Money Management | Vol. 35 No 18 | October 7, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 35 No 18 | October 7, 2021

12

INFOCUS

Evergrande crisis

ESG

18

Impact investing

GENDER IN FINANCIAL SERVICES

Serving, not selling

Advisers to pay more for FASEA exam under ASIC

BY LAURA DEW

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Attracting female talent WHILE statistics may show there is a broadly even gender split between male and females in the financial services sector, when you break the data down, the numbers tell a different story.

In the financial advice sector, the proportion of female staff falls from 50.1% in the total finance industry to 31% and many are likely working in roles ‘behind the scenes’ such as HR or paraplanning rather than giving advice to clients.

As a result, firms are taking it upon themselves to start offering initiatives to attract female staff such as mentoring schemes and flexible parental leave.

Others are focusing on the graduate space and trying to convince female students of the benefits of a career in financial advice or investment management. These include the flexibility of the role, ability to build a deep relationships with clients and to set up your own business.

In particular, the Financial Planning Association of Australia has received $1.5 million to offer scholarships to female students.

Currently, too many students think that finance is a “less interesting career” compared to other options such as technology or law, according to Thuy To, senior lecturer at the University of New South Wales Business School.

She encouraged financial advice firms to consider building relationships with universities via attending recruitment events, offering internships and being guest speakers.

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Full feature on page 18

24

ADVICE

The Government has released exposure draft legislation and consultation documents for the Better Advice Bill, including an increase in the Financial Adviser Standards and Ethics Authority (FASEA) exam fee.

The bill was introduced into Parliament on 24 June, 2021, and would cover areas including establishing a single disciplinary body and registration system for financial advisers, a single disciplinary and registration system for financial advisers that provide tax (financial) advice service and the wind-up of the FASEA into the Australian Securities Investments Commission (ASIC).

Within the legislation, it said the exam run under ASIC would cost $948 compared to $594

under FASEA. It would also cost $218 for ASIC to review the marking of one or more answers to non-multiple choice questions.

This would apply to those advisers who had not yet passed by the exam by the end of 2021 and those who needed to re-sit in 2022.

Advisers to be registered as a relevant provider by ASIC would also need to pay a fee of $95.

Other measures related to the exam included the removal of the three-month waiting period before being able to re-sit the exam and more flexibility to allow candidates to sit the exam in person, virtually or through alternative arrangements.

Consultation was being sought on: • Setting the criteria for when Continued on page 3

Video and recordings to be future of financial advice

BY JASSMYN GOH

THE future of advice will be using video recordings, video statement of advice (SoA), and advisers with an ability to service 200 to 300 clients, according to an adviser.

Enlightened Financial Solutions chief executive, James Wortley, said the only way advice firms would be able to have scale and be efficient was through recording all meetings whether it be face-to-face or digitally as it would save time on file notes and was a form of evidence.

“If you haven’t got a file note, you didn’t do it. It’s your word versus the client’s word but when you have a recording there, it really doesn’t matter,” he said.

“I know the big licensees won’t like that, because video advice Continued on page 3

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October 7, 2021 Money Management | 3

News

Still issues with single disciplinary body legislation

BY CHRIS DASTOOR

THE Financial Services and Credit Panel (FSCP) will only convene for serious issues, but there are still issues with the single disciplinary body (SDB) legislation according to the Association of Financial Advisers (AFA).

The Government released the draft legislation for the Better Advice Bill which also included an increased fee for the adviser exam, as well as the cost to register as a relevant provider.

In the draft, some of the circumstances Australian Securities and Investments Commission (ASIC) were required to convene a FSCP included: • The relevant provider became an insolvent under administration; • The relevant provider was convicted of fraud; • ASIC believed that the relevant provider was not a fit and proper person to provide personal advice to retail clients in relation to relevant financial products; • The relevant provider had at least twice been linked to a refusal or failure to give effect to a determination made by the Australian Financial Complaints Authority (AFCA) relating to a complaint; • If a relevant provider had not met the education and training standards; • If a relevant provider breached the requirements of a Statement of Advice as

Advisers to pay more for FASEA exam under ASIC Continued from page 1 ASIC must refer matters to the single disciplinary body; • Specifying the administrative sanctions made against a financial adviser that must be included on the Financial Advisers Register; • Extending the deadline to complete the financial adviser exam to 30 September, 2022, for financial advisers who have attempted the exam twice before 31 December, 2021; • Proposing new fees for the financial adviser exam and registration of financial advisers from 1 January, 2022; and • Outlining the registration, education and training requirements for financial advisers providing tax (financial) advice services.

The Government said it intended the legislation would come into force on 1 January, 2022, and stakeholders were invited to comment on the exposure draft by 15 October.

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laid out in the Corporations Act; and • They were unregistered and provided advice.

Phil Anderson, AFA general manager policy and professionalism, said the association was reasonably comfortable with the changes to the circumstances where the referral of a matter to an FSCP was mandatory.

“The inclusion of insolvency, conviction for fraud and not a fit and proper person were all expected and are completely reasonable,” Anderson said.

“The key driver of matters to be referred to an FSCP will be breaches of a financial services law where the breach is serious.

“In terms of what defines serious, we totally agree with the criteria about material

loss or damage to a client and involves dishonesty or fraud.

“It appears that ‘material’ has not been defined, which adds a layer of complexity to this. We are unsure about the other criteria around a material benefit to the adviser, and how this would be assessed.”

However, Anderson said It should be noted that this regulation only defined which matters must be referred to an FSCP and that ASIC could still choose to refer other matters to the FSCP even if they were minor and administrative.

“Overall, this looks like an acceptable outcome with what must be referred to an FSCP, however we need to make the point that we still have issues with the SDB legislation, including the fact that ASIC are forced, when they reasonably believe that an adviser has breached a financial services law, and they choose not to refer a matter to an FSCP, that they must issue a written warning or reprimand,” Anderson said.

“We would like them to have the option to take no further action where the matter is minor or administrative.

“The fact that they must issue a written warning, means that they will need to thoroughly investigate the matter and this will drive unnecessary costs, that will end up being charged back to advisers in the ASIC funding levy.”

Video and recordings to be future of advice Continued from page 1 makes it really difficult for them to be able to do a compliance audit on something like that.”

Wortley said when scale was reached, advisers would be able to see 200 to 300 clients but that advice firms would need the right technology stack to enable this. This would allow advisers to spend most of their time with clients as opposed to filling out compliance.

“I think from a compliance and red tape point of view that will start to go away, we’re moving into a profession so there’s so much opportunity,” he said.

“We got these baby boomers coming through the next five to seven years and you’re going to have the most opportunity that you’ve probably ever had ever before.”

“So you need to make sure that you’re geared up for that through support staff and trying to bring these younger financial advisers in and coaching them as well. It’s

going to be a great opportunity for the industry moving to a profession.”

Peloton Partners chief executive, Rob Jones, said the most profitable advice firm he had come across in the country had just one adviser who spent 70% of his time in front of clients and was moving that percentage up.

“He structures 16 client meetings a week and has five support staff. So this firm decided that they would be heavy in the back light in the front with the sole owner just for the clients,” Jones said.

“I know it sounds like a lot but it is the most profitable firm in the country that I’ve dealt with and I’ve seen 600 to 700 firms, including my own, and this one is at the top of the range.

“It’s genuine as well because of that service proposition. It’s not for every firm but it’s a stand out as far as we’re concerned.”

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4 | Money Management October 7, 2021

Editorial

jassmyn.goh@moneymanagement.com.au

WHY ARE ADVISERS PAYING MORE FOR THE SAME EXAM?

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

Advisers who sit the financial adviser exam under the corporate watchdog will pay almost 60% more than advisers sitting the exam under the current regime and transparency is needed on the rise.

WITH the amount of compliance the corporate watchdog has piled onto the financial advice industry in a bid to increase transparency and standards, it would be wise for the regulator to also walk the talk on disclosure.

This is especially given that the draft regulations of the Better Advice Bill revealed that once the financial adviser exam is moved from the Financial Adviser Standards and Ethics Authority (FASEA) to the Australian Securities and Investments Commission (ASIC), the fee to sit the exam will increase by almost 60%.

Next year, the financial adviser exam fee will rise by $354 to $948 and ASIC needs to explain why.

The reason they need to explain is the fact that the regulator had exponentially increased the ASIC levy over three years, before the Government decided to restore the levy to the 2019 level, for the reason that there were less advisers and that most advisers were not associated with the litigation the levy funded.

Many of the advisers who have left the industry have done

Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Features Editor: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au News Editor: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au ADVERTISING Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Amelia King Tel: 0438 879 685 amelia.king@moneymanagement.com.au Junior Account Manager: Karan Bagai Tel: 0438 905 121 karan.bagai@moneymanagement.com.au

so due to the amount of red tape the regulator has introduced.

Not only this, ASIC representatives recently told a Parliamentary committee that they “deeply cared” about the costs being borne by financial advisers but now have increased the fee for advisers to sit the compulsory exam.

Another reason the regulator should be explaining how they worked out the fee is because the cost to remark non-multiple choice answers has remained the same at $218.

Advisers that continue to be “existing” on the Financial

Adviser Register but not a “relevant provider” and intend on sitting the exam next year may need to rethink their strategy as the booking period for the last exam of 2021 closes at the end of October.

However, the draft regulations did include some sensible changes such as the removal of the three month waiting period before a person could resit an exam as well as the addition of more flexibility around how a person chooses to sit the exam.

Jassmyn Goh Editor

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30/09/2021 2:09:57 PM

October 7, 2021 Money Management | 5

News

New entrants face hurdles in securing professional year

BY LAURA DEW

WHEN licensees have a clearer number of how many advisers are left in the market at the end of the year, this will likely prompt them to consider setting up a pathway for taking on new entrants.

Since January 2019, new entrants were required to complete a professional year (PY) which comprised of 1,600 hours of work, at least 100 of which was structured training, before they could work as a financial planner.

However, candidates had reported struggling to find a workplace willing to spend time and money on a new starter.

Marisa Broome, chair of the Financial Planning Association of Australia, said: “Young graduates and career changers aren’t daunted by exams, the cause [of fewer new entrants] is the professional year, that’s the hurdle for them.

“The rules are very prescriptive, firms don’t have time to take someone on who can’t give advice yet and there is not a lot of flexibility.”

Joel Ronchi, principal consultant at myIntegrity in Practice, said the problem lay not

with the Financial Adviser Standards and Ethics Authority (FASEA) but rather that firms were already swamped with existing challenges.

“To be fair, FASEA has done a good job, it has FAQs, policy documents and templates on their website and they have built those resources up over time,” he said.

“It is hard for people to get a PY because firstly, firms are so heavily focused on their existing advisers passing the FASEA exam and secondly, it takes a fair bit of internal resources to

Compliance burden a myth to digital financial advice take-up

BY CHRIS DASTOOR

THE corporate regulator is not supportive of digital advice, institutions cannot recommend their own products and it does not meet best interest duty (BID) – these are three myths about digital advice dispelled in a whitepaper.

Ignition Advice’s ‘Compliance myths about digital advice’ whitepaper highlighted those three myths about the take-up of digital advice: • Myth one: The Australian Securities and Investments Commission (ASIC) is not supportive of digital financial advice solutions; • Myth two: Institutions are not able to compliantly recommend their own products to their customers; and • Myth three: How does digital advice meet BID obligations?

On myth one, Craig Keary, Ignition Advice Asia Pacific chief executive, said scaled advice was permitted by ASIC and permitted in law.

“We know the unmet advice needs in the community is huge, we also know that unmet advice needs

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have accelerated as a result of COVID-19,” Keary said.

“From our perspective, this makes that advice need that is currently being unmet more affordable and accessible.”

On myth two, the Royal Commission’s spotlight on vertical integration meant institutions recommending their products to their customers had been seen as a “no-go” or done with great caution.

“Institutions can confidently deliver single-issue personal advice on their own products,” Keary said.

“ASIC has issued guidance with respect to that, [but] the scope of that advice must be understood and agreed.”

On myth three, the report said digital advice had evolved to satisfy BID, as unlike robo-advice, digital advice was not limited to investments and used fact-find and algorithm calculations for its advice.

“Digital advice is a hybrid solution that allows you to have a human involved in that… Algorithms have now evolved to provide that consistent strategic and compliance advice,” Keary said.

put a structured pathway in place and can be onerous.”

However, both said that the experience would gain awareness with licensees once the FASEA exam deadline had passed at the end of the year.

Ronchi said: “I wouldn’t say it needs to be improved but there needs to be greater awareness of it by licensees. Once they are rid of one variable in the FASEA exam, that allows them to focus on a different one which would be the PY. “Once they have that clarity over how many advisers they will have left going into 2022, they will be able to plan and consider how many candidates they can bring on for a PY.” He commented that once a firm had set the initial pathway up in the first place, that experience could then be replicated for subsequent candidates going forward.

“Now people are going through the process, the experience can be finetuned and I am hopeful of seeing changes. Already we are seeing changes which let people begin their PY while they are still at university rather than having to wait until they have graduated,” Broome added.

Portfolio change delays from compliance exponentially reduce gains: HUB24

BY JASSMYN GOH

INVESTORS could lose up to 60% of gains if portfolio changes are delayed by six weeks, according to HUB24 modelling.

HUB24’s latest report, in conjunction with Milliman, said increased compliance and the manual nature of traditional portfolio management processes made it challenging for financial advisers to deliver timely investment decisions.

It said advisers could take up to six weeks to implement investment decisions due to challenges in preparing advice documentation, discussing changes with clients, obtaining client consents and lodging paperwork.

The report modelled a scenario of a client that held $500,000 in a diversified growth managed portfolio on 25 March, 2020, during the COVID-19 market sell off, for six months.

The modelling looked at the difference in returns when 5.5% of the client’s funds were moved to a defensive portfolio over a delay of one, two, four, six weeks, and no delay.

It found the portfolio was $4,460 better off when portfolio manager decisions were implemented immediately compared to if there was a delay in implementation of one week.

When it came to a six week delay the gains were reduced by 60.1%.

Milliman principal, Victor Huang, said: “Delaying asset changes by just a couple of weeks can really have a material impact on your client’s outcomes and quite possibly negate a large part of what the portfolio managers are trying to achieve when making these decisions”.

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6 | Money Management October 7, 2021

News

Govt needs to create ‘meaningful’ change

BY CHRIS DASTOOR

IF the Government wants credit for helping the industry it needs to do more to drive “meaningful” change, rather than fixing no brainer issues, according to Lifespan Financial Planning.

Eugene Ardino, Lifespan chief executive, said the Government had fixed things that needed to be fixed but would not deserve full credit until meaningful change was completed.

“The way I see it [the Government] are fixing things that need to be fixed, some of the things they’ve come out with were no brainers,” Ardino said.

“Maybe I’m being too rough on the Government, but the Government doesn’t deserve credit for doing it, they deserved to be criticised if they didn’t do it.

“If the Government wants credit, they need to look at meaningful change to actually acknowledge that you can regulate an industry out of existence and do away with all misconduct.

“If you have no advisers, you won’t have misconduct. If you have no clients, you won’t have

BY LIAM CORMICAN

misconduct. But there’s got to be a balance.”

However, Ardino said there was positives to come out of this upheaval for those that stuck it out, despite it being a fastshrinking community.

“We dipped under 19,000 [advisers], I expect us to get closer to 15,000 over the next 12 to 18 months and possibly to go down further,” Ardino said.

“That’s a massive opportunity for those that stick it out and stick around, and I genuinely believe that at some point the Government is starting to take note of how over-regulated our community is and I think we will see the

pendulum swing back.

“I guess the message is hang in there, things will get better. It’s important there are advisers left at the end of this because consumers need you.”

Ardino said he believed there was a spike in mental health concerns in the advice community this year.

“I think it’s the coming together of all the new legislation, the education deadline around the corner – yes, there’s an extension, but there’s confusing over what extension actually means and that will be there until the relevant legislations are amended,” Ardino said.

Uncertainty falls for China tech firms

BY LAURA DEW

ANTIPODES is focusing its Chinese exposure on e-commerce firms which it says present less regulatory risk than other parts of the market.

On an investor webinar, Antipodes Global fund manager, Jacob Mitchell, said he favoured e-commerce as its penetration would continue to grow in the future. His fund had 14% allocated to China including Tencent and Trip.com Group (C-Trip) in its top 10 largest holdings.

“The largest cluster of companies we have in China are those with e-commerce exposures including Tencent, JD.com and C-Trip where, for the multiples you’re paying, you’re getting structural growth,” he said.

“There will be an element on economic sensitivity but it is far less sensitive than a lot of the Chinese equity market which is dominated by domestic cyclicals.”

He said Chinese companies were in a similar position as Facebook in the US in having come out

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The residual impacts of COVID-19 on saving and investing attitudes

the other side of regulatory scrutiny. Numerous fund managers had been reducing their China allocations over the last few months in light of this increased regulation.

“There has been regulatory tightening but we’re fairly well progressed through that so the uncertainty will fall. For companies that have been directly by that, investors will go back to focusing on the long-term opportunity and we think those companies are supported by the valuations being cheap relative to the long-term growth opportunity,” Mitchell said.

“For Tencent, they have exposure to a growing share of internet advertising, a dominant gaming platform and advertising penetration in China will continue to grow and outperform gross domestic product.”

The Antipodes Global fund had returned 21% over one year to 31 August, 2021, according to FE Analytics, versus returns of 14.6% by the absolute return sector within the Australian Core Strategies universe.

ONE-IN-TWO investors intend to save more and invest more in low-risk asset investments after the permanent lifting of lockdown, according to a global Schroderscommissioned survey of 23,000 people.

Spanning across 32 countries in Asia, Europe, the Americas and Australia, the survey consisted of those who were planning to invest at least €10,000 ($16,063) in the next 12 months. Schroders acknowledged this group was not necessarily representative of everyone’s experience during the pandemic.

About one-in-seven Australians surveyed said they spent more time thinking about their financial wellbeing and reorganising their personal finances this year, slightly lower than the global finding of 74%.

Schroders Australia chief executive, Sam Hallinan, said this was unsurprising “given the amount of time that we’ve been spending thinking about reorganising our personal finances, and maybe even that increase in priority of financial wellbeing is linked to the economic uncertainty and job stability which has been a characteristic of our landscape for the last 18 months to two years”.

According to the research, 48% of Australians said they would contribute more towards their savings generally while 44% said they would invest more towards low-risk asset investment. About one-inthree Australians said they would invest more towards high-risk investments.

“For many, the pandemic has presented an opportunity to recalibrate their personal finances and focus on financial wellbeing and, due to decreased spending on nonessentials, investors around the world have been able to save according to plan or indeed exceed their targets for savings,” Hallinan said.

Following the permanent lifting of lockdown, 40% of Australians said they would spend their money paying off debt, including a mortgage, followed by investing in, or purchase of a property at 39% and gifting to charity at 37%.

The survey found 58% of Australians were less cautious about spending their retirement savings, 11% higher than the global average.

Australian investors indicated they were saving more towards their retirement than the mandated 10%, with people saving 15% on average from their income.

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8 | Money Management October 7, 2021

News

Advisers see future opportunities after regulatory hurdles

BY LAURA DEW

THE challenging period for financial advisers surrounding regulation and education is coming to an end and advisers are able to look ahead for the first time.

The last few years since the Hayne Royal

Commission had been characterised by increasing regulation and scrutiny, more paperwork and stringent educational requirements with the Financial Adviser Standards and Ethics Authority (FASEA) exam.

But those in the industry said they were beginning to see a light at the end of the tunnel.

Jodie Blackledge, chief executive of Fitzpatricks Private Wealth, said: “I feel the industry is at a tipping point and people are starting to think about doing what they enjoy again. They now have the capacity to think about the future and it’s the first time in a while that I’ve seen that.

“There have been lots of exits from the industry so it has suffered but the people who have stayed are the ones who are going to be here for the long term and they have a bright future.”

According to the Money Management 2021 TOP Financial Planning Groups data, the number of financial advisers at the largest groups had fallen to 11,500 from 16,140 in 2018.

Risk advisers need to make clear insurance expectations

BY JASSMYN GOH

RISK advisers need to make it clear to clients that level premiums are not a guarantee and what they are to expect with their insurance product so that they are not shocked when their discounts expire, according to life insurers.

TAL chief executive, Brett Clark, spoke on a panel and said level premiums were an important part of the insurance market.

“I’m really sensitive to the issues that advisers have had to deal with some of the pricing increases around level premium, but the distinction is that level premium does not mean guarantees it means a different pattern of premium payments over time and in many cases for long-term life insurance customers at an appropriate premium pattern,” Clark said.

AIA chief executive, Damien Mu, agreed and said the Australian market did not have scale for level premiums to work. He also said the industry needed to look shorter-term level term premium products such as five, 10, or 15 years that had a component of level and stepped as people’s needs changed over time.

Zurich life and investments chief executive, Justin Delaney, said advisers needed to help tackle the “bill shock” customers received after their first-year discounts expired.

“There’s no doubt that over the last few years price has become more important and how new business flows have been attributed across the market. I think the importance of that first-year price, unfortunately, has become a great determinant of placement and that’s helped drive some of the discounts in market,” he said.

“From an advice perspective, particularly if the customer has a clear view as to what that sort of three, four or five year projection looks like – that’s really what we should be focused on.”

MLC chief life insurance officer, Michael Rogers, said discounting in the first year needed to be thought of in the context of what the client wanted to achieve and the sustainability of the product.

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Steve Donald, financial adviser at ANZ, said: “It’s always a shame when you lose good people who have seen the industry grow and have a lot to offer but if we want to get to the next step in becoming a profession then there is only way to go. It’s the right thing to do in the long term in terms of people’s livelihood”.

Chair of the Financial Planning Association of Australia (FPA), Marisa Broome, said she felt the current environment was only a “speed hump” in people’s careers rather than a long-term change.

She said the current changes had meant financial advice had been less flexible as a career than but that she hoped this would change, particularly as the pandemic had increased the number of people who were working remotely.

“There isn’t as much flexibility anymore but I think this is a moment in time and a speed hump from the regulatory change but hopefully we will go back to being flexible again,” Broome said.

“Working from home is definitely helping with that and I am hopeful we are seeing a change.”

Advisers stuck in the ‘old world’ of financial advice FINANCIAL advice is stuck in the “old world” and needs to adjust to how consumers want to receive advice.

Speaking at the Association of Financial Advisers (AFA) conference, Jacqui Henderson, founder and chief executive of Advice Intelligence, said: “There’s a massive gap between how consumers interact and how they receive financial advice. Consumers interact via their smartphones whereas they receive advice via paper documents.

“We are really stuck in the old world of delivering financial advice via paper and PDFs whereas technology is evolving into something that’s interactive and can be delivered via a mobile device.

“We need to evolve technology from being in this old world to a new world of digital because consumers are interacting that way so we need to step up and deliver advice in the same way.”

Based in the UK, Johann Koch, chief sales officer at fintech firm Intelliflo, said hybrid working would remain a constant.

“The feedback from the advice industry here is that hybrid working is

here to stay,” Koch said.

“It’s great to see people face to face again but the way the industry has pivoted to service clients remotely is there, and clients are demanding access to advisers and access to information digitally.

“There are certain elements of the advice process that can be digitised such as sending or presenting something to your client, electronic signatures, even presenting their net worth.”

As Intelliflo was launching into Australia, Koch said the similarities were “massive” between the UK and Australian financial advice markets.

“There’s huge crossover and similarities between the two markets, one of the reasons we were keen to launch in Australia was the market demand, market size and the regulatory changes coming in. So, the similarities were massive,” he said.

“We had to localise the solution to cater for the nuances of the Australian market and making sure it is scalable but a lot of the learnings and best practice we have had in the UK, we have brought over here.”

30/09/2021 9:55:18 AM

October 7, 2021 Money Management | 9

News

Pro bono work needed to reduce financial advice gap

BY LAURA DEW

FINANCIAL advisers should spend time doing pro bono work with underprivileged citizens as part of their continuing professional development (CPD) in a bid to reduce the advice gap.

Speaking to Money Management, ANZ financial adviser, Steve Donald, said the lack of support available for people in lower socioeconomic classes was a real problem that the Government needed to improve.

Changes such as making financial advice tax-deductible would have a positive effect on the economy in the long-term by reducing the Age Pension costs.

“There needs to be improved public services dealing with people in lower socioeconomic classes on establishing what they can afford to do. Websites like Moneysmart are great but they aren’t wellknown enough and that should be something the Government focuses on,” he said.

“Could advice be subsided for people who are on

benefits? Could advice fees for ongoing and upfront advice be tax-deductible? Small changes like this could be huge for the Age Pension.

“The people who need advice are the people who are unable to get it so what can we do about this?

How about making people on their professional year spend some time giving general advice to people in need? Or it should be part of advisers’ CPD to spend one day a year providing a pro bono service. This would give out a positive message and help the community.”

Small changes he said people could make would be regularly investing $20 in their superannuation.

“Superannuation is not understood and people worry about being unable to access it but there is nothing more tax-efficient than super, even at the lower end,” he said.

“If you can find $20 for super then the ATO [Australian Taxation Office] will make a co-contribution. This is the type of thing that is not widely understood and doing small things now will help build wealth for later.”

Evergrande issue unlikely to be systemic

BY LIAM CORMICAN

EVEN though China may allow Evergrande and other developers to fail, the Chinese economic system is ultimately underwritten by the government and should not collapse as bearish investors fear.

With the Chinese real estate giant heavily indebted and the Chinese government cracking down on real estate debt, Evergrande was forced to sell properties at a discount to generate cash.

At the time of writing, many Australian investors were looking at falling iron ore exports as a result of reduced steel production for Chinese construction meaning the potential ramifications on Australia’s economy were unclear.

Platinum deputy chief investment officer, Andrew Clifford, told investors there was unlikely to be a domino effect because China had been focused on reforming its financial sector in recent years which reduced the risk of the failure having a widespread domino effect.

However, he admitted, some individuals and corporates would be impacted “as that is the nature of corporate lending”, but it was important to remember China had not experienced the rampant asset price boom seen in most parts of the world.

Reuters reported Evergrande’s US dollar bondholders were still waiting for information about a US$83.5 million ($114.3 million) interest payment which had been due on 23 September

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– this was now expected to be delivered in the coming month. A further US$47.5 million US-dollar-bond interest payment was due the following week. Evergrande would default on the debt if it was not paid in 30 days.

BlackRock and UBS were among the asset managers who had been accumulating Evergrande bonds, while TCW and HSBC had closed their positions, said Morningstar.

Janus Henderson’s lead emerging markets analyst, Jennifer James, said current market pricing estimates indicated Evergrande’s US dollar bond holders were likely to recover very little, with no expectation of a coupon. The most likely outcome, according to James, was the company engaging with creditors to come up with a restructuring agreement.

James said so long as the Chinese government did not mishandle the situation, there would not be contagion effects on other markets.

“However, if the government opts not to use tools to engineer a soft landing for Evergrande – e.g. the government does not step in to ensure that the estimated 1.6 million homes paid for but not yet delivered are built – then there could be a crisis,” she said.

Clifford said there was a risk a slowdown in property market activity could spill into the real economy and cause short-term market disruption, but Evergrande did not represent trillions of dollars of inflated assets with non-serviceable interest.

“It is a property developer with developed and undeveloped land, hence it has collateral. It is relatively straightforward to assess, value and/or liquidate,” said Clifford.

With Evergrande agreeing to settle interest payments on a domestic bond and China’s central bank injecting cash into the banking system, AMP chief economist, Shane Oliver, said he believed China was unlikely to allow the failure to “mushroom” into a credit squeeze.

“While the Chinese authorities want to teach property developers and investors a lesson about the dangers of too much debt, it’s unlikely to allow Evergrande’s failure to mushroom into a full-on credit squeeze,” he said.

“So ultimately, some sort of debt restructuring rather than full bankruptcy is likely.

“And more broadly China is likely to provide policy stimulus to support growth into year end.”

David Bassanese, chief economist at BetaShares, said the risk of global financial contagion remained contained, helped by the fact it was mainly Chinese creditors at risk if Evergrande defaulted on its debt.

29/09/2021 9:28:12 AM

10 | Money Management October 7, 2021

News

Adviser numbers drop to new low

BY OKSANA PATRON

THE number of actual advisers in Australia dropped further to 18,965 on 24 September, breaking another record, after excluding timeshare advisers and FX traders.

According to Wealth Data, there were 47 new appointments and 94 resignations, which gave a net change of -38. Following that, 26 licensee owners gained 33 advisers while 42 financial planning groups reported net loss of 71 advisers.

Wealth Data’s director, Colin Williams, said that after deducting the new five provisional advisers, the net loss of experienced advisers would be higher and stood at 43.

“This week also saw the number

of advisers drop below 19,000.

However, our figures may be different to other numbers you may see quoted as we do exclude timeshare advisers and advisers we believe are FX traders,” he said.

AMP Group posted the highest losses for the week of around 11

advisers, with nine having departed from AMP Financial Planning.

Despite that, AMP FP remained the largest licensee in Australia with 655 advisers on its books, looking at the year-to-date data, and this was followed by the SMSF Advisers Network (648 advisers) and Morgans Financial (469 advisers).

According to Money Management's TOP Financial Planning Groups ranking, the collective number of advisers working for the top groups in the country has dropped to new lows and stood at approximately 11,500.

This compared to the number of advisers registered two and three years ago at the largest groups at 14,500 and 16,140, respectively.

Life insurers ‘irrational’ practices need to stop

BY JASSMYN GOH

THE life insurance industry has made irrational decisions borne out of the competitive nature of insurers and shorter income protection benefit periods are needed to reduce premium increases and uncertainty, according to a panel.

Speaking on a panel PFS Consulting principal, Ian Laughlin, said the changes being made to premiums “had” to work if the industry wanted to survive and thrive.

“As we all know, this industry has a competitive streak, which can drive it to do rather, I’d say irrational things, and one of the things it has to be alert to is the possibility that will happen again,” he said.

“Everybody will behave sensibly for a little while but then we’ll start to see some changes that are not rational.

“I think a combination of APRA [the Australian Prudential Regulation Authority] and ASIC [Australian Securities and Investments Commission], and maybe the Actuaries Institute will be needed to wave the flag when that starts to happen to keep us everybody on the straight and arrow.”

Integrity Life Australia managing director and chief executive, Sean McCormack, said no one was winning in the life insurance ecosystem and that for level premiums it was the longer benefit periods that caused greater uncertainty.

“The greater the benefit period, the greater the uncertainty with respect to occupational societal changes, therefore, the greater the risk of future premium rate increases. It’s just really hard to predict how those changes will impact experience over a 20, 30 or 40 year policy duration,” he said.

“For level premiums for me, I think it will depend

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in part on the outcome of this five-year term review, which we know is that the third phase of these changes which will come in a year’s time. I think it’s going to be really challenging for an adviser to recommend a level premium product, when the policy may be only held for that five-year period.

“Having said that, there’s still a huge need to protect clients long-term needs with level premiums. But I think what we’re probably going to see is the evolution of more fixed term premiums if this five-year term comes in, and as we work towards the implementation of the five-year term, having greater premium rate certainty for that period will become more important.”

He noted the industry needed to consider shorterterm benefit periods such as two or five years for income protection and couple it with total and permanent disability (TPD) insurance given to reduce the benefit uncertainty.

“That will give the client protection against future premium rate increases whilst also giving them protection for what’s most important here, which is that when sickness, illness, accidents and injuries strike that their insurance product is there to help them through that significantly life changing event,” McCormack said.

“That’s complex but for me the really important point here is this has to work for you for it to work. All parties in the ecosystem need to operate a little bit differently.”

McCormack agreed with Laughlin and said the industry needed to make sure it did not fall into the same trap of the past with insurers taking different risk appetites and turning it irrational practices in the quest for new business market share.

“At the same time, healthy competition is a good thing so we’ve got to protect that as well. I think that we also need to be appreciative that the way we’ve done things in the past won’t work in the future,” he said.

Equities remain attractive despite volatility

BY LIAM CORMICAN

EQUITIES remain attractive as the effects of monetary and fiscal stimulus are expected to stay through 2022, signalling a tailwind for strong economic growth, according to Fidelity portfolio manager, Paul Taylor.

According to Taylor, some of the best-positioned equities to prosper were those which were set to benefit from the re-opening trade and which had healthy balance sheets, including those involved with e-commerce, food delivery, the cashless transition, leisure travel, leisure events and hospitals.

“People don’t often think of hospital operators as a reopening trade – they also were quite hit through COVID-19 because a lot of your elective surgeries were cancelled or delayed,” Taylor said.

He said investors should question their equities which were linked to business travel as he expected a reduction in this space compared to pre-COVID due to the continuation of the working from home movement.

Market-based financials including private equity and credit markets as well as “special situations” like insurance markets were also in a good position for long term growth, Taylor said.

“Because you’ve had a range of different catastrophes or events that have tightened the market and tightened capital... and we’ve seen premiums go up across the board,” he said.

He believed interest rates would pick up slower, as the Federal Reserve, and by extension the rest of the world, would have learned from the mistakes made by their rapid response to bottoming interest rates in 2016.

Therefore, in the early phase, equity markets would benefit from a slower rates-rising environment as investors would see the economy doing well.

29/09/2021 9:28:23 AM

October 7, 2021 Money Management | 11

News

Income protection premiums continue to increase but new products to help

BY JASSMYN GOH

INCOME protection insurance premiums increases are likely to continue but new products, along with the industry working together, are needed to get the pricing right, according to insurers.

Speaking on a panel, AIA chief executive, Damien Mu, said volatility in premiums had not been a “friend” to the industry and was not good for the cost of an advice business, relationships with clients, and for the cost of the industry.

“The reality is the one particular area we will continue to see increases is in the current income protection book. We’re going to close that book but it is going to continue to deteriorate,” Mu said.

“We’re going to really focus on how we work together to either move clients to a more sustainable product, or how do we manage the inforce book. I think we’re going to see a few more years yet of some potential increases on income protection for sure.

“We’ve seen a far more stable experience on lump sum and we’re not expecting that same volatility.

Although in trauma, it is an area that you know, the market has seen and is asking whether we need to make some changes ahead seeing the same cycle with income protection.”

TAL chief executive, Brett Clark, said there was “no joy” for anyone when it came to the premium increases the market had seen.

Clark noted lower interest rates did not helped the sustainability of the life insurance industry.

“We’ve seen billions of dollars of losses and then pricing responses have followed. However, we can’t be in a situation where price keeps

chasing these sorts of industry losses, we can’t continue to go on like we’ve been going on.

“The intervention that APRA [the Australian Prudential Regulation Authority] has made and the changes that industry are making as a result are sorely needed and frankly, long overdue. Now is the time we all must collectively come together to get this right,” he said.

“Income protection insurance or disability income insurance in particular is the core risk management and insurance tool consumers use to protect their most important asset – their ability to earn an income – and we have to get this right for them.

“I’m a little optimistic that we may have seen or towards the bottom of the industry losses and that hopefully means less pricing pressure in the future as well.

“We’ll see how the new products play out as they are going to be an important part of riding the ship around income protection insurance.”

Delegation needed to ‘thrive’ in financial advice

BY LAURA DEW

FINANCIAL advisers need to be able to delegate work away and take a proactive approach to increased regulation if they want to thrive in the industry.

Speaking at the Association of Financial Advisers conference, Dr Adam Fraser said a survey of financial advisers by AIA Australia had indicated there were four factors which characterised ‘thriving advisers’.

These were good wellbeing, positive mental health, high engagement and running a good business.

Research from Fraser had found that advisers in particular had suffered high levels of burnout.

“They are very, very connected and understand their role, it’s not just about protecting the client, they have a laser-focus and clarity about what their job brings.”

One big difference was that thriving advisers were still frustrated with the regulatory and educational requirements but were able to cope better.

“Thrivers are still frustrated with change, it wasn’t as if they weren’t, they didn’t have a utopian mindset about the changes but they were able to focus on the end goal in a way that people who weren’t coping found difficult,” he said.

“Those who weren’t thriving were very angry and

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yelling at us and letting that anger control them, they were getting overwhelmed.

Another way for advisers to cope with the change was to delegate away tasks which weren’t compatible with their skillset. Research found those 43% of ‘thrivers’ did less administration, 97% did less compliance and 83% spent more time on new business.

This was echoed by panellist, Michael Bova, founder and managing director of Family Wealth Advisory, who said advisers should avoid trying to micromanage all the changes that were happening.

“You start out and you want everything in your control but you should work out what you are good at and what you like doing and then put in a plan to delegate everything else away. When I’m doing things like reviews, that takes me away from the client relationship,” Bova said.

“You need to spend time in areas where you add value for clients and that meet your value proposition, if you have faith that you will deliver value then you can afford to outsource.”

Fellow panellist, Ray Albrighton, adviser at Private Wealth Partners, added advisers needed to “step back to move forward” and trust their staff to do the work correctly.

Risk specialists future is positive: Zurich RISK advisers are unable to grow their businesses but the future for risk specialists is “quite positive” as generalist advisers are seeking out specialists for support and the need for insurance is emphatic, according to Zurich.

Speaking on a panel at the Association of Financial Advisers (AFA) Evolve conference, Zurich life and investments chief executive, Justin Delaney, said balancing the inforce management of existing customers had been an increased burden on advisers, particularly with price increases.

“A lot of the advisers we talked to, particularly who are specialising in risk are dealing with much more inforce management types of issues and customer issues meaning they aren’t actually growing their businesses, which clearly is not a good place to be,” he said.

Delaney said he hoped over time the management and affordability issues would dissipate.

“The opportunity for generalists and specialists, particularly as demand we know is strong the customer need is emphatic, is that we know customers need what we provide,” Delaney said.

“I think the increasing specialisation, typically for a number of groups is certainly two new types of partnerships. The ability to scale and investing in new technology and new processes and consolidate books as well. The future for specialist risk advisers should be quite positive given that we are seeing some generalists look to seek specialists out for support.

Delaney noted there were new advice models emerging that were focused on digital engagement that helped empower clients and customers, and develop a kind of relationship that was quite different to now.

“Overall, both generalists and specialists are really important to our industry, particularly if we’re looking to close that advice gap and ultimately provide advice and life insurance to all customers,” he said.

29/09/2021 9:28:33 AM

12 | Money Management October 7, 2021

InFocus

IS EVERGRANDE’S COLLAPSE GOING TO BE BETTER OFF FOR PROPERTY IN THE LONG RUN? The collapse of China’s second-largest developer could be positive for the property sector in the long term, while direct Chinese government assistance could send a counter intuitive message to the private sector, Oksana Patron writes.

THE COLLAPSE OF the secondlargest developer in China, Evergrande, could be positive for China’s property sector in the medium to long-term as it will deliver a strong message to the private sector and emphasise the critical goal of the Chinese government achieving “common prosperity”.

Jonathan Wu, executive director at Premium China Funds Management (PCFM), said by allowing Evergrande to collapse more competition and innovation could be created across the Chinese property sector. It would also help “split the pie amongst the remaining players in a more equitable way.”

However, the Chinese property sector would face continued structural headwinds, meaning the days of supernormal profits for developers might be over as the earnings of developers would be less cyclical than before, Wu said.

According to Wu, one of the significant contributors to the Evergrande situation was last year’s Government introduction of the ‘three red line rules’ which effectively acted as debt covenants for property developers.

These three lines were: • Liability to asset ratio (excluding advance receipts) of less than 70%;

ADVISER COUNT FROM LARGEST PLANNING GROUPS

the breach of those three red lines and pushes those developers to even more aggressively deleverage their own books. It would also send a strong signal for companies to ‘watch their own backs’ and successful deleveraging would help create a more sustainable property market.”

SO, IS EVERGRANDE CONTAGIOUS?

• Net gearing ratio of less than 100%; and • Cash to short-term debt ratio of more than one.

“These three red lines is effectively the method by which the government has nationalised debt covenants on companies to effectively stop them from borrowing so much to contain the fear of never-ending growth in property. Evergrande has breached all of three of those red lines, meaning it had become very difficult for them to continue borrowing,” Wu said.

He said the ultimate goal of the Chinese government was not to save the company but to

ensure properties were delivered to those who purchased them.

Selling off the Evergrande sites to other developers would also show the public the government was on its way to achieving “common prosperity”.

The Chinese banking system was largely government owned/ backed which, in cases like Evergrande, would help ensure an orderly potential restructure of the debt.

“So the longer term prognosis on the property market on the basis that Evergrande collapses is good because it serves a very strong message to all the other developers that are currently in

Federated Hermes believed the impending bankruptcy of Evergrande, which has ¥2.3 trillion ($495.2 billion) of assets on its books – an equivalent of 2% of China’s gross domestic product (GDP), would definitely result in some casualties.

However, the firm said in a note, it believed a collapse would remain contained if an “administrative support” programme was implemented by the government.

“We expect Evergrande to ultimately file for bankruptcy in the coming weeks. However, the contagion will be limited both globally and domestically by virtue of the Chinese authorities’ absolute power and willingness to pull whatever levers it needs to avert instability. Numerous companies across the mainland and beyond will be used to absorb the shock and spread-out the impact,” said credit analyst Robin Usson.

16,000

13,200

11,500

Number of advisers in 2011

Number of advisers in 2020

Number of advisers in 2021

Source: Money Management 2021 TOP Financial Planning Groups survey

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14 | Money Management October 7, 2021

Impact investing

DELIVERING A SOCIAL DIVIDEND

Going beyond responsible investment screens, Chris Dastoor writes, investors want to see that their manager is creating a social dividend as well as financial returns.

ENVIRONMENTAL, SOCIAL AND governance (ESG) has democratised investing by giving socially-conscious investors a way to have their money impact change in society, not just to generate a return.

However, new investors are quick to learn the downfall of many ESG funds – that they often use negative screening. This isn’t necessarily a bad thing; having

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the option to screen out sectors like fossil fuels, weapon manufacturing, gambling and pornography has been a huge win for socially-conscious investors.

But it doesn’t drive change – and that’s where impact investing comes in. Impact funds differ from traditional ESG funds as rather than negatively-screen undesirable companies, impact funds will invest in companies

actively driving expressed outcomes.

Alex Vynokur, BetaShares chief executive, said the historical conventional wisdom around investing ethically coming at the expense of returns had been well and truly debunked and disproven, and this applied to impact investing too.

“Over the last decade there’s been quite a significant shift in the

ALEX VYNOKUR

28/09/2021 3:01:43 PM

October 7, 2021 Money Management | 15

Impact investing Table 1: Top five global risks in terms of impact

AMBER FAIRBANKS Source: World Economic Forum 2014-2020, Global Risks Reports

mindset of investors to recognise the fact that investing can be not just about obtaining significant returns on your investment, but also an opportunity to influence society in a positive and meaningful and constructive way,” Vynokur said.

“The value of impacting investing is in addition to achieving strong returns, you can also deliver a social dividend.”

With a spectrum of ESG funds on the market and products increasing, advisers are left with the challenge to establish the difference between each product and how it fits in with the needs of a particular client.

Evergreen Consultants launched the Evergreen Responsible Investment Grading (ERIG) index which classified funds (from least to most contribution to ESG solutions) in either ‘ESG integration’, ‘negative screen’, ‘norms-based screening’, ‘active ownership’, ‘positive screening’, ‘sustainability-themed investments’, and ‘impact investing’.

Meanwhile, Zenith had classified 878 funds on its approved product list (APL), classed by ‘traditional’, ‘aware’, ‘integrated’, ‘thematic’, and ‘impact’, with each category

designating the extent of each fund’s incorporation of RI factors.

Dugald Higgins, Zenith Investment Partners head of responsible investment and real assets, said fund managers are increasingly realising they must show how they are delivering impact.

“The game has changed – everybody is moving to the viewpoint from ‘what are you looking at doing’ towards ‘well, tell us how you’re going to achieve it’ and now it’s about ‘show us how you’re going to measure the impact on the world that you have’,” Higgins said.

“Now we see a lot of managers producing various forms of stewardship reports, engagement reports and impact reports.

“There’s clearly a burning need to move businesses of all sizes to be more sustainable because what’s the alternative, that you’re an unsustainable business?

“While we are seeing more impact funds come to market, the rate of growth in that sector has been enormous.”

However, Higgins warned that as with greenwashing, ‘impactwashing’ was starting to “rear its head”.

“For all that, some of the managers are very keen to try and make certain they’re having a positive impact on the world and wanting to ensure they help industries transition,” Higgins said.

“In the transition to be seen embracing responsible investment, sometimes it’s really a case of the manager reach exceeding their grasp.

“They’re keen to say the impact they’re going to have but they are sometimes further behind in actually being able to do it.”

Patrick Noble, Zurich senior investment strategist, said impact objectives may be more bespoke than widely-distributed ESG funds and may include areas such as those identified in the United Nations Sustainable Development Goals (SDGs).

“There are 17 SDGs in total which could all realistically include impact investing with objectives focused on eliminating poverty, climate, clean energy, education, and good health and well-being to name but a few,” Noble said.

Noble said, unsurprisingly, areas like the environment, such as a reduction in carbon emissions, would immediately spring to mind.

“Early impact funds in Australia are environmentally focused, but the pandemic has moved the spotlight to now also cover social impact opportunities such as those found within the healthcare sector,” Noble said.

CLIMATE CHANGE When it comes to sectors investors are interested in having an impact in, climate change takes centre stage.

According to a report from the World Economic Forum (WEF), failure to address climate change was the number one global risk in terms of impact for 2020, and four of the top five risks were all related to climate change.

Amber Fairbanks, Mirova US Global Sustainable Equity fund co-portfolio manager, said climate change was a long-term trend that could not be ignored.

“Sea levels will continue to rise, natural sources of fresh water will continue to become scarcer, people will continue to live longer, and innovations in technology will continue to change the way the world interacts and conducts business,” Fairbanks said.

“We believe companies that Continued on page 16

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29/09/2021 10:22:27 AM

16 | Money Management October 7, 2021

Impact investing Continued from page 15 are positively exposed to these long-term secular trends will experience economic tailwinds, whereas companies that are unable or unwilling to address them will experience business model risks over time.”

Equities could still be used for climate impact – and BetaShares and VanEck had both launched competing funds in this space – but if investors are open to fixed income, green bonds present a strong option for impact.

“The early days of ESG investing focused on the equity side of things, but as ethical and sustainable investing is continuing to move into the mainstream, we’re seeing the fixed income part of investors’ asset allocation is also in need of genuine true to label investment alternatives,” Vynokur said.

“There will be more and more opportunities for green bonds and investors are demanding that more and more and Australian banks are starting to issue more green bonds.

“Some of them could be used to fund green buildings or high energy efficiency buildings, some of the proceeds might go into climate change related projects, and some of them might go into technologies to combat carbon emissions.

“There is a variety to impact directly, green bonds actually have a number of direct impact touchpoints.”

HEALTHCARE The COVID-19 pandemic has pushed healthcare outcomes from market forces into the spotlight with contributions from listed companies including Pfizer, Johnson & Johnson and CSL, but that has only been a reminder of value they can provide in other healthcare outcomes.

Henry He, American Century HealthCare Impact fund portfolio manager, said there is now a “special” demand for healthcare.

“There’s a crop of companies that can supply new revolutionary products that can meet demand,” He said.

“There’s a tailwind of demand which creates a lot of pressure on society, what’s great is at this

18MM071021_14-27.indd 16

“The companies that can generate long-term sustainable financial returns are also the companies that can create impact.”

– Henry He, American Century moment in time we are seeing tremendous innovation across all facets of healthcare.

“We’re looking for companies that have internal research and development capabilities, to replenish their pipeline, to generate multiple solutions over time.

“These are the companies that really add value; they’re not financial projects, they’re real scientific investments.”

He said it was important to focus on companies in the sector that prioritised long-term growth, not short-term gains.

“The companies that can generate long-term sustainable financial returns are also the companies that can create impact,” He said.

“In the short and mediumterm you have companies that can generate earnings growth by exploiting certain aspects of the healthcare system through high prices, price increases or slashing research and development.

“That’s not how you grow earnings over the long-term and that’s not how you generate impact so we believe those two are absolutely entwined.”

PUTTING IT ALL TOGETHER With all this information, Jessie Pettigrew, BT head of ESG and sustainability, said it was important for advisers to dig into the specifics of what the client is interested in.

“What we tend to see – and I know making broad demographic generalisations can upset different groups – but what we see is that younger investors tend to be really interested in that impact piece,” Pettigrew.

“They might have a portfolio of investments and they’re interested in how sustainability is considered in that, but it might be suitable for them to have a small satellite allocation to an impact investment that shows what they’re doing.

“Whereas if you have a strong

HENRY HE

values-driven investor, they’re going to want to make sure that’s considered across every single asset in their portfolio.”

Pettigrew said advisers get a bit “nervous” when she says this to them as the information and options can be overwhelming.

“They think it’s a different strategy for each client, but I don’t think that’s necessarily the case,” Pettigrew said.

“You have those foundational building blocks, so you have that conversation with the client, understand what they think sustainability means to them and match that to the right investment strategy, there’s definitely going to be commonalities.

“It’s having a couple of different options available and as with every other type of financial advice then pulling the different levers that are appropriate for clients.”

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27/09/2021 11:12:15 AM

18 | Money Management October 7, 2021

Gender in financial services

ATTRACTING FEMALE TALENT In a bid to improve a lack of female participation in financial advice, firms are actively offering and supporting initiatives aimed at recruiting females, writes Laura Dew. IT IS A well-known fact that financial advice, and finance in general, has the perception of being a male-dominated profession.

Reflected on TV and movies is the image of shouting male brokers on a trading floor or a middle-aged white male in an office, making it understandable if women do not see themselves represented in the industry.

But that is not entirely accurate as data from the Government’s Labour Market Information Portal shows financial and insurance services has a broadly even gender representation with 49.9% men and 50.1% women and an average age of 40.

However, this fell to 31% female share when considering financial investment advisers and managers which was the second most popular profession in the sector.

The gender pay gap in finance and insurance services had also been rising to 24.1%, up from 22.6% in 2020, based on full-time weekly earnings as women tended to be working in support roles.

Marisa Broome, Financial Planning Association of Australia (FPA) chair, admitted the increase in compliance and regulation had made financial planning less flexible than in the past.

This was a possible reason that women tended to be working in support roles rather than as frontline financial planners. However, she hoped this trend was reversing, particularly as many firms had adjusted to remote or flexible working since the pandemic.

“There are too few female frontline staff, they are still in critical roles like HR or paraplanning but

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they get less recognition, and the lack of flexibility is one reason for that,” she said.

“My youngest was six months old when I started, I knew I wanted to be a financial planner and work with clients rather than be in a support role and the job could be very flexible. There isn’t as much flexibility anymore but I think this is a moment in time and a speed hump from the regulatory change but hopefully we will go back to being flexible again.”

WORKING ENVIRONMENT In a bid to counter this reputation, firms and organisations are taking it upon themselves to make it a female-friendly working environment, such as offering mentoring and paid leave, as well as setting up initiatives to recruit a diverse workforce.

Jodie Blackledge, chief executive at Fitzpatricks Group, said: “We have a lead adviser program which is a coaching program where they work with an existing adviser and they stay in touch with them as they build their business.

“Our firm is set up on the principle of 4/40 which is working four days a week for 40 weeks of the year. That is the aspiration and presents a good opportunity for women, it takes time to build that but it can be done.”

Fitzpatricks also had a female peer group, known as ‘Fitzpatricias’ which had helped the business to develop a female adviser cohort.

“Female advisers can be very innovative in their value proposition and focus on a tight segment such as divorce or death, those transition points in people’s life. Some people prefer a female adviser in the same

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October 7, 2021 Money Management | 19

Gender in financial services Strap Table 1: Admissions to UNSW Business School programs

2021 2020 2019 2018 2017 Source: UNSW

Table 2: Current admissions at UNSW’s Masters Finance programs

way that some prefer a female GP,” Blackledge said.

“We have a group of 10 women who are running their own businesses and they support each other, encourage purpose, growth and collaboration through sharing ideas and inspiration.”

Ashleigh Crittle, chief operating officer at Jana, said: “We have doubled paid leave for secondary carers which is usually the men so they can take four weeks paternity leave which sets good standards early on.

“Paid parental leave is available to either parent so we are seeing men take three months when the baby is nine months and the mum goes back to work. This creates a ripple effect and becomes the norm.”

RECRUITMENT When it came to recruitment, Crittle said firms would need to be patient if they were taking diversity seriously and consider other options beyond the traditional recruitment route.

“If you are genuinely committed to diversity then you have to be patient, appointments must be merit-based so it can take a long time to find the right candidate.

Use multiple recruitment channels and advertise in targeted areas such as the Women in Super job board,” she said.

“Look at the language you are using in the advert, is it gender neutral? Is the recruitment panel diverse, is it representing diversity at the firm?

“Lastly, women interview differently to men so be conscious if they are underselling themselves during the interview; they often apply for roles where

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they only meet every criteria whereas men will apply if they only meet a few of them.”

Meanwhile, industry super fund HESTA had collaborated with social enterprise program, Girls of Impact, to encourage women to consider a career in finance and highlight career opportunities in areas such as risk and compliance and investments.

It was also piloting a Returnship Program to encourage experienced, mature-age workers to retrain and return to the workforce and had partnered with Future IM/PACT to attract more diverse talent into investment teams.

HESTA chief experience officer, Lisa Samuels, said: “Financial services can offer a wonderfully rewarding career. We want to share the experiences and cuttingedge work our people are doing every day that simply wouldn’t be available in other industries.

“We strongly believe that more diverse and inclusive teams have better decision making, which can lead to stronger long-term performance.”

Girls of Impact chief executive, Kate Bushell, added: “We need more women in decision-making roles, especially in financial services, where investment decisions can impact people’s financial futures and the Australian economy.

“The superannuation industry is a great career pathway for young women to explore as they can be and invest in supporting positive change in our world.”

EDUCATION Before firms could hire, however, it was necessary for them to attract the talent in the first place and promote financial planning as a

Source: UNSW

viable profession to begin a career.

According to the FPA, some 66% of its student members were female compared to 36% of total FPA members which indicated there was a burgeoning interest in the profession.

While some students studied degrees which included financial planning elements, it appeared it was harder to attract students from general business or finance degrees, often because they were unfamiliar with the career.

Camilla Love, managing director of eInvest and founder of F3 Future Females in Finance, said: “There is a lot of competition for talent from firms like pharmacy and technology, graduates are only aware of accountancy and investment banking but finance is bigger than that. Lots of smaller wealth management or financial planning firms don’t have the money for graduate recruitment”.

According to data from the University of New South Wales (UNSW), new graduates from its business degrees had ended up in roles included operations consulting at Deloitte, investment banking analyst at UBS and

assurance associate at PricewaterhouseCoopers (PwC) rather than financial advice or investment management.

Thuy To, senior lecturer in the School of Banking and Finance at UNSW Business School, said: “On average, over the last five years, for domestic students, only around 41% are female whereas that ratio for international students is 57%. Finance courses experience significantly more severe gender imbalances.

Female students account for only a third of total enrolment in our finance undergraduate courses.

“We are very concerned with this gender imbalance. Perhaps one of the reasons for this is a lack of understanding on what finance is and what type of career a finance graduate can take. Too many students we ask, their impression of finance is just ‘money’ and therefore that wrongly implies a less interesting career.”

She suggested firms have graduate recruitment programmes, better connections with universities such as being guest speakers or attending Continued on page 20

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20 | Money Management October 7, 2021

Gender in financial services

Continued from page 19 career fairs and offer mentoring and internship schemes.

INITIATIVES In light of this, Love’s organisation, had set up a program with the UNSW Business School to provide work experience in financial services for its female students and “break down the network” which was holding women back.

“F3 is an online project set up for six weeks in groups of five, they work with a financial services business and are given a project and mentor from the business and have to come up with a solution. It’s about 50 hours over six weeks for the students and about nine to 15 hours for the mentors,” Love said.

“This is a way to nudge girls into finance and give them real-life work experience, it gives them insight into what makes the industry tick and ‘hooks’ them at an early stage.

Girls can often feel unsupported in all-male teams so this is a safe environment for them.”

The organisation had partnered with firms including Jana, Natixis Investment Managers, Daintree Capital and Dimensional.

Crittle said: “The investment industry is losing women to investment banking and accountancy because those who are better at recruiting are more desirable employers and offer more flexible opportunities.

“We had expected F3 to be a long-term initiative as we weren’t seeing enough women in our pipeline but in our first year, we hired three female graduates from the project.”

A second initiative was the $1.5 million FPA female scholarship scheme which included programs with Deakin University, Futurity Investment Group, CA ANZ Mentor Exchange Program and Kaplan Professional.

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The grant had been awarded to manage and deliver a scholarship program funded by the Australian Government for women in finance and economics, which was part of the Women’s Leadership and Development Plan with support from the Department of the Prime Minister and Cabinet’s Office for Women.

Broome said the scholarship had taken on “a life of its own” since the launch announcement in June.

“The scholarship programme has developed a life of its own since the launch, it is starting to snowball because so many firms are getting involved, it isn’t just us who can see this opportunity.

“We have staff who are involved in the university sector and have student members so we were the right fit to put the scholarship to work. We expected to get $300,000 and we ended up receiving $1.5 million.”

Kaplan Professional received $85,000 in the scheme to fund 10 scholarships which would cover the tuition fees of any four subjects in Kaplan Professional’s Master of Financial Planning. Chief executive, Brian Knight, said it would continue to offer the scholarship even once the FPA grant was complete.

“This is something we have been focusing on for the last 12 months, 40% of our students have been female so we are getting traction and it would be good to get to 50%.

Anything that talks about finance as a career option is important to raise awareness,” he said.

“We will continue to offer the female scholarships as we are looking to increase diversity and have had a really good response.

“It hasn’t been an attractive career for females but they are good at building relationships and empathy, they can really contribute and the industry needs that representation.”

A WORTHY PROFESSION Blackledge highlighted an appeal of the financial planning profession was that many advisers were self-employed which was an option unavailable in many other finance roles.

“One benefit of financial planning industry which would be attractive to graduates is most advisers are self-employed so there is a good opportunity for people to set up their own business in a way you can’t do with investment banking for example. I think more needs to be made of that fact,” she said.

“It is imperative that we are seen as a profession and have that understanding. There is a lot

more the industry needs to do to encourage graduates to consider financial planning and we need to think about how we can best explain it to them.”

Regardless of the hurdles, all commentators agreed financial advice was a worthy profession to consider and said women could stand out by offering different skills to men.

“Gender diversity brings better decision making and performance.

We need greater representation of women at all levels of business. We look after people’s wealth and the financial future of Australia so it’s important we should be able to make the best decisions we can,” Crittle concluded.

28/09/2021 2:57:32 PM

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22 | Money Management October 7, 2021

Fixed income

THE ATTRACTION OF INVESTMENT GRADE CREDIT Offering protection against rising interest rates and inflation, collaterized loan obligations are an attractive segment of the fixed income market, writes Teiki Benveniste.

IN TODAY’S MARKET environment, investors are faced with the challenge of seeking attractive current income without reaching for risk. To solve for this, we seek to unearth investment solutions offering higher yields and diversification for Australian investors’ portfolios within the more senior, higher quality segments of the corporate debt and alternative credit markets.

In this article, we examine the attractive attributes of an allocation to liquid alternative credit; specifically, why we believe collaterised loan obligations

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(CLOs) investing offers a compelling investment grade opportunity and how a dynamic, flexible approach can capture value across various market environments.

LIQUID ALTERNATIVE CREDIT Investment grade credit is not limited to traditional corporate bonds, as liquid alternative credit also offers products rated triple-B or higher, including CLOs and real estate debt securities. As many investors struggle to find attractive income solutions in today’s market environment, we

believe certain liquid alternative credit asset classes, specifically CLO debt securities, screen attractively as they offer a yield premium relative to similarly rated corporate debt. As of 30 June, 2021, that premium was 200bps for triple-B rated debt.

In addition to attractive yields, CLOs offer protection against both rising interest rates and inflation due to their low duration of less than one year. From a credit risk perspective, CLOs also have various structural enhancements that substantially reduce the chances of default within their debt tranches.

We believe the CLO debt market presents opportunities to capture value arising from a high degree of pricing inefficiency as these instruments are generally misunderstood by the broader market and may often reflect a perceived complexity or illiquidity premium.

CLOs are much like a managed fund in the sense that they directly invest in a portfolio of broadly syndicated bank loans selected and are actively managed by a CLO manager. The portfolio of bank loans is subject to investment guidelines, including industry concentrations and

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Fixed income

“Triple-B rated loans proved resilient to inflationary pressures and outperformed similarly-rated corporate bonds due to their floating rate, low duration profile.” ratings limitations, further diversifying the investment.

Investors hold securities that are issued such that one may invest in a particular tranche, usually issued with varying maturities, credit ratings, and yields, based on investor appetite from a risk/ return perspective. Having the capabilities to analyse the underlying pool of assets, the structure, and the manager of CLO securities is therefore paramount to investing in the asset class.

Typically, these more esoteric asset classes have barriers to entry as they require: • Technical expertise; • An established investment platform to access and unlock the benefits associated with alternative credit markets; and • A rigorous, cycle-tested risk management approach.

In short, we believe that managers with the right skills and infrastructure can unlock for investors liquid alternative credit’s compelling investment-grade opportunity defined by current yield, downside protection and value creation from market inefficiencies.

DYNAMIC ALLOCATION APPROACH We also believe a dynamic portfolio allocation spanning investment grade corporate credit and liquid alternative credit is paramount as, beyond the diversification benefits, it also offers additional opportunity to generate alpha. This can be done by shifting targeted exposures through active portfolio management as value shifts between markets can generate attractive entry points into each asset class.

When the COVID-19 induced market turmoil gathered pace in March 2020, the Federal Reserve took quick and decisive action to cut the federal-funds rate to nearly zero and maintained its dovish stance throughout 2020.

Investment grade corporate bonds, which predominately have fixed payment schedules and are subject to significant levels of interest rate risk, subsequently benefitted from falling interest rates alongside other longer duration-oriented strategies. From a historical perspective, the base

Chart 1: 2021 YTD total return by asset type

rate return component has attributed to 84% of investment grade bond total returns since January 1999. As broader risk assets continued to rally throughout the year, triple-B rated loans and CLOs outperformed in the latter part of 2020.

Specific to the Ares Global Credit Income fund, we repositioned the portfolio throughout 2020 as market conditions evolved. At the fund’s inception in May 2020, we initially deployed the portfolio’s investment grade allocation in single-A rated CLO debt securities and triple-B rated bonds given the potential for spread tightening amid improving technicals within these segments of the credit market.

As broader risk assets continued to rally throughout the year, we took profits on our triple-B rated corporate bond exposure and rotated into triple-B rated CLO debt securities as the asset class presented a stronger relative value opportunity.

Additionally, within the portfolio’s CLO debt allocation, we dynamically allocated between

TEIKI BENVENISTE

newer vintages (primary) and seasoned securities sourced in the secondary markets to add attractive risk adjusted returns.

In contrast to 2020, investment grade corporate credit has lagged the broader market rally during the first half of 2021, posting negative returns for the first half of the calendar year. This was due to the re-opening of the global economy, concerns around inflation and a material move higher in interest rates drove investor demand for higher beta, floating rate instruments.

Meanwhile, triple-B rated loans proved resilient to inflationary pressures and outperformed similarly rated corporate bonds due to their floating rate, low duration profile.

Similar to loans, triple-B rated CLO debt securities have also benefitted from a shifting rate environment in 2021 as robust demand for lower duration assets, strong technicals, and a yield premium of 100 to 200 basis points (bps) relative to similarly-rated corporate debt provided a supportive tailwind to the asset class.

As demonstrated above, we believe the CLO debt market presents opportunities to capture value arising from a high degree of pricing inefficiency as these instruments are generally misunderstood by the broader market and may often reflect a perceived complexity or illiquidity premium.

In summary, we believe CLO investing offers a compelling riskadjusted return opportunity for investment grade allocations.

Teiki Benveniste is head of Ares Australia Management.

Source: BofA, Credit Suisse. As of June 30, 2021

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29/09/2021 10:24:08 AM

24 | Money Management October 7, 2021

Advice

FINANCIAL ADVICE MUST SERVE, NOT SELL Financial advisers want to help their clients’ wellbeing and achieve their dreams but are struggling how to document their achievements, writes Santiago Burridge.

I’VE HAD THE pleasure of meeting many financial advisers throughout my career and was one for 16 years. Most of the advisers I have met are obsessive about the value of advice and have a passion for their clients unrivalled by most other professions.

They spend more time than almost any other industry trying to get to know their client. They have deep conversations to understand what is important to them to help them achieve their dreams. They keep the most precise notes that detail exactly what the client wants to accomplish in life. Then, it gets locked in a filing cabinet and replaced by documents that are unintelligible to even the smartest high net worth clients.

The customer experience has, in the main, been ignored. Clients engage with their adviser once a year in a people-dependent process anchored to product. This puts more pressure on the front office to force a square peg (the client experience) into a round hole (product-led technologies).

Furthermore, the process requires a significant amount of box-ticking and compliance to meet ‘know your customer’ and ‘best interest duty’ requirements.

What became clear to me many years ago is that this industry has not supported advisers. Instead, financial products remain at the core of the advice proposition, with technology focused on middle and back-office functions.

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Further, if all you read were the industry press, you would think that selling the same thing to every client (managed accounts) was the solution and, by doing so, you would have a better business.

Have you ever wondered if this is why we see increased regulation and compliance requirements in this industry?

It’s not the adviser’s fault. It’s the deck of cards that advisers have been dealt by a product-led industry intent on keeping them focused on sales, not what’s best for their clients.

INDUSTRIES SELL, PROFESSIONS SERVE. On a recent call to New Zealand, I was reminded that we are still an industry, not the profession we deserve to be. Why, because industries sell, and professions serve.

A profession is a vocation founded on specialised education and training. The purpose of which is to supply disinterested counsel and service to others, for direct and definite compensation, wholly apart from the expectation of other business gain. Professions include things like doctors, dieticians, psychologists and more.

While industry refers to a group of companies and activities involved in the process of producing goods or solutions for sale. Think of industries like retailers, fast moving consumer goods and entertainment.

When I see my doctor or dietician, they check my meds,

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October 7, 2021 Money Management | 25

Strap Advice

heart rate, and blood pressure.

They listen to what is happening in my life. And only then, once informed, will they make a recommendation to help me lead my healthiest life.

When I joined this industry, I was trained to sell. I was taught to be a butcher. Now, I love my butcher. Of all the weekend interactions I have, my butcher is the most sincere and cheerful person in the community. He knows more about me than any other retailer I deal with as he spends time getting to know me.

But when I go to see my butcher, he will sell me the best piece of meat they have. He is never going to suggest I go and get some fresh fish. He’s never going to say; you don’t need any more meat as you are packing on the pounds. He’s going to sell me meat regardless of what is good for me.

Knowing what we’re going to sell a client when they walk in the door is the fundamental problem of this industry because that is selling, not serving. More importantly, clients are left wondering what we do. We have little evidence to show their lives have improved from the value of our advice, outside of meaningless performance benchmarks.

A profession makes money because they care, and their clients can see both the tangible and intangible value of what they do.

They love that every client that walks through the door is different, and their job is to listen and then tailor a solution to meet their needs.

Now, nothing would make me happier than to see our profession start to achieve its nobility. But for that to occur, technology needs to start supporting advice, not sales.

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Technology has to bring to life that purposeful conversation that occurs in every first advice meeting. It has to measure the output of our advice and help advisers anchor their experience in something they can control – helping their clients lead their best lives. And, advisers need to invest in the right technologies that put the client at the heart of their experience, not the product.

Lastly, there is little evidence to support that selling every client the same thing makes you more profitable. We continue to deliver profit margins that are way below what our profession deserves. I believe that relates to the fact that we have focused on compliance around product sales, not the customer experience.

And, technology has followed suit. It has and continues to support product sales, like automating records of advice (RoAs) and associated compliance. It does not help advisers with what they should be paid to do, and that is to provide strategic, product-free, independent financial advice.

WE HAVE BEEN ENGAGING THE WRONG SPOUSE One final point that is critical in changing the prism we see our profession through. We need to engage both the chief financial officer (CFO) and non-CFO spouses.

Forever it has been the CFO spouse who completes the fact find, risk profile, participates with the adviser, and logs in to see how they are going to some meaningless benchmark. The same spouse questions things when things don’t go to plan.

Arguably quite rightly, as we never

had any mathematical chance of creating outperformance.

But, it is the non-CFO spouse who runs the family. Who worries about the family’s and their own wellbeing. Who wants peace of mind that things are on track. Yet, we’ve been unintentionally disengaging them. Creating complexity that leaves them unsure of the value that advisers provide.

Imagine if, instead of focusing on financial performance, we engaged them around their wellbeing.

Brought that to life and could prove that everything they are doing today will allow them to live the way they dreamt of in the future. Imagine them telling their friends how their adviser helped them live a better life aligned to their values.

How deeply they understand us, that we cried with them and that you need to see them. That’s more powerful than the markets doing 6% whilst we did 7%.

Now imagine the CFO-spouse telling their friends about that same meeting. That it created a discussion with their spouse that they have not had for a long time or better, never before. And it’s brought their family closer together because of it.

The value of advice is advice, not sales, and that advice needs to be 100% associated with improving lives. If you do that, then the advice is very valuable and highly profitable. Clients will quickly be able to see the value as it will have a direct impact on their lives. With performance measured against what they achieve in life and their overall wellbeing.

You can’t pretend you know what the market is going to do.

Your job is to help people make great decisions at turning points in their lives. Turning points that

“It’s the deck of cards that advisers have been dealt by a product-led industry intent on keeping them focused on sales, not what’s best for their clients.” happen every three to five years and to deeply understand what drives them in life so you can help them make great decisions that will be life changing.

Let’s not allow those fantastic conversations you have with your clients to live in a filing cabinet.

Let’s not have our results anchored in a performance benchmark we cannot control. Your clients are driven by purpose. They want to live a full life, not die rich. Your job is to change plans, not write them.

If you get that right, you will start to see there is a new game in town.

A game that’s centred purely on the client experience.

It’s time for financial advice to become the profession it deserves to be. To do that, we need to decouple the process, technology and experience from product, and better align it with what clients truly value in life.

So, let’s make the client’s values and goals the picture cards in a new deck, with the rules anchored to the client experience.

Santiago Burridge is chief executive and co-founder of Lumiant.

28/09/2021 2:52:07 PM

26 | Money Management October 7, 2021

Small caps

BENEFITTING FROM A NEW ECONOMIC CYCLE Based on historic trends of financial crises, the small-cap market has further to run and global smaller companies could be set to benefit until 2024, writes Stephen Milch.

FOR THE FIRST time in over a decade, a new economic cycle is underway – a ‘reflation’ cycle characterised by faster economic growth, higher inflation and ongoing monetary and fiscal stimulus, which is going to benefit small businesses globally.

Advisers and investors should anticipate quality assets that have been underappreciated for some time again becoming sought after, as the trends that defined the post-Global Financial Crisis (GFC) period make way for new themes.

Specifically, the following themes are expected to become features of the investment landscape: • In a durable economic upturn, improved profitability is likely to provide value stocks with the ‘scarcity’ factor previously enjoyed by growth stocks. At the same time, rising bond yields will leave the

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questionable valuations of growth stocks vulnerable; • The greater breadth of economic activity, across and within economies, will allow smaller businesses to benefit – particularly those leveraged to the forecast strength in consumer and capital expenditure; and • Stronger economic and market performances are anticipated beyond the US – notably in Europe where there remains ample scope for an extended growth phase. Indeed, official projections are for European growth to outpace that in the US over the next five years.

LOOKING BACK – CRISES BOOST SHARE MARKETS Who would have thought that a global crisis or two would actually benefit equity investors? It’s 13 years since the GFC and almost

two years since the onset of COVID-19 and, in each case, investors have reaped strong gains following the initial ‘shock’.

In the case of COVID-19, global central banks simply dusted off the successful GFC playbook: Quantitative easing resumed, bond yields registered new lows and markets rebounded.

Meanwhile, the future was brought forward, as the take-up of digital technology accelerated.

COVID-19, therefore, intensified two of the most pronounced themes that have driven investment returns since the GFC: 1) Lower bond yields and weak growth reinforced the market bias in favour of growth stocks (those with favourable long term profit prospects) over value stocks (those with high profitability today); and 2) The technology revolution, in which businesses involved in

STEVEN MILCH

hardware, software, streaming services, social media and internet shopping – especially the dominant US names – have flourished.

THE NEW ECONOMIC CYCLE However, as the global COVID-19 threat eases, the economic disruption of 2020 is giving way to other powerful forces:

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October 7, 2021 Money Management | 27

Small caps Chart 1: Cycles in small cap performance

Chart 2: Small cap valuations

Source: Pengana Capital

• A combination of massive policy stimulus, a surge in house prices, high rates of precautionary saving and pentup demand has created a potent cocktail for consumer spending across the major economies; • Infrastructure spending plus bottlenecks in industries from semiconductors to healthcare and transport are igniting an investment boom. Indeed, Standard and Poor’s estimate that the world’s largest companies will undertake capex worth US$3.7 trillion ($5.1 trillion) in 2021, while The Economist states that the capex boom “may only be getting started”; and • Global growth has become strongly synchronised as authorities have adopted a clear ‘pro-growth’ stance. Moreover, policymakers are likely to err on the side of caution in removing stimulus, with the International Monetary Fund (IMF) urging supportive monetary and fiscal policy “wherever possible” and “until the pandemic ends”.

POLICY UNDERWRITES THE EXPANSION The cycle is also being driven by a philosophical shift on the part of policymakers. In the US, for example, the fiscal response to COVID-19 amounted to a whopping 25% of gross domestic product as at June 2021 and is expected to rise further with the Infrastructure Investment and Jobs Act which is being viewed as a “generational investment” for the US economy.

In Europe, the European Central Bank has adopted a more

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inflation-tolerant and growthsupportive stance by announcing a subtle but important change to its inflation target (from “below, but close to, 2%” to “2% over the medium-term”) and a commitment to meet the target through “persistently accommodative monetary policy”.

These policy shifts are likely to play out over years, providing enduring support for the ‘stronger and broader’ growth theme and for small companies in sectors and regions that have lagged over recent years (including quality smaller companies in Europe and those geared towards consumer demand and business investment).

SEARCH FOR VALUE Under unique circumstances, investors cannot assume that the strategies of recent years will continue to deliver. Strategies and portfolio positioning must adapt to the new environment and while absolute returns may be a little harder to find, a quote by billionaire Berkshire Hathaway investor Charlie Munger highlights the importance of searching for value: “all intelligent investing is value investing – acquiring more than you pay for”.

Today, that value is likely to lie in previously ‘unloved’ places. We favour exposures in quality smaller companies in Europe. We also encourage investors to look to businesses that are likely to benefit from the release of pentup consumer demand and the capex surge.

Although these themes are expected to play out over an extended period, short-term

indications are already supportive. European markets have outperformed the US over recent months – including smaller companies – while there are early signs of a rotation to value and relative gains within the industrial and consumer sectors. It’s early days, however, and investors still have time to capitalise.

VALUE IN SMALL CAPS After underperforming for much of the past decade, ‘value’ certainly describes the small cap sector, as shown in Chart 1.

The chart shows the highly attractive valuations of US and European small versus large cap stocks (in a single indicator), with small cap valuations currently trading 28% below the long-term average.

HISTORY PROVIDES A GUIDE Providing additional context, Chart 2 shows three cycles in the performance of US small versus large-cap stocks over the past 30 years, including the following episodes of small-cap outperformance: • Up to February 1994 (three years, nine months): the 199091 recession and Gulf War saw smaller companies commence a cycle of outperformance that began in November 1990 and provided excess returns of 50%; • March 1999 to April 2006 (seven years, one month): an extended upswing, incorporating the US ‘tech wreck’ recession of 2001 and subsequent credit fuelled growth, saw small cap stocks outperform large cap names by 94%; and

• April 2008 to March 2014 (five years, 11 months): the GFC and widespread implementation of quantitative easing saw smaller company returns exceed those of large caps by 28% during this cycle.

The average duration of these four upswings is 5.5 years, with small-cap stocks outperforming by an average of 57%. Assuming a similar cycle length from the August 2020 low in the small-cap performance ratio, suggests an upswing potentially extending into 2026.

RECESSION AS A PRELUDE TO RECOVERY A recession featured relatively early in each of the three periods of small cap outperformance. This relates to the profit recovery and improved risk appetite – both of which favour the performance of small-cap stocks – which typically follow recession (but may be anticipated by the market prior to the conclusion of the recession).

Taking the 1991, 2001 and 2008 recessions as a guide, peak small-cap performance was achieved, on average, four years following the recession. On this basis, it’s not unreasonable to expect the current small-cap cycle to extend well into 2024.

To conclude, the valuation and economic setup is in place for a cycle of small-cap outperformance. While investing has always been, and will always be inherently uncertain, history suggests we are only in the early stages of the upswing.

Stephen Milch is a consulting economist at Pengana Capital.

30/09/2021 9:25:16 AM

28 | Money Management October 7, 2021

Toolbox

DOWNSIZER CONTRIBUTION RULES AND STRATEGIES

John Perri answers common questions on downsizer contribution strategies and explains the key rules and eligibility criteria to utilise the option for clients.

SINCE ITS INTRODUCTION in the second half of 2018, the downsizer contribution strategy continues to be popular with both advisers and their relevant client base. It allows those who are age 65 or over and have sold a qualifying residence to contribute up to $300,000 each of the sale proceeds into superannuation outside the contribution rules and limits which may otherwise preclude them from doing so.

For a seemingly straightforward strategy, it also generates its fair share of questions from advisers. In this article we will highlight some of the relevant rules and strategies.

Key highlights and attractions of the strategy include: • The ability for those age 67 or more to contribute to super without having to meet the work test – there is no upper age limit; • The downsizer contribution can

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be made irrespective of the client’s total super balance (TSB) which might otherwise limit or exclude the client from making non-concessional contributions (NCCs); • The downsizer contribution can be made in addition to NCCs where the client is otherwise eligible to make these; and • The downsizer contribution counts towards the client’s tax-free super component.

Limitations and issues to consider with the downsizer contribution strategy include: • Although a contribution can be made to super, it can only be moved to a tax-exempt retirement phase pension if the client has sufficient space in their personal (pension) transfer balance account; and • The proceeds from sale of the clients’ Centrelink exempt asset (their home) may become assessable by Centrelink and

this may lead to a reduction in Age Pension (or other benefit) eligibility.

KEY RULES AND ELIGIBILITY CRITERIA. Eligibility criteria to make a downsizer contribution include: • Eligible sale contracts are entered into on or after 1 July, 2018; • Sale proceeds must come from the sale/disposal of a dwelling (or interest in the dwelling) which is eligible for at least a partial main residence capital gains tax (CGT) exemption (or if the dwelling is a pre-CGT asset it would otherwise meet that requirement); • The home being sold must be in Australia and cannot be a caravan, houseboat or mobile home; • The property must have been owned by the client and/or their partner for at least ten years;

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October 7, 2021 Money Management | 29

Toolbox

• The client(s) making a downsizer contribution must be at least age 65 when the contribution is made; • The contribution must be made within 90 days of receipt of the sale proceeds (usually settlement); • The contribution must be accompanied by a ‘Downsizer contribution into super’ form available from the super fund or the Australian Taxation office (ATO); • The maximum permitted downsizer contribution is the lesser of: - a maximum of $300,000 per person from the sale of one qualifying property; or - limited to the amount of sale proceeds (if less than $600,000). The term ‘sale proceeds’ is the gross sale price; and • The client has not previously made a downsizer contribution from the sale proceeds of another home.

A proposal in the 2021 Federal Budget, if legislated, will decrease the minimum age for the downsizer contribution to age 60.

Let’s investigate the eligibility criteria in a bit more detail.

DOWNSIZER DOESN’T HAVE TO BE ‘DOWNSIZER’ Despite the name, there is no requirement that the vendors buy another residence. Selling a qualifying residence is a key element here. The vendors could be moving to another property they already own, buying something bigger and more expensive, renting, going to a retirement village, aged care, living with adult kids or going on extended travel.

DISPOSAL OF AN ‘OWNERSHIP INTEREST’.

The most common downsizer contribution we see is following the normal arm’s-length sale of the

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clients’ residence. It certainly includes sale of a ‘strata title’ unit and even company title apartments. However, the definition of an ownership interest is potentially wider than common ‘outright ownership’. It includes disposal of only part of an ownership share in the property or even disposal of a ‘licence’ or ‘right to occupy’.

Specific tax advice may be required in these situations. It could include disposal of a retirement village interest, depending on the nature of the ‘ownership’ or terms of occupation.

MAIN RESIDENCE CGT EXEMPTION The dwelling that has been sold must be eligible for at least a partial main residence CGT exemption. This basically requires that an eligible contributor must have occupied the dwelling as their main residence at some time.

This includes a member of the couple who is not an owner (i.e. not on title). The dwelling could have been used as an investment property by the clients at some stage but as long as it was also used as their residence it could also qualify for the main residence CGT exemption (at least in part).

If the dwelling is a pre-CGT asset (i.e. acquired prior to 20 September, 1985) then it would have to qualify as the contributor’s main residence as if it was a postCGT asset as above.

A property that has ‘mixed use’ could also qualify. Take for example, the sale of a farm. The dwelling on the farm may qualify for the main residence exemption and if so the whole of the farm sale proceeds are eligible to be downsizer contribution(s) up to the $300,000 per person cap – there is no requirement to apportion sale proceeds between the dwelling and the rest of the property.

Where clients have more than one dwelling which could qualify for the main residence CGT exemption (in whole or part) they need to consider where their own best outcome might be.

Broadly, they don’t have to make the election to apply the exemption until they sell a qualifying property.

Claiming the exemption on one property and making the downsizer contribution could deny them the ability to apply the exemption to another property and lead to a worse CGT outcome. Specific tax advice may be required in such a situation.

TEN-YEAR OWNERSHIP REQUIREMENT The property must have been owned for at least 10 years.

Where a current owner has not been on title for the whole 10 years then periods of ownership by a former spouse of the current owner can count towards this period. The relationship with the former spouse may have ended, for example, due to death or relationship breakdown.

It is sufficient that one member of the couple meets the 10-year ownership requirement for both members of the couple to be eligible (other criteria being met).

Where there has been a property construction or ‘knockdown re-build’ it is sufficient that the underlying land has been owned for at least ten years.

The ATO counts the minimum 10-year period from settlement to settlement (which may differ from CGT rules where a ‘contract date’ is often the relevant date).

CONTRIBUTION LIMITED

BY SALE PROCEEDS Each member of the couple may contribute up to $300,000 each from the sale proceeds (basically the gross sale price).

Where the sale price is less than, say, $600,000 then the couple

Continued on page 30

28/09/2021 2:49:56 PM

30 | Money Management October 7, 2021

Toolbox

CPD QUIZ Continued from page 29

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.

are limited to contributing an amount equal to the gross sale price (‘capital proceeds’), and no more than $300,000 for either of them. This applies even if the couple has other funds available to contribute up to the limit.

This limit also applies where the disposal has been made at less than market value, for example, to a related party. Expenses associated with the sale, e.g. agent’s commission and legal fees and possibly repayment of a loan do not reduce the ‘gross sale price’ for the purposes of determining the maximum available downsizer contribution.

1. Eligible downsizers Linda and Peter sell their residence for $500,000. What is the maximum downsizer contribution Peter can make? a) $500,000 b) $400,000 c) $300,000 d) $250,000

CONTRIBUTION WITHIN 90 DAYS OF RECEIVING SALE PROCEEDS

2. Amongst other eligibility criteria, downsizer contributions can be made by those who: a) Are age 65 or more at the time the contribution is made b) Have reached their preservation age when the property sale contracts are exchanged c) Have sold their main residence, regardless of age d) Have sold vacant land they intended to build a residence on

A key requirement is that the downsizer contribution is made within 90 days of receiving the sale proceeds. It is possible to apply to the ATO for an extension of this 90-day period.

The explanatory memorandum indicates that an extension will not be granted to allow a contributor to reach the age 65 qualifying age to make the contribution.

IF THE CONTRIBUTION DOES NOT QUALIFY A super fund will accept a contribution as a downsizer when it is accompanied by the election form completed by the contributor. The ATO may subsequently notify a super fund that the contribution does not qualify as a downsizer, for example, because the minimum 10-year ownership requirement has not been met (the ATO checks this through data matching of state Land Titles/Registry records).

When the super fund is notified that the ‘downsizer contribution’ has been found to be ineligible the fund must assess whether it could otherwise accept the contribution from the member. This includes an assessment of the client’s contribution eligibility e.g. age and work test.

The member may also be able to subsequently supply the ATO with information to confirm the eligibility of the downsizer contribution.

If the fund determines that it can accept the contribution it will be assessed against the client’s NCCs cap. This may lead to an excess NCCs assessment by the ATO. If the fund determines that it cannot accept the contribution (or part) from the client then the fund must return the contribution (or part) to the client within 30 days.

STRATEGY OPPORTUNITIES Where it is possible for the client to commence a tax-exempt retirement phase pension this should be done as a separate pension from other pension(s) (probably containing taxable component) that the client may have. The pension commenced solely with the downsizer contribution will be 100% tax-free component which could be useful for estate planning purposes where adult children are death benefit beneficiaries.

Releasing home equity by sale of the client’s residence will likely create a Centrelink assessable asset which could reduce or eliminate eligibility for Age Pension or other benefits the client may previously have been receiving. Ideal clients for a downsizer funded pension may be self-funded retirees who may already be paying marginal rate tax on retirement income and have the ability to move the downsizer to a tax-exempt retirement phase pension.

John Perri is technical super manager at AMP.

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3. Sale of which of the following properties would be eligible to be a downsizer contribution: a) Sale of vacant land which previously had a dwelling b) Sale of a dwelling which is the clients’ investment property but was previously their residence c) Sale of a piece of land sub-divided from the residence block d) Sale of the client’s residence which was owned by them for eight years 4. Which of the following is correct: a) A downsizer contribution forms part of the client’s taxable component in their super fund b) The downsizer contribution must be made within 28 days of the property settlement c) The downsizer contribution forms part of the tax-free component of the client’s super fund d) The downsizer contribution can automatically be used to commence a retirement phase pension 5. a) b) c) d)

A downsizer contribution can be made by those: Who have a total superannuation balance which exceeds $1.7 million Are over age 65 Do not meet the work test if over age 67 All of the above

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ downsizer-contribution-rules-and-strategies For more information about the CPD Quiz, please email education@moneymanagement.com.au

28/09/2021 2:50:08 PM

October 7, 2021 Money Management | 31

Send your appointments to liam.cormican@moneymanagement.com.au

Appointments

Move of the WEEK Matthew Rady Chief executive BT Financial Group

BT Financial Group has appointed Matthew Rady as its chief executive and made him responsible for leading the combined business including BT Panorama, BT’s Personal and Corporate Super, and Investments.

Rady joined BT Financial Group in

Australian asset consultancy, Frontier Advisors, has appointed Fiona Reynolds as its independent board director.

For the last nine years, she was chief executive of the UN Principles for Responsible Investment (PRI), responsible for overseeing over 4,000 signatories representing $121 trillion in assets around the world.

Before that, Reynolds served as CEO of the Australian Institute of Superannuation Trustees (AIST) for seven years.

Global investment firm T. Rowe Price has appointed Craig Hurt as its head of institutional for Australia and New Zealand.

Hurt’s leadership appointment aimed to enable the firm’s existing institutional sales team to deepen their channel focus, allowing team members to enhance their level of engagement with clients as the firm diversifies its business in the institutional market.

Hurt would report to Darren Hall, head of distribution for Australia and New Zealand.

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October and with 30 years of experience in financial services and wealth industries, Rady had held executive positions at Macquarie Group and Iress and most recently was Allianz Retire Plus’ chief executive.

Rady’s responsibilities included

He would be responsible for leading a growing team of institutional sales professionals to service existing clients and develop new relationships with relevant investment solutions.

Hurt joined T. Rowe Price after 16 years with AXA Investment Managers where he held the position of country head of Australia and New Zealand since 2007. He was active in the environmental, social and governance (ESG) investing space for over a decade and had led successful launches of ESGintegrated strategies.

MUFG and First Sentier Investors has appointed Velina Karadzhova to lead the newly-created First Sentier MUFG Sustainable Investment Institute.

In her new role, Karadzhova, was made responsible for developing the institute’s research program which included macrolevel research on sustainable investment topics, market trends and industry practices.

The studies would look at how these developments affected

driving positive customer and member outcomes through the one BT Financial Group business and seeking to enhance the performance of the business as the strategic review of the Westpac’s specialist businesses continued.

the performance of companies, sectors and economies and their influence on investor capital allocation.

She was previously an ESG analyst and utilities sector lead at MSCI, where she was responsible for utilities sector and company research, ESG ratings, ESG methodology enhancements and developing new products.

Prior to her role at MSCI, she held roles as a credit ratings analyst at Moody’s and was a senior associate in audit at PwC. Hyperion has made three appointments to its team which the firm says will allow it to strengthen its investment performance.

Thomas Withers was appointed as head of risk and compliance and joined from Northcape Capital while Alexandra Clarke was appointed as general executive and Sam Parcell as a research associate.

Withers had 20 years’ of experience in investment management and would be responsible for providing

strategic direction to Hyperion’s senior management team.

Clarke joined from ClearView Wealth where she was a senior investment and macro research analyst and previously worked at the Reserve Bank of Australia.

Parcell joined from his role as investment analyst at Sandhurst Trustees and had previously worked at Bendigo Bank as an analyst.

Non-bank corporate lender Metrics Credit Partners, has appointed Alison Chan as investment director, sustainable finance, a move it says will intensify its focus on sustainability.

The firm also appointed Lalit Barhate and Luke Adams to the corporate office as director, internal audit and group treasurer, finance and fund accounting, respectively.

Chan, who was previously director of sustainable finance at National Australia Bank, would be responsible for developing Metrics’ sustainable finance strategies to support the global transition to a low carbon economy.

29/09/2021 9:13:48 AM

OUTSIDER OUT

ManagementOctober April 2, 7, 2015 32 | Money Management 2021

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

Hacking… phishing…

SMSishing!?

A family affair IN uncertain times like this, Outsider is sure there have been many fraught conversations around the dinner table as people try and convince their family and friends to get the COVID-19 vaccination.

What one person sees as a lifesaving vaccine, another may view as a conspiracy theory or be reluctant to get the jab for various reasons.

However, Outsider had not expected Australia’s very own deputy chief medical officer, Dr Nick Coatsworth, to be facing the same problem with his family.

Speaking at the Association of Financial Advisers annual conference, Dr Coatsworth said his mother and aunt had been hesitant to get the vaccine, despite their family member being a high-profile face in Australia’s vaccination efforts and appearing in numerous public health campaigns.

Dr Coatsworth reassured delegates that after listening to their concerns, he had managed to successfully convince them to go and

get their jab. Appealing to his financial adviser audience, Dr Coatsworth likened the conversation to one about risk profiling and establishing how risky the vaccine was for each individual.

Outsider wonders if Dr Coatsworth could make a trip from Canberra to Sydney and convince a few people he knows…

OUTSIDER likes to keep up with ‘hip’ lingo, but with the new generations feeling more and more like alien colonies for Outsider, he settles for the less-intimidating Parliament to learn about new additions of the English language.

The latest one Outsider heard was ‘SMSishing’ (pronounced ‘smishing’, for those who struggle reading gibberish).

It was CBA chief executive Matt Comyn that explained this new term to Parliament, which was the SMS-specific version of phishing attacks.

This has been topical at the moment, as like many other Australians, Outsider and Mrs O have been inundated with unsolicited text messages from scam accounts often under the guise of parcel deliveries.

This issue is compounded by the fact that Outsider’s memory is a bit foggy in his age and often struggles to remember if he has actually ordered anything. Though with this extended lockdown in NSW, it was more about deciphering which order had been dispatched for delivery.

Fortunately, this wiley old fox does not get fooled easy but given his own company’s need to bring in extra phishing protections because of colleagues that have been tricked, he’s left to wonder what restrictions he might be subject to comply with over text messaging in the future.

Though Outsider does worry he may get ‘SMSished’ if they worked out that his deliveries revolved solely around scotch and golf.

If an Outsider screams…

OUTSIDER recently found himself screaming at his computer screen while covering the Association of Financial Advisers (AFA) Evolve conference.

Why, dear reader? Because the AFA’s general manager for policy and professionalism, Phil Anderson, told the virtual audience to do so.

In a bid to connect, Anderson asked: “Who is feeling overwhelmed by the level of regulatory reform? It’s OK to say ‘yes’. In fact, if you feel like it, shout at your screen!”

Anderson did in fact get a response from his audience as Outsider noticed the chat box on the side of the video started filling up with messages from financial advisers shouting “YESSSSSSSS!!!!!”.

OUT OF CONTEXT www.moneymanagement.com.au

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Outsider jumped a little as he felt the anger and exhaustion streaming out from the advice industry. One viewer said they had lost their voice from screaming and another was screaming after losing a valued financial adviser from their team.

Feeling the rage from his fellow viewers, Outsider decided to muster all his strength to shout at his screen once again before he quickly realised he might have disturbed some neighbours and sheepishly looked around and found no one was listening.

But, did Outsider ever really scream if no one heard it?

Perhaps next time Outsider needs to scream in a chat box to be heard.

"You don't want to be the plumber with the leaky tap."

"It's the regulator's job to do the regulator's job."

- Cate Americano, Inspiration Café founder.

- David Haynes, AIST senior policy manager.

Find us here:

30/09/2021 8:53:24 AM