Money Management | Vol. 33 No 17 | October 10, 2019

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MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 33 No 17 | October 10, 2019

FUTURE OF WEALTH

Interview with Easton Investments

18

FUNDS

24

Building on infrastructure

MANAGED ACCOUNTS

Changes to means testing

Exempt mortgage-related life insurance says AFA

BY MIKE TAYLOR

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Waiting on ASIC’s conclusion MANAGED accounts are rapidly becoming a growing part of the investment and financial advisory industry, with the Institute of Managed Account Professionals (IMAP) estimating it could reach $115 billion by 2020.

With over $71 billion in funds under management already, the vehicles are liked by clients for their transparency and wide asset class availability while advisers prefer them for their lower administration costs and time-saving benefits.

A study by Colonial First State (CFS), which has over $10 billion in managed accounts, found 87% of advisers reported reduced administration, 73% found improved client engagement and improved client investment outcomes and 70% found improved portfolio risk control from using them.

Ben Abell, head of institutional solutions at CFS, said: “We found advisers were surprised by how much of a positive impact managed accounts achieved. They report improved client engagement and communication.

“They also reported improved investment outcomes which they attributed to being able to make changes quickly and being able to execute decisions quickly across all the relevant portfolios, rather than any individual investment ideas.”

However, the industry could be changing and coming under more scrutiny in the future as it is currently awaiting the conclusion of an Australian Securities and Investments Commission (ASIC) ‘information gathering’ exercise.

After previously identifying managed accounts as a ‘blind spot’, the regulator has been looking for conflicts of interests, diversity of models and the high standards of MDA operations. This involved ASIC sending questionnaires to a number of platforms, operators, licensees and providers to ensure a range of perspectives on the matter.

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Full feature on page 20

40

TOOLBOX

ADVISED life insurance taken out as a safeguard around a home mortgage should be exempted from the Government’s tough new rules around add-on insurance, according to the Association of Financial Advisers (AFA).

However, the AFA is arguing that insurance sold under general advice or no advice should not be exempt.

In a submission responding to the Treasury discussion around the Government’s reform to the sale of add-on insurance products, the AFA warned that the situation within which advisers recommended life insurance at the time of taking out a home mortgage appeared to have been overlooked.

It said that, given the scale of the debt involved in a home loan,

the issue needed to be addressed.

The AFA said it appeared that the situation of life insurance attaching to the taking out of a home loan appeared to have been inadvertently caught up under the Government’s proposals.

“It is often the case when someone takes out a home loan that they might also take out life insurance,” it said. “The fact that they have taken on significant debt to finance the purchase of a home is a very sensible trigger to consider the adequacy of their existing level of life insurance.”

The AFA submission said that this was often done by a financial adviser working within the office of a mortgage broker or by someone to whom a mortgage broker referred clients.

“Generally, the advice process Continued on page 3

NAB to pay a further $1.18b in customer remediation

BY JASSMYN GOH

THE National Australia Bank (NAB) has announced an additional charge of $1.18 billion from customer-related remediation and a change to its software capitalisation policy.

The bank said in an announcement to the Australian Securities Exchange (ASX) that this was expected to reduce 2H19 cash earnings by an estimated $1.1 billion after tax and earnings from discontinued operations by an estimated $57 million after tax.

Customer remediation would account for $832 million after tax ($1.18 billion before tax) and the key driver of these charges was the inclusion of a provision for potential customer refunds of adviser service fees paid to self-employed advisers.

NAB said it had placed provisions for the estimated costs and Continued on page 3

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October 10, 2019 Money Management | 3

News

Dealer groups touting for departing bank planners

BY MIKE TAYLOR

MID-SIZED financial planning dealer group, Infocus has been actively canvassing to attract bank-employed financial planners under its masthead.

Infocus general manager of partnerships and distribution, Richard Herbst, has used an article published on social media to directly address bank-employed financial planners who describes as being in the “Advice departure lounge”.

In doing so, he has suggested that Infocus has space available in its Sydney, Melbourne and Sunshine Coast offices to accommodate planners who want to start their own advice businesses within a dealer group.

In doing so, Herbst has cited the experience of a number of ex-Westpac planners who had taken the decision to become self-employed by starting their own advice businesses and who had taken their loyal clients with them.

“Unfortunately for some, the future of the other Big Four advice business is not so clear, with some financial planners being made redundant, others still employed (but for how long), client service agreements being terminated, fees switched off and a lot of angst and uncertainty,” Herbst wrote.

He said financial planners were facing

Exempt mortgage-related life insurance says AFA

difficult decisions noting that he had spoken to a number of bank-employed financial planners in recent months.

“For those looking to start their own business, one of, if not the biggest decision is the choice of a dealer group,” he wrote. “Many bank-employed financial planners have not been exposed to the world of dealer groups

NAB to pay a further $1.18b in remediation Continued from page 1

Continued from page 1 takes place before the loan is taken out, often during the loan application process to coincide with the completion of the loan and to ensure the client is covered immediately upon commencement of the loan,” it said.

“The products made available as part of this process are the standard retail advised life insurance products with good terms and conditions and much higher claims payment ratios.”

The AFA submission said that the Government had signalled that there were grounds for certain products to be exempt and that advised life insurance should be included amongst the exemptions.

“We consider that it is essential that these exemptions were also extended to all cases where personal financial advice is provided and where the client received a Statement of Advice,” it said. “In our view, this deferred sales requirement should be limited to general advice and no advice business models.”

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and have found it difficult to know where to start and what to look for in a dealer group.

“My advice is to choose slowly and choose wisely. If something looks very cheap compared to others, do your research to ensure they have the appropriate resources, compliance framework, support services and are going to be sustainable in the future.”

customer payments relating to all known material customer-related mediation matters. However, until all payments were completed, the final cost remained uncertain.

About 92% of the charges were for wealth and insurance-related matters with the remainder for banking-related matters.

NAB chief executive, Philip Chronican, said: “NAB is moving forward with rigour and discipline to make things right for customers”.

“While we previously noted additional customer-related remediation provision were expected in 2H19, the size of these provisions is significant. We understand that shareholders will be rightly disappointed.”

“However, we also recognise the need to prioritise dealing with these past issues and fixing them for customers.”

Chronican said the bank had made about 450,000 payments to customers with a total value of $202 million between June

2018 and August 2019.

Total customer-related remediation as at 30 September was $2.1 billion.

The announcement said the key items for the additional charges included: • Adviser service fees charged by NAB Advice Partnerships (self-employed advisers) with customer refunds of approximately $1.3 billion, with an assumed refund rate of 36%; • Consumer credit insurance sales through certain NAB channels; • Non-compliant advice provided to wealth customers; and • Adviser service fees charged by NAB Financial Planning (salaried advisers) with an assumed refund rate of 28%.

NAB’s software capitalisation was to be increased from $500,000 to $2 million, to reflect the bank’s focus on simplification and the increasingly shorter useful life of smaller software items. This was expected to reduce NAB’s cash earnings in 2H19 by $348 million, after tax.

3/10/2019 11:38:39 AM

4 | Money Management October 10, 2019

Editorial

mike.taylor@moneymanagement.com.au

WHAT IS REALLY MOTIVATING THE RETIREMENT INCOME REVIEW?

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

A significant question mark will hang over the Government’s Retirement Income Review if all it seeks to achieve is abandonment of the superannuation guarantee timetable and tinkering with the tax settings.

Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au

WHEN THE FORMER chief of staff to a former Federal Liberal Treasurer is appointed to head up a Review of the Australian Retirement Incomes and that person is to be assisted by an activist academic and a lawyer/banker then the financial services industry should pay very close attention.

The influence of former Federal Treasurer, Peter Costello, is writ large on the retirement incomes inquiry not just because the man appointed to head up the inquiry, Michael Callaghan was once Costello’s chief of staff but because another member of the inquiry panel, Carolyn Kay, is on the board of the Future Fund which is now chaired by Costello.

Then, too, academic Deborah Ralston is chair of the SMSF Association and was a significant voice during the 2019 election campaign against the issue of the Australian Labor Party’s highly controversial policy proposals to pare back dividend imputation.

When those factors are taken into account with many of the recent utterances of key Coalition backbenchers around superannuation, there would seem to be some justification in the nervousness which has been expressed by more than a few

superannuation fund executives about what the Government really wants to achieve from the inquiry exercise.

In particular, there is nervousness about whether the Government will seek to leverage the inquiry to abandon its timetable for increasing the superannuation guarantee (SG) to 12% by 2025 – something which some Coalition back-benchers have suggested ought not occur and against which Ralston has also spoken.

Indeed, barely days after the Treasurer, Josh Frydenberg, announced her appointment to the review panel Ralston was quoted in the national media echoing the views of the Grattan Institute that it would force low-income workers to forego too much money.

All of this needs to be seen against the background of a growing view in the superannuation industry that the Government has two key objectives it wishes to achieve from the retirement incomes review – scope to exit the SG increase timetable well before it reaches 10% together with the ability to reduce the beneficial tax treatment of superannuation, particularly for large balance holders.

If some of the Government’s more vocal back-benchers have

their way, the review might also traverse the question of whether superannuation should be made entirely opt-in for low balance holders and those aged under 25.

There are, of course, entirely legitimate reasons why the Government should be holding the retirement incomes review not least the better harmonisation of the superannuation/age pension/health cost settings to reflect the challenges and complexities of an ageing population.

If that is the Treasurer’s motivation then the inquiry is both timely and welcome. But it is hard to look past some of the political motivations for doing so, not least seeking to curb the power and influence of industry superannuation funds and the perception that they act as a funding conduit for the Australian Labor party.

The Government should not allow the review of retirement incomes to become a political battle ground. Doing so carries with it the risk of undermining an industry which has delivered long-term benefits to Australia including helping it weather the global financial crisis.

Mike Taylor Managing Editor

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1/10/2019 4:20:30 PM

October 10, 2019 Money Management | 5

News

Advisers warned Treasury on fee cap manipulation a year ago

BY MIKE TAYLOR

FINANCIAL advisers run the risk of being ethically compromised if their clients seek to ‘game’ the superannuation fee cap regime which both adviser and superannuation groups argue is still open to manipulation.

Superannuation group the Association of Superannuation Funds of Australia (ASFA) has told the Federal Treasury the fee cap regime is open to ‘gaming’ and the Association of Financial Advisers (AFA) pointed out that the system was open to ‘manipulation’ in evidence to the Senate Economics Committee in July last year.

The situation has now become more complex because of the terms of the Financial Adviser Standards and Ethics Authority (FASEA) code of conduct.

AFA director of policy, Phil Anderson, pointed out that his organisation had raised the problems with the superannuation fee cap last year and had posed the situation of a member with an account balance of $1 million at the start of the year withdrawing all but $1,000 on the last day of the year.

The AFA suggested that under the current terms of the legislation such a person would only need to pay a maximum of 3% of the $1,000 account balance, representing

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a saving of at least $9,970.

“They could then withdraw the remaining balance in the new year plus the refund of the excess fee which

the fund must pay within three months of the end of the year. As a result, this would become a common strategy in order to avoid fees in the last

year that you choose to be a member of the fund,” the AFA submission said.

“It would also be possible for people to have two funds with

different end of financial year dates and move the money between the funds in order to avoid paying fees,” it said.

The AFA suggested

that any fee cap should be based on the maximum balance of the account throughout the entire year, and not the balance at the end of the year.

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2/10/2019 2:50:00 PM

6 | Money Management October 10, 2019

News

AustralianSuper frequent flyer points offer prompts adviser concern

CountPlus focuses on aligning clientcentric culture with Count Financial

BY MIKE TAYLOR

BY JASSMYN GOH

NEW promotional activity on the Qantas website around AustralianSuper’s offer of 20,000 frequent flyer points for those who open a Super account before 31 December, this year, has angered financial advisers who claim it is a breach of anti-hawking provisions.

The AustralianSuper frequent flyer offer has been criticised by advisers before, but the latest promotion, which appears on the Frequent Flyer section of the Qantas website, has prompted them to raise concerns about whether some regulations have been breached.

The Qantas promotion states: “AustralianSuper has been independently rated the best performing super fund over 10 years. They could also help turn that dream holiday into a reality.

“Make the switch to AustralianSuper today and you’ll earn 20,000 bonus Qantas Points – points that can be put towards flights, upgrades, hotels, wine and more.

“To be eligible you must open a Super account or Choice

Income account via the button below before 31 December 2019 and contribute a minimum of $350 within six months.”

One of the advisers to raise questions about the new promotion, West Australian planner, Steve Blizard, said he was

surprised at the promotional activity particularly given the findings of the Royal Commission and regulator views on anti-hawking.

He said he would be interested hear the views of the regulators on the issue.

Treasury warned super fee cap can be ‘gamed’ THE Federal Government has been warned that some of its changes to superannuation legislation, including the fee cap on low balances remain open to being ‘gamed’ by people with high account balances.

In a submission filed with the Federal Treasury responding to a range of amendments to the recent legislation, the Association of Superannuation Funds of Australia (ASFA) has warned that people who exit a superannuation fund part-way through a year may be able to ‘game’ the system.

The ASFA submission said the organisation had brought the situation to the attention of Treasury in a submission filed in March, this year, and that it remained concerned “that the annual balance

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test could have unintended consequences or be used to minimise fees in high balance accounts”.

“The balance day test, or the test for the day the member ceases to hold the account, does not appear to allow for the possibility of the account having had a higher balance in the previous 12 month,” it said noting that while some amendments had clarified the treatment of members that ceased holding the product during the fund’s income year, “it does not prevent a member from ‘gaming’ the application of a fee cap on low balances”.

“This is a significant concern,” the ASFA submission said suggesting that one protection for this would be to raise the minimum retained balance to a level higher than $6,000, such as $8,000.

COUNTPLUS is focusing on integrating Count Financial into its business as it has completed the acquisition of Count Financial from the Commonwealth Bank of Australia (CBA).

The $2.5 million sale was announced in June and 99.7% of shareholders voted in favour of the acquisition in August. CBA would provide indemnity to CountPlus of $200 million and all claims under the indemnity must be notified to CBA within four years.

CountPlus chief executive, Matthew Rowe, said the firm had started the process to reset its strategic plan, deploy the right team structure and embed new leaders who knew what to expect from a values-based, high performing professional services team.

He said all Count Financial firms would focus on the firm’s approach of being client-centric.

“We are looking forward to helping the underlying Count Financial member firms transition to the new world of financial advice,” he said.

“This new world means meeting community expectations around quality advice outcomes, transparency in client dealings, a move to fee for service, meeting the new Financial Adviser Standards of Ethics Authority (FASEA) education and ethical standards and an approach to advice that is client-centric.

“We will ensure that all member firms fit into the CountPlus family photograph.”

2/10/2019 2:50:40 PM

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8 | Money Management October 10, 2019

News

SEAS Sapfor victims to be compensated $80 million

BY LAURA DEW

IN a long-awaited ruling, Australian Executor Trustees is expected to be ordered to pay $80 million in compensation plus costs to victims of the SEAS Sapfor forestry scheme.

On 27 September, the Supreme Court of New South Wales ruled in favour of David Kerr in his capacity as additional trustee of the SEAS Sapfor forestry scheme on behalf of the covenant-holders.

The SEAS Sapfor scheme invested in timber on behalf of covenant-holders but investors ended up losing the entirety of their investment.

Australian Executor Trustees was formerly owned by IOOF until it was sold to Sargon last year.

Litigation funding company IMF Bentham’s investment manager, Oliver Gayner, said: “Naturally we are delighted on behalf of the covenant-holders that the

injustice they have suffered has been recognised by the Court, and the trustee whose sole job was to protect their interests has been found liable to pay them compensation. Given the Court’s clear and unambiguous ruling we hope the matter can now be quickly and finally resolved in the interests of all stakeholders.”

Simon Morris, partner at commercial law firm Piper Alderman, said: “This is a hugely satisfying and long-awaited outcome for covenant-holders who, as found by Justice Stevenson, have been let down by the professional trustee they entrusted to protect their investment.

“For lawyers and corporate trustees this decision will rebound for the things it says about the responsibilities of corporate trustees, their advisers and equitable compensation. There are salutary lessons here for corporate trustees about the consequences of their failures when but for their breach a loss would not have been suffered.”

APRA acknowledges high risk, high fee products can drive better returns

BY MIKE TAYLOR

THE Australian Prudential Regulation Authority (APRA) has acknowledged data confirming that high risk, high fee products generally generate higher long-term net investment returns, but that is not going to stop the regulator trying to put downward pressure on fees.

An APRA answer to a question on notice to the House of Representatives Standing Committee on Economics has seen the regulator’s deputy chair, Helen Rowell confirm the status of higher risk, higher fee products.

Rowell had been asked by Shadow Assistant Treasurer, Andrew Leigh, what a good average level of fees was for the Australian superannuation sector to be charging.

She said that while APRA had not conducted an exhaustive search of academic literature, its MySuper data “shows that investing in higher risk asset classes (which in many cases involve higher investment fees) also generally generates higher long-term net investment returns”.

However, Rowell’s answer said that it was “important to be clear on the nature and components of fees that were included in any analysis of the relationship between fees and returns, to ensure like for like comparisons were made”.

“Similarly, it is also important to consider the level at which any such analysis is undertaken (i.e. whether it is at a fund, product, asset class or other level) in order to understand the conclusions that can be drawn from it,” she said.

“Nevertheless, APRA agrees that there is scope for fees and costs in the Australian superannuation system to be reduced, and achieving this is a key component of our supervision focus on enhancing member outcomes for superannuation members,” Rowell said.

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Labor Parliamentarians sympathetic on FASEA extension FINANCIAL advisers have been lobbying Federal Opposition parliamentarians in an effort to ensure that the Government’s promised extension to the Financial Adviser Standards and Ethics Authority (FASEA) exam arrangements actually pass the Parliament.

The lobbying has been occurring amid reports that Australian Labor Party members will oppose passage of the legislative changes when they reach the Senate, but a number of Labor backbenchers have told financial adviser constituents that no formal party position has been reached on the issue.

After substantial lobbying by both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, announced in late August the Government would be moving to allow an extension of the FASEA timetable.

She said that under the new requirements, advisers who were registered on the Financial Adviser Register on 1 January, 2019 would be able to complete the FASEA-approved exam by 1 January, 2022 representing a one year extension and that they could complete FASEA’s qualification requirements by 1 January, 2026, representing a two year extension.

However, the chief executive of FASEA, Stephen Glenfield pointed out to Money Management's recent Future of Wealth Management conference that the Government’s proposed changes needed to pass the Parliament and that, until that happened, the authority would be adhering to the previouslylegislated timetable.

2/10/2019 2:51:00 PM

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10 | Money Management October 10, 2019

News

AFA recommends limited adviser role for TPB Include forecasts in portfolio construction

BY MIKE TAYLOR

THE Tax Practitioners Board (TPB) should be confined to an education and CPD advisory role to the Australian Securities and Investments Commission (ASIC) and the Financial Adviser Standards and Ethics Authority (FASEA) under proposals for the future regulation of tax financial advisers put forward by the Association of Financial Advisers (AFA).

As well, the AFA has pointed to serious problems associated with any attempt to reintroduce the so-called Accountant’s Exemption.

In a submission to the Review of the Tax Practitioners Board, the AFA urged giving priority to reducing regulatory overlap and said that its preferred position was that ASIC would be the primary regulator supported by FASEA and, perhaps, the Government’s proposed central disciplinary body.

“ASIC would maintain the financial adviser register and would set the standards for the provision of financial advice. FASEA would set the education and CPD requirements, along with the Code of Ethics,” it said.

The AFA then proposed that “the

BY JASSMYN GOH

TPB would continue to have a role as an adviser to both ASIC and particularly FASEA, to ensure that the education and CPD standards adequately incorporate taxation requirements and content”.

The AFA also suggested that any move to reintroduce the Accountants Exemption would run foul of the introduction of the Australian Financial Complaints Authority (AFCA).

“We note the discussion about the accountants’ exemption, however resolving this issue presents a few fundamental complications, including advice documentation standards and the complaints framework,” the AFA submission said.

“Requiring advisers who recommend SMSFs [self-managed superannuation funds], to operate under

an AFSL [Australian Financial Services Licence], means that they are required to be bound by an internal dispute resolution and an external dispute resolution (AFCA) regime,” it said. “If the accountants’ exemption was reintroduced, and limited licensing was disbanded, then accountants in this situation, would not be bound by membership of AFCA, which would be a reduction in the level of consumer protection.”

“We do however recognise the imposition of the financial advisers Professional Standards regime on limited licence accountants and do believe that it is appropriate for the Government to give consideration to how this regime can be refined to better address the specific role that some specialists, such as limited licence accountants, play.”

Concentration of life/risk reaches new high THE Australian life insurance industry has never been so concentrated in the hands of the big five insurers, according to the latest data from specialist research house, Dexx&r.

The report concluded the top five life insurers now dominated the Australian market, noting that once AIA Australia’s acquisition of CommInsure was completed the five largest life insurers would account for 85% of the Australian life insurance market as measured by in-form premiums.

The company’s principal, Mark Kachor, noted that in June, 2016, the five largest life insurers accounted for 66% of the total market.

The Dexx&r analysis said that for the year to June, 2019, the industry wrote $1.13 billion of lump sum new business, down 12.2% on the $1.29 billion recorded in the previous corresponding period, and the lowest value of sales recorded in the past five years.

It said MLC was the only company in the top 10 life

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companies to record an increase in lump sum new business with a $7.2 million increase, The analysis said the continued decrease in business was the result of lower sales through advice channels and the suspension or cessation of sales of direct lump sum products by several major life companies.

“This is the lowest level of sales in any June quarter over the past five years. With both AMP, one of Australia’s largest life company’s, and Asteron following its acquisition by TAL, now closed to new business there are now fewer life companies competing for new business than at any time in the past,” it said.

“Ongoing restructuring of large institutionally owned dealer groups has exacerbated dislocation in the advice channel, and with alternative direct channels now closed or suspended by most major companies there is little prospect of a short-term turn around in risk product sales.”

THE ‘gold standard’ of equallyweighted portfolio assets is not foolproof, Plato Investment Management believes.

The firm’s head of long/short strategies, Dr David Allen, said a 2009 London Business School study entitled Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy claimed to demonstrate that simply equally weighting each asset in a portfolio would outperform mean-variance optimisation, was false.

Plato said the mean-variance portfolio construction technique, which traded off the expected return and risk of all assets, was first developed by Harry Markowitz in the 1950s and, up until the 2009 study, it was considered the ‘gold standard’ of modern finance and taught in MBA programs worldwide.

“Ten years later, our findings published in the Financial Analysts Journal have cast doubt on the London Business School study,” Allen said.

“We show that Markowitz’s mean-variance outperforms equal weighting handsomely and if investors can forecast, the gains from adopting mean-variance are very large indeed.

“The key take-away for investors is that it is essential to account for the relative, return, risk and correlation of assets when constructing portfolios. In these turbulent times, the benefits of lower risk through diversification are perhaps more important than ever.”

2/10/2019 2:51:30 PM

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2/09/2019 4:54:28 PM

12 | Money Management October 10, 2019

News

IOOF was a test case says APRA

BY MIKE TAYLOR

THE Australian Prudential Regulation Authority (APRA) has chosen to portray its failed action against IOOF Limited and five of its senior officers as a test case which has served to clarify conflicts of interest.

Hours after suffering the legal defeat in the Federal Court, APRA deputy chair, Helen Rowell, admitted the regulator was disappointed by the decision but said the case had served to examine “a range of legal questions relating to superannuation law and regulation that had not previously been tested in court”.

“Litigation outcomes are inherently unpredictable, however APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner,” her statement said.

“APRA still believes this was an important case to pursue given the nature, seriousness and number of

potential contraventions APRA had identified with IOOF.” Rowell also noted that additional licence conditions that APRA had imposed on IOOF in December were unaffected by the judgement and remained in force.

“APRA has seen significant improvement in the level of cooperation from IOOF since this case was launched.

Additionally, the new licence conditions have enhanced IOOF’s organisational structure and governance, including the role and independence of the trustee board within the IOOF group. This will better support effective identification and management of future conflicts of interest,” her statement said.

The APRA action, launched in the immediate wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, is estimated to have cost APRA several million dollars in circumstances where costs were awarded against the regulator.

IOOF share price Private equity demand recovers but grows ‘significantly’ short of highs

BY LAURA DEW

THE degree to which the Australian Prudential Regulation Authority’s (APRA’s) legal action weighed on IOOF’s share price has been revealed by the spike which has occurred since the Federal Court ruled against the regulator.

The Federal Court decision has seen the IOOF share price rise from just below $5.50 per share to close at just under $6.75.

However, the rise of the company’s share price is still slightly short of the more than $7 a share which preceded the announcement of the APRA legal action and is still well below the level which preceded the hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The IOOF share price peaked at $11 in October, 2017.

The announcement of the APRA legal action saw the company’s share price plummet from just over $7 a share on 6 December, last year, to a low of $4.23 a few days later.

17MM1010_01-17.indd 12

A report by Willis Towers Watson has found demand for private equity is growing significantly as companies change the ways they raise capital.

The private equity industry had grown more than 500% since 2000 and was now valued at over US$3 trillion ($4.47 trillion) in 2019, it said.

It said companies preferred private equity as it reduced the need for quarterly reporting which was required for public companies. There was also more regulatory burden and rising ongoing costs for listed companies.

The fact companies were choosing to list on the market at a later date meant investors often missed out on the crucial stages of early growth in a company.

For investors who wished to access private equity themselves, Willis Towers Watson suggested four routes to this: • Relying on companies in an existing public equity portfolio to acquire young and growing private companies via acquisition;

• Invest in private equity or venture capital funds; • A private equity fund invites a fund investor to co-invest in a specific company; and • Asset owners bypass specialised private equity funds completely and invest directly in private companies.

Liang Yin, senior investment consultant at the Thinking Ahead Group, an independent research team within Willis Towers Watson, said: “Technology may well drive evolution in this space. It’s possible that crowdfunding platforms that already exist to connect businesses and investors in private markets could evolve to become the new private stock exchanges or even utilise the benefits of fractional ownership offered by blockchain technology to open up investment in private markets to a new segment of the investor community.

“Whichever path firms choose to follow in the future, the private equity market looks likely to form a bigger part of the institutional landscape going forward.”

2/10/2019 2:52:26 PM

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26/09/2019 1:36:05 PM

14 | Money Management October 10, 2019

News

Market uncertainty prompts need for quality stock selection

BY LAURA DEW

QUALITY stock selection is growing in importance for managers, as social and political changes cause uncertainty in markets, according to Nikko Asset Management.

As well as technological and economic disruption, investment opportunities were affected by political and social change such as the rise of populist politicians and the

threat of climate change.

Iain Fulton, portfolio manager of Nikko AM’s global equities team, said: “At the moment, the over-riding sentiment of the global ‘crowd’ is anger – which is very unusual at this point of the cycle, with low rates and high employment.

“Ever-cheaper money has led to everincreasing asset prices, and there is a perception by the many that this has only been of benefit to the few. Low levels of real wage

growth, an increasing cost of living, and high debt levels in the system overall has left many feeling they have missed out – even as markets and corporate profits accelerate to new highs.”

The key, therefore, when selecting equities was to choose quality companies which were working to find a solution to these environmental and social problems while still offering good returns on capital.

These included those businesses with a strong competitive advantage, which were gaining market share and were financially stable. They also needed to have sustainable long-term profits and be able to thrive in an uncertain environment.

Fulton added: “Businesses need to make profit but they can (and should) do it in ways which create value for all stakeholders.

“To remain high quality in the future, management of firms need to get the balance right between stakeholders and shareholders. This is the best way to survive and thrive in the changing social and political environment which lies ahead.”

The Nikko AM Global Share fund has returned 10.6% over one year to 31 August, 2019, according to FE Analytics, versus returns of 5.5% by the AMI Global Equity sector.

Will APRA name superannuation fund underperformers?

BY MIKE TAYLOR

THE chairman of the Australian Prudential Regulation Authority (APRA), Wayne Byres is predicting a backlash in the event the regulator was to publish data detailing underperforming superannuation funds.

Byers made the comments while noting that APRA’s earlier efforts with respect to under-performing funds had resulted in around half of them exiting the industry while the remaining half had picked up their act.

“So later this year, starting with MySuper products, we plan to publish a selected set of performance-related measures and benchmarks,” he said. “Our initial focus will be investment returns, fees and charges, and measures of sustainability/viability. We will subsequently expand that to include insurance costs.”

Byers said that the regulator had in mind a simple heat map or traffic light approach giving a snapshot of the performance of each MySuper product against a range of benchmarks with this approach being expanded to include choice products over time as better, and more reliable, data became available.

“Our goal here is pretty simple: to identify those trustees that, when looked at across a range of dimensions, do not seem to be delivering value-for-money outcomes,” he said. “It will add to the pressure on trustees to address persistent underperformance, or reconsider their continued presence in the industry.

“We have already undertaken one round of this work where,

17MM1010_01-17.indd 14

based on the data available to us, we identified a number of funds that seemed to potentially be generating poor outcomes. Given the limitations of the exercise, we didn’t publish the data, but did share it with the trustees concerned. It resulted in reduced costs for a number of funds or, in about half the cases, those funds being wound up.

“If I thought that new data collections would generate cries of protest, they may well be muted relative to the likely reaction to the publication of the heatmap. No doubt there will be fierce complaints – particularly from those at the wrong end of the scale – that the data is wrong, the metrics we use are wrong, or that the benchmarks we choose are wrong. No doubt some people will claim all three,” Byers said.

“Our view is: let’s have the debate. We do not intend to issue pass/fail marks to trustees. Nor will their status hinge on a particular metric beating a particular benchmark. Rather, we will be looking to highlight those funds who seem to persistently, across a range of metrics, produce poor returns and who, looked at in various ways, appear to have high costs.

“It is important to stress we are looking at the issue of member outcomes holistically. Debate about the merits of a particular data point or metric are therefore far less important when we are looking at the broader picture. A single measure is inevitably going to be imperfect. Consistently poor outcomes across a range of measures will be more difficult to defend.”

2/10/2019 2:48:46 PM

October 10, 2019 Money Management | 15

News

Opportunity for super funds to help Major accounting bodies want far more than members maintain insurance accountant’s exemption

BY JASSMYN GOH

BY MIKE TAYLOR

THE amended start date for the Putting Members' Interests First legislation of 1 April, 2020 will allow time for superannuation fund members to make a considered decision about their insurance cover, before it is cancelled, a super body believes.

The Association of Superannuation Funds of Australia (ASFA) welcomed the new date of the legislation, that has passed the Senate, and said it would lead to “more consumers maintaining valuable insurance arrangements through their super”.

ASFA deputy chief executive, Glen McCrea, said superannuation funds now had a better opportunity to reach consumers and help them understand what the changes would mean for them.

“More time for funds should enable more communications to members, smooth the response rate and reduce wait times to contact centres as we approach the commencement date,” he said.

McCrea noted the amended start date also provided superannuation funds with additional time to implement the necessary system changes and update their disclosure material.

Federal Court backs ASIC against Gallop

BY CHRIS DASTOOR

THE Federal Court of Australia has judged in favour of the Australian Securities and Investments Commission (ASIC) in proceedings against Gallop International Group (GIG), Gallop Asset Management (GAM), Stumac and former director Ming-Chien Wang.

The proposed civil penalty against Wang would be the highest civil penalty awarded against an individual in an ASIC proceeding.

GIG and GAM both held Australian Financial Services Licences (AFSL) and operated the Gallop business, with investors, predominately from China and Taiwan, who deposited funds into Australian bank accounts to invest in Gallop products.

Between May 2016 and May 2017 over $36 million had been deposited into GIG’s Australian bank account, which was withdrawn and paid into overseas accounts held by GIG, Wang, his family or associates.

Justice Charlesworth had proposed orders and given time to apply to the court about the proposed

17MM1010_01-17.indd 15

orders, but if no parties applied they would be effective on 26 September, 2019, the orders were: • Declarations of contraventions of financial services laws by GIG; • Declarations that Wang knowingly concerned in the contraventions of GIG; • Permanent injunctions restraining Wang from carrying on a financial services business; • An order disqualifying Wang from managing a corporation 10 years; and • An order Wang pay a civil penalty of $3 million, and the winding up of GAM and Stumac.

Justice Charlesworth declined to make declarations of contravention sought by ASIC against GAM. Martin David Lewis of KPMG would be appointed liquidator of GAM, GIG and Stumac.

MAJOR accounting groups CPA Australia and Chartered Accountants ANZ (CA ANZ) say they do not want re-establishment of the accountant’s exemption – they want changes that go a whole lot further with respect to accountants giving advice.

In the face of calls by the Institute of Public Accountants (IPA) for the re-establishment of the accountant’s exemption, the two big accounting organisations said they wanted a wholesale review of the advice sector which had become mired in complexity.

The two organisations issued a joint statement arguing that reinstating the accountant’s exemption would amount to little more than putting a band-aid over a very deep wound.

It said that both organisations strongly believed that accountants should be able to provide services benefited their clients and supported the public interest “but reintroducing a mechanism that, due its extreme limitations, is no longer relevant in this current, increasingly complex financial advice environment is unlikely to achieve this objective”.

“There is widespread agreement amongst members that the current regulatory and licensing regime for strategic advice needs work,” group executive, advocacy and international, Simon Grant said. “So rather than putting a band-aid over a very deep wound, we need to look at the issue holistically and find a solution for strategic advice that is fit-for-purpose, permanent and serves Australian mums and dads.

“Both professional bodies are undertaking extensive consultation to find a solution, ranging from a public practice member survey to nation-wide workshops to gather feedback.”

CPA Australia external affairs general manager, Paul Drum said the objective of the Future of Financial Advice (FoFA) reforms had been to ensure advice was in the best interests of clients and not put out of reach of those who would benefit from it.

“This has arguably not been achieved,” he said.

“CA ANZ and CPA Australia are calling for a wholesale review of the current financial advice frameworks to address regulatory complexity,” Drum said. “This complexity has been caused by years of layered regulatory reforms, without appropriate consideration to ensure these reforms are meeting their policy intent.”

“The wholesale review must identify policy changes needed to ensure that consumers can access quality affordable advice from their choice of trusted adviser.”

The two accounting bodies said they had submitted on behalf of members and in the public interest that: • Tax is a key consideration for the majority of financial planning strategies, it is material to the advice and recommendations and not incidental; and • The accountants’ exemption only permitted the recommendation to either establish or wind up an interest in a self-managed super fund (SMSF). It was so limited that it did not even allow a recommendation to not establish an SMSF. Restoring such a limited exemption is not going to address the need to enable affordable, accessible and quality advice by trusted advisers.

2/10/2019 2:48:07 PM

16 | Money Management October 10, 2019

News

Consumer satisfaction cooling on life/risk insurance

BY MIKE TAYLOR

AT the same time as advisers worry about the future of life/risk beyond the Life Insurance Framework (LIF), the latest research from Roy Morgan has revealed that consumer satisfaction with life/risk insurance has also declined.

The latest Roy Morgan research has revealed that customer satisfaction with risk and life insurance fell to 64.6% in July, down from 65.6% a year earlier and 68.4% in 2018.

Roy Morgan’s analysis said that, at these levels life/risk insurance continued to have the lowest satisfaction of all major household and personal insurance types including general and health insurance.

According to the survey, Insuranceline emerged best in terms of consumer satisfaction with a rating of 78.9%, ahead of second placed Allianz (74.1%) and Zurich (71.8%).

“The three largest players in the industry experienced contrasting fortunes with both MLC and CommInsure scoring above average with MLC increasing their satisfaction rating by a significant 4.3% points to 67% and CommInsure up slightly by 0.5% points to 67.3%.

“In contrast AMP, which has seen a sharp decline in the number of policies over the last year since several scandals involving AMP were uncovered, scored 64.6% – exactly the market average and barely changed on a year ago,” the Roy Morgan analysis said.

Commenting on the survey results, Roy Morgan chief executive, Michele Levine, said

they showed that although 86% or risk and life insurance policies were renewed automatically without shopping around, there was a risk associated with having below average satisfaction as this had the potential to discourage renewal and new clients.

She said the biggest increase in the purchasing channel used to purchase risk and life insurance over the last three years had been from an employer as part of superannuation, which had increased from 16.6% to 28%, while purchasing risk and life insurance online was another growing channel although it remained relatively small at 9% of purchases, showing only gradual growth from 7%.

“In addition, the use of insurance brokers

and financial planners remains an important channel to purchase risk and life insurance which now accounts for around 17% of the market, but this is down from 21.3% three years ago,” Levine said.

“The use of these third parties to purchase risk and life insurance has the potential to take the customer relationship away from insurance companies and as a result they are likely to have less control over satisfaction and retention levels.

“These results also indicate that fewer Australians are taking out risk and life insurance, 199,000 in the past year down from 236,000 three years ago. This is likely to lead to a smaller market over time if this trend continues.”

ASIC/APRA/ATO need to be audited on value for money THE Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) should be the subject of a comprehensive audit to ensure they are doing their jobs properly and efficiently.

That is the assessment of the Association of Superannuation Funds of Australia (ASFA) which has called for the audit task to be referred to the Australian National Audit Office (ANAO) arguing that there is a form of moral hazard in the current arrangements with the regulators having a vested interest in increasing industry levies to

17MM1010_01-17.indd 16

increase their discretionary coffers.

What is more the superannuation funds do not want to pay levies which effectively crosssubsidise ASIC’s handling of financial advisers and self-managed superannuation funds (SMSFs) which are not directly subjected to levies.

In a submission to Treasury dealing with the Financial Institutions Supervisory Levies being used to fund the regulators, ASFA has pointed out that superannuation funds will pay over $89 million this year in supervisory levies, up from $68 million and it wants to know whether the industry is getting

value for money.

“Given that this is money which could otherwise have been attributed to member accounts, it is critical that all of the agencies who receive the levy are accountable for the costs and expenditure they incur,” it said.

On the question of moral hazard, the submission said levies represented “a form of moral hazard, in that the agencies have a vested interest in increasing the levies with relatively little accountability while the parties providing the funding (industry) have no control over the resourcing decisions made by the agencies”.

“This extends to the type, and in particular the scope, of activities engaged in by the agency and the quantum, and nature, of the resources used,” it said.

Elsewhere in its submission, ASFA argued that because, functionally, superannuation was a part of wealth management it was “critical to ensure that superannuation funds only pay levies with respect to consumer protection within superannuation and not with respect to other wealth management sectors, such as managed investments and financial advisers”.

It said this was because neither SMSFs nor financial advisers paid levies.

2/10/2019 1:33:25 PM

October 10, 2019 Money Management | 17

InFocus

ADDRESSING DIMINISHING CAPACITY Disability personal financial advice specialist, William Johns, examines the challenging issues associated with giving advice to clients with diminishing capacity.

THERE ARE MANY reasons why financial advisers do what they do, but it comes down to the desire to help others navigate the future with foresight to achieve their goals. A cohort that understands the value of this offer better than anyone is retirees or those seeking retirement. They also hold significant wealth that needs professional expertise and management.

Unlike others who make the initial transaction as lucrative as possible, advisers invest in relationships, and our revenue stream is founded on a relationship locked by an ongoing service agreement with the client.

In this article, I want to highlight the risks of taking on such a longitudinal journey with clients, and why diminishing capacity is the biggest risk to our profession unless addressed swiftly.

Firstly, we need to recognise that the human body is a vessel that decays with time until no more. The decaying process involves physical and cognitive processes that slowly wither away.

People are living longer thanks to advances in medicine that tend to

aim at prolonging the physical ability but have had little success relating to cognitive decline. The result is that people are living longer, but their cognition was not given the same boost as their body. So there is a mismatch in the natural duration.

Secondly, the correlation between ageing and cognition is well documented. While we are all familiar with dementia, there is a very large portion of adults over 60 who live with Mild Cognitive Impairment (MCI) and their symptoms tend to fluctuate.

Therefore, we need to be aware that there are many phases to the journey, not just the familiar end-stage.

As a matter of fact, a study by CEPAR chief investigator Kaarin Anstey and colleagues found that 8% of those in their 60’s had MCI. This increased to 37% for those aged between 70 and 90.

Thirdly, dementia is only one type of umbrella condition that causes cognitive disorder. There are many other neurocognitive disorders such as Parkinson’s disease and Huntington’s disease.

It could also be acquired traumatically such as traumatic

Chart 1: Cognitive decline vs normal ageing

Source: Sperling, Mormino & Johnson (2014)

17MM1010_01-17.indd 17

brain injuries, post-traumatic stress disorder, and even drug/ alcohol abuse disorders.

Medications, substance abuse, urinary tract infection, severe pain, sleep deprivation, mental illness etc can cause short term memory issues and concentration issues.

This is called delirium. The best way to explain this is trying to have a deep conversation under powerful medications such as a strong painkiller (or a drunk).

Back to the main issue: 37% of those aged between 70 and 90 live with some MCI. A number would have chronic pain and would be taking strong pain killers, and some would have neurological disorders as described and so on.

I dare not venture to estimate the number of clients in this category in an average adviser practice, because this issue clearly requires research. I would not be surprised if it was at close to one-third of the client base falling in the MCI category.

When it comes to contract law, capacity is a big deal. The contract is void if the party has restricted capacity such as minors, people with mental disabilities, intoxicated people and bankrupt people.

In order to avoid the contract on the ground of incapacity, the onus is on the party seeking to have the contract avoided to first establish that: a) the contracting party was unable, due to mental impairment, to understand the contract at the time of formation; and b) the other party either knew or ought to have known of the impairment.

I put it to you that your clients tell you about their health concerns, and about medical procedures they undertake and pains and aches. You know the client for such a long time, you would observe changes in sensory, mobility and memory overtime.

The question then is how many of my clients have impaired capacity? Why do they not read documents like they used to? Do they understand Record of Advice documents, Statement of Advice documents? how do I know they have capacity?

My hypothesis is this particular issue will become ‘the’ biggest issue for financial planners because of the risk concentration to this particular cohort of age segment.

I believe that lawyers and estate administrators will be asking questions regarding the legality of contracts between an adviser and their client, particularly where medical evidence proving legal incapacity exists. I believe this informed consent issue will be specifically targeted by litigation lawyers seeking refunds for fees or even unfavourable market movements.

Financal Adviser Standards and Ethics Authority (FASEA) appears to have missed an opportunity to address this issue. I would like to see more on this in the curriculum and how advisers and dealer groups should respond in a humane, dignified way bound by the Disability Discrimination Act. I would also like to see guidelines around when and how to take action and refer matters for Financial Administration hearings.

Finally, the profession through our associations has to move quickly and swiftly to fund research and start collaborating with government and health professionals such as neuropsychologists to adopt a uniform way of measuring capacity.

There are already great tools ready used by health professionals that I am certain can be adapted easily. I have used one and it was fit for purpose.

William Johns is an expert in disability personal financial advice matters.

2/10/2019 11:20:36 AM

18 | Money Management October 10, 2019

Future of Wealth

EASTON INVESTMENTS: WE HAVE A STRONG VALUE PROPOSITION FOR THE ACCOUNTING PROFESSION Money Management currently runs a new series in which we speak with financial planning groups who share their views on the industry in a post-Royal Commission environment. This month MM interviewed Greg Hayes, managing director of Easton Investments.

MM: WHAT ARE your general thoughts on the market in this new environment?

Greg Hayes: Obviously it’s been a turbulent time for the market post-Royal Commission in that it’s created some levels of uncertainty.

I think for advisers it’s been a difficult time too because they have the Financial Adviser Standards and Ethics Authority (FASEA) education requirements coming through. So there have been a lot of changes for advisers and coming out of the Royal Commission it’s caused some negative perception in the adviser market. This has created some challenges for both advisers and for dealer groups.

For dealer groups it’s really pointed out that you need to ensure that your systems and your compliance are up to market expectations.

I think most dealer groups have increased their investment in those areas and [they] are also working hard with their advisers to bring them consistent with the expectations of the market and the regulator. And obviously the regulator is much more active in the market at present. It’s important to ensure that while the market is going through this change process and is resetting to the expectations and changes applied through the Royal Commission that everybody is prepared and well-organised for

17MM1010_18-39.indd 18

the changes coming through.

I think also that at the dealer group level you either need to be quite boutique or you need to have scale. We’ve taken the view that we want to operate at the scale level. We think we have some significant differentiation and in part that differentiation in the marketplace is quite noticeable because we have this large group of accountants who are on our licence and we have a strong accounting relationship.

We have a strong focus on advisers and are trying to make sure that they are growing and developing successful businesses.

MM: How has your business evolved over the last years?

GH: Both GPS Wealth and Merit Wealth are owned by Easton Investments which is a publiclylisted company. Merit was one of the first businesses that we took in to the Easton Investments together with a couple of other businesses back in 2014.

Merit was established to provide financial services through the accounting channel so it has a specific focus on the accounting market. Subsequently in 2017 Easton acquired GPS Wealth, which is a well-established, larger dealer group that provides dealer groups services to independent financial planners around the country. SMSF Expert was

2/10/2019 2:54:05 PM

October 10, 2019 Money Management | 19

Future of Wealth Strap

GREG HAYES

acquired by Merit Wealth last year and SMSF Expert again deals with the accounting profession and it only provides a limited authorisation to accountants. Merit has both full advisers and limited authorised reps who only work in the self-managed superannuation fund (SMSF) space whereas SMSF Expert only has accountants working in the SMSF space.

MM: Given the growing number of advisers, how would you describe your business strategy?

GH: Our strategy is to be a significant provider of services in the wealth space. We have a strong value proposition for the accounting profession as we have one of the largest cohorts of accountants under licence in Australia.

Increasingly we see accounting and wealth services converging and we are uniquely positioned here with a national adviser force comprised of both independent advisers and accountants. The combined engagement of adviser and accountant will generally result in a superior client outcome.

At the present time, the group has close to 780 advisers, and is a significant provider of wealth services into the Australian market through its two primary brands: Merit Wealth and GPS Wealth.

MM: How did the post-Royal Commission environment affect your business?

GH: There’s nothing that came out of the Royal Commission that caused us any great surprises and because both of our businesses

17MM1010_18-39.indd 19

Financial Planning group name

Merit Wealth

AFSL Licence No

409361

Head of Financial Planning

Grahame Evans

Ownership

Easton Investments Limited

Number of financial planners

457 (includes SMSF Expert)

Financial Planning group name

GPS Wealth

AFSL Licence No

254544

Head of Financial Planning

Grahame Evans

Ownership

Easton Investments Limited

Number of financial planners

285

are relatively young businesses by comparison to some much longerestablished businesses we don’t have the same challenges with the grandfathered commission and legacy income streams. Our businesses are relatively young and primarily developed on the fee-to-services basis.

I don’t think that this Royal Commission was surprising in terms of the changes that were proposed. We are quite supportive of the recommendations and also the underlying philosophy – consistent with the Royal Commission – which is to make sure you are always acting in the best interest of your clients.

So basically no differences and no great challenges there. Having said that, like most other dealer groups we’ve significantly increased our investment in both the training space and compliance area to make sure we are capturing information in relation to adviser activity and adviser trends. High quality adviser education and support are essential in today’s market.

MM: Who are majority of your clients?

GH: The majority of our clients are everyday Australians. We are not a dealer group that is specifically targeted towards any one sector of the market. We are not a dealer group that is targeted solely

towards individuals – our typical client is the owner of a small or medium business, an SMSF or a person with investment portfolio – mums and dads of Australia.

And that’s because our advisers are accountants practice across the country. The intent of what we do in the wealth space is to assist them to provide a financial services capability to their clients.

MM: What is your view with regards to the evolving business model and self-licensing?

GH: In terms of self-licensing, there’s obviously been an increase over the past year.

The fact is that the larger institutions have or are exiting from distribution in the advice space – this will result in a smaller number of advisers in the marketplace progressively over the next four to five years. A significant number of advisers will be aligned to dealer groups such as ours who have the capabilities to provide a range of services: back office services, compliance services, training, and engagement services.

Advisers will choose whether be aligned to a group like that or they may choose to be selflicensed? Those who choose to be self-licensed, are still going to need to buy in some of those services because the challenge with the self-licence is that you

can’t do it all yourself, you can’t be all things. We see ourselves as a service provider to the selflicensed market.

MM: What are, according to you, the potential red flags across the industry moving forward?

GH: I think the two most visible issues for the future will be the removal of grandfathered commissions and legacy income streams, together with the changing education requirements.

These are certainly going to have an impact on dealer groups.

There is no question that the education requirements over the next four or five years will cause some people to exit the industry. I think the change in education standards and the professional requirements coming through FASEA will cause challenges for some people.

Fortunately there’s a transition period but there will be people who will exit the industry before then.

But there will be enormous opportunity and a lot of work for the advisers who progress through the transition period.

The opportunity from the dealer groups point of view is to continue to do what we do and help our advisers successfully work through that transition period and continue to build high quality, client centric and advice business.

2/10/2019 3:23:14 PM

20 | Money Management October 10, 2019

Managed accounts

WAITING FOR AN ASIC OUTCOME

Laura Dew explores how the managed account space could change in the future as the industry awaits the conclusion of an ASIC review of the sector.

THE MANAGED ACCOUNTS space is waiting with ‘bated breath’ over the conclusion over an investigation by the Australian Securities and Investments Commission (ASIC) into the growing sector.

Last year, it was announced ASIC would be carrying out an ‘information gathering’ exercise to understand the sector and how it works. It is now due to issue a subsequent paper on the operation of managed account portfolios including where an advice licencee is involved in formulating the investment approach.

The body said it was ‘carrying

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out information gathering on harms, risk and regulation of platform and managed discretionary accounts (MDAs) and considering necessary changes to regulatory settings’.

An MDA includes separately managed accounts, managed accounts or managed discretionary portfolio services.

Within this structure, the manager is given responsibility to manage a portfolio according to prescribed guidelines and the service usually includes administration, investment management and financial advice.

Their appeal lies in the fact

investors may not have the time or skills to do this themselves while also giving them exposure to a wider range of asset classes.

For advice businesses, they are a more efficient option and allow for lower administration costs and greater time saving.

Since coming into formation in the 1990s, assets held in MDAs have grown and have particularly grown sharply in recent years.

According to figures for 30 June, 2019 from IMAP and Milliman, total funds under management (FUM) in managed accounts stood at $71 billion. This was an increase of $9 billion from the

start of 2019 when FUM was at $62 billion.

This increase was divided between $4.4 billion from selfmanaged accounts (SMAs), $2.7 billion in MDAs and the remainder distributed between other types of models.

MDA products remained the most popular type at $29.2 billion but platform-based self-managed accounts were growing in popularity and catching up with MDAs at $25.5 billion in funds under management.

However, they were described as being a ‘blind spot’ for the regulator by former ASIC commissioner Greg

1/10/2019 3:19:11 PM

60% 40% October 10, 2019 Money Management | 21

20%

Managed accounts

0% Reduced administration

Improved client engagement

Improved client Improved risk investment control of portfolios outcomes

Chart 1: Risk management confidence levels

100% 80% 60% 40%

Managed accounts practice

20% Industry average

0% Managing conflicts of interest appropriately

Breach identification, assessment and reporting procedures

Appropriate training for themselves and staff

Monitoring and supervising staff

Source: CFS

Tanzer, who said ASIC was particularly interested in conflicts of interest between MDA providers and financial advisers and worried that MDAs did not always meet clients’ best interests.

As a result, ASIC sent questionnaires to a number of platforms, operators, licensees and providers to ensure a range of perspectives on the matter.

When the information was released in ASIC’s Corporate Plan, the Institute of Managed Account Professionals (IMAP) said the message was a ‘change in tone’ from the regulator.

IMAP chair, Toby Potter, said: “This is consistent with a more suspicious view of financial services providers and a more assertive regulatory stance”.

He said IMAP had submitted a number of papers to ASIC regarding issues such as the diversity of MDA models, the benefits for clients and the high standard of MDA operation and typical costs.

“We are waiting to see what ASIC has to say, they have been doing this information gathering exercise and we are waiting for the conclusion. They have been ensuring they have a clear understanding of the way managed accounts operate, the benefits they have and the

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process for managing conflicts of interest. It is a good thing they are looking into it, they want to make sure they understand how this system works,” Potter said.

“We have tried to find out if the exercise was driven by a specific instance of client loss that they were concerned about but I’m not aware of any instances within managed accounts.”

The potential problems concerning conflicts of interest came in five forms; advisers recommending their own in-house products, revenue via portfolio management fees, overtrading in order to charge more transaction fees, overservicing of the portfolio and adopting a ‘one size fits all’ approach with multiple clients.

But a report by Colonial First State (CFS), which has over $10 billion in managed accounts, entitled 'Managed Accounts: Building Your Future Business' said owners of firms which used managed accounts were more confident than their marketplace peers that they were managing conflicts of interest appropriately, were monitoring and supervising their staff and had breach identification, assessment and reporting procedures (see chart 1).

Advisers using managed

accounts were confident and optimistic about their practices’ growth potential and risk management capabilities and felt the use of managed accounts enabled their businesses to grow.

Ben Abell, head of institutional solutions at CFS, said: “We found advisers were surprised by how much of a positive impact managed accounts achieved. They report improved client engagement and communication as they can talk holistically rather than about individual stocks.

“They also reported improved investment outcomes which they attributed to being able to make changes quickly and being able to execute decisions quickly across all the relevant portfolios, rather than any individual investment ideas.”

James Mantella, head of managed investment products at Netwealth, said: “[The industry] expects to receive information from ASIC later this year. They did a lot of work with platforms and investment managers to understand the full focus of the sector. We are waiting with bated breath for the result.”

Asked whether the investigation could result in additional regulation for managed accounts, Mantella said he did not expect that to be the case.

Continued on page 22

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22 | Money Management October 10, 2019

Managed accounts

Continued from page 21 “That is not ASIC’s intention, they want to ensure the support is stringent as they are new to these types of products and want to tighten their focus on client outcomes and fees. I don’t expect there will be any findings which will shock the industry. The industry has been calling for this for a long time to ensure consistency across platforms and to achieve better outcomes for clients.”

FUTURE Dependant on ASIC’s findings, the industry was optimistic on the future of the managed account space with IMAP data estimating the industry could grow to $115 billion by 2020.

A study by HUB24 suggested trends in the space would be increased use of artificial intelligence and machine learning to capture and analyse data to improve client investment outcomes and enhance engagement between adviser and clients.

“The application of AI is in its

infancy in the managed portfolio sector, but its potential is immense. However, employing AI effectively will require an explicit commitment by providers to invest the time and money to make it work effectively,” it said.

As well as this there would be customisation of client portfolios to allow far greater flexibility, group and individual tilts without additional complexity.

“While the number of players in the managed portfolios space may proliferate in coming years, not all will be created equal, and many offers have only the basic functionality available. Those that prosper, and support advisers and their clients best will be those with a proven technology track record, a proven ability to remain responsive to clients’ and advisers’ needs, and a constant drive to deliver new features and solutions,” it said.

Abell said tailoring was becoming increasingly important and would be helped by improvements in technology.

Chart 2: Key benefits of using managed accounts

100% 80% 60% 40% 20% 0% Reduced administration

Source: CFS

Improved client engagement

Improved client Improved risk investment control of portfolios outcomes

“We will see a trend towards personalisation and people using managed accounts to apply their individual world view such as a portfolio with a low carbon tilt.”

– Jodie Hampshire, Russell Investments “We think tailoring is becoming increasingly important and the improvements in technology are an important driver of this, having that ability to access a broader range of assets and customise portfolios.

“Simplification will also be a key theme and this is something we are spending time on at CFS, it is one of the areas where there is the greatest potential for improvements and making managed accounts easier for a wider range of people to access.”

When it came to types of products, Jodie Hampshire, managing director at Russell Investments, said Russell had introduced a range of active managed accounts which she expected would become a more common option in the future.

“When we spoke with advisers they said they only had two options of being very active at a high cost or being very passive at a low cost so

they wanted something in the middle. So we launched four risk profiles which all have an active dynamic multi-asset diversified fund plus Australian equities plus ETFs [exchange traded funds] so they end up with a well-rounded account that combines active and passive management. We think this is a pragmatic way to approach asset allocation.” “[In the future] I think we will see a trend towards personalisation and people using managed accounts to apply their individual world view such as a portfolio with a low carbon tilt.

“I can also imagine we will see more unbundling where the investor is able to view their full portfolio.”

This was confirmed by Abell who said transparency and greater visibility was a key desire for CFS clients and a reason why they opted for managed accounts in the first place.

100% 17MM1010_18-39.indd 22

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October 10, 2019 Money Management | 23

WIFS

BEATING YOUR OWN EXPECTATIONS After joining Australian Unity with the expectation that it wouldn’t be a long-term option, Nikki Panagopoulos recently celebrated 15 years with company, showing the value a company culture provides, Chris Dastoor writes.

DURING THE GLOBAL Financial Crisis (GFC), Australian Unity fund manager Nikki Panagopoulos would embark on her biggest accomplishment as an investment professional – taking over management of Australian Unity’s diversified property fund (DPF), which she now describes as her ‘fourth child’.

Panagopoulos was the manager of both Australian Unity’s DPF and its retail property fund (RPF), which were both finalists at the 2019 Money Management Fund Manager of the Year awards in the direct and hybrid property category, which the RPF won.

“Australian Unity acquired the fund in the midst of the GFC and I relished the challenge of repositioning it to ensure investors received the true-tolabel product income and growth they’d signed up for,” Panagopoulos said.

“We developed a strategy to divest assets, to achieve a more balanced geographical and sector spread, and reduced the fund’s gearing in a post-GFC environment. “[Then] we re-built the fund with acquisitions and product enhancements whilst promoting the fund to a new genre of investors.

“Those decisions have been rewarded with a stable and consistent income profile and outperformance.”

With over 30 years of experience in the industry, she had her start with National Mutual, followed by stints at AXA and Deutsche Bank, before she found her long-term home at Australian Unity.

In August, she celebrated her 15-year anniversary at the company, although unofficially

17MM1010_18-39.indd 23

she had started a few months before that as a contractor in May. “I came across to Australian Unity after working for a huge listed property fund worth $2 billion, I came on board to help the head of property, thinking ‘I’m not really sure who they are and how long I’ll be there’,” Panagopoulos said.

“In my mind I thought I’d help them out for a couple of years, but I’ve been here for 15, so that’s a testament to the group as a whole.

“It’s got a superb culture, the message they deliver is for the community and wellbeing, and it cascades through the business.”

Panagopoulos said her success had purely been a result of her trying to make a difference in people’s investments.

“I’ve always had that aptitude to try and help people through their financial wellbeing, and financial services was probably the best path to do that,” she said.

“Being able to add value to staff and help them grow, add value to my investors and the community by doing the work I do.”

Despite being a maledominated industry, she believed the financial industry fostered women to excel and succeed, which should encourage woman thinking about joining the sector.

“If you’re true to label and want to add value then it’s the perfect industry as it provides a lot of support,” Panagopoulos said.

“Sometimes I reflect on what would I have done differently, but it will always be financial services and being able to do that as a woman is quite significant in my view.”

She made the choice to join the funds management side of the industry because she felt it was more tangible than financial planning.

“In financial planning you deal

“If you’re true to label and want to add value then it’s the perfect industry that provides a lot of support.”

– Nikki Panagopoulos, Australian Unity with one-on-ones providing guidance to your clients to direct the best way to create their wealth,” Panagopoulos said.

“Whereas in funds management you’re delivering and creating that contribution that creates the wealth, and setting the strategy to be able to deliver that successful outcome.”

After 30 years in the industry, she had witnessed numerous

changes over the journey and believed it had become more customer driven than in the past.

“The industry has changed significantly, and it’s all coming from a support base mentality and understanding there needs to be an evolution as we grow and change. The diversity that’s coming into it has captured the change in workforce, there’s a lot of flexibility.”

1/10/2019 4:51:13 PM

24 | Money Management October 10, 2019

Investment Centre

BUILDING OUT INFRASTRUCTURE The infrastructure sector has been among the best-performing sectors of the past year for the Australian market, having seen vast year-on-year improvements, writes Laura Dew. AS INVESTORS CONSIDER alternative assets to seek positive returns not offered by equities or fixed income, infrastructure is turning out to be a strong sector.

Over the 12 months to 31 August, 2019, the ACS Equity–Infrastructure was second only to the ACS Property–Australia Listed sector for 12-month returns, according to FE Analytics.

The infrastructure sector returned 15.3% over the 12 months to 31 August, versus returns of just 3.5% over the same period in 2018.

Not a single fund in the sector reported losses over the period.

This compares to returns of 9% by the S&P ASX 200 and 5.1% by the ACS Equity–Australia sector, indicating investors were right to consider alternative assets away from domestic equities.

For individual funds, returns were even more impressive with all but one of the 48 funds in the sector with a one-year track record returning double-digits.

Furthermore, 11 of the funds returned more than 20%.

The best-performing fund was

the BlackRock Global Listed Infrastructure fund which returned 26.2% over the 12 months, up from 14.5% in the same period in 2018.

The fund aims to achieve returns that exceed those of the S&P/UBS Global Infrastructure and Utility index over rolling three-year periods by investing in listed infrastructure securities.

The only fund which performed poorly, versus the returns by the rest of the sector, was the IPIF Management Pty Infrastructure Partners Investment Core fund which returned 2% over the period.

According to its website, the IPIF Core fund provides access to unlisted infrastructure assets via specialist funds. These were the Utilities Trust of Australia, Global Diversified Infrastructure Fund Feeder Fund 2 and AMP Capital Diversified Infrastructure Trust funds.

Surprisingly, there were only three ETFs in the 52-strong sector, a low volume compared to other sectors, with the best-performing of these being the ETFS Global Core Infrastructure ETF which returned

18.5% over the period. Run by ETF Securities, this fund aims to provide exposure to the least volatile listed infrastructure companies selected from global exchanges. Its highest weighting is to the United States followed by Canada and Hong Kong.

The majority of the funds featured covered global infrastructure with some specialising in specific regions such as RARE Emerging Markets which had 61% of its assets invested in Asia and returned 12.9% over the 12 months to 31 August, 2019.

UK UTILITIES One of the biggest developments in portfolio construction of infrastructure funds in recent months was the divide between managers on their views over UK utilities.

RARE Infrastructure said it believed the UK utility sector was an undervalued opportunity while Magellan, which runs the Magellan Infrastructure Fund, said it was steering clear due to the threat of nationalisation from the UK Labour Party.

Chart 1: Performance of ACS Equity–Infrastructure sector over 12 months to 31 August, 2019 v ASX 200 and ACS Equity–Australia sector.

Source: FE Analytics

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“We believe one area in which quality infrastructure companies are being undervalued is in UK utilities. Brexit, along with the UK Labour Party talks of nationalisation, has led to periodic, indiscriminate sell-offs.

“National Grid is one such example. Two-thirds of the company’s revenue is generated from regulated utility businesses in the US. Despite this, the stock continues to be caught up in UK-centric sell-offs. This allows us to buy a quality, defensive stock, with strong, predictable, regulated cashflows at a discount,” RARE said.

Its RARE Infrastructure Income Fund (Hedged) holds UK utilities SSE, United Utilities and National Grid while National Grid was also the largest holding for the Lazard Global Listed Infrastructure fund at 8.2%, part of a total 21% UK allocation.

However, Gerald Stack at Magellan, only holds 1% allocated to the UK and said two of these UK stocks, United Utilities and Severn Trent, had detracted from recent performance.

“The reduction in allocation to the water segments reflects our concerns over sovereign risk in the UK; specifically, the policy of the opposition Labour party to nationalise these utilities at significantly less than market value.

“We remain underweight the UK given the issues with UK utilities.”

This was the same for the Ausbil Global Essential Infrastructure fund which had 8.6% allocated to the UK but said this had been a drag on performance.

In an update, it said: “Regionally, Europe performed the strongest, rising by just over 12%, whereas the UK posted a rise of under 2%, being held back by both Brexit concerns and also the spectre of re-nationalisation of the utilities under a potential (but increasingly unlikely, in our view) Corbyn-led Labour government.”

2/10/2019 12:52:25 PM

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CrownRating2_FP_2018.indd 25

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1/10/2019 11:24:28 AM

26 | Money Management October 10, 2019

Future of wealth management

SHOULD INVESTMENT BE LEFT TO THE ROBOTS?

As advice practices look to leverage the digital options to reduce costs, Mike Taylor writes that questions are being asked about the value that can be extracted by utilising digital investment options.

AS FINANCIAL ADVICE practices look to deal with a more commercially challenging environment there has been plenty of talk about greater use of digital, but that does not necessarily mean ‘robo-advice’.

While AMP Limited’s group executive, advice, Alex Wade has acknowledged that digital represents a core element of the

company’s new advice strategy, Bell Direct head of sales and marketing, Tim Sparks, believes some advice practices will find more value in looking to digital options with respect to constructing investment portfolios, rather than delivering advice.

In Spark’s view, the application of digital is probably better suited to investment than to advice,

– something which would allow advisers more time to coach their clients through difficult periods.

Discussing the evolving shape of the industry, Sparks said he believed advice businesses were going to have to put the microscope across their value proposition.

“Where technology is concerned I think advice practices need to separate out the investing

component and advice component,” he said noting that technology had developed to the stage where it was well capable of developing robust investment portfolios while advice remained a much more complex service offering.

He said that by separating investment and advice, this would leave plenty of time for advisers to focus on planning, particularly

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October 10, 2019 Money Management | 27

Future of wealth management

in specialised areas such as estate planning.

“The wealth management component is important, but the fact is that technology means that really robust portfolios can be built quite quickly now,” Sparks said.

He said that if advisers were coaching their clients through periods of severe market dislocation then it became much easier for them to justify their fee.

“It takes a skilful adviser to navigate such periods,” Sparks said citing the market volatility which had accompanied the result of the Brexit referendum and then the ongoing uncertainty which had followed.

This contrasts with AMP Limited’s approach to the use of digital technology, with Wade confirming to Money Management’s recent Future of Wealth Management – Advice conference in Sydney that the company would be looking to take a ‘triage’ approach.

“For me it’s about somehow solving advice for the masses and the reality and economics

today of face-to-face advice is that it has become too expensive for the average person and we look to now have a greater serviceability and delivery to those clients,” he said.

“And they can go up and down that model – they may be able to do everything digitally, they may be able to talk to someone on the phone or face to face, depending, and likewise they can go down [the system], for example, a high net worth individual may wish to be self-direct in the sense of knowing exactly what they want and how they want to do it and do it totally on digital if they want to.”

The Money Management conference pointed to the changing shape of the Australian financial planning industry in the wake of the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry but also as a result of the ongoing impact of the Financial Adviser Standards and Ethics Authority (FASEA) regime.

Bell Direct’s Sparks pointed to the similarities between what is currently happening in Australia and the experience in the United Kingdom as a result of the so-called Retail Distribution Review (RDR) which came into effect in 2013.

Prior to the RDR many financial advisers were charging via commission but not unlike the current environment in Australia the RDR sought to lift adviser qualifications and virtually the separation of product and advice.

Bell Direct’s Sparks said there were some parallels to what had been witnessed in the UK and what was occurring in Australia now.

“We’re seeing a move to what happened in the UK, numbers will play out in the next two years, but the drop in adviser numbers in the UK was about 20%, time spent by advisers declined by around 40% and the reduction in the number of people providing advice led to higher cost,” he said.

However, he warned against

Continued on page 28

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28 | Money Management October 10, 2019

Future of wealth management

Continued from page 27 making too much of what was uncovered by the Royal Commission in circumstances where its terms of references directed it towards discovering poor behaviour rather than examining all behaviour.

Sparks said he believed this had given rise to a perception gap in the community which needed to be addressed by the financial advice industry.

“We know that 90% of people who receive advice are happy with it,” he said. “The trust problem

resides with those who have not received advice and don’t understand how it is delivered. It is incumbent on the industry here in Australia to fill in that knowledge gap.”

Sparks said that it was in that respect that he believed that the FASEA regime would ultimately help repair the reputation of the industry and deliver financial advisers a lot of credibility over the long-term.

“The educational component is a fantastic thing for the

industry and will lead to a lot of credibility over the long-term because it will be anchored around consistent education across the industry and that can only be a good thing,” he said.

“Education can never make the industry worse,” Sparks said.

Acknowledging the growth in self-directed investing and the role played by Bell Direct, he said that trading volumes had been up this year and that on days when dips occurred in the market clients tended to be net buyers.

“We’re also seeing clients more diversified than they were 10 years ago,” he said.

“In the retail space its always been a case of portfolios being overweight Australian stocks. These days they are more diversified – add in two ETFs [exchange traded funds] and you’re redefining how they are accessing investments.”

Amid the different approaches with respect to how technology would be utilised with respect to the delivery of financial advice, key planning group heads

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October 10, 2019 Money Management | 29

Future of wealth management

attending the Money Management conference agreed that the Royal Commission and the FASEA regime were having a fundamental impact on the value of advice businesses.

Three senior dealer group executives agreed that multiples of as high as 2.5 times revenue were now unrealistic in the context of today’s industry.

CountPlus chief executive, Matthew Rowe, said that it was common for small accounting practices to be valued at between

80 cents and $1.10 and he believed that advice practices would need to adjust to a similar reality.

Centrepoint Alliance chief executive, Angus Benbow, agreed with Rowe that changes to the industry, not least around grandfathered commissions, had had a fundamental impact on valuations.

However, Rowe acknowledged that notwithstanding the realities confronting advice practices, he still regarded them as being between 5%-7% more profitable than accounting businesses.

“The days of trading on revenue are gone,” he said.

The conference also heard that these factors had also played into AMP’s approach to Buyer of Last Resort (BOLR) arrangements which had seen a reduction from four times to 2.5 times under new contracts issued by the company.

Some AMP advisers had said the BOLR changes had left them ‘under water’ with businesses formerly valued at around $2 million (excluding debts) now valued as little as $200,000.

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2/10/2019 11:16:46 AM

30 | Money Management October 10, 2019

Legal

OPERATIONAL RISK RESERVES Financial services barrister, Noel Davis, explores the recent Federal Court decision on IOOF’s use of the member’s reserve and concludes that superannuation fund members should be entitled to better treatment.

THE WAY IN which operational risk reserves can be utilised in superannuation funds was the subject of analysis in the recent IOOF Federal court decision of the Australian Prudential Regulation Authority (APRA) v Kelaher.

After lobbying by the Association of Superannuation Funds of Australia (ASFA) and others, the requirement for such a reserve in each superannuation fund was imposed by the Superannuation Legislation Amendment Trustee

17MM1010_18-39.indd 30

Obligations and Prudential Standards Act, 2012. The legislation was supplemented by prudential standards issued by APRA, which defined operational risk as the risk of loss from inadequate or failed internal processes, people and systems or from external events.

The amount of the reserve must be at least 0.25% of the total amount in the fund.

The trustee is required to have a strategy for determining when and how the operational risk reserve can be applied.

Over three years, from 1 July, 2013, the reserves of superannuation funds were brought up to the required level, largely by taking away earnings that would otherwise have been credited to those who were members during those three years. Thus, those members were deprived of some of the earnings that would have otherwise been credited to their accounts. They will never recoup the lost earnings if they have since left the fund or if they don’t obtain any benefit from the reserve during their future membership.

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October 10, 2019 Money Management | 31

Legal

It is arguable, therefore, that the legislation is unfair because the effect of it is that earnings were taken off those who were members of a particular fund between 2013 and 2016 to create a reserve which will be utilised for the benefit of future members, at least some of whom did not contribute to the creation of the reserve. It will be applied, at the latest, on termination of the fund, if it isn’t needed beforehand.

An issue in the IOOF case, was whether, if there are losses in a fund because of negligence of the trustee or its investment managers or otherwise, can the reserve be applied to compensate the members who have lost money or will the trustee or anyone else who caused a loss have to compensate the fund, thus leaving the reserve intact? If the reserve is reduced, it will have to be topped up by the existing members.

In the IOOF case, there were losses to the fund caused by some companies who were providing services to the fund and the trustee applied money from the reserve to compensate those members who lost money.

APRA argued in this case that the trustee should have first attempted to obtain payment from the companies that caused the losses before compensating

17MM1010_18-39.indd 31

the members out of the reserve, because the money in the reserve was the members’ own money and they were, in effect, compensating themselves rather than being compensated by those who caused the losses.

APRA’s arguments were not accepted by the judge who decided the case. She said in her judgment that it was misconceived to describe the reserve as the members’ own money. Rather, she said, it was money held for the express purpose of compensating members for operational risk, including risks arising from the conduct of the trustee or others.

Compensating members from it did not, therefore, involve compensating members from their own money.

It is understandable why APRA argued the way that it did as the money in the reserve was contributed by the members out of the earnings on their money in the fund and any top up to keep the reserve at the minimum level, after compensating the members, would have to be contributed by the members.

The judge also disagreed with APRA’s submission that the use of the reserve without exhausting other means of being able to compensate the members was not in the best interests of members and was, therefore, in breach of

“From 1 July, 2013, the reserves of superannuation funds were brought up to the required level, largely by taking away earnings that would otherwise have been credited to those who were members during those three years.

– Noel Davis the trustee’s obligation to act in the members’ best interests. The judge added that the trustee does not have a duty to make claims against anyone who may be potentially liable for a loss of the members before the trustee accesses the reserve.

Regardless of whether APRA’s arguments should have succeeded or not, it is strongly arguable that superannuation members should be entitled to expect that if losses occur in the future, the trustee of their fund will take all reasonable steps to recover the loss from those responsible for the loss before the reserve is raided to compensate members. That includes the trustee itself paying compensation if it caused the loss.

Noel Davis is a Sydney barrister.

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32 | Money Management October 10, 2019

Artificial intelligence

AI IN ASSET MANAGEMENT As technology around fund management has improved, the use of artificial intelligence could be beneficial for portfolio managers, writes Rebecca Healey.

THE INTRODUCTION OF artificial intelligence (AI) technology in asset management is being heralded as an opportunity to streamline the creation of more targeted and bespoke outcomes for clients, but the reality is there is still considerable disparity in the interpretation of what AI can deliver versus its use in practice.

While increased use of technology can improve customer engagement and data can be mined for information on clients and potential clients; sub-sets of AI can empower asset managers to streamline processes to optimise investment decisions and processes (see Chart 1).

Understanding how AI can be incorporated into investment strategy workflows to deliver value, rather than representing an obstacle to overcome in terms of cost and resources, is slowly becoming more apparent. As third-party technology providers become more ubiquitous in asset management, there is the opportunity to learn from other industries and rethink current workflow processes.

One example from the oil industry is tracking robots on the seabed to monitor for maintenance requirements. Predicting the likelihood of an event before it takes

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place not only can prevent oil supplies from being disrupted but can also improve the pre-trade interpretation of the impact of including certain instruments in a portfolio.

Another example is the use of natural language processing (NLP) to systematically detect when CEOs ‘duck’ questions on earnings calls to provide predictive analysis on future earnings; or the use of clustering algorithms to identify fake news by examining the content for the inclusion of ‘clickbait’ wording – the higher the content, the higher the probability of the article being fake news and information that needs to be discarded rather than acted upon.

The level of adoption of AI has up to now depended on where on the technology curve an individual firm, team or portfolio manager stands, but while systematic funds with quantitative analysts are more likely to dedicate the technology resources necessary to uncover signals, many discretionary fund managers have yet to embrace any form of AI technology.

Historically, the greater the level of standardisation in extracting information for a fundamental investment strategy, the lower the alpha opportunity.

However, the ability to extract

2/10/2019 11:17:18 AM

October 10, 2019 Money Management | 33

Artificial intelligence Strap

Chart 1: Difference between AI and sub-set constituents

value from data in a repeatable and reliable format is one example where decision making processes can be enhanced and investment strategies improved.

Modelling predictions based on enriched datasets can be used to facilitate the automation of certain tasks – whether that is an underlying decision to trade, uncovering latent liquidity or adjusting an investment strategy.

By creating more efficient workflows on a scalable basis, firms can review a greater number and more diverse range of datasets such as credit card transactions to track company earnings pre-estimates, company solvency statistics, satellite imagery to track shipping or sentiment analysis for consumer goods. Then, through using enhanced analytics together with machine learning and NLP, decision trees can be improved and sped up by removing any unnecessary information.

Accessibility and portability of data will be crucial to the implementation AI technology.

For many active management firms the incorporation of new alternative datasets remains on the periphery for a subset of funds or particular managers given the expense of the individual

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Source: Liquidnet market structure commentary, April-June 2019

dataset, the level of accuracy and cost of extracting value. The time it takes to onboard and evaluate datasets differentiates how far individual firms are on the adoption curve – with sophisticated funds acting more as software development shops, consuming data to build a strategy, versus more fundamental active managers remaining wedded to traditional datasets to validate an existing investment idea. However thirdparty aggregators are now providing cost-effective means of aggregating company research, foreign news websites or more in-depth environment, social and governance (ESG) profiling.

Visualisation tools and userfriendly interfaces will better facilitate data consumption across a broader sector of industry participants and use cases. But to improve the portability of data, firms need to address the persistent siloed nature of data storage within organisations. This can translate into individuals being unable to access certain data

sources, such as fixed income teams walled off from equity market data, and prevents the combination of all data sources.

Firms are starting to address this issue through the introduction of centralised golden source datasets with data curators, which ensures there is a central point of access which holds clean, accurate, catalogued and documented data.

As the next generation takes up the mantle of building cleaner and more accessible data through APIs, their expectation levels and knowledge of what is now possible for asset management from their day to day interaction with technology will ensure the continued evolution of AI. For example, currently consumer datasets are difficult to reparse without breaching cross-border regulation; however, the replication of consumer data in an anonymised synthetic form can then be repurposed and modelled. The proposed use of video game engine sampling will enable firms to build and experiment with hypothetical alternative datasets from already

cleaned and tagged data. This has the potential to translate into seemingly unlimited modelling scenarios which can form part of a portfolio construction and re-adjustment in real time.

As further innovation takes place, in whatever form it may take, AI will continue to assist in ways which large datasets can be consumed and repurposed in a manner that suits a particular user, asset class or geographical focus beyond the capability of the human brain – but a successful outcome will require technology to be used in tandem with human input as well as be fully integrated throughout a firm’s investment process and organisational culture. The threat of artificial intelligence wiping out the asset managers is overdone – AI will not replace asset management, but those who invest in technology will undoubtably replace those who do not.

Rebecca Healey is head of market structure and strategy, EMEA at Liquidnet.

2/10/2019 11:17:27 AM

34 | Money Management October 10, 2019

NZ financial planning

DON’T MISS THE FOREST FOR THE TREES (OR THE KIWIS)

Founder and principal of New Zealand financial planning firm Fairhaven Wealth Sonnie Bailey explores the differences between the two Australasian markets.

FINANCIAL PLANNING IS heavily regulated and has been getting more so. It also involves a lot of technical knowledge and expertise. But it’s important, sometimes, to step back and see the forest for the trees – and remember what clients are looking for when they engage with a financial planner.

Looking at the differences between financial planning in Australia versus New Zealand can provide a fresh perspective.

I worked in the Australian financial services industry for roughly 10 years and have been providing financial planning services in New Zealand for the last three years.

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And boy, there are a lot of differences between Australia and New Zealand when it comes to financial planning.

I won’t go into any detail regarding regulatory differences.

All I’ll say is that I feel for what you’re going through in Australia.

Here in New Zealand we are going through a number of changes including a complete re-write of the legislation impacting financial advisers, which introduces something resembling Australia’s licensing regime and increased educational requirements and conduct standards for advisers in the risk and lending space. This has passed into law and we are about to

enter into a lengthy transistional period. But in my view, our experience is nothing like the scale of change being experienced in Australia.

On top of this, from a technical perspective, it is much easier to provide financial planning services to clients in New Zealand than in Australia.

• Our KiwiSaver regime is relatively uncomplicated. There are basically no tax concessions associated with KiwiSaver. All you get from the Government is a maximum Government co-contribution of $521 (which you get if you contribute $1,043 or more over the course of a

year). Some employees will also benefit from an employer co-contribution, which is usually 3%, but that depends on their employment agreement.

You can also only be a member of a single KiwiSaver scheme.

Unless locking your funds away until you’re in your mid- to latesixties is a feature rather than a flaw (and that is the case for some people), there isn’t much reason to focus too strongly on KiwiSaver; • In New Zealand, there is no equivalent to self-managed superannuation funds (SMSFs); • You can’t pay for insurance via KiwiSaver;

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October 10, 2019 Money Management | 35

NZ financial planning

• At age 65, all Kiwis who meet the eligibility requirements (which relate to how long you’ve lived in New Zealand as an adult) are entitled to a universal pension of roughly NZD$21,000 ($19,449) for a person living alone and $32,000 for a couple.

This pension isn’t means tested; • The top marginal tax rate in New Zealand is 33%. However, there are very few items you can deduct against your income; and • There is no capital gains tax.

The only areas where things are slightly more complicated in New Zealand relate to our Accident Compensation Corporation (ACC) and the popularity of trusts. But if I’m being candid then these differences are pretty minor.

Our ACC regime, which provides generous cover to Kiwis who suffer accidents, can make Kiwis a little complacent about their need for personal insurance.

But once you point out their exposure to non-accident related risks, they can usually appreciate the value of insurance.

Advising clients in their personal capacities as well as in their capacities as trustees of family trusts usually isn’t that difficult once you’re used to it, either.

(As an aside, some of the reasons trusts are more popular in New Zealand than in Australia relate to historical accident; the lack of options that are more beneficial in Australia such as tax-concessional superannuation; and the lack of capital gains tax in New Zealand, meaning there is no tax disadvantage to holding a family home in trust.)

The long and short of all of the above is that it’s harder to demonstrate your value as a financial planner in New Zealand, at least in pure financial terms.

It’s virtually impossible to recommend a strategy to clients and point out a specific saving they’ll make by making additional contributions to superannuation or

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by implementing a transition to retirement strategy.

If I want to point to a specific dollar benefit, I can usually point to savings I can generate from not paying fees that I consider unnecessary. Or where appropriate, by pointing out to clients that they are over-insured and can afford to reduce their level of cover on some policies and therefore their premiums. But except in rare cases these figures are minor, and ancillary to what is fundamental to the advice I provide.

Despite this, clients still receive a lot out of the financial planning process and perceive that they do so.

It’s easy to think about all of the technical expertise and knowledge you have.

But I draw this distinction between New Zealand and Australia to point out something more fundamental about the advice process.

Sure, clients want to make sure they’re not paying more in fees or tax than they otherwise would be. They want to ensure their financial affairs are structured appropriately.

But those strategies are really a means to an end.

• Clients want to make sure they’ve got an appropriate plan in place, and that it is tailored to them; • Clients want to know that they’ll be okay; • Clients want to ensure that they have a plan in place that will help them live a life in line with their values and priorities; • They want to be able to sleep at night, knowing that they’ve considered many of the things that can go wrong in their lives, and that they have strategies in place to help manage these risks (through insurance and otherwise); • They want someone to listen to them and provide them with an external perspective. They want someone who can facilitate

“Our KiwiSaver regime is relatively uncomplicated. There are basically no tax concessions associated with KiwiSaver.”

– Sonnie Bailey, Fairhaven Wealth conversations about money (and other important things) that they might necessarily have with their partner. They want someone who can be a devil’s advocate and challenge them, and get them to entertain other perspectives and approaches; and • At the end of the day, many clients want comfort and confidence.

All of these things are true wherever they are located. It doesn’t matter whether they’re in Australia, New Zealand, or elsewhere.

As a financial planner in New Zealand, it’s important to get to the heart of this. Because our financial system is so simple, we can’t point to dollars saved in tax by contributing to KiwiSaver or how to make the most of SMSFs, or by paying for insurance within these structures.

We have to put a special focus on the client, make sure they are heard, and provide them with confidence that they have a plan that is tailored to their situation.

With all of the regulatory changes you’re dealing with in Australia, and all of the technological knowledge and expertise you have to muster, it’s important to remember that all of this is a means to an end: Who is the client, what do they care about, and what do they want from working with you?

Everything else is important, and in most cases, essential. But ultimately, it’s a means to an end and that end starts with the client.

Sonnie Bailey is founder and principal of Fairhaven Wealth.

1/10/2019 3:53:31 PM

36 | Money Management October 10, 2019

Fintech

WHY TECHNOLOGY MUST ENABLE SUSTAINABLE FINANCIAL ADVICE The use of technology in financial advice can help advisers to operate a sustainable and efficient businesses, Jacqui Henderson, writes.

AS WE APPROACH the year 2020, thinking about the notion of a sustainable financial advice model, we can’t help but first consider the historic challenges that have driven the financial advice sector into its current state of flux.

The good thing about being in a flux state, is the opportunity it provides us to adapt and elevate.

As a technology provider, with a solid mission to help more people access quality digital advice, the type of technology that will support this industry going forward needs to be designed in alignment with the way consumers interact, whilst maintaining compliance standards.

It is also our responsibility to deliver tools that help advisers deliver an advice experience that inspires consumers to want to pursue the process of advice, in a language consumers understand.

If we do not change the current model, we risk disadvantaging the Australians who need financial advice the most.

We all know that pressure has been mounting across several

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fronts – increased regulation, higher education standards and challenges to traditional revenue streams, all of which are creating a fair amount of existential navigating.

The fact still remains that 50% of Australians currently have unmet financial advice needs, primarily in strategic advice, cashflow management, insurance and superannuation – according to Investment Trends research. The way forward to create a sustainable financial planning industry to meet this demand, is to harness emerging technologies.

Existing technologies simply don’t cut it. The traditional advice model has been supported by ‘old world’ technology that’s continuing to deliver ineffective and inefficient advice to consumers.

MAKING ADVICE CO-CREATION A POSSIBILITY We have to accelerate digital transformation through a humancentric lens and address the current friction and inefficiencies

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Fintech Strap

that exist in the current financial advice process.

When we asked consumers about their own financial planning experience, most respondents stated they wanted to be part of the process and educated along the way. Some 26% agreed to the advice they were provided with, yet didn’t entirely understand it; 29% thought decisions were left for their adviser; and 45% said they wanted to be involved, with more knowledge. This demonstrates the massive gap that exists between advice and consumers.

For the industry to evolve, rebuild trust, and deliver an inspiring advice experience more broadly, we must first listen to what consumers want.

Consumers are seeking an experience that delivers advice as an instant and interactive service, available at their fingertips using their smartphone rather than via a paper document that is static and often confusing for them.

Consumers need to be empowered to play an active role in determining their financial futures, and as in other areas of their life, they are expecting this process to be in the palm of their hands.

A NEW SUSTAINABLE MODEL OF ADVICE In this changing regulatory environment, where it costs upwards of $50,000 for an advice practice just to open its doors, how can an adviser stay in business, with such challenges to current and future profitability?

Old world technology was not

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designed for today’s consumer, nor regulatory environment. The traditional advice process is manual and lacks consumer facing engagement.

New developments in technology offer new opportunities for licensees and advisers. Technology will be the enabler of smarter, safer and more efficient advice for Australian consumers. Licensees have a significant opportunity to capitalise on this new tech-driven advice model.

We all want to create a sustainable model that reduces the cost of advice to service the greatest number of Australians.

REMOVING FRICTION, INEFFICIENCY FROM PROCESS Regulators globally are working to ensure that consumers receive quality financial advice tailored to their particular needs and situation. Compliance is part of the value chain, and when it’s inefficient, it adversely affects the value delivered. Advisers, licensees, and consumers are all paying for these inefficiencies.

According to CoreData, on average, administration and compliance make up 29.9% of an adviser’s time – nearly 12 hours a week.

Paraplanning is also a significant cost within the advice process. Producing Statements of Advice (SoA), template coding, and data input takes a lot of time and is very inefficient. The result of all this work is a printed document, pages long, static, and full of complex terminology that clients

“If we equip the client-facing advice experience to handle data collection, modelling, strategies, and complexities of document generation automatically, we can remove significant friction from the advice ecosystem.”

– Jacqui Henderson, Advice Intelligence rarely read or understand properly.

Essentially, a lot of work goes into creating something that has limited practical use for the customer.

Latest research indicates that 43% of Australians who receive financial advice are confused by the content and language of an SoA, while 24% don’t even read the document. According to the Financial Planning Association’s research it takes on average 26 hours, at a cost of between $3,715 – $6,063 to complete an SoA. If we equip the client-facing advice experience to handle data collection, modelling, strategies, and complexities of document generation automatically, we can remove significant friction from the advice ecosystem.

Digital and instant SoAs will mean that a client’s tailored and personalised financial plan can be generated at the click of a button and delivered directly to the client’s app.

We must see the simplification of a client-facing, tech-based and goals-based advice process that empowers consumers to choose the way they receive advice, tailored toward what is most important to them – their life goals.

Jacqui Henderson is chief executive of Advice Intelligence.

1/10/2019 3:16:23 PM

38 | Money Management October 10, 2019

Global markets

WHAT POLITICAL SAGAS MEAN FOR GLOBAL MARKETS With President Trump threatened with impeachment and Boris Johnson handling Brexit in the UK, AMP Capital’s Diana Mousina examines how these political developments impact markets.

BETWEEN IMPEACHMENT TALKS in the US, the UK Prime Minister seemingly giving unlawful advice to the Queen and protesters in Hong Kong continuing to rally in the streets – you could be forgiven for assuming global economic markets are a mess. However, these political dramas don’t necessarily translate into market volatility.

THE UNITED STATES: PRESIDENT TRUMP IN HOT WATER One of the latest political developments in the US is an impeachment inquiry opening into President Donald Trump, announced by Speaker of the

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House Nancy Pelosi.

Pelosi set the scope of the inquiry to focus on the unfolding revelations about President Trump’s dealings with Ukraine, and the accusation that he withheld aid to leverage for information about his political rival, Joe Biden.

This comes in the midst of ongoing trade tension relations between the US and China, which currently show no signs of a resolution.

The impeachment inquiry does cause a bit of uncertainty for markets and for business, particularly in the US. However, AMP Capital ultimately believe that share markets will look through this noise.

It’s worth noting that it can

take a while for impeachment proceedings to get anywhere, even though the first and major step has now occurred. Further, the next step is that the US Senate needs to agree to an impeachment, which as it stands, looks unlikely. The Republican party have a majority in the Senate, and it’s unlikely they would want to impeach President Trump within close proximity of an election.

THE UNITED KINGDOM: BOJO AND BREXIT Although the happenings of UK Prime Minister Boris Johnson are dominating headlines, it’s the ongoing Brexit saga which is having the most impact on markets.

The Brexit deadline of 31 October is fast approaching, and there is still no sign of an agreement between the European Union and the United Kingdom being reached.

At this stage, AMP Capital think the most likely outcome is that Brexit will be delayed again. In this sense, it’s positive that we are not going to see a no-deal Brexit, because this would be disastrous for the UK. It would mean shortterm disruption to all the UK’s trade channels, and a high chance of a near-term recession.

In saying all that, we note a previous position that the Brexit saga is not disastrous for the global economy. Rather, the UK is wearing the brunt of the impact.

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October 10, 2019 Money Management | 39

Global markets

Chart 1: Sydney auction clearance and home price growth

Source: Domain, CoreLogic, AMP Capital

CHINA: TRADE TENSIONS AND TAKING TO THE STREETS Tensions in Hong Kong are ongoing, with protesters making international headlines and continuing to clash with local police. In terms of market impact, so far, this seems to be contained to Hong Kong, and is not being felt by global markets.

As far as China goes, the trade tensions with the US continue to impact global markets.

Lately, there’s been good news and bad news on the longstanding dispute. The good news is that tensions haven’t gotten any worse, which is an improvement on recent updates. What we don’t want to see is a re-escalation of trade tensions, and more trade tariffs to be imposed on top of what is already in place. That would have a negative impact on share markets.

At the moment, there’s a lot of uncertainty as to how this will end, and how much longer the dispute can extend. We think that ultimately President Trump does want to form some sort of deal with China before the election in 2020, but that may take some months. We aren’t anticipating a quick resolution on this.

More broadly, China’s

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Chart 2: Melbourne auction clearance and home price growth

Source: Domain, CoreLogic, AMP Capital

economic data has been OK recently. There have been some signs that the manufacturing sector in China is stabilising, albeit at a low level, because of the negatives flow-on effects from the trade war with the US. Further, Chinese policymakers are putting in place a lot of different forms of stimulus into the economy, and we think that is finally showing up in the data.

That should be a positive for Chinese growth in the near-term, but any further escalation in trade would de-rail that recovery.

FINALLY, WHAT ABOUT AUSTRALIA? As is always the case, the housing market continues to dominate the hearts and minds of Australians investors and market watchers.

Speculation of boom-time conditions returning have started to surface, but the data paints a slightly different picture.

According to figures from CoreLogic, capital city dwelling prices rose 1.1% in September.

Although this seems minor, it is a turnaround compared to a 10.2% decline over a 21-month period, which is worse than during the Global Financial Crisis of 2007/8.

Sydney and Melbourne led the charge, dwelling prices both rose

a strong 1.7% in September, which is their fourth gain in a row.

Prices also rose in Brisbane, but only a fraction, by 0.1%. Prices in Canberra rose 1%, and there was no movement in Adelaide. For all remaining capital cities – Perth, Darwin and Hobart – prices fell. Perth prices are now down 21.3% from their 2014 high and Darwin prices are down 30.8% from their 2014 high.

Green shoots No doubt, there is a bounce in home buyer demand in Australia.

The impact of the Reserve Bank of Australia cutting the cash rate for a third time this year, the re-election of a conservative government in May and the banking regulator easing its guidance for lenders are all contributing to this.

Auction clearance rates also give an indication of what’s to come for the housing market in Australia over the next year. As can be seen in the below charts, the rebound in auction clearance rates points to a continuing rebound in home prices in the key markets of Sydney and Melbourne. Based on past relationships and patterns, the current level of clearances points to annual house price growth

rising to around 10% to 15% over the next nine to 12 months.

Boom time conditions not on the horizon Although the bottom of the property cycle is upon us, our base case at AMP Capital remains that house price gains will be far more constrained than what Australia has seen in most recent boom time conditions, particularly at its peak in 2016.

Key factors to consider here are that household debt to income ratios are much higher, bank lending standards are much tighter than they have been during previous housing recovery cycles.

In addition, the supply of units has surged, with more in the pipeline.

For cities like Sydney, this has pushed up the rental vacancy rate to above normal levels.

Unemployment is also likely to drift up, as overall economic growth remains weak.

For the immediate term, the Spring selling season in October is worth watching. If auction clearance rates and volume of listings continue to trend upwards, this will be a positive indication of continued recovery.

Diana Mousina is a senior economist at AMP Capital.

2/10/2019 2:55:30 PM

40 | Money Management October 10, 2019

Toolbox

BENEFITTING FROM CHANGES TO LIFETIME INCOME STREAMS Challenger’s Sean Howard looks at means testing changes and the benefits the changes offer for asset-tested retirees.

THE CHANGES TO the means testing of lifetime income streams from 1 July, 2019 presents a significant opportunity for retirement advice. The means testing changes provide an immediate exemption under the assets test where the lifetime income stream meets a capital access schedule. This means an asset-tested retiree can immediately increase their Age Pension entitlement by investing in a lifetime income stream. In this

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article we look at the retirement advice opportunity and the immediate benefits for assettested retirees.

MEANS TESTING CHANGES TO LIFETIME INCOME STREAMS Means testing changes apply to lifetime income streams commenced on or after 1 July, 2019 with lifetime income streams commenced before 1 July, 2019 grandfathered under

the previous means testing rules.

Means testing changes do not apply to fixed term income streams, account-based pensions, defined benefit income streams or asset-test exempt income streams.

Under the income test, 60% of the gross payment from the lifetime income stream is the income assessed. For deferred lifetime income streams, 60% of the gross payment will generally be assessed after the deferral period

when payments commence.

Under the assets test, the assessed asset value is determined by the lifetime income stream meeting the capital access schedule. The capital access schedule restricts voluntary withdrawals and death benefits payable from the lifetime income stream.

Chart 1 (page 41) provides the capital access schedule.

The maximum voluntary withdrawal is a percentage of the

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October 10, 2019 Money Management | 41

Toolbox

Chart 1: Capital access schedule

Source: Social Security (Value of Asset-tested Income Streams (Lifetime)) Determination 2019 Explanatory Statement

purchase price declining in a straight line from 100% at commencement to 0% at life expectancy. The maximum death benefit is 100% of the purchase price from commencement until half of life expectancy and then equals the maximum voluntary withdrawal thereafter.

Where the lifetime income stream meets the capital access schedule, the assessed asset value will be 60% of the purchase price from the commencement date until age 84 (or for a minimum of five years) and then 30% of the purchase price thereafter.

Where the lifetime income stream does not meet the capital access schedule, the assessed asset value is the greater of the following: • Some 60% of the purchase price from the commencement date until age 84 (or for a minimum of five years), then 30% of the purchase price thereafter; • Any current or future surrender value; and • Any current or future death benefit.

Example Henry is age 67 and invests in a lifetime income stream with $100,000 which meets the capital access schedule. The lifetime income stream pays $4,717 in the

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first year indexed to inflation for the rest of his life.

Chart 2 provides the assessed asset value and assessed income from his lifetime income stream.

The assessed asset value of his lifetime income stream is $60,000 (60% of the purchase price) until he reaches age 84 and then reduces to $30,000 (30% of the purchase price) thereafter. The assessed income from his lifetime income stream is $2,830 (60% of the gross payment) in the first year.

REDUCING ASSESSABLE ASSETS WITH LIFETIME INCOME STREAMS The Age Pension is subject to an income and assets test, with the test producing the lower amount determining the amount payable.

Under the assets test, the Age Pension reduces at a rate of $3.00 p.f. for every $1,000 of assessable assets above the lower assets test threshold.

If an asset-tested retiree invests $100,000 in a lifetime income stream which meets the capital access schedule, their assessable assets will immediately reduce by $40,000 (40% x $100,000).

Assuming the retiree is still assettested after the reduction, their Age Pension entitlement will immediately increase by $3,120 p.a.

(40 x $3.00 p.f. x 26).

Chart 2: Lifetime income stream assessed asset value vs assessed income

Source: Challenger

The relative increase in Age Pension entitlement will change in future years depending on the assessed asset value of comparable assets such as account-based pensions. The retiree may also become incometested in future years at which point the relative increase in Age Pension entitlement will depend on their assessable income.

Case study 1 Diane and Desmond are a couple, both aged 66, own their home and are recently retired. They have $300,000 each in deemed account-based pensions, $50,000 in cash and term deposits and $20,000 in personal contents.

Diane and Desmond are spending retirement income of $60,000 per annum which includes a combined Age Pension entitlement of $14,812 per annum . Their Age Pension entitlement is currently determined under the assets test.

Diane and Desmond withdraw $75,000 each from their accountbased pensions and invest in lifetime income streams which meet the capital access schedule. The combined lifetime income streams pay $6,649 in the first year indexed to inflation for the rest of their lives.

Table 1 compares their estimated Age Pension entitlement over the next five years.

Continued on page 42

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42 | Money Management October 10, 2019

Toolbox

CPD QUIZ Table 1: Estimated Age Pension entitlement over the next ďŹ ve years

Source: Challenger

Continued from page 41 By purchasing lifetime income streams, Diane and Desmond have immediately reduced their assessable assets by $60,000 (40% x $150,000).

As a result of the reduction in assessable assets, their Age Pension entitlement has immediately increased to $19,773 per annum.

The benefit for asset-tested retirees of purchasing lifetime income stream which meet the capital access schedule will depend on their assessable assets. Where they have assessable assets above the assets test cut-off, their Age Pension entitlement will only start increasing when their assessable assets reduce below the assets test cut-off. Where they become income-tested after reducing assessable assets, their Age Pension entitlement will depend on their assessable income.

Case study 2 Edith and Eric are a couple, both aged 66, own their home and are recently retired. They have $400,000 each in deemed account-based pensions, $50,000 in cash and term deposits and $20,000 in personal contents.

Edith and Eric are spending retirement income of $60,000 per annum which does not include any Age Pension entitlement. They do not receive any Age Pension entitlement because their assessable assets exceed the assets test cut-off.

Edith and Eric withdraw $20,000 each from their account-based pensions and invest in lifetime income streams which meet the capital access schedule. The combined lifetime income streams pay $1,773 in the first year indexed to inflation for the rest of their lives.

Table 2 compares their estimated Age Pension entitlement over the next five years.

By purchasing lifetime income streams, Edith and Eric have immediately reduced their assessable assets by $16,000 (40% x $40,000).

As a result of the reduction in assessable assets, they will start to receive an Age Pension entitlement of $2,002 per annum. They will also become entitled to the Pensioner Concession Card.

Sean Howard is the technical services manager at Challenger.

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. How does the capital access schedule restrict death benefits payable from lifetime income streams? a) Maximum death benefit is 100% of the purchase price from commencement until life expectancy and then there is no death benefit thereafter b) Maximum death benefit is 100% of the purchase price from commencement until half of life expectancy and then equals the maximum voluntary withdrawal thereafter c) Maximum death benefit is a percentage of the purchase price declining in a straight line from 100% at commencement to 0% at life expectancy d) Maximum death benefit is 60% of the purchase price from commencement until age 84 and then 30% of the purchase price thereafter 2. How are investments in lifetime income streams which meet the capital access schedule assessed under the assets test? a) Purchase price is assessed for the life of the income stream b) 60% of the purchase price is assessed for the life of the income stream c) 60% of the purchase price is assessed until age 84 (or for a minimum of five years) and 30% thereafter d) 30% of the purchase price is assessed for the life of the income stream 3. If a lifetime income stream pays a gross annual payment of $5,000 how much is assessed under the income test? a) $3,500 p.a. b) $1,500 p.a. c) $5,000 p.a. d) $3,000 p.a.

4. If an asset-tested retiree invests $150,000 in a lifetime income stream which meets the capital access schedule, how much can they immediately increase their Age Pension entitlement by? a) $4,680 p.a. b) $7,020 p.a. c) $3,510 p.a. d) $8,190 p.a.

5. Where a retiree has assessable assets just above the assets test cut-off, an investment in a lifetime income stream which meets the capital access schedule will not increase Age Pension entitlements? a) True b) False

Table 2: Estimated Age Pension entitlement over the next ďŹ ve years

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ benefitting-changes-lifetime-income-streams

Source: Challenger

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

1/10/2019 3:15:17 PM

October 10, 2019 Money Management | 43

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

Appointments

Move of the WEEK Leanne Gregory-Aylett General manager, advice delivery IOOF

Wealth manager IOOF has appointed Leanne Gregory-Aylett to a newly-created senior role of general manager advice delivery.

She would be responsible for delivering critical functions for licensees, including advice systems and technology, advice innovation, IOOF advice academy, adviser marketing and events, operations and training and advice research.

Gregory-Aylett had more than 20 years of experience across the financial

Aberdeen Standard Investments (ASI) has appointed Danielle Welsh-Rose as environmental, social and governance (ESG) investment director with regional responsibilities.

As well as supporting the integration of ESG factors into ASI investment decision-making in Australia and the Asia Pacific, she would advocate on the importance of ESG capabilities to clients.

Welsh had over 17 years of experience in ESG leadership roles and joined from the Victorian Funds Management Corporation where she was head of ESG. She would report to Euan Stirling, ASI’s Edinburgh-based global head of stewardship and ESG investment, for functional responsibilities, and Brett Jollie, managing director – Australia, for business matters.

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services sector and a successful track record in advice, wealth management, banking and superannuation.

She was also a founding member of Financial Executive Women (FEW), an organisation where women mentored other women to reach their career potential.

Prior to this, she held a number of key roles which included general manager at MLC Business Solutions, general man-

State Street Global Markets has appointed Abhilash Menon as multi-asset class transition manager (vice president).

Based in Sydney, he would be responsible for Australian and New Zealand clients, and would report to James Clark, head of transition management and exposure solutions, APAC. Menon had spent the last two and a half years with Ord Minnett and seven years with Goldman Sachs before that, where he was part of their transition management team.

Qantas Super has appointed Suzette Thurman to the newlycreated role of chief risk officer.

The fund said Thurman had over 25 years in building and implementing risk frameworks in the financial services sector and was most recently at First State

ager of retail sales for ME Bank, director of aligned channels business development for AMP Financial and non-executive board director for Aftercare.

“Most recently, Leanne has been consulting on a range of strategic assignments. She brings a deep understanding of the regulatory environment and a passion for creating value for advisers and their clients,” IOOF’s general manager advice, Darren Whereat, said.

Super as group executive, risk and compliance.

Thurman would start in December and report to chief executive Michael Clancy.

Commenting on the move, Clancy said: “Thurman’s appointment reinforced Qantas Super’s continued focus on risk and compliance for the benefit of our members and follows the careful implementation of the three lines of defence risk governance model within the organisation”.

Newton, part of BNY Mellon Investment Management, has appointed Andrew Parry to lead its responsible investment team from 14 October.

He joins from Hermes Investment Management where he was head of sustainable investing and previously held roles at the firm including head of equities and impact investing.

Based in London, Parry will report to Newton chief investment officer Curt Custard.

His role at Newton would involve growing the firm’s sustainable business, overseeing its sustainable strategies and communicating the firm’s approach to responsible investment.

Custard said: “Andrew’s hire underpins the strategic importance and commitment that Newton places on responsible and sustainable investment. We have a long track record and heritage embedding ESG across our investment strategies and in developing leading responsible investment capabilities, having been evolving our approach since inception in 1978.

“Andrew’s experience in responsible and sustainable investment will be hugely valuable as we continue to develop our offering in response to our clients’ needs.”

2/10/2019 3:32:09 PM

OUTSIDER

Money Management ManagementOctober April 2, 10, 2015 44 | Money 2019

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

A game that’s worth a try

HAVING spent many years living in Canberra before moving to Sydney, Outsider was excited that the Canberra Raiders made the final against the Sydney Roosters and watched the game from his man cave.

The fact his corporate home of Martin Place was abuzz with an NRL Fan Fest in the days before certainly helped him get in the mood for the grand final. Among the activities available were a dive try foam pit, an NRL reaction test and a skills session with various players.

As a financial services hub, Martin Place is home to, among others, Challenger, Commonwealth Bank, Macquarie, and the Australian Prudential Regulation Authority, although none of them were spotted on the ground.

This was a shame as, although APRA has been strong on tackling regulation, Outsider would have paid good money to see how it fared tackling the professional NRL players.

Having played rugby in his distant youth, Outsider felt he would have been up to the challenge but decided not to embarrass the professional players in case he was scouted.

Whatever would Money Management have done without him!

Considering one’s mortality OUTSIDER was disturbed to read Money Management's article about how he was a ‘decaying vessel’. Although he understood the point made in William John’s very wellwritten article on addressing diminished capacity in clients, the comment did give him pause for thought over his own mortality. He would like to think he is in the prime of his life!

Outsider furrowed his brow for a few seconds as he thought about all the free lunches and merchandise he would miss out on if his decaying vessel was no more but soon forgot as he was distracted by the thought of the free meal he’d receive that day from a certain roundtable.

Nevertheless, Outsider feels the phrase ‘The human body is a vessel that decays over time until no more’ is the ideal motivational quote for his Money Management colleagues and has posted it up on his office whiteboard.

Should any of his younger teammates have any problems, he can now philosophically remind them how small their problems were, and that life was short. After all, there are only so many hours in a day to grab a free meal.

Having a good lie down until the mood passes NO names, no pack drill, but Outsider has heard tell of a recent financial services company off-site (love-in) which ended with two participants being tended to in the emergency department.

Now, of course, Outsider would never attend an off-site on the basis that anything he needs to achieve can generally be achieved on-site – his comfy chair in the man cave not far from the big screen TV. So, if Outsider had been asked to go mountain biking as part of an off-site bonding session then he would have politely declined and retreated to the Jason

OUT OF CONTEXT www.moneymanagement.com.au

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Recliner and his comforting bottle of single malt. Young folk are rarely so wise.

Thus, as Outsider hears it, one offsite participant found himself flying over the handle-bars – something which resulted in stitches, while another female participant was last seen hobbling out on crutches.

Outsider’s advice is that for your next off-site you should consider full contact tiddlywinks or Jason Recliner bonding sessions. Then, too, just a cup of tea, a Bex and a good lie down would probably work.

Outsider intends remaining firmly on-site.

"We did not expect this slowdown, so it has come as a bit of a surprise."

"We can't have them growing up as mushrooms either but at the same time we have to have perspective.''

- Philip Lowe, Governor of the Reserve Bank of Australia

- PM Scomo on children's climate change anxiety

Find us here:

3/10/2019 11:57:46 AM

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18/09/2019 1:04:02 PM

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5/09/2019 12:19:18 PM