for the US economy for 2022, the unemployment rate is expected to be 4.4%, inflation 2.8% and growth at 3.9% for the full year.

The answer to the second question is more ambiguous. The Fed’s long-run projection for the interest rate is 2.5%, a similar level it got to in its last rate hike cycle. But this view may be clouded by debt sustainability issues given the significant increase in federal debt that needs to be financed, as well as what to do with its balance sheet.

The Bank of England (BOE) laid out its approach recently. The BOE’s plan is that once the cash rate reaches 0.5% (currently 0.1%), it will allow for the natural attrition of its balance sheet by not replacing bonds as they mature. All going well, the BOE will keep raising the cash rate and once it reaches 1.0% it may become more active in actually shrinking its balance sheet.

This approach places more emphasis on balance sheet reduction than on a higher cash rate and implies that asset purchases, rather than rate cuts, may be the focus of future policy support, hence the need to lower the balance sheet in preparation.

The Fed may not feel the same way, but will need to prepare to use this policy tool again at some point in the future.

There is a risk that the additional fiscal stimulus, at a time when the economy is recovering, generates higher than expected inflation before the tapering process ends. It raises the question of how the Fed, or any other central bank, would be able to raise interest rates while still purchasing bonds. This explains why central bankers appear to be pursuing these exit

“The Fed has spent a great deal more time in preparing the market for the gradual reduction in bond purchases and is overall a more dovish institution.”

– Kerry Craig strategies even as the economic momentum has waned in the last few months.

What does all this mean for markets? History isn’t a perfect guide but we can draw a few lessons from the 2013 tapering experience. The first is that the Fed has spent a great deal more time in preparing the market for the gradual reduction in bond purchases and is overall a more dovish institution than the one headed by the then Fed chair, Ben Bernanke. This reinforces the gradual nature of both the tapering and eventual rise in interest rates.

Next is that tapering didn’t end the equity bull market. The Fed started to taper its bond purchases in December 2013, the US S&P 500 rose by 13.7% in 2014, the MSCI Asia ex Japan by 7.7% and European equities by 5.2% (total returns in local currency). For fixed income, policy normalisation did not lead to higher US government bond yields. In fact, contrary to expectations, the 10-year Treasury yield fell from 3.0% to 2.2% over the course of the year.

This benefited US government bonds and investment grade corporate debt, which have longer durations and perform better as yields fall.

Nonetheless expecting a copy and paste of the 2014 taper may be less than wise. The Fed’s policy setting is important for investors, but it is only one of many factors determining asset allocation in the months ahead.

Valuations are also a crucial

factor. The S&P 500 is trading at a price to forward earnings multiple of 21.2x and the ASX 200 at 18.0x whereas, back in 2014, markets looked a lot cheaper at 16.0x and 14.8x respectively. The full re-opening of many sectors and economies is supportive of the earnings outlook and helps to maintain lofty multiples, it’s unlikely to drive them higher and put a lid on returns.

Yields on core government bonds are unlikely to fall this time around. In 2013, bond markets were quick to reprice the impact of tapering before it began and upside risk to the inflation outlook was not part of the bond market calculus.

When my wife was pregnant with our first child, we were given the book 'What to expect when you're expecting' to prepare us for parenthood. No matter how much information was gleaned from this book, at best it was a loose guideline to what may happen but not every eventuality.

There is an expectation that the Fed will soon announce the beginning of the end for quantitative easing and the gradual path back to ‘normal’ policy settings. We know that this is unlikely to create a bear market or sudden collapse in economic activity, but there are some wildcards around the potential for higher rates of inflation and uncertainty of COVID-19 that will still need to be managed.

Kerry Craig is global market strategist at J.P. Morgan Asset Management.

1/09/2021 10:40:30 AM

22 | Money Management September 9, 2021

Advice

DO ANNUAL GOALS-BASED REVIEWS NEED A FACELIFT? In order to provide an efficient and valuable progress meeting for clients, Johann Maree finds the best way to ensure they are working towards their goals.

THERE IS NO doubt that 2020/2021 financial year tested all of us in many ways. Financial advisers and their clients are still navigating the impact.

Amidst a sea of change, the quality of the adviser/client bond continues to define the strength of the relationship. However, given there has been so much change, client loyalty may have been affected and advisers should therefore consider giving their annual goals-based review service a meaningful facelift.

THE YEAR THAT WAS During this last financial year, financial advisers were hit from all sides: additional compliance requirements from the regulator, adviser educational qualifications, the Financial Adviser Standard and Ethics Authority (FASEA) code of ethics, changes to ongoing fee arrangements, increased operational costs from licensee and levy increases, additional compliance requirements from dealer groups, changes to commission remuneration and adapting to new fee structures, all while involved in an ongoing search for better client engagement and operational efficiency systems, implementing software and processes into businesses and working out how to deliver an advice value proposition in a digital world.

It is little wonder then, that advisers have had next to no time to rethink their service proposition or improve their client experience.

Many of the above pressures have kept advisers away from their core proposition – servicing their

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clients and helping those who need financial advice. One could say that they have spent the past 15 months ‘putting out fires’. Now is the time to ‘build fire breaks’ and ‘back burn’ – in other words: work on the business and be more strategic.

CHANGING CLIENT LOYALTY The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended the law be amended to ensure that ongoing financial services be renewed by clients annually.

In 2020 research by the Investments and Wealth Institute (USA) revealed that clients are starting to question whether their adviser is providing the kind of service and advice they need. A gender bias study, ‘Creating a better financial future for women’ conducted by Bank of America Merrill Lynch in August 2020, concluded that 35% of women and 30% of men who have bad experiences with a financial adviser, will fire them.

While an adviser’s service activities may seem intuitive, the Royal Commission and client loyalty research shows that not all financial advisers do them well. This goes to show that the success of a financial adviser is heavily dependent on their client’s level of satisfaction and is even more reason for financial advisers to respond to these forces by re-evaluating and repurposing their annual goalsbased review, their service proposition, their fees and how they charge their clients.

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Strap Advice THE IMPORTANCE OF THE REVIEW The annual review is an opportunity to strengthen and expand client relationships. It can help develop client loyalty and has the potential to differentiate financial advisers from their peers. Advisers who continually enhance the annual goals-based review meeting agenda go beyond just investment performance, insurance policies and market outlook (these reports can be provided to client before the review), freeing up time to focus on the more valuable aspects like goal progress, attainment and adjustments. They use the meeting to assess unmet needs and identify areas of dissatisfaction. These activities build client satisfaction and increase loyalty and trust.

However, advisers need to go deeper in their client meetings and prepare for the unexpected. A well-known saying that our lawyer colleagues use when preparing for court is ‘never ask a question you don’t know the answer to’. The same holds true for the financial advice client review meeting, in that you want to be able to provide an answer for any question the client may have regarding their financial plan. AdviceTech tools that allow a client to update and submit information prior to the meeting provide advisers with the opportunity to review that information and prepare for the meeting, reducing the chances of being blindsided by the client.

In the review meeting itself, advisers can then use their AdviceTech tools to illustrate the benefits of their recommendations.

They can show the value they have already added to the client and how much more value they can add over the coming years.

For the client, the goalsbased annual review provides a focus on the future to the next big event in their lives. This may sometimes prove exciting and sometimes daunting.

The adviser can create confidence and clarity about how the future may look for each client and with that a roadmap for navigating

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the next steps in the client’s life, keeping in mind their goals.

Clients want to know: “Am I on track?” What they are asking is: • Are we going to reach our goals?

• Do we have enough in super/ going into super?

• Will our super last?

• Have we saved enough money?

• Are we investing enough?

• If something happens to me will my family be OK? • Can we reach all our goals with our current financial plan?

• How do we get back on track?

Answering these questions requires a thorough understanding of the client’s goals and solid, efficient preparation prior to the review.

THE REVIEW MEETING STRUCTURE In the meeting itself, using a conversational structure will help create a positive and meaningful experience and outcome for the client. The way to do this is to create and implement a structure, such as: • Begin the meeting with a framing comment; • Set the agenda; • Discuss the information that the client provided prior to the meeting; • Ask some questions; • Explore the answers; • Review performance to date; • Show the client which goals have been attained, which goals are on track, and which goals need adjustments to get them back on track; • Agree to next steps; and • Review the ongoing service arrangement.

IMPROVING THE CLIENT REVIEW JOURNEY In order to improve the client review journey, advisers need to ask their existing clients about the services they want and value. In this way they include their clients in the development of the value proposition. Considering how existing clients want to engage with the business helps determine how the approach may need to change for new ongoing service

clients. How clients experience the adviser’s value proposition will help advisers create new, more valuable service packages.

How advisers optimise client engagement technology to enrich their ongoing service leading to the review meeting will therefore be critical going forward.

A Fidelity financial planning study in the US, ‘Three Principles of Holistic Wealth Planning’, found that life change planning, values-based planning and total wellness would become the main drivers of adviser success into the future. They propose that advisers should advance their roles and existing business models beyond just financial planning to engage a broader and deeper client engagement and consider factors across a client’s life.

Improving the client review journey requires actively supporting clients and providing significant value based on their unique needs.

BENEFITS OF IMPROVING THE CLIENT REVIEWS A valuable review process with an improved client experience journey holds several practice management and business benefits for advice businesses. To this end, Salesforce’s second annual ‘State of Sales’ report showed that customer experience had overtaken process as the top KPI for the measurement of success in business and Russell Investments now includes customised client experience and planning in their ‘Value of an Adviser’ formula.

According to PwC in the US, even if people love your company or product, 32% of all customers would stop doing business with a brand they loved after one bad experience and 59% will walk away after several bad experiences. If advisers get their client experience wrong then one in three clients (32%) could walk away from their business after just one bad experience! The payoff for valued client experience is tangible. Not only are clients more sticky but are also more likely to endorse the services they receive from an adviser.

A goal-based review facelift will create a compelling marketing message for advisers that differentiates them from their peers, robo-type advisers and digital advice dispensed by superannuation call centres, while also driving referrals from existing clients.

Investing time and resources into an enhanced service proposition can also provide leverage for increasing the value of the business. Finding smart AdviceTech that helps lower expenses, improve personalisation, enhance client loyalty and act as a growth engine all head up the list for increasing multiples on earnings before interest and taxes (EBIT) which is now, more than ever, the primary driver of advice business valuation.

BOOK THE FACELIFT REVIEW INTO YOUR DIARY Consider expanding your existing role and explore the benefits of behavioural finance to your clients.

Repurpose your annual goalsbased review process so that it goes beyond traditional financial planning and investment feedback. Although most advisers’ efforts have gone into responding to the new regulations, ensuring they are compliant, upgrading professional qualifications, coping with the large increase in financial requirements imposed on them, it is now time to regain customer trust and loyalty.

While the steps involved in giving your services a facelift are simple, making the time to focus on the strategic is not easy. The secret of success lies in employing the right AdviceTech that facilitates better client engagement, and if you need someone to keep you accountable, finding the right business coach. Do the strategic work now and you may be surprised by how much time it will free up, how many fires you put out and how much better your business will be in the future.

Johann Maree is a practice development manager with AstuteWheel.

31/08/2021 11:37:35 AM

24 | Money Management September 9, 2021

Superannuation

MODERN MUTUALITY: REALISING LIFETIME VALUE FOR SUPER MEMBERS The principles of mutual companies are still evident in our superannuation system, writes Andrew Howard, but more can be done to improve life insurance within super.

ONE OF THE great developments in the Australian economy has been the emergence, nearly 150 years ago, of a series of mutual companies or friendly societies that were designed to raise funds which could be used to provide common services to all members of the organisation or society.

Many of Australia’s heritage wealth management companies arguably rose to their peak commercial and community value when they were structured as mutuals. The mutual structure was a model fundamentally grounded in genuine alignment between the organisation and the customer, not just at claim time but throughout the entire relationship.

In the 1980s, a wave of

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similarly-designed companies were created in response to an agreement between the Hawke government and the trade unions – superannuation funds. For the most part, they represented a renewed ability for people to invest, and be protected, together.

Over time, the super model has also evolved into an efficient distribution system and value for money life insurance system, which is leading by world standards. It is both a highly efficient and customer-centric model, returning a very high proportion of premiums to members in claims payouts.

In terms of benefits to consumers and the community, it is a world-leading, inclusive model that offers Australians excellent value and provides

access to insurance to many millions of Australians who otherwise may not be able to access life insurance at all.

While the mutual structures of the past may no longer exist in that original form, the principles which underpin them – community, members-first, shared interest, collective benefit, and alignment – remain as important and relevant as ever in superannuation funds today.

A SOCIETAL BENEFIT

BY DESIGN Super funds’ single most powerful attribute is that they are, by design, intended for broad-based social benefit. By individuals collecting their savings for retirement and life-risk protection premiums together, they do better

than they would on their own, more often. In simple terms, they are stronger together, and that can only be a good thing.

Likewise, what makes insurance through super so vital is its very nature, representing an incredibly important, and high value, form of protection which those members may not otherwise be able to access.

Australia’s insurance through super model leads the world in terms of value for money for customers and access to life insurance, with currently around 94 cents in the dollar returned to members as benefits on claims paid.

In the 12 months to 30 June, 2020, Australian super fund members received $6.3 billion in claims paid through group

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Superannuation

insurance, including around $4 billion in living benefits, helping people to continue living their lives while recovering from serious illness or injury.

Clearly, there is no question about the value of this important aspect of the super system in supporting members during what are often the most difficult times in their lives, however the opportunity exists for life insurers and our fund partners together, to consider how we can further improve the insurance in super system and add greater value beyond claim time.

FINDING OPPORTUNITIES WITHIN THE CHALLENGES Right now, there are at least two major challenges facing our super funds, as they have become larger and more complex.

First is the ever-rising tide of political challenge and regulation.

This tide represents a continuous, and in some cases necessary, compliance overlay that draws upon the capacity of teams whose sole purpose is to support members.

However, if we accept that political challenge and regulatory reform are undertaken with the intention of making a good system even better, then by extension we should also be looking at these aspects of the industry as an opportunity to support change which will enable super funds and their partners to do more for members over the long term.

The second challenge, and by far the greatest, is the general engagement of members within the super funds. More than ever, members are now required to understand and take action in relation to their retirement savings and risk protection.

Despite this, engagement remains at levels well below other consumer products and services.

While we saw through the implementation of legislation over the last 24 months, the heightened levels of conscious engagement that come with the prospect of underlying changes that may impact a member’s retirement savings, these events

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are the exception, not the rule.

To understand how we can drive more ongoing engagement with members and enhance the value they derive from their relationship with their super fund – and by extension their group insurance provider – we need to go back to those aspects of their lives that members hold most dear.

ENHANCING THE MODEL FOR LIFETIME VALUE AND ENGAGEMENT TAL works with a broad range of super funds to provide life insurance and disability protection to their members, and the engagement of those members is fundamental to the way in which they understand and value their cover.

In a traditionally low touch, low engagement category, finding new avenues for ongoing member engagement is critical to member confidence and value, and as we consider the challenges outlined, an opportunity exists for life insurers to work collaboratively with fund partners to ‘supercharge’ their engagement models.

Life insurers can play a key role in providing opportunities for funds to demonstrate greater value to members throughout the life of their membership, enabling a more positive impact to be made for all Australians and enhancing the value exchange in a way that brings the principles of mutuality to members in a contemporary context.

One critical opportunity lies in the importance of improving financial literacy for super fund members. As noted in the Retirement Income Review, a lack of financial literacy is impeding too many Australians from understanding the super system and the benefits it provides for them.

The recently passed Your Future, Your Super legislation means members will need to look at super and insurance more carefully, so there is a natural opportunity for funds to educate and better support members when making decisions.

“The opportunity exists for life insurers and fund partners together to consider how we can further improve the insurance in superannuation system.”

– Andrew Howard Reminding members about what their fund does, or encouraging them to take action, can increase their confidence in their own future. Through TAL’s ‘Discover’ proposition, we’re helping our super fund partners to raise member awareness about life insurance products and their options, and to engage and empower them in their decision making.

Moreover, as more Australians move into the retirement phase of super, they will need to make key decisions directly impacting their quality of life, and the ability to drive greater engagement with members through the lens of financial literacy in advance of that, means funds and insurers together can play an ongoing, meaningful role in supporting these members.

EMBRACING HEALTH TO DRIVE MEMBER VALUE Another key pillar for member engagement lies in supporting them with their other needs, such as holistic health and wellbeing.

Supporting Australians to live healthier lives, remain productive and retain their abilities to earn an income is aligned to the system of saving for a comfortable retirement and also maintaining the overall affordability of life insurance in super for all members.

Working together, super funds and life insurers play an important role in our community, supporting Australians in the worst of circumstances with life insurance and disability benefits when they are unable to work due to serious injury or illness, or permanent disablement.

While we can, and do, facilitate access to health support at the time of a claim, there are broader opportunities to engage members

through the lens of their health, such as through preventative mental health initiatives.

With almost half of all Australians likely to experience a mental health condition in their lifetime, there is significant opportunity to be realised in helping individuals identify and manage mental health challenges to prevent the onset of conditions.

Beyond health, insurers and super funds together should always be thinking about ways in which we can improve the system, and the value that is delivered to members throughout their lifetime.

Lifetime value should support more services aligned to saving for – and spending in – retirement, and life – or lifestyle – protection, but not necessarily limited to investments or insurance.

Mutual by design, our super sector works as a world-class savings and protection system, and we must rise above the debate and deliver on the promise of super by ‘supercharging’ engagement and ensuring lifetime value and more comfortable retirement for all Australians.

By finding ways to further support engagement and access to insurance through technology enabled education and advice, by thinking through the improvement of disability product and benefits, and considering how trustees and their insurance partners can work together on health prevention and support – before, during and after claims – we can bring the principles of mutuality to members in a contemporary way, and enable a more positive impact for all Australians.

Andrew Howard is chief commercial officer for group life and investments at TAL.

2/09/2021 9:08:44 AM

26 | Money Management September 9, 2021

Advice

WHERE ARE ADVISERS REQUIRING SUPPORT? Superannuation and social security are among themes where advisers are querying the most as they look to upskill their knowledge in a complex advice world, Craig Day writes.

DEMAND FOR TECHNICAL support from financial advisers jumped by over 11% during the 2021 financial year – and while the uncertainty caused by COVID-19 and changes to super contribution rules drove much of that increase – analysis shows demand for non-investment strategic advice grew across a broad range of areas as both demographic shifts and policy settings continue to play out.

With this in mind, it may be timely for advisers to better understand these trends and position themselves ahead of the curve to meet their client’s growing strategic advice needs into the future.

The breakdown of enquiries received by CFS’ FirstTech team (Chart 1) showed that superannuation remained the dominant technical topic, making up over 48% of all queries. This was followed by social security, estate planning, along with issues on aged care and selfmanaged super funds (SMSFs) – these top five topics made up 82% of the questions we received.

While this distribution of questions remained broadly consistent with what we have seen in previous years, there were some stand-out changes compared to the last financial year that were worth noting.

SUPERANNUATION TECHNICAL SUPPORT For most advisers in 2020/21, super was the key focus for their clients, driving enquiries up by

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15% over 2019/20 levels, with significant increases in a number of individual topic areas.

Contributions generated the most queries – up by a massive 146% on last year – with most questions centred on the Federal Government’s proposed extension to the non-concessional bring-forward rules to people aged 65 and 66.

The big driver in demand here was advisers wanting to know whether the new rules affecting their clients, which took a lengthy 405 days to get through Parliament, had become law yet and what their effective date was.

We also saw a significant increase in questions relating to concessional super contributions during 2020/21 compared to the previous year. While this rise was likely driven by a range of factors, one of the more common concessional contribution enquiry topics related to the carry forward concessional contributions rules, which only came into effect on 1 July, 2018.

The interest in this topic continues to grow each year in line with the potential benefits of the strategy as the rules continue to phase in before it reaches full maturity in 2023/24.

Questions about the carry forward concessional rules were mainly practical with advisers wanting to know whether the client needed to notify the fund (or the Australian Taxation Office) that they will be making carry forward contributions; if there is a maximum age limit for making

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Strap Advice

S carry forward concessional contributions; and where advisers can access information about their clients’ unused concessional contribution cap amounts.

SUPERANNUATION INCOME STREAMS Income streams also featured prominently in queries about super received by the FirstTech team compared to 2019/20. This increase was driven by a range of issues, including the announcement in May that the Government would extend the halving of the minimum pension drawdown requirement for an extra 12 months to cover 2021/22, while we also saw more questions relating to transition to retirement pensions.

In addition, we also saw a massive 80% increase in the number of enquiries relating to members satisfying the retirement condition of release.

While this surge in questions may be driven by demographics and the fact that more and more baby boomers are reaching retirement each year, it could also be a consequence of people technically satisfying a retirement condition of release, such as where they lost their job or were made redundant after turning 60.

population with more people now having significant estate planning needs, what’s also clear is that more and more advisers are looking to assist their clients in this area.

While estate planning involving the establishment of wills and testamentary trusts is still very much the domain of specialist estate planning lawyers, we have noticed that more advisers are upskilling in this area and looking to work with legal service providers to leverage their skills and understanding of their clients’ needs and circumstances to facilitate the implementation of comprehensive estate plans.

As a result, FirstTech has seen not only a jump in these enquiries but also noticed the increase in complexity of the enquiries received over the last several years.

REDUCED DEMAND FOR SOCIAL SECURITY SUPPORT At the other end of the spectrum, demand for social security technical support surprisingly fell by 12% in 2020/21 compared to 2019/20 levels. However, this reduction appears to be a one-off event caused by a significant spike in the number of enquiries received in late 2019/20 related to the Federal Government’s

ESTATE PLANNING

COVID-19 social security announcements, rather than any reduction in the overall level of technical enquiries received from year to year.

Technical questions in relation to the assets and income tests as well social security pensions increased by 42% and 110% respectively compared to 2019/20.

While it is difficult to be certain, these increases are likely due to advisers seeking to understand how the significant market volatility and changes to the deeming rates would impact their clients’ social security entitlements.

SMSF SUPPORT DRIVEN

BY LEGISLATIVE CHANGE We also saw questions for SMSF clients rise 31% compared to the previous year making up approximately 7% of our total technical enquiries for 2020/21.

Further analysis shows a combined 70% increase in in-specie asset transfer and related party transaction enquiries in 2020/21 compared to 2019/20 levels. This may have been due to an increased number of people looking to take advantage of decreased asset values in early 2020/21 to transfer assets such as listed shares and business real

Chart 1: CFS technical enquiry topics

Estate planning was also a big issue for advisers in the 2021 financial year. Questions, which covered both super and non-super issues, increased by 39% over 2019/20 levels. This continues a trend that FirstTech has observed over the past five to 10 years to the extent that estate planning issues now make up the third most common type of enquiry we receive.

While the increased focus is to be expected given the ageing

“We have noticed that more advisers are upskilling in estate planning and looking to work with legal service providers to leverage their skills and understanding of clients’ needs.”

– Craig Day property into their SMSF. We also saw more enquiries relating to SMSF income streams as well as the segregation of assets. While it’s not possible to determine the precise catalyst for these questions, it’s likely to be associated with a range of factors such as SMSFs being unable to meet their minimum pension liabilities due to the financial impacts of COVID-19, the extension of the 50% reduction in the minimum pension requirement for 2021/22, as well as proposed changes to the way SMSFs will be required to calculate their exempt pension income.

Our review of this enquiry data shows that advisers are not only continuing to add real value through the development of longterm strategies to help their clients meet their financial goals, but also demonstrates how subsequent change, such as through new legislation and macroeconomic events, may impact them and help to guide them through that change.

Such evolution should also serve to keep advisers well informed and on course to pursuing new strategies to secure their clients’ futures.

Craig Day is head of technical services at Colonial First State.

Source: CFS

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2/09/2021 10:26:56 AM

28 | Money Management September 9, 2021

Toolbox

BEYOND THE LABEL, ESG FUNDS MAY MISS THEIR MARK There are plenty of ESG funds available on the market, writes Warwick Schneller, but the lack of universal definition means some may not be having a real-world impact.

PEOPLE ARE GROWING more interested in how they can make investment decisions which also align with their views about climate change and sustainability. The market has responded with an increasing number of solutions carrying environmental, social and governance (ESG) type labels.

However, the absence of a universally-accepted definition of ESG investing has led to a wide array of different approaches and outcomes, both in terms of investment methodologies and sustainability profiles.

What we do know is that it is possible for investors to align their sustainability and financial goals within a sound investment framework that targets measurable ESG outcomes while pursuing higher expected returns and diversification. But discretion is required.

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So where do you begin? Part of the issue in judging between different options is the absence of a universally-accepted

definition of ESG investing. This has resulted in a broad array of approaches that vary in the components considered, the

Chart 1: US equity funds with a sustainability focus, percentage of AUM by Morningstar category, as of 31 October 2020

variables by which those components are measured and the method of incorporation.

This presents a potential dilemma for investors as these differences can lead to a wide range of investment outcomes.

It’s against that background that Dimensional Fund Advisors carried out a study of ESG-focused funds. What we find is significant variation in both fund characteristics and sustainability profiles.

The results of this study serve as a reminder to advisers and their clients to look beyond ESG branding in evaluating whether the chosen investment approach is consistent with the investor’s goals.

MANY FLAVOURS TO ESG INVESTING

Source: Morningstar

The first sign of a varied ESG investment landscape is the breadth of investment categories

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September 9, 2021 Money Management | 29

Toolbox Table 1: US equity sustainability funds aggregate characteristics, as of 31 October 2020

among ESG-focused strategies.

Chart 1 shows the Morningstar category breakdown for a sample of US equity mutual funds and ETFs categorised as sustainable investments as of 31 October, 2020.

While the majority of the $131 billion in this sample’s assets under management (AUM) is focused on largecap stocks, the 165 ESG funds are spread across 16 categories – spanning size, style, and sector composition. In contrast to the mutual fund industry at large, the majority of these ESG funds are actively managed; less than 40% by net assets were categorised as index funds.

While research suggests ESG characteristics do not provide additional information about expected returns, an emphasis on ESG characteristics might impact the performance of these strategies. For example, if the incorporation of ESG considerations leads to a systematic over or underweighting of drivers of expected returns, such as size, relative price, or profitability, the expected returns of ESG strategies may be systematically higher or lower than the expected return of the market.

Viewed in aggregate, ESG-focused US equity funds differ from the broad US market.

Characteristics for an assetweighted sample of ESG funds as of 31 October, 2020, in Chart 2 show a tilt toward higher relative price and smaller market capitalisation than the

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Chart 2 and 3: Emissions exposure for the US equity sustainability fund sample, as of 31 October 2020

Source: Morningstar

Russell 3000 index.

Interestingly, the number of distinct US stocks included in the aggregate ESG sample totals more than 2,700, approaching the index’s 3,023 holdings. This implies that, depending on whom you ask, more than 90% of stocks in the US market fit the bill for ESG investing.

Aggregate characteristics obscure the range of outcomes across ESG strategies. Chart 2 also shows characteristics for

the cross-section of ESG funds at the 25th, 50th, and 75th percentiles of the distribution.

Portfolio positioning runs the full spectrum along all three characteristics. In particular, the inter-quartile range of weighted average market cap spans from a market-like $348 billion down to under $25 billion, the latter bordering on mid-cap territory. The observed variation in size, relative price, and profitability implies meaningful

differences in expected returns among these funds.

In addition to the individual fund characteristics, the results indicate many ESG funds select only a small subset of companies, leading to a limited investment universe and lower diversification. Chart 2 shows, at the 25th percentile, the number of stocks held in a sustainability fund is just 34.

Continued on page 30

1/09/2021 9:27:38 AM

30 | Money Management September 9, 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. What proportion of the survey sample’s assets under management were categorised as index funds? a) About 80% b) Less than 40% c) More than 90% d) About 70% e) Zero

Continued from page 29 With so many approaches to ESG investing, one might expect substantial variation when assessing strategies through the lens of any individual ESG measure. This is exactly what we see in the greenhouse gas (GHG) emissions exposure data for our sample of ESG funds. As shown in Chart 3, both the emissions intensity and potential emissions of ESG funds in aggregate are meaningfully lower than those of the broad market. But the range of reduction is considerable. For example, for the 75th percentile of funds, emissions intensity is 11% lower than that of the Russell 3000 index; by comparison, the reduction is 61% at the 25th percentile.

The emissions results are instructive in the context of investor expectations. The latest science unequivocally pinpoints GHG emissions as the primary contributor to climate change, and data on GHG emissions are widely available for public companies. To the extent that investors expect an ESG investment to reflect their concerns over environmental sustainability, the wide gamut in emissions exposure outcomes may be disappointing.

A ROAD MAP FOR CHANGE Dimensional’s findings show that the ESG label is hardly prescriptive when it comes to investing, highlighting the importance of evaluating an investment approach based on one’s goals. Those with concerns over climate change may seek out strategies with reduced exposure to companies and sectors that drive climate change through carbon emissions. That means asking questions of the investment managers to evaluate which ones have delivered on the claim of reducing exposure to emissions versus simply paying lip service.

Investors should also be wary of claims by ESG managers that their sustainability funds will meaningfully impact climate change.

There is a distinction between GHG emissions exposure in one’s asset allocation and actual GHG emissions in the real world: just because you’re not holding shares of a company doesn’t mean it stops burning hydrocarbons.

As a result, while managers may use divestment to avoid companies with high GHG emissions, this does not mean that these types of strategies necessarily have a real-world impact. Investors should make sure that managers claiming to have actual real-world impact can provide objectively measurable reporting that backs up their claims.

Warwick Schneller is a senior researcher and vice president with Dimensional Fund Advisors.

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2. The expected returns of ESG strategies may be systematically higher or lower than the market as a result of the weighting of such characteristics as: a) Carbon emissions b) Debt-equity ratios c) Relative price d) Company location e) Carbon footprint 3. What percentage of stocks in the US market did this research find fit the bill for ESG investing? a) Over 50% b) Over 60% c) Over 70% d) Over 80% e) Over 90% 4. In addition to the broad range of individual fund characteristics, results indicate many ESG funds select only a small subset of companies, an approach that leads to a limited investment universe and lower diversification. At the 25th percentile, the number of stocks held in a sustainability fund is: a) 24 b) 34 c) 44 d) 54 e) 64 5. Both the emissions intensity and potential emissions of ESG funds in aggregate are meaningfully lower than those of the broad market. But the range of reduction is considerable. For example, for the 75th percentile of funds, emissions intensity is 11% lower than that of the Russell 3000 Index; by comparison, the reduction at the 25th percentile is what percentage? a) 41% b) 51% c) 61% d) 71% e) 81%

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ beyond-label-esg-funds-may-miss-their-mark For more information about the CPD Quiz, please email education@moneymanagement.com.au

1/09/2021 9:27:26 AM

September 9, 2021 Money Management | 31

Send your appointments to chris.dastoor@moneymanagement.com.au

Appointments

Move of the WEEK Peter Loehnert Head of iShares and index investments BlackRock

BlackRock has appointed Peter Loehnert as head of iShares and index investments for Asia-Pacific, commencing from 1 October, 2021.

Based in Hong Kong, Loehnert would be responsible for growing iShares exchange traded fund (ETF) market share and ETF adoption

Colonial First State (CFS) has hired Anthony Lane from MLC as its group chief risk officer (CRO).

Lane was most recently CRO and chief operating officer (COO) at MLC which he joined in 2019 and led a team of 750 people.

This included work on the firm’s separation from NAB which was completed in May 2021 with MLC Wealth being acquired by IOOF. Prior to this, he held senior leadership roles at Westpac and BT, and also spent almost 15 years at Mercer in a variety of roles including global leader of fund manager research and global COO. CFS had made several senior appointments in advance of its separation from Commonwealth Bank, which included Kelly Power as chief executive for CFS Superannuation, Andrew Morgan as chief financial officer and Darren McKenzie as COO. AustralianSuper has promoted Justin Pascoe to head of equities, having previously held the role in a deputy capacity since September 2020.

Pascoe joined AustralianSuper in June 2019 and was later appointed as deputy head of equities where he was responsible for day-to-day leadership of the

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among investors in the region, as well as institutional index mandates.

Rachel Lord, BlackRock’s chair and head of Asia-Pacific, said Loehnert gained outstanding experience in building the international cash management and global transitions businesses which

equities team in Australia.

This followed the relocation of head of equities Innes McKeand to the firm’s London office and he later joined London-based USS Investment Management in March 2021.

Prior to joining, Pascoe worked as chief investment officer at Victorian Funds Management Corporation from 2008 to 2016.

The fund’s equities portfolio, which was a mix of internal and external management, was expected to exceed $200 billion in the next three years.

Tony Klim will depart as Bravura Solutions chief executive after 13 years in the role as global chief operating officer (COO), Nick Parsons, will succeed him from 3 September, 2021.

Parson’s remuneration would be £375,000 ($709,460) with a shortterm incentive plan of 100% cash of his standard remuneration.

Klim said: “Given his deep industry expertise, outstanding client relationships and long-term tenure with Bravura I’ve every confidence and Nick will champion the needs of clients, employees and shareholders to the future”.

Parsons joined Bravura as its chief technology officer in 2007 and

he previously led.

Before joining BlackRock in 2011, he held positions at Nomura International, Lehman Brothers International (Europe), Cominvest Asset Management, and Commerzbank AG where he started his career in 2004.

had undertaken a range of senior leadership roles in the business during his tenure, including business development director and more recently as global COO. Megan Owen would take over Parson’s role as global COO. Boutique fund manager SG Hiscock & Company has appointed Sophie Smith to the role of investment analyst, working on the recently-launched SGH Medical Technology fund.

Smith would directly report to portfolio manager, Rory Hunter, who said strong investor demand had driven the need for growing the capabilities of the fund.

The fund invested in a mix of established and start-up medical technology companies, listed and unlisted, in Australia and New Zealand, and typically held between 40 and 60 investments.

Fidelity International has appointed Daniela Jaramillo as director, sustainable investing, based in Melbourne.

In the newly-created role, Jaramillo would work with Fidelity’s investment team to help further integrate sustainability considerations into the firm’s investment process.

She would also act as a spokesperson for Fidelity and represent the firm’s sustainable investing capabilities in Australia and New Zealand.

She was currently a board member of the Responsible Investment Association Australasia (RIAA) and served as a member of the Principles of Responsible Investment (PRI) Stewardship Advisory Committee.

Jaramillo had over 15 years’ experience and joined from industry superannuation fund HESTA where she was most recently senior responsible investment adviser.

During her time at there, she founded 40:40 Vision, an investor-led initiative to drive gender diversity in the C-suite of Australian Securities Exchange (ASX) listed companies.

Prior to HESTA, she held roles in sustainable investment in the US for Wespath Investment Management and the UK for Legal & General Investment Management.

She would report to Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International, who said Jaramillo was a welcome addition to an already strong sustainable investing team.

2/09/2021 12:18:50 PM

OUTSIDER OUT

ManagementSeptember April 2, 2015 32 | Money Management 9, 2021

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

Matchmaking mergers THE superannuation industry is going through a period of consolidation via mergers and Outsider believes he can use some real-life experience to help the process.

What sparked Outsider’s idea was during the AIST Superannuation Investment conference, Sonya SawtellRickson, HESTA chief investment officer, was asked what her ideal merging partner would be for the health and community industry fund.

Obviously, it might have created some interest from the regulators should she have mentioned funds by name, but as she danced around the question, she ended up sounding like she was describing a list of traits for her ideal mate.

This included being purpose driven, responsible with how they use their money, sharing the same beliefs, and ideally from a similar line of work (Outsider notes she didn’t mention anything about the size of the merging partner).

Now it’s been a while since Outsider has needed to find a merging partner for himself, but he is quite confident he could

set up a matchmaking service for super funds. After all, back in the day, your humble Outsider had no trouble finding suitable candidates to merge with.

As with traditional matchmaking services, candidates can list their ideal traits of a (merging) partner and the matchmaking service can come back with something more realistic.

And just like with those matchmaking services, Outsider promises to make them as dehumanising as possible.

Drinks reception in the kitchen TO break up the tedium of the current lockdown, Outsider spent the past week listening to the virtual Australian Institute of Superannuation Trustees Superannuation Investment conference.

After another busy day of sessions on topics such as investment governance and defensive investment strategies, he was amused when panel moderator Ken Marshman from REST said: “That’s the end of the conference, drinks are being served in my kitchen”.

How Outsider wept at the thought of all the drinks receptions he’s missed in the past year.

While he enjoys the insightful content provided at these conferences and finds them a valuable source of future stories and networking opportunities, he cannot deny that he is missing the, ahem, other benefits of a conference.

A few days in a luxury hotel, few rounds of golf, time away from the office, time away from being shouted at by Mrs O at home, drinks receptions and three-course swanky dinners with free-flowing wine, what’s not to like?

While he probably said the same thing in 2020 unfortunately, he is still hopeful 2022 will be the year they return.

Now he is off to make a drink in his own kitchen, because you’re so faraway, Ken.

Ever-hopeful of travel MAYBE it was the groundhog-like nature of lockdown getting the better of him or maybe there was some dust in his eye, but Outsider felt oddly emotional watching the latest Qantas advertisement.

The advert shows a family flying to Disneyland, a father visiting his daughter overseas, and a couple travelling to a wedding – all having been jabbed first, of course.

On social media, the advert was widely praised for giving more encouragement to people to get vaccinated than any of the national Government campaigns.

Given Qantas staff have been furloughed for many, many months as the border closures have

OUT OF CONTEXT www.moneymanagement.com.au

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dragged on, they have had some time to think about creating the best campaign possible.

In its company results, the firm reported a $1.7 billion statutory loss, which followed a $1.9 billion loss in the previous year, in what has been an unprecedented period for the aviation industry.

Nevertheless, its shares are up 28% over the past year which will be a reassurance to Alan Joyce, once the highest-paid chief executive in Australia.

While Outsider may be a bit too old to be visiting Disneyland, he still has his own travel plans on the horizon and had better check his passport is still in date.

"I think financial professionals get a bad rap... the sort to sell their mothers to maximise performance."

"I'm not gonna ask what people had for breakfast."

– Sonya Sawtell-Rickson, HESTA chief investment officer

– Senator Deborah O'Neill

Find us here:

2/09/2021 1:44:54 PM