Money Management | Vol. 34 No 1 | February 13, 2020

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 34 No 1 | February 13, 2020

SUSTAINABILITY

If not now, when?

26

LOW-COST FUNDS

28

What this year holds for lowcost funds

RURAL ADVICE

Contribution strategies

AMP’s $5.175m penalty a ‘deterrent’

BY MIKE TAYLOR

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In times of drought THE bushfires that have ravaged the country since June 2019 has been exacerbated by a relentless drought. The cost to rural communities and farmers especially has been both financial and emotional. This has taken a huge toll on the mental health of the people that provide Australians with produce they use to live.

Most businesses would not survive years of no income and yet the farmers are desperate to save their land and businesses that have been in their families for generations.

Financial advisers have a significant role to play in both the financial and emotional side of things and sometimes farmers “just want to talk to someone”, according to North West Wealth adviser James Smith.

Smith said 90% of his clients over this drought period have had to change or have discussion about their portfolios to re-evaluate insurance premiums, superannuation contributions, or to rearrange investments and income.

Investment Collective’s managing director, David French, said education played a large role in helping farmers get back on their feet and one of the first steps was for them to understand that the farm was a business as many did not separate it from their family.

Unlike city advisers, rural financial planners often travel long distances for their clients and even live in with them to gain a deeper understanding of the situation farmers are in.

In getting to know clients, French said it was important for advisers to acknowledge when a client’s mental health had deteriorated and that they needed to have a hard conversation with them if professional help was needed.

“People need a trusted conduit so that they can get their feelings out and understand what is going on and an adviser should immediately say ‘we need to get you help’, and probably the first step is going to a GP or a psychologist,” he said.

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Full feature on page 18

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TOOLBOX

THE Australian Securities and Investments Commission (ASIC) has sought to reinforce the fact that the $5.175 million penalty imposed on AMP Limited in the Federal Court should act as a deterrent to other major financial institutions who fail to adequately address adviser misconduct.

This point was driven home by ASIC deputy chair, Daniel Crennan QC, while ASIC at the same time pointed to the number of other best interest duty cases ASIC had brought before the courts including against Westpac and against RI Advice.

In doing so, the regulator is driving home the message that regulatory action will not stop at advisers but will be directed towards the highest levels of institutions where their failure to address bad behaviour can be proved.

This was acknowledged by Crennan who expressed pleasure that the Federal Court had agreed with ASIC’s case that AMP had failed

to monitor and supervise its financial planners properly and in accordance with its legal obligations.

ASIC had alleged that a number of AMP financial planners engaged in ‘rewriting conduct’ – providing advice that results in the cancellation of a client’s existing insurance policies and the taking out of similar replacement policies by way of a new application rather than through a transfer.

This resulted in the clients being exposed to significant risks and the planners receiving higher commissions.

AMP’s problems arose because the court accepted that AMP had become aware of the problem with one planner but had failed to then ascertain the extent of the problem amongst other planners.

The bill for AMP Limited could have been higher because the Federal Court penalty was determined under the old penalty regime which applied a $1 million maximum for each contravention. There is also the question of costs.

AMP fined $5.2m for insurance churn

BY OKSANA PATRON

THE Australian Securities and Investments Commission (ASIC) has announced that AMP has been ordered by the Federal Court to pay $5.175 million penalty after failing to ensure that’s its financial planners complied with the best interest duty and related obligations under the Corporations Act. Also, the court found that there was a total of six contraventions of the act and indicated that it would make orders requiring AMP to undertake a review and remediation program to ensure financial planning clients who were subject to rewriting conduct were properly remediated.

“ASIC had a strong case against AMP, which resulted in AMP’s admissions in relation to ASIC’s case in May last year. We now have Continued on page 3

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February 13, 2020 Money Management | 3

News

Govt should fund review of advice regulation – CPA Australia

BY MIKE TAYLOR

THE complex, multi-layered nature of the regulatory environment covering financial advice is alienating many consumers and small businesses and placing substantial strain on accountants, according to major accounting group, CPA Australia.

In a pre-Budget submission filed with the Federal Treasury, CPA Australia has urged the Government to fund a holistic review of the regulatory frameworks for financial advice, with the objective of such a review being to ensure that regulations are fit for purpose and to reduce overlaps and costs.

In doing so, the CPA Australia submission pointed to the number of regulations and regulatory agencies touching advice.

“For example, in relation to financial advice, advisers must comply with the Corporations Act, the Tax Agent Services Act, the National Consumer Credit Protection Act, plus there are obligations imposed under the ASIC Act and the Financial Adviser Standards

and Ethics Authority (FASEA), amongst others.

Often there is no harmonisation between these regulatory frameworks, or even within a single regulatory framework,” it said.

“Depending on how the licensing and registration system is set up, an accountant in practice may need to hold multiple licences and/or registrations to be able to provide one piece of advice,” it said.

Extend compensation scheme to MISs says AFCA THE Australian Financial Complaints Authority (AFCA) may only have been around since 2018 but it can already point to 40 compensation determinations which have gone unpaid due to the insolvency of financial firms.

The authority has used its submission supporting the implementation of a Compensation Scheme of Last Resort (CSLR) to argue that it should funded by and encompass the entire financial services industry including managed investment schemes (MISs).

It said that the scheme should cover unpaid compensation arising from the provision of any financial service and product that came under AFCA jurisdiction and all forms of regulated financial services financial advice or financial products.

The AFCA submission said that while many of the unpaid determinations that arose related to financial advice, evidence indicated noncompliance with determinations was not confined to financial advice firms but also credit providers, MIS operators, finance brokers, mortgage brokers, securities dealer and derivatives dealers.

On the question of the status of professional indemnity (PI) insurance compulsorily held by financial advisers and others, the AFCA submission said it was a separate issue in circumstances where “PI covers business risk and is not a consumer compensation mechanism”.

“Notwithstanding any need for further PI reform in relation to how firms meet their legal obligation to have adequate compensation arrangements in place, there is a need for a CSLR to cover loss where PI will not respond. These circumstances include fraud, amounts above PI limits and other situations where PI does not provide coverage or is not available,” it said.

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The submission said CPA Australia’s research had found that almost 90% of accountants in practice believed the compliance burden of differing legislative frameworks was an issue, and less than a quarter said they had a clear understanding of their obligations.

“Further, this regulatory complexity is increasing the costs many millions of Australians pay each year to access the services of accountants, with almost 50% of practitioners stating that they increased their fees in the past year to cover increasing compliance costs,” it said.

CPA Australia pointed out that this was also happening at a time where the financial services sector was experiencing a major structural adjustment, with service providers exiting the sector in significant numbers.

“The impact of this structural adjustment is a growing advice gap in the market, which is to the detriment of those who need financial advice in an increasingly complex world with an ageing population.”

AMP fined $5.2m for insurance churn Continued from page 1

a decision from the court which agrees with ASIC’s case that AMP failed to monitor and supervise its financial planners properly and in accordance with its legal obligations,’ ASIC deputy chair Daniel Crennan said.

ASIC alleged that a number of AMP’s financial planners engaged in ‘rewriting conduct’ – which is providing advice that results in the cancellation of the client’s existing insurance policies and the taking out of similar replacement policies by way of a new application rather than through a transfer.

Further to that, the regulator said by cancelling insurance policies and advising clients to submit new applications, clients were exposed to a number of significant risks and the planners received higher commissions than they would have by simply transferring the policies.

Additionally, the court said that the rewriting conduct by one of AMP’s financial planners, Rommel Panganiban, was “morally indefensible”.

“The court accepted ASIC’s case that, having become aware of Mr Panganiban’s conduct, it was necessary for AMP to ascertain the extent of breaches by other planners to meet its legal obligations,” ASIC said in the announcement.

“AMP failed to do so, and the court found, ‘the lack of an effective response is an illustration of how badly things had gone wrong within the organisation’.”

In its judgment, the court noted that “this penalty proceeding reflects a lamentable failure of corporate will to take the necessary steps to prevent greedy and unlawful conduct taking place, and a further failure to adopt a swift and proper remedial response”.

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4 | Money Management February 13, 2020

Editorial

mike.taylor@moneymanagement.com.au

OBJECTIVELY, HAYNE BARELY EARNED A PASS MARK

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au

Much of the commentary attaching to the first anniversary of the Hayne Royal Commission recommendations has tended to flatter what was, objectively, a flawed outcome thoroughly undeserving of receiving a Government rubber-stamp, Mike Taylor writes.

Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266

AS IS FREQUENTLY the way with such events, much was made of the 12-month anniversary of the handing down of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry which saw much praise being heaped on the Commissioner, Kenneth Hayne.

The underlying theme adopted by many commentators was that the Royal Commission, under the leadership of Hayne, had succeeded in identifying a multitude of sins in financial services and then recommending a series of measures which would bring the industry, particularly the financial planning industry, to a level acceptable to the broader community.

That theme flatters Hayne.

Stripped back to the fundamentals, the Royal Commission can be seen to have traversed little that was not already known and was already being addressed by the Government, the regulators and the industry itself and to have stopped doing its work before it might have actually reached into new areas.

Fee-for-no-service, the issue which appeared to fascinate and absorb Hayne and his Counsel Assisting, had already been identified by the Australian Securities and Investments Commission (ASIC), just as the

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question of phasing out grandfathering had also been identified, along with the frequency of fee reviews under the terms of the Future of Financial Advice (FoFA) changes.

Then, too, the Government had already put in place a timetable and methodology for reviewing the success or failure of the Life Insurance Framework – yet this did not stop Hayne from moving beyond his brief to recommend dialling down life commissions to zero.

Of significance is the fact that, on the first occasion a Royal Commission referral was put to the test in the Federal Court – the Australian Prudential Regulation Authority’s (APRA) case against IOOF – the regulator failed to make its case and ended up paying costs.

However, such were the political priorities of early 2019 that the Government, via the Treasurer, Josh Frydenberg, leapt upon Hayne’s recommendations and committed the Government to an almost unquestioning rubberstamping of their contents and adherence to an implementation timetable ending in December, this year.

In the pursuit of this almost unquestioning objective, the Government has seen fit to trample across some of its own measures, not least allowing a modicum of industry selfregulation in the form of

code-monitoring as part of the broader Financial Adviser Standards and Ethics Authority (FASEA) regime, and accepting that despite its faults and the efforts of some players to ‘game’ the system, the FoFA changes were working and may have been made to work even more effectively.

Where the Royal Commission got it right was in its analysis that the financial services regulators could have done much better. Where the Royal Commission erred was in Hayne’s decision not to continue its probe, particularly with respect to the operations of the superannuation sector.

And as Frydenberg continues his efforts to meet his selfimposed implementation timetable, the financial planning industry is left to ponder what it will end up costing them in terms of time, money and higher industry levies to pay for the single disciplinary body which was recommended by Hayne despite the Government having previously encouraged the industry to pursue the establishment of codemonitoring bodies.

Political analysis suggests that most financial planners tend to support Liberal/National Party Coalition Governments, there is precious little evidence this Government is supporting them.

jassmyn.goh@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Amelia King Tel: 0407 702 765 amelia.king@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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Mike Taylor Managing Editor

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6 | Money Management February 13, 2020

News

APRA/ASIC ‘engage’ super funds over adviser relationships

How ASIC told superannuation funds to handle adviser commissions

BY MIKE TAYLOR

THE degree to which the Australian Securities and Investments Commission (ASIC) has used its powers to eliminate the payment of commissions to financial advisers by superannuation funds has been revealed by its latest review of regulatory relief applications.

The ASIC document has revealed that while the regulator was prepared to grant disclosure relief with respect to transfers between superannuation funds with the same trustee, it used the

process to oblige the superannuation fund to act on commissions.

The regulator said it had provided an extension of relief to the superannuation on the basis that while the transfer involved a change of fund for the member, the member would still subsequently hold a superannuation that contained substantially the same rights and features.

However, one of the conditions ASIC saw fit to impose on the superannuation fund related to commissions and the ability of adviser clients to end those arrangements without having to

first contact the adviser.

“We also imposed further conditions to relief under the extension so that the trustee must: (a) provide members whose accounts are charged commissions with a notice to highlight the trustee’s arrangements under which members may give a direction to the trustee that it immediately cease charging commissions without any need for the member to contact the person to whom the commissions are being paid; and (b) further highlight those arrangements prominently on its website.”

Former FASEA board member unhappy with Standard 3 in the Code of Ethics A former board member of the Financial Adviser Standards and Ethics Authority (FASEA), Countplus chief executive, Matthew Rowe has expressed deep concern about the workability of the authority’s code of ethics unless the controversial Standard 3 is revised.

Speaking during a roundtable in Sydney, Rowe agreed with specialist financial services lawyer, Hillary Ray that Standard 3 dealing with conflicts of interest would either deliberately or inadvertently change the commercial underpinnings of many financial planning businesses.

He said that while he had supported the original Standard 3 which had been taken to the industry for consultation, he did not support the current

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THE Australian Prudential Regulation Authority (APRA) has confirmed that a number of superannuation funds have been “engaged” over payments to third parties such as financial advisers.

The regulator revealed the engagement as part of its outline of its supervisory priorities for 2020, noting that it was area of joint supervisory focus with the Australian Securities and Investments Commission (ASIC).

It said that during 2019 both APRA and ASIC had required all trustees to review the robustness of their existing governance and assurance arrangements for fees charged to members’ superannuation accounts.

“APRA and ASIC are engaging with individual trustees on the outcomes of their reviews, ensuring that trustees have credible plans for addressing identified weaknesses in a timely manner,” APRA said. “Industry-level findings will be made public in the first half of 2020.”

APRA said conflicts of interest was another key area of supervisory focus for it in 2020 and that it had begun an “in-depth review of selected large trustees’ management of outsourcing providers, focusing on related party arrangements and managing conflicts of interest”.

Standard 3 which he believed would have significant negative consequences for the industry.

Ray had earlier told the roundtable that she believed the nature of Standard 3 meant that the FASEA code of ethics had gone beyond what codes of ethics were generally intended to achieve and that there was now “real potential for financial harm”.

“We are stuck with a fairly draconian approach to conflicts of interest,” she said.

Notwithstanding suggestions during the roundtable that overtures to Canberra about the code of ethics had elicited little sympathy, Rowe said he believed there needed to be further consultation and he would be happiest with a reversion to the original Standard 3.

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8 | Money Management February 13, 2020

News

Trade war didn’t hold back best diversified credit fund

BY CHRIS DASTOOR

DESPITE the back and forth over US/China trade talks, a China fund lead the fixed interest diversified credit sector over the last year, according to FE Analytics data.

Within the Australian Core Strategies universe, the fixed interest diversified credit sector returned 6.17% over the year to 29 November, 2019.

The best performing funds were Premium Asia Income (17.24%), BetaShares Investment Grade Corporate Bond ETF (15.2%), PIMCO Capital Securities Wholesale (14.83%), Macquarie Core Plus Australian Fixed Interest (14.72%) and Capital Group Global Corporate Bond Hedged AU (13.57%).

According to its November fact sheet, Premium Asia’s recent performance was boosted by the expectation of reaching Phase One in the US/China Trade War, but that alone won’t be enough.

“We continue to expect the trade negotiation will be a long, drawn-out process, and the two world superpowers battling for supremacy on all fronts will be the new normal,” it said.

“Investors should get used to it. Geopolitics and trade frictions will impede global growth, delay recovery and result in low global rates and a rising number of negative rate products in the market.”

Premium Asia’s top holdings were Golden

Wheel Tiandi (3.3%), GD Poly (3.1%), Tongfang Aqua (3%), China Jinjiang Environment (3%) and Modern Land China (2.4%), as at 30 November, 2019.

Their country allocation was 95% China/ Hong Kong, and real estate (67%) was the only sector that had a double-digit weighting.

BetaShares’ top holdings were Fonterra

Cooperative Group (4.6%), Emirates NPD Group (4.5%), Telstra (4.5%), QNB Finance (4.4%) and United Energy Distribution (4.3%), as at 31 December, 2019.

Capital Group’s top holdings were US Government (3%), Microsoft (2.1%), Unicredit (1.9%), BP (1.7%) and Allergan (1.7%), as at 31 December, 2019.

Chart 1: Top five performing fixed interest diversified credit funds v sector over the year to 29 November 2019

Source: FE Analytics

APRA’s heatmaps got it wrong says industry fund

BY MIKE TAYLOR

A key parliamentary committee has heard industry funds concerns about the accuracy of the Australian Prudential Regulation Authority’s (APRA’s) superannuation fund performance heatmaps.

TWUSuper has used its submission to the Senate Economics Legislation Committee inquiry into the Government’s proposed changes to choice of fund to claim that the APRA heatmaps involved some significant classification errors which led to the fund comparing unfavourably with other funds.

The industry fund said that it was supportive of efforts to improve transparency in the superannuation sector and welcomed APRA’s

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decision to publish comparative data, but added “we are concerned the heatmap published by APRA misrepresents TWUSuper’s investment performance”.

“APRA’s initial heatmaps classified TWUSuper’s infrastructure and property assets as 100% listed when in fact they are almost entirely unlisted,” it said. “TWUSuper’s investments in unlisted infrastructure and property were classified as 100% growth when compared to some funds whose infrastructure and property assets were classified 75% growth and 25% defensive.”

The superannuation fund claimed this, and other classification errors had skewed TWUSuper’s investment risk rating, giving it a

growth rating of 78%, when in fact it should be 71% growth.

“Without these misclassifications TWUSuper would compare favourably in APRA’s heatmaps,” it said.

The TWUSuper submission also suggested that the majority of its members would not be impacted by the Government’s changes to superannuation scheduled to come into force on 1 April because the majority would be covered by the dangerous occupation exemption.

“TWUSuper has consulted with its actuary to determine the feasibility and likelihood of the application of the exemption in relation to its membership. An analysis of the occupations of TWUSuper members

indicates that the vast majority (95%) are in manual occupations,” it said.

“Occupation data collected from the fund’s largest employers provides evidence that the majority of the manual occupations are likely to be in dangerous occupations and covered by the dangerous occupation exemption.

“This means that the majority of members may continue to be covered by default insurance on an opt out basis and TWUSUPER will be unique in its ability to continue to provide the financial protection to its members and their families in the event of a death or serious illness or injury that prevents the member returning to work.”

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10 | Money Management February 13, 2020

News

Call to free SMSF members from default captivity

BY MIKE TAYLOR

OLDER members of selfmanaged superannuation funds (SMSFs) who choose to return to the workforce are often forced into default funds against their wishes, giving greater weight to the need for the Government to legislate on choice of superannuation fund, according to the SMSF Association (SMSFA).

In a submission filed with the Senate Economics Legislation Committee, the SMSFA claimed that being forced into a particular superannuation fund without choice not only affected younger, disengaged members but also older individuals transitioning to retirement that might

already haven an SMSF. “A common scenario for SMSF members, of whom approximately 60% are aged over 55, is working in parttime jobs which can often fall under an enterprise agreement while transitioning to retirement,” the submission said. “These people are restricted from having their super guarantee (SG) contributions made into their SMSF and are instead required to have contributions made to the relevant default fund under the agreement.”

“The SMSFA understands that there are many SMSF members affected by agreements that do not let them choose where their superannuation guarantee contributions go, including to their

own SMSF,” it said.

The submission claimed that arrangements which did not give employers or employees any choice as to where superannuation contributions were made created a multitude of issues, “the most significant being account proliferation and the consequent multiple set of fees and insurance premiums which continually erode superannuation balances”.

“Opening up choice of fund to all employees will also increase the efficiency of the superannuation system by removing the need of employees who are constrained by an enterprise agreement or other restriction to roll-over their contributions to their fund of choice,” it said.

Choice of fund will only work with good advice CHOICE of superannuation fund will only be effective if superannuants have access to quality and timely financial advice, according to major accounting group, Chartered Accountants ANZ (CA ANZ).

In a submission filed with the Senate Economics Legislation Committee review of the Government’s new choice of fund legislation, CA ANZ pointed out that despite the need for financial advice, ASIC research had revealed that only 27% of the Australian population had received personal financial advice.

It said despite this, many potential financial advice providers were “dissuaded from offering advice because of complex costly inefficient regulatory frameworks”.

“In addition, multiple regulatory regimes together with regulator behaviour have been forcing many professional advisers (accountants and financial advisers) to question whether they should continue to provide advisory services,” the submission said.

CA ANZ then flagged new research it had conducted which it said suggested that few people used digital platforms or robo advice, with only about 12% of consumers having

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heard of robo-advice.

“The main attraction of this option is that it may reduce the cost of providing advice and allow widespread access,” the submission said. “But it would appear only a minority of people would consider using this service.”

“The majority of consumers are saying they want to receive financial advice from another human beaning. This means reform of this area is essential and urgent.”

Advisers view on gearing improves despite subdued market outlook

BY CHRIS DASTOOR

FINANCIAL planners and stockbrokers are increasingly considering gearing to invest to be an appropriate strategy for their clients, according to research from Investment Trends.

Its latest research found 87% of stockbrokers believed their clients could benefit from using borrowings to boost returns, up from 72% in 2018, and this outlook was even stronger among financial planners, rising from 82% to 89%.

Despite the improved views on gearing, their outlook for domestic equities were subdued.

The average adviser expected the All Ords Index to rise by less than 2% over the next 12 months, lower than the 4-6% levels prior to 2019.

John Carver, analyst at Investment Trends, said advisers did not expect local equities to repeat the strong performance of 2019, so advisers were considering gearing for better investment returns.

“While the use of gearing to invest in the advice channel remains below pre-GFC levels [with] only 21% of planners and 60% of stockbrokers currently recommend margin lending, most advisers consider gearing products as part of their advice process,” Carver said.

“Margin lending remains the most popular option, but there is also appetite for non-margin lending products such as internally geared funds, home loan redraw facilities and lines of credit.”

Margin lending was also an issue as a quarter of stockbrokers and 43% of planners had used margin lending in the past with clients, but no longer do so.

However, they were open to resume usage with 71% of stockbrokers and 78% of planners having said they could be encouraged to use the credit product again.

“Many advisers are open to re-engaging with margin lending, but improved product features are important to convert interest into action,” Carver said.

“For instance, significantly more stockbrokers would be encouraged to use these products if they could structure loans that avoided margin calls (23%, up from 9%) and were given more choices to protect their clients’ initial capital (12%, up from 5%).

“While improved product features are key, margin lending providers must also continue maintaining their high levels of service and support, particularly their business development manager (BDM) support – a good BDM relationship is among the top three reasons why advisers favour their main provider aside from its good reputation and range of approved shares/funds.”

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12 | Money Management February 13, 2020

News

FSC argues for exclusion of ‘experts’ from new claims-handling rules

BY MIKE TAYLOR

THE Financial Services Council (FSC) has called on the Government to exclude professionals such as accountants, doctors and lawyers from coverage when it legislates to makes insurance claims handling a financial service.

The FSC has made its call in a submission responding to a Treasury consultation process but makes no reference to any exclusion for financial advisers.

However, it argues against proposed additional disclosure obligations with respect to providing financial product advice, claiming that it is established industry practice “and to the claimant’s benefit for the insurer to assist in the provision of information” on matters such as benefit calculation, the potential eligibility to claim on other insurance products and any applicable offsets between benefits paid and multiple insurance products.

“Imposing additional disclosure obligations for factual statements would unreasonably

hinder the quality and efficiency of the CHS service provided to the claimant,” it said.

On the question of excluding accountants and others, the submission suggests that the exclusion apply to “any persons acting in their professional capacity to provide an ‘expert’ opinion”.

It suggested that if the legislation did not exclude such professional “experts” there was “likely to be a withdrawal of services by such professionals and a deterioration in the efficiency and quality of the CHS service which would be provided to the claimant”.

In a media release attaching to the FSC submission, the organisation’s chief executive, Sally Loane referenced the fact that the FSC had “requested that the proposed legislation does not capture people such as doctors, physiotherapists and accountants acting in their professional capacity by providing expert opinion in claims matters”.

She said that while they might have a role in the process, the experts, specialists and service providers were external to the insurer

and held no delegated authority to make claims decisions.

Elsewhere in its submission the FSC called for confirmation of a definite start date of 1 July, 2021, for the new regime sating it was vital that the industry had time to act to invest the significant resources necessary to meet the new requirements.

APRA maintains pressure on super funds

Price not the only factor when picking licensee

THE Australian Prudential Regulation Authority (APRA) has revealed the degree of pressure it applied to underperforming superannuation funds ahead of the release of its first ‘heatmaps’ last year and the reality that those funds remain under pressure.

The regulator has revealed the degree of pressure applied in its first-ever ‘Year in Review’ publication covering 2019 and makes clear that it contacted underperforming funds ahead of the release of the heatmaps to ask those funds what they going to do about the situation.

It confirmed that in the absence of those superannuation funds acting to turn their performance around, they would need to consider mergers or actually exiting the industry.

“Ahead of its [the heatmaps] release, APRA contacted the trustees of the worst performing products and asked them to provide or update action plans outlining how they intended to address identified weaknesses,” the Year in Review document said.

“If these trustees are unable to make substantial improvements in good time, APRA will consider other options, including the need for the trustees to consider a merger or to exit the industry.” It said.

“However, APRA expects all trustees, regardless of how their funds appear on the heatmap, to reflect on the drivers of their current performance, and to identify where they can do better.”

A number of superannuation fund trustees have questioned the methodology utilised by APRA in the heatmaps and the accuracy of the underlying data.

EXPECTATIONS from advisers will increase on their licensees around the quality of services and depth of expertise now that there is more regulatory certainty surrounding the industry, according to Centrepoint Alliance.

Speaking to Money Management, Centrepoint Alliance’s chief executive, Angus Benbow said consolidation and aligned institutions shedding their advice arm would lead to advisers looking for high quality licences.

“Unfortunately because it is such a hard decision and is very complex. A lot of advisers haven’t had to make that decision for a long time and many are only focused on price,” he said.

“Advisers need to look past just price and discounting and look at who they are actually partnering with.”

When picking a licensee Benbow said three main points advisers should look at were transparency, certainty and quality.

On transparency, Benbow said advisers needed to look at who owned the licensee, ask for a copy of its profit and loss statement, cashflow forecast, and balance sheet.

01MM130220_01-16.indd 12

BY JASSMYN GOH

“If they are not prepared to provide then they have to ask questions around transparency. Because they would be asking the same thing for any investment they make for clients,” he said.

Advisers also needed to be certain that the licence would be around for the long-term as making a licencing choice was “not just a transaction or a commodity”.

“They need to look at its financials and level of governance and compliance in investments and corporate services to make sure they are doing the right thing,” Benbow said.

Advisers would also need to analyse the quality of service and solutions as these were the elements that would support their business.

“Do they have the breadth of services that they are going to need as an advice business, whether it be from business management, to advice, technology, technology support services, and whether they have the depth in terms of quality of those services,” he said.

Benbow said this year would be a more positive year for advisers as many of the industry’s regulatory changes and political uncertainty had already played out.

4/02/2020 3:12:13 PM

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4/02/2020 12:02:43 PM

14 | Money Management February 13, 2020

News

Govt accused of reneging on Royal Commission over default super

BY MIKE TAYLOR

THE Federal Government is pandering to the major banks by trying to change default superannuation arrangements, according to major union, the Electrical Trades Union (ETU).

The union has filed one of the earliest submissions to the Senate Economics Legislation Committee inquiry into the Government legislation underpinning the default superannuation changes – the Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019.

In doing so, the ETU accused the Government of acting contrary to the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation

and Financial Services by backing the banks over industry funds.

“It is astonishing that barely months after the damning findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were published, the Morrison Government has returned to its old habit of protecting banks and attacking industry superannuation funds,” the submission said.

“As continued revelations of finance sector misconduct appear almost daily in the media such as the recent case of Westpac being found to have 23 potential criminal breaches of money laundering laws – found to have facilitated the financing of child exploitation – the government is persisting in giving the banks

exactly what they want,” it said.

“Superannuation is an initiative of working people and where they choose to negotiate a default fund with their employer, in their own best interests, what right does the Government have to refuse or undermine that choice,” the submission said.

The ETU submission said that each time an industrial instrument was renegotiated “the workforce has ample opportunity to review the fund and determine any changes they might want”.

“Once again, a Government that pretends to believe in free markets demonstrates its beliefs only apply when workers choose to buy products off the multinational companies from whom the government receives political donations,” it said.

Sustainable ETFs top Aussie equities in 2019

BY CHRIS DASTOOR

SUSTAINABLE exchange traded funds (ETF) were the best two performing Australian equity ETFs in 2019, according to data.

According to FE Analytics, within the Australian Core Strategies universe, the best performing ETFs were VanEck Vectors MSCI Australian Sustainable Equity ETF (28.73%), BetaShares Australian Sustainability Leaders ETF (28.54%), BetaShares Australian Ex-20 Portfolio Diversifier ETF (28.4%), State Street Global Advisors SPDR S&P ASX 50 (27.77%) and VanEck Australian Equal Weight ETF (26.73%), from the year to 29 November, 2019.

The Australian equity sector returned 22.96% over the same time period.

The best returning ETF, the Van Eck MSCI Australian Sustainable Equity ETF, excluded nonsocially responsible companies including adult entertainment, weapons, alcohol, gambling, tobacco, soft drink and genetically modified organisms.

Its top holdings were CSL (5.29%), Telstra (5.14%), Commonwealth Bank of Australia (5.02%), Transurban Group (4.94%) and ANZ (4.76%), as at 16 January, 2020.

BetaShares Australian Sustainability Leaders ETF top holdings were CSL (4.7%), Resmed (4.3%), Insurance Australia (3.8%), Suncorp (3.8%) and Cochlear (3.7%), as at 31 December, 2019.

Its Australian Ex-20 ETF’s holdings were

01MM130220_01-16.indd 14

Unibail-Rodamco-Westfield (3.3%), Aristocrat Leisure (3%), Fortescue Metals (2.4%), Coles (2.4%) and Sydney Airport (2.3%).

State Street’s top holdings were CBA (9.8%), CSL (8.84%), BHP (7.75%), Westpac (6.06%) and NAB (5.3%), as at 30 November, 2019.

VanEck Australian Equal Weight ETF’s top holdings were Northern Star Resources (1.47%), Charter Hall Group (1.32%), Magellan (1.28%), Afterpay (1.24%) and Link Administration Holdings (1.23%), as at 16 January, 2020.

Call to place employers under legal obligation on default super HISTORY shows that retail superannuation funds might be willing to flout the laws designed to protect consumers when choosing superannuation products, according to plaintiff law firm, Maurice Blackburn.

Citing a recent Federal Court case in which the Australian Securities and Investments Commission (ASIC) brought charges against Westpac and BT, Maurice Blackburn used a submission to the Senate Economics Legislation Committee to argue that the Government’s new default superannuation legislation could have potential adverse consequences.

“Choice of fund, whilst a worthy goal, comes with dangers,” the legal firm submission said. “Maurice Blackburn urges the Committee to ensure that adequate protections are in place for consumers, should a more open approach to choice be recommended.”

“Where choice is available, consumers are more open to the risk of targeted marketing campaigns by superannuation funds,” it said. “It is worth noting that the findings of the Royal Commission included a specific recommendation aimed at prohibiting hawking of superannuation products.”

Looking at the totality of the legislation, the Maurice Blackburn submission said the firm regarded the Government’s legislation as a missed opportunity to implement reforms to ensure employees “are not victims of the abdication of responsibilities in relation to the payment of superannuation by unscrupulous employers”.

It said that for this reason it was asking the Parliamentary Committee to consider embedding in the bill a legislated right for action for damages caused by an employer’s failure to make on time superannuation guarantee contributions.

The submission also calls for the imposition of a legislated obligation on employers to conduct due diligence over any default superannuation fund and “a legal obligation on employers to ensure any default fund they choose for their employees is appropriate to the industry and employee demographics”.

4/02/2020 4:17:24 PM

February 13, 2020 Money Management | 15

News

A third of life clients considering changing financial advisers

BY MIKE TAYLOR

NEW research has revealed that one-in-three consumers are thinking of changing their financial adviser or stopping seeing a financial adviser altogether over the next 12 months, with the major reasons being cost and lack of communication.

The research, commissioned by major insurer MetLife revealed that 15% of respondents to a survey were thinking of no longer using an adviser while 15% were thinking of changing to another adviser, with 25% citing high fees, while 23% said they did not need advice any more, 23% cited poor communication and lack of contact while 21% cited poor value for money.

The survey analysis said that advisers needed to recognise the

findings as a serious call to nurture their relationships and show their expertise to clients through regular contact and reviews.

“There are two ways that advisers can easily improve client satisfaction. The first is around building a relationship that is more akin to a partnership, the second is by demonstrating their expertise and providing value on a regular basis,” it said.

“One act that can have a big impact on their clients and be an opportunity for an adviser to demonstrate their care and expertise is a simple annual review,” the survey analysis said.

“Of the 60% of consumers with life insurance who undertook a review with their adviser in the last 12 months, 63% rated their experience as ‘very good’ or

‘excellent’ and 49% modified their insurance cover in line with their stage of life,” it said. “For example, those aged under 35 increased their cover, while those who might be transitioning to retirement reduced theirs. The added value of this engagement with clients is clear. Consumers who have had a review are more likely to be loyal and recommend their adviser to a third party.”

Which were the riskiest sectors in 2019?

BY JASSMYN GOH

THE Australian equity geared sector was the riskiest equity sector with a volatility of 15.38 over the year to 31 December, 2019, according to FE Analytics.

FE Analytics data from the Australian Core Strategies universe found that the top performing fund in this sector was BetaShares Geared Australian Equity at 57.8%.

North American equities was the next most risky sector with a volatility of 12.01, followed by European equities at 10.3, emerging markets at 9.4, and hedged global equities at 9.2.

Volatility for the geared and North American equity sector paid off as the two had the highest average return during 2019 at 36.4% and 31.5% respectively. The hedged global equity sector was also in the top performing quartile at 24.9%.

While the global equity sector was also a top quartile performer at 25%, its volatility was substantially lower and in the second quartile at 8.7.

Four of the top five performing North American equity funds were exchange traded funds (ETF), and the best performing fund was BetaShares Geared US Equity (69%). This was followed by BetaShares NASDAQ 100 ETF (38.77%), VanEck Vectors Morningstar Wide Moat ETF (34.89%), Pendal American Share (32.75%), and UBS IQ MSCI USA Ethical ETF (31.38%).

01MM130220_01-16.indd 15

Pendal said in its latest factsheet that its fund outperformed the S&P500 during the third quarter of the last calendar year due to stock selection in consumer discretionary and communication services.

“Overweights in Target, Dollar General, Altice, and Fiserv and not owning Netflix were stock positions that contributed to performance,” it said.

It noted that the portfolio’s holdings of US animal health products manufacturer Elanco Animal Health and oil company BP held back returns.

The BetaShares Geared US Equity fund had its largest sector weighting towards information technology at 23.2% and, unsurprisingly, its top five holdings were Apple, Microsoft, Amazon, Facebook, and conglomerate Berkshire Hathaway.

On the other end of the scale, the infrastructure equity sector was the least risky sector with a volatility of 5.7. This was followed by Australian equity income at 7.85, Australian small/mid cap equities at 7.99, and global small/mid equities at 8.1.

Returns were varied with the least risky sectors with the Australian small/mid cap equities performing the best in the second quartile at 24.45%.

The poorest performer among the least risky sectors was the Australian equity income at 18.45% which fell into the fourth quartile. The worst performing fund in this sector was MLC National Australia Investment Trust Monthly Income at 10.3%.

Tight finance poses growth challenge for advisers SMALL financial practices looking to gain scale through acquisition are finding the going tough in circumstances where the major banks are proving unwilling to lend less than $1 million without some form of security.

According to financial planning business brokerage principal, John Birt, the reluctance of the major bank lenders to provide sub-$1 million loans for the acquisition of financial planning businesses is making things for small players looking to gain scale in the changing environment.

“Traditional lenders to financial planners and accountants have raised their minimum loan requirement. The big four banks are now asking for any approved loan to be at least $1 million which has stopped financial planners and accountants from expanding,” Birt said in a client newsletter.

“It has caused several nontraditional lenders to surface to accommodate loans of between $250,000 and $500,000 by merely using the equity in the business they are buying.

Naturally, interest rates are higher due to the lender taking on a higher risk,” he said.

Birt said vendor finance was also becoming an alternative if sellers were finding it difficult to attract a suitable buyer who needed traditional finance.

Notwithstanding the attitude of the banks to smaller loans, he said the market for financial planning and accounting practices remained active, particularly in NSW and Western Australia with a number of well-resourced buyers looking for mid-sized practices.

The changed approach on the part of the banks comes at the same time as AMP are faced with key decisions about their future stemming from the company’s new strategy and amid expectations of a class action being filed on behalf of some AMP advisers.

4/02/2020 3:12:44 PM

16 | Money Management February 13, 2020

InFocus

DDO – THE DEVIL IS IN THE DETAIL Mike Taylor writes that advisers need to be alert to the current discussion around the Australian Securities and Investments Commission’s proposed new design and distribution regime because it imposes onerous obligations.

WHEN IT COMES to the Australian Securities and Investments Commission’s (ASIC’s) product intervention and design and distribution (DDO) powers the devil for financial advisers is unquestionably in the detail.

The devil is the degree to which financial advisers will be held accountable for the products which are utilised by their clients in circumstances where a consultation paper issued in late December, last year, clearly seeks to rope them in as “distributors” and make them responsible for ensuring the products are appropriate.

The DDO obligations are based on good intentions in terms of enhancing consumer protections, but debate is already occurring around the degree to which the regime should create greater transparency for the consumers themselves about what is and is not appropriate for them.

While many financial advisers will have vivid memories of the negative fall-out which surrounded previous product failures, they will need to be alert to the degree to which regulatory regime being canvassed by ASIC in its discussion paper is likely to impact them.

While product manufacturers will be required to define who are the appropriate people to use their products via a “target market determination”, thereafter a good deal of responsibility will be

MANAGED FUNDS IN AUSTRALIA AS AT Q3 2019

imposed on advisers/distributors.

The specific words used in the ASIC discussion paper are: “Distributors generally interact directly with the end consumer. A distributor must take reasonable steps that will, or are reasonably likely to, result in its retail product distribution conduct being consistent with the target market determination. In this way, a distributor plays a key role in ensuring that the target market determination is adhered to and that the objectives of the design and distribution obligations to improve consumer outcomes and promote the provision of suitable financial products to consumers are achieved.

“Distributors are prohibited from distributing a product unless a target market determination has

been made. A distributor must also notify the issuer of a product of any significant dealings in the product that are not consistent with the target market determination.

These obligations are critical to reduce harm to consumers in such circumstances.”

Elsewhere, the ASIC discussion paper then states that: “A distributor must keep complete and accurate records of distribution information, include: • The number of complaints received about a product; and • Information specified by the issuer in the target market determination.

In other words, licensees and their authorised representatives will have to be able to prove they had a detailed understanding of the target market for a product

and well-documented proof of how they handled the distribution of that product.

They will also have to bear in mind that ASIC has already made clear that it will closely monitor how “distributors” are paid with the onus being placed in product issuers.

“We will take into account whether a conflict, potential conflict or apparent conflict of interest exists (including in remuneration and incentive structures proposed for distribution), and the issuer’s ability to eliminate or appropriately manage those conflicts of interest,” the ASIC discussion paper said.

“In developing remuneration and incentives for the distribution of a financial product, we expect an issuer will consider the role that incentives have in influencing behaviours that could result in distribution being inconsistent with the target market determination, and the harm that could arise as a result. If the issuer decides it is likely that incentives will influence behaviours that result in distribution being inconsistent with the target market determination, we expect that this will be a consideration in altering distribution channels or not proceeding with that distributor.”

The key for financial planning organisations will be ensuring that product manufacturers accept appropriate responsibility for their offerings, with advisers not being made to carry the can when products fail.

$3.87t

$3.09t

$2.99t

total managed funds industry

in consolidated assets of managed funds

in superannuation funds

Source: Australian Bureau of Statistics, 12 December, 2019.

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5/02/2020 4:35:05 PM

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6/02/2020 12:49:14 PM

18 | Money Management February 13, 2020

Rural advice

IN TIMES OF DROUGHT Jassmyn Goh speaks to rural advisers to find out how the years long drought has affected their clients and what other hidden challenges they face in these trying times.

THE CURRENT BUSHFIRE season has ravaged the east of Australia since June 2019 and has burned over 18 million hectares of land, paddocks, and homes.

The main cause, the drought, has impacted rural communities for years and many farmers are now going to financial advisers to save their businesses.

Hell Yes Financial Advice adviser, Vicki O’Connor, told Money Management the drought

01MM130220_18-35.indd 18

was going to cost the farming community a significant amount both financially and emotionally.

The community, she said, needed the help from advisers if Australia wanted to remain a country with its own farms and farmers on the land.

The style of farmers O’Connor worked with were very focused on building reserves to protect their business when drought and other natural disasters occurred.

“Some farmers have had previously profitable farm businesses that have allowed them to build up reserves and they have been using these to help them through,” she said.

These reserves included fodder stored for unexpected events, however O’Connor did not know anyone today with any fodder stores remaining, farm management deposits (FMDs) that she expected a reasonable

outflow of funds to be occurring now, and off farm investments including superannuation.

O’Connor said many farmers had been running down their livestock and were not part of the farm management deposits scheme. If eligible, primary producers could set aside pre-tax income from their primary production activities during years of high income and that income could be drawn in future years as needed.

6/02/2020 12:44:25 PM

February 13, 2020 Money Management | 19

Rural advice

However, the Dubbo-based adviser said many farmers did not have the capability to put more or any into the FMD scheme and if they did, the interest was paid at a very low rate.

BANKING RESPONSE As the scheme was managed by the banks, the banks were very nervous.

“At the moment they are in a pattern of wait and see but probably do not want to be seen as coming down on a farmer and saying that they have to sell,” O’Connor said.

“Banks are understandably very nervous and are already asking farmers for their drought recovery plan – how will they trade out of the additional debt that might be needed to allow them to trade out of the drought.

“In some cases, I am expecting that some farmers will simply be asked to sell their farms – that brings the challenge of who the buyers will be. Most farmers have plans around natural disasters.

Any planner dealing with them would be looking at what needs to be done to protect the business.”

The Investment Collective’s managing director, David French, said the banks had been “pretty good” if they thought a farmer was organised and serious about running a farm as a business or property.

“They’ll work with you – they might make it interest only. There are also government initiatives where rural loan schemes that can be accessed that we’ve used such as replacing bank debt with a rural loan scheme debt at lower interest rates with more attractive capital repayment schedules,” he said.

While most farmers knew about the various government

01MM130220_18-35.indd 19

incentives they did not know how to access them. French noted that once the website was opened a professional was needed to navigate it.

For North West Wealth Management adviser James Smith, 90% of his clients have had to make changes or have discussions about their portfolios as a result of the drought to re-evaluate insurance premiums, superannuation contributions, or rearrange investments and income.

A few, he said, had to liquidate investments to keep afloat.

“It’s just the relentless nature of the drought going on and on.

Normally there’s 18 months of it and then it rains but this time it’s been relentless and there’s no end in sight. Mentally, it’s the hardest thing because they don’t know when it’s going to end,” he said.

While banks had been supportive, Smith said, the Royal Commission had made it harder to borrow money and this also added to farmers’ stress.

“It has become substantially harder to borrow and it is taking longer. There are many people in the same boat and the banks have to lend more money and figure out if people are viable going forward so it’s not necessarily the bank’s fault. There’s more i’s to dot and more t’s to cross,” he said.

On the insurance side, the Tamworth-based adviser said some of his clients were looking at restricting insurance as a lot could not afford premiums.

“Some insurers waived premiums and others might have deferred premiums and we help them put a letter together to move that forward. If they need money we look at whether they need to borrow more or cash-in investments, or they might take

money out of super. It’s working through the options with them but sometimes they just want to talk to someone,” he said.

“Some of the farms had gone three years without income and if you think of it like an advice business or a retail shop most of them would not survive.

“The only way they have survived is by borrowing more money or cashing in investments.

It’s a very different way of running a business when you have no income at all.”

SEPARATING BUSINESS FROM FAMILY For French, one of the “big ticket items” financial advisers needed their farming clients to understand was that the farm was a business.

“It’s critical for the penny to drop that the farm is a business. They know they earn their living from it but they don’t see it as separate from their family. Their life is the farm and getting them over that bridge that this is a business and having to treat it as something separate and make decisions in the interest of the business is a big ticket thing,” he said.

Farmers were, French described, as proud small business people who did not engage with financial advisers until it was past a critical stage. Education played a big part in helping these clients engage with the banks.

“Once they understand that they could lose their whole livelihood and everything they stand for it resonates with them,” he said.

French said he would often travel to the farms and stay on the property, given the distance, which enabled him to acquire a deeper understanding of the business, the families, the

underlying issues that his clients needed help with, and come up with solutions. On average French spent five visits for the best part of a week over a two-year period living in with the families.

French said he helped a family farm business that was not performing well and had difficult and unpleasant customers that were the most likely revenue source for the business which had put pressure on the relationship between the wife and husband.

After looking over the business operations and using economic modelling, he found a whole group of new customers that might be interested in their services. The family could rent out their farm to be used by disability support groups.

This way, the business had steady income coming in from the national disability insurance scheme.

RURAL ADVICE French stressed that spending time getting to know these types of clients was one of the most important aspects in the adviser/ client relationship. This helped understand the situation, gave time to listen to their concerns, and the ability to be clear headed enough to step away and make a strategy.

“Because there isn’t a perception that there’s a difference between the business and the family, advisers need to be clear headed enough to draw the distinction out in their minds,” the Rockhampton adviser said.

“It’s all about numbers and saving the business which are two separate things so advisers can’t be too emotionally attached to the family drama. You need the guts to say they need to sell if that is necessary.”

Continued on page 20

6/02/2020 12:44:14 PM

20 | Money Management February 13, 2020

Rural advice

Continued from page 19 Morvest Financial Planning adviser, Mark Carroll, said advisers working in these situations needed to be realistic on the returns they could achieve and that looking and income and cashflow was at the forefront.

“Returns are likely to be lower than what they had been used to five to 10 years ago. They don’t want to chew through their capital so it’s about managing spending, budgeting and cashflow. It’s all around income producing Australian equities, real estate, infrastructure assets, global equities that have an income skew,” the Moree-based planner said.

“They also may need to go up the risk profile and add more growth assets because farmers including retiree farmers tend to be more conservative in nature and tend to have a defensive portfolio.

We’ve had to educate them to moving to a more growth orientated portfolio to get greater cashflow.”

Smith agreed that cashflow was important but stressed that advisers needed to appreciate the difference in cashflow management and the operation of their business.

“Having an appreciation that it is different. I talk to clients who have town businesses and clients that have been affected by the drought or fires and it’s having an appreciation of those differences,” he said.

Typically, these clients did not have pay as you go income and advisers need to need to understand different ways that

01MM130220_18-35.indd 20

their financial position is put together. They also tended to have more complex structures such as trust companies or super funds that owned some land.

“No doubt it has been a difficult time and while farmers have been the worst affected, there is a flow on effect into the towns from restaurants to accountants, to advisers, to butchers,” Smith noted.

“Everyone is impacted by the downturn and it has been going on for years and it will not change overnight. Even if there is rain now there will be no income for the next year or two and a lot of small businesses may never recover from this long sustained downturn period,” he said.

MENTAL HEALTH The other invisible impact of the drought has been the emotional toll it has taken on rural community members’ mental health.

Smith said he completed a mental health first aid course to help recognise if clients were struggling mentally and to put them into contact with professionals who could help.

“When we do an insurance application 80% of our

applications would have a mental health exclusion because they’ve been to someone and have gotten help or medication.

“80% of farmers tick the box that say they’ve had mental health issues and this is a much higher rate than the general public.”

Carroll said it was important for advisers to pick up on client attitude and demand changes, and if their clients did not appear like they used to be.

“You generally have a closer relationship with clients than other professions so while it is a hard topic it would be easier for an adviser to address. It’s not easy but it has to be done,” he said.

O’Connor said the problem was often that the farmers saw themselves as “guardians of the land” for the next generation and when there was a prolonged downturn they felt like they had failed their family and the land.

“I would probably put it up there with something like post traumatic stress syndrome (PTSD). When the drought does end they will find it hard to manage the impact of the return to the previous position. I would think this would leave a mark on many of them for years to come,” she said.

“If they’re going now into an

era where it does rain farmers are then dealing with ‘where I get the money from, will the bank lend to me and what does my drought recovery plan look like?’

“For a lot of farmers that’s very hard when you’re already feeling depressed because it’s hard to lift your head to look that much further ahead. People think rain brings an end to it but it doesn’t, it brings a whole new series of challenges for the farmer.”

For French, being put in a position to advise a client to seek help from a psychologist or a GP is nothing new having done this several times.

“There are all these internal conflicts these farmers are dealing with and using an independent adviser as a sounding board is critical. I speak sternly to them and say they need help if I feel like their mental health has declined,” he said.

“Mental health thing is critical for people under financial pressure. People need a trusted conduit so that they can get their feelings out and understand what is going on and an adviser should immediately say ‘we need to get you help’ and probably the first step is going to a GP or a psychologist.”

6/02/2020 12:44:01 PM

February 13, 2020 Money Management | 21

Responsible investing Strap

DO CLIENTS CARE ABOUT CLIMATE CHANGE? With growing demand from investors for investment strategies that take into account ESG considerations and more knowledge of how their money is being invested, advisers need to look for more tailored solutions, Oksana Patron writes.

WITH ONE OF the worst bushfire seasons ravaging Australia over the last four months, lost homes and the massive loss of wildlife has once again drawn the attention of the investment community and individual investors to climate change.

It has become obvious that companies that have been prioritising and focusing on returns without paying enough attention to the environmental, social, and governance (ESG) aspects of their operations no longer look attractive for a growing number of investors.

Along with higher ESG awareness, shareholders have begun more than ever to look for more diverse investment options which sit well with their personal beliefs and values and those companies that truly take into account ESG considerations.

Almost all advisers have admitted that a responsible investment theme has been on the rise among their clients compared to a few years back. And with an increased number of clients enquiring about responsible investing and searching for more information, both fund managers and advisers have felt a growing pressure to adjust their product portfolios and strategies accordingly.

Based in Esperance, Western Australia, financial planner Tamara Virgo who has built her integrated mortgage and financial planning business, TV Financial, from scratch, said: “I think [people] are

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becoming more aware of their choices when it comes to asset allocations within their superannuation. They are able to make a lot more freedom decisions around ethically investing and with what aligns with them.

“As an adviser, I remind people they have choice. As a financial planner it’s my duty of care to display to clients how they have a choice and options to have their investments ethically aligned with their own values.”

ETHICAL SCREENING Andrew Gaston, dealer principal and senior adviser at Adelaide-based Accord Financial Solutions, who has a strong focus on responsible investing, said that an increasing number of his clients now demand ethical screening of the companies.

“It has changed a lot, probably over the last five years meaning that more people are now taking an interest, and thanks to the fact that it is in the media every day the level of knowledge has increased hugely.”

Although advisers said they had not seen the full impact the recent bushfires have had on their existing and prospective client base and their selection of investment strategies, they agreed that awareness was growing.

“People are making a very conscious decision about not investing with companies that put geographical locations in danger. I don’t know about whether it is Continued on page 22

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Continued from page 21 linked directly 100% with climate change per se but people are being more aware about how their money is being invested and what choices they have around those investments,” Virgo said.

Although recent bushfires have contributed to growing environmental awareness among people and had an impact on many communities due to their proximity, there was no direct link to clients’ take on their investment strategies.

“In my region especially I don’t think there is a direct link between these activities and their investments. I think it’s more around the questions being asked on what we are doing about prevention, I don’t think you can link the bushfires to climate change myself, and from what I get from investors.”

Of a similar opinion was Gaston who said that it was too early to say whether the bushfires had triggered any responses in people, as at this stage the communities were more focused on what had happened, who was affected, and which charities they should be supporting. However, he expected more activity around portfolio reviews once the dust settled.

“It’s too early to say but it’s triggering people’s thought process. I expect that probably in a couple of months time when people had time to think back and then start to think about it, it will trigger a new wave,” he said.

Following that, the financial planning community would need

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to embrace this change by assisting people with enquiries and directing them to the relevant places such as the Responsible Investment Association which might be a good starting point both for enquiries from clients and advisers.

Gaston also said that advisers were being approached by a group of investment houses who claimed to be taking ESG considerations into account, however what they offered was “not as much of ESG” as the clients would wish to see.

“I would say that from the clients’ perspective – they [clients] have come a long way very quickly and they’ve left a lot of investment houses behind in the process,” he said.

Similarly, the new products coming to market would need to have much stronger screening, consistent with clients’ requirements.

According to Accord Financial Solutions, the fund managers, in particular those who are relatively new or boutique, had already learnt to recognise that if they were not

offering what the clients were asking for in their new products, or if they offered products similar to what was already in the market, they would not be able to attract strong fund flows.

Gaston also said that over the last couple of years there has been growing interest among his clients towards impact investing.

“Therefore we are trying to talk to investment managers that specialise in that and have impact funds as clients that are going to take the next step,” he said.

THE BIG THREE When it comes to clients’ take on the ESG considerations and responsible investments, most advisers admitted the individual understanding of their clients significantly varied across the board and would depend on a number of factors such as lifestyle, education, demographic, and place of residence.

Gaston said that the big three things that matter the most for his clients, before getting to the other ethical concerns they may have, were: gaming, tobacco and

fossil fuels.

The other growing trend, according to Gaston, was that his clients are not only inquiring about the negative screening but are asking, more often than not, for the positive screening where given sectors and projects are being selected based on their positive ESG scores.

At the same time, Virgo said that her clients are more interested in renewable energy and being more efficient towards the way people operate now compared to previous years.

“Carbon footprint, reducing waste and clean energy – those are the types of things that we are seeing or I am seeing or having more conversations, if I relate it back to five years ago,” she said.

According to Roger Prince from Roger Prince & Associates, whose client base included mostly “ordinary Australians – mum and dad” investor types, and who are not necessarily actively pursuing financial market news, it all came down to avoiding investing in certain areas such as alcohol or gambling.

He said that his clients were happy if their portfolios remained profitable and had the best possible strategy in place. “[The majority of my clients] are not actively pursuing the financial market news, they are doing their day-to-day lives, and the peace of mind that I am meeting their needs so they are really satisfied on that basis,” he said.

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INVESTING TO INFLUENCE CLIMATE CHANGE As people become conscious of the impact of climate change and what they can do to help mitigate it, Chris Dastoor writes where they invest can help drive change.

WHEN RUNNING FOR Prime Minister in the 2007 election, Kevin Rudd described climate change as “the greatest moral, economic and social challenge of our time”.

Over time we’ve seen policies come and go, including the carbon pricing scheme enacted by the Gillard government in 2011.

Despite the ineffectiveness of public policy to take hold and be a catalyst, the market had slowly created options for consumers and investors to help contribute to change.

In the financial services industry, this led to funds with a

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sustainable focus for ethicallyminded investors to direct their savings to, particularly in the case of compulsory superannuation.

There are also managed funds and exchanged traded funds (ETFs) with an environmental, social and governance (ESG) focus, but collectively these still only make up a fraction of the overall market.

BlackRock, in what seemed to reflect a visit from the three ghosts of Christmas over the holidays, recently changed their direction announcing they would completely divest from coal this year.

This was a significant move

from one of the largest funds globally and they would additionally incorporate other ESG initiatives.

In two open letters – one for the chief executives of the companies they invest in and the other to their own clients – BlackRock chief executive officer (CEO), Larry Fink, said climate change had become a defining factor in companies’ longterm prospects.

“Last September, when millions of people took to the streets to demand action on climate change, many of them emphasised the significant and lasting impact that it will have on

economic growth and prosperity – a risk that markets to date have been slower to reflect,” Fink said.

“But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

One of the external factors that had been pressuring BlackRock was activist group Climate Action 100+ (CA100+).

Launched in 2017, CA100+ was an investor initiative that aimed to ensure the world’s biggest greenhouse gas emitters acted on climate change.

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Continued from page 23 One of the other major investment funds that had come under scrutiny by CA100+ was Vanguard, and unlike BlackRock, have resisted the call to sign up to the demands of the activist organisation.

However, a Vanguard spokesperson said the company regularly engages with the CA100+ as they shared similar climate change risk concerns.

“There are a variety of ways in which organisations engage with the issue of climate change,” the spokesperson said.

“Vanguard’s investment stewardship team is taking action to address climate change risk through our company engagements and industry advocacy efforts with organisations and initiatives such as the Sustainability Accounting Standards Board, Task Force on Climate-related Financial Disclosure (TCFD), and UN Principles for Responsible Investment (PRI), among others.”

WHAT FUNDS ARE DOING There are two directions ESG investment can take: either divest from companies not adhering to those policies or use the stakeholder power in those companies to lead change.

Australian boutique Alphinity Investment Management runs the

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Sustainable Share fund which specifically focuses on ESG factors as well as adherence to the United Nation’s Sustainable Development Goals (SDG).

Stephane Andre, principal and portfolio manager for Alphinity, said leading a large investment fund offered significant power over the companies they invest in.

“It gives us a voice because having $8 billion [funds under management] gives us access to all the CEOs in Australia, so we would have BHP, Rio or Woodside sitting here in our office and it’s part of the conversation,” Andre said.

The firm’s consideration of climate change was aligned with the TCFD, which aimed to develop voluntary, consistent climate-related financial risk disclosures for companies to use, to provide information to investors, lenders, insurers and other stakeholders.

Andre, said they looked at both traditional and physical factors of climate change.

“We look at impact of market changes, that’s part of the traditional factors – a very clear one would be thermal coal and the move away from it,” Andre said.

“That means you have less demand for thermal coal which has an impact in terms of return for price.

“I’m not saying we wouldn’t invest in it, but certainly not on the sustainable side, but in our other funds we are really considering these risks and what it means for the company.”

Climate change was Goal 13 of the United Nations Sustainable Development plan and Alphinity looked at companies who were having a positive impact towards those goals.

“We never invest in a company purely because it has a positive impact, we don’t want to compromise investment returns, we want investment returns and we want to support sustainable development goals,” Andre said.

Stuart Palmer, head of ethics research at Australian Ethical Investment, said climate change was the single biggest issue which is going to drive future wellbeing of the planet or lack of wellbeing, depending on how we respond to it.

“It plays into our investment choices across all our portfolios and asset classes, whether it’s equities, fixed income or property, and all sectors, because we think all sectors have a role in limiting warming in accordance with the Paris Agreement,” Palmer said.

Vanguard had been criticised for its lack of action and the company defended what it

considered a nuanced approach.

“As an asset manager with a fiduciary duty to act in the best interests of our 30 million clients in 170 countries, Vanguard is concerned about any risk to longterm shareholder value,” a spokesperson said.

“Climate change is one such topic and we understand the importance of addressing this complex issue while adhering to our obligations to deliver longterm value to our fund holders.

“Our most effective role as a manager of equity index funds is to encourage strong governance practices that enable this resilience.

“We convey to companies what we see as best practices, as well as inadequate practices, through engagement, voting, and advocacy.”

However, between 2015-2019, Vanguard had opposed 84% of climate-related shareholder motions.

Vanguard defended that record and believed shareholder proposals related to climate change or sustainability varied widely in degrees of prescriptiveness.

“Vanguard applies particular scrutiny when shareholder proposals are binding resolutions, which is often the case in Australia,” the spokesperson said.

“Our votes against a

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Climate change

“We never invest in a company purely because it has a positive impact, we don’t want to compromise investment returns, we want investment returns and we want to support sustainable development goals.”

- Stephane Andre, principal and portfolio manager for Alphinity Investment Management shareholder proposal may indicate a disagreement with the specific ask that overrides our overall support of the proposal.

“For example, in 2019 we voted against a shareholder proposal filed at three Australian banks that called for annual reporting on strategies and targets to reduce fossil fuel assets, including eliminating exposure to thermal coal in OECD countries by 2030.

“In these cases, we support meaningful disclosure of climaterelated strategy and risks, but we believe that specific tactics and timeframes for addressing those issues should be determined by the board and management.”

ENERGETIC The core issue of climate change comes down to carbon emissions generated by energy supplies, but current renewable capacity wasn’t enough to carry the load.

That means firms must decide between fully investing into the development of renewables and batteries, or compromising and finding other sources that are not perfect, but do not have the worst carbon impact.

Alphinity still invested in conventional gas – but not coal seam gas (fracking) – as they considered it a transition fuel to

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help technology progress towards greater dependency on renewables and battery storage.

“We see the dirty fuels such as thermal coal, coal seam gas and uranium as not necessary, because you have cleaner offers on the market,” Andre said.

“Gas for us is a transition fuel that is required even if you want to have renewables, because you can’t go 100% renewable today because you don’t have the batteries in place.”

However, Australian Ethical believed that gas was no longer needed as a transitional energy supply.

“The rationale was the transitional role that gas could play as we’re building up the renewable supply,” Palmer said.

“We’ve gotten to the point where the transition fuel argument doesn’t work, we should be building out renewables instead.”

Nuclear energy was not an option for either Alphinity or Australian Ethical, although they had no issue with the energy generation, they had concerns over treatment.

“You would have to look at the waste recycling of the uranium side of it, the issue with uranium is not the generation of it, it’s the waste treatment at the end,” Andre said.

The obvious issues of radioactive waste, site safety, the time it takes sites to come online and be operational, and the risk of diversion of fuel for nuclear weapons had kept it excluded for both funds.

“Anything is on the table and we’re open-minded, but nuclear we have always excluded based on our analysis,” Palmer said.

WHAT CAN POTENTIAL INVESTORS DO? For investors, Palmer said it’s worth doing the extra research to make sure the fund was being compliant, rather than just using climate change action as a marketing tool.

“You want to see the fund is publishing a list of the companies they’re invested in, so they’re transparent about that and amazingly there’s still a lot of funds that don’t publish that information,” Palmer said.

“They might give you a top 10 holdings, but they won’t tell you across the portfolio where they invest.

“You want to see them talking about climate change and how they’re investing to take into account both the risks and opportunities of climate change and amazingly we’ve seen funds just refuse to comment on climate in the past.”

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2020 A TIPPING POINT FOR INVESTING IN SUSTAINABILITY One of the biggest challenges for investors this year will be finding companies that can grow at a faster and more sustainable basis than their peer group, Nick Griffin writes.

IN MANY WAYS, 2019 was a year that confounded expectations. It was a year of very weak economic growth, a year of earnings downgrades across the market, a year with a high degree of political uncertainty, and a year that saw a power struggle between the world’s two biggest economies via a trade war.

And yet, the moves from the

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US Federal Reserve earlier in 2019 to lower the risk-free rate ultimately supported markets throughout the year. As a result, seemingly against all odds, it was a strong year for equity markets.

The main lesson for investors was that interest rates really, really matter.

The big question for 2020 is whether equity markets can continue to perform. I think the

answer to that is, like 2019, it’s probably going to be okay. It’s likely that we’ve experienced a slowdown but that ultimately growth has bottomed.

There are a few reasons for this positive outlook.

Firstly, a trade deal has been agreed which – if it holds – removes a significant cause of business uncertainty. Secondly, interest rates continue to be very

low and the positive benefits will continue to flow through to the economy. This is further supported by the Federal Reserve having stated that it intends to let inflation run ahead of target before making any adjustments. Finally, much of the poor data, such as the Purchasing Managers’ Index (PMI), has already been priced into market expectations.

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Chart 1: Stock Story – Climate

As a result, it looks like a fairly benign outlook for equity markets at the start of the year.

The bigger challenge for investors is identifying the companies that can grow at a faster and more sustainable basis than their peer group in this kind of macroeconomic environment.

One of the most significant themes in 2020 is climate change and sustainability.

While it’s an area that has been on our radar for many years, we believe that a tipping point has now been reached and that this theme is coming to the fore this year and will extend well into the 2020s.

The reason for this is that the world’s leading companies are stepping up and taking action proactively - because their employees, customers and shareholders care about it – rather than waiting for governments to enact legislation.

ZERO CARBON EMISSIONS A noticeable shift is the increasing number of corporates that are committing to a zero carbon target by a set date, including major global companies such as Starbucks, Walmart and Vodafone.

This is in addition to countries like the UK and France, and US states including California and New York, also committing to zero carbon targets in law. To date, 37

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Source: Munro Partners

countries and 155 companies have adopted ‘net zero’ emission targets by 2050, representing 16% of global gross domestic product (GDP).

Achieving zero emissions is a laudable goal, but it’s going to cost a lot of money which could well run into trillions of dollars.

As stock pickers, we are seeking to invest in the beneficiaries of this trend – companies that are leveraged to clean energy; batteries; storage supply chain; more efficient transportation, as well as other businesses that are catching on to consumer trends such as food, packaging and sustainable buildings.

The initial area of focus for us is in renewable energy. There’s no point having an electric car if it’s powered by a coal power station so clean energy is key.

We’ve identified a number of

companies that we believe will benefit from this trend shown at the top of Chart 1: Stock Story – Climate.

TRANSPORTATION The second key area is transportation. Transportation is clearly one of the key emitters in the world and there are some very interesting opportunities.

The obvious investment is Tesla; however we are also focussed on companies like Infineon, which is a key semiconductor player within the transportation industry.

The other areas of focus are in building efficiencies as well as in packaging and waste. These companies will benefit as consumers, businesses and governments institute sustainability programs including schemes around single use plastic and growing awareness of

waste management. We have also highlighted some businesses at risk of disruption or that are in industries which have considerable structural headwinds to growth.

We see significant opportunities in companies that can navigate the climate challenge, where strides are being made regardless of government subsidies. We have been increasing our investments in this area and will likely continue to do so over the course of 2020 as more opportunities develop.

The key point for investors is that this shift is going to happen.

Regardless of political, scientific, or other views, investors will seek to benefit from this shift in 2020 and beyond.

Nick Griffin is chief investment officer at Munro Partners.

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WHAT THIS YEAR HOLDS FOR LOWCOST FUNDS The new regulatory and education changes for financial advisers may lead to more demand for low-cost funds, Evan Reedman writes.

AS IT GOES, 2020 is unlikely to bring a period of prolonged stability that investors are hoping for. While there are a range of views on what this year’s market conditions and economic growth rate might be, it is safe to say that the plethora of voices are largely in agreement that investors should brace themselves for lower returns for a much longer period global growth scenario.

This should come as no surprise to most, given the circumstances where trade tensions and unpredictable policymaking have weighed negatively on global demand and supply.

Amid this new age of heightened global tension and market uncertainty, we are all understandably looking for some portfolio ‘R&R’: rebalance and returns.

In such a time, the best strategy is to focus on the longterm, follow the tried and true path of diversification and minimise costs where possible.

The latter, in particular, is at the heart of Vanguard’s investment philosophy; simply put, the less

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you pay for investments, the more you keep in your pocket.

So, what are the trends we are likely to see in 2020 in low-cost funds that advisers and investors alike may want to consider?

SHIFT FROM HIGH-COST PRODUCTS TO LOW-COST PRODUCTS While cost is not the only factor to consider when investing, it certainly is an important one. As we believe, you can’t control the markets but you can control the costs of your investments.

With this in mind, index investing has become a globally accepted investment approach over the last decade, and it shows no signs of slowing down. In more recent times, the focus has also shifted to lower-cost active and factor investments in the market.

The traditionally high costs of active investing (be that management fees, administrative costs, commissions and the like) have significant impacts on net returns – the return that really matters to investors.

Add to this the considerable evidence that traditional active

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Low-costStrap funds

products underperform the market on average after fees, it builds a compelling argument to focus on minimising costs in your investment portfolio.

GREATER COST TRANSPARENCY MAY FAVOUR LOW-COST PRODUCTS Scrutiny of the financial advice industry continues in 2020, with the Financial Adviser Standards and Ethics Authority (FASEA)’s Code of Ethics now in full effect since 1 January. The code comprises a set of principles that all financial advisers must adhere to, including a standard of client care that states clients must be advised and understanding of product cost structures and any associated fees.

This standard elaborates on the principle that advisers must act in the best interests of their clients.

While for most advisers this is nothing new, for some it may mean clients asking for more justification of higher-cost products than they previously did.

This might stimulate a shift towards lower-cost investment products as investors become more cost-conscious and seek greater transparency on their potential investments.

Moreover, in the wake of the Hayne royal commission and the subsequent media coverage on practices that fail to meet client and community expectations in the adviser space, financial regulators and investors alike will probably be watching closely for any misbehaviour, particularly regarding high or dubious fees.

However, for many advisers, this is an opportune time to define

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a unique value proposition, demonstrate their value and strengthen client relationships, reminding clients that the value of financial advice can be more than a number on an investment statement that is higher than market benchmarks.

In times of market shocks an adviser’s experience and stewardship can be particularly valuable to clients because left alone investors can make choices that impair their returns and put at risk their ability to achieve their long-term objectives.

Consistent research highlight that the value of good financial advice is much broader than investment selection.

ETHICAL INVESTING GAINING MOMENTUM Environmental, social and governance (ESG) issues are unsurprisingly at the forefront of investors’ minds.

We know from our global experience that there are a variety of humanitarian, ethical and social concerns many people want to factor into their decisionmaking process when it comes to selecting investment funds and, in recent years, we have seen an increasingly diverse set of Australian investors adopt ESG products from those who are seeking to achieve their investment objectives while also investing in line with their values.

Especially with the country still reeling from the bushfire crisis, many investors both new and experienced have a wide variety of humanitarian, ethical, environmental, and social concerns that they want to see reflected in their investments.

In addition, key signals are

emerging that indicate the market is becoming more conducive to ESG investing. The recent focus on the economic health of companies based on sustainable practices, especially after the global financial crisis, has further aided momentum around screened ESG investing.

Regulatory change is also driving increased adoption of screened ESG products by institutional investors in some regions of the world.

It is important to note that costs can vary widely among ESG products. There are a number of low-cost indexed products available, along with some products, often active management strategies, that carry higher expense ratios.

The cost of a product is often largely dependent on the firm offering the product, its agreement with the benchmark provider that constructs the index, management expenses etc.

Because ESG products are predominantly actively managed, they typically involve a higher cost.

ESG funds also tend to be smaller in scale and as a result, may come with a cost drag.

THE STABILITY OF FIXED INCOME IN A PERIOD OF INSTABILITY The world has been in a stretch of geopolitical uncertainty for a while now and slowing economic growth is the new mantra. It is not surprising to see this reflected in investor sentiment – despite a booming 2019 for the Australian equity market.

The tempered sentiment was best reflected in last year’s boom in fixed income funds as investors sought to rebalance their

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Continued from page 29 portfolios in a bid to weather increasing market volatility.

With Vanguard’s 2020 market and economic outlook predicting lower returns for longer, it is likely that we will continue to see an increase in the number of investors throwing their weight behind fixed income products, as a way of rebalancing and or de-risking portfolios.

With the continued growth in this specific asset class it is expected that more inflows will move into globally focused fixed income products as investors look for greater diversification and possibly higher yields by tapping into the much larger pool of bond issues in the US, Europe and elsewhere.

ALTERNATIVE INVESTMENTS A growing number of investors are seeking diversification and returns from alternative investment options outside of the usual asset classes of shares and bonds.

While alternative investments are not a new concept, the current low-return environment is pushing investors and asset managers towards funds that have a low correlation with the stock market. Non-traditional assets include, for example, private equity, real estate and infrastructure.

Private equity is a large and growing proportion of the overall equity market as it offers investors diversification through access to a broader and uncorrelated investment universe.

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It is worth noting that alternatives should not be a considered option for all investors. While many alternatives may have lower exposure to market risk, they do introduce other factors to consider when constructing a portfolio such a liquidity risk, less transparency and regulatory risk.

Generating returns from alternative investments also relies heavily on the skill of the investor or asset manager, and places an even greater focus on choosing the right investment manager to maximise after fee returns.

DEVELOPMENTS IN RETIREMENT INCOME PRODUCT DESIGN The Australian government has been developing the Retirement Income Framework since 2016 with the intention of improving the currently under-developed retirement phase of superannuation.

This framework will require superannuation funds to develop a strategy for their members that would substitute or supplement the Age Pension and ensure that they have sufficient funds to cover their life span. This could mean the creation or employment of more low-fee investment products that can provide retirees with a steady income for life while still remaining cost-effective.

IN SUMMARY Heading into 2020, financial markets most likely will remain

decidedly jittery. Asset class returns will vary, as they always do, depending on many market and geopolitical factors Spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk. This way you are not relying on the returns of a single asset class.

The right mix of asset classes or investments for you will depend on your goals, time frame and tolerance for risk.

Evan Reedman is head of product at Vanguard Australia.

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ANOTHER YEAR OF LIVING DANGEROUSLY? Geopolitics will be an ongoing source of volatility for markets but there are opportunities for advisers to find assets that will generate investment returns that clients need, Brian Parker and Anne Fuchs write.

2019 WAS A terrific year for Australian investors. The median growth fund produced a 14.7% return for 2019: the eighth consecutive year of positive returns, according to Chant West.

Last year, there were very strong share market returns, especially in the developed world, particularly in the US, and in IT, that underpinned the result. Australian shares also performed strongly, albeit not as strongly as markets in the US and the Eurozone.

Both Australian and global fixed income benchmark returns

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were pretty solid for the year – better than 7% for domestic and (hedged) global fixed income – even though the last quarter saw yields rise sharply, and some of the very strong gains earlier in the year were given back.

Overall, 2019 was a challenging year for the whole world economy, despite it being the 10th consecutive year of postGlobal Financial Crisis growth.

MACRO ISSUES The global economy has been slowing down since the middle of 2017. Even though consumer

spending and services have held up well in most major economies, global manufacturing effectively fell into recession – particularly in the major developed economies.

As a rule of thumb, if your economy and manufacturing sector was more heavily export oriented, more heavily exposed to capital goods and more heavily exposed to the auto industry the worse you fared, with Germany being a clear case in point.

Inflation remained stubbornly low, and in most economies, lower than previous market forecasts and lower than central

bank policy objectives.

Compounding all this, of course, was the trade war between the US and China and the ongoing debacle that was – and is – Brexit.

The tariff measures imposed by both countries have not been substantial enough in isolation to seriously derail the global economy. However, the second round impacts on business confidence, business spending plans, and the disruption of supply chains have been a significant drag on economic growth, although not enough to bring about a global recession.

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INTEREST RATES Slower global growth and low inflation has allowed the world’s central banks to maintain extraordinarily accommodative monetary policy settings. In the case of the Federal Reserve and our own Reserve Bank allowed them to move official rates lower.

Falling interest rates effectively allowed world share markets to defy the challenges posed by a slower global economy, ongoing trade tensions and Brexit. In other words, for many investors low interest rates meant that equities remained the only game in town.

2020 As we start 2020, several concerns that have weighed heavily on market sentiment have abated, at least to some extent.

US and Chinese trade negotiators delivered the so-called ‘phase one’ trade deal, an outcome which should limit further damage to world trade and economic growth.

In the UK, a decisive victory by Prime Minister Boris Johnson’s Conservative party in the December election ensured the passage through Parliament of a Brexit agreement. There have been early signs that the world economy may be starting to stabilise. In particular, the worst of the downturn in global manufacturing may well be behind us.

There remain good reasons to believe that the global economy can avoid recession for another year. The traditional alarm bells that typically ring prior to the onset of recession are (mostly) not ringing. Monetary policy

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settings are far from restrictive, although the boost to growth over the coming year or two from easier monetary policy is likely to be modest.

Financial market conditions indices and surveys of bank lending conditions remain pretty healthy, and there is some prospect of expansionary fiscal policy being brought to bear in a number of economies.

Here in Australia, economic growth remains below the economy’s growth potential, and inflation remains below the Reserve Bank’s target range.

Private domestic spending growth has been weak, and household spending grew only marginally in the September quarter, despite income tax cuts boosting disposable income.

While there has been some better news in recent retail sales data, that seems to reflect changes in seasonal spending patterns (associated with the fact that “Black Friday Sales” are now a thing in Australia) rather than a more durable improvement.

House prices have begun to recover but housing activity continues to decline.

Despite solid gains in employment, indicators of both unemployment and underemployment are still elevated and this is casting doubt over the economy’s ability to generate faster wages growth.

We are likely to see some better economic growth as 2020 progresses – courtesy of lower interest rates and a pick-up in domestic spending. However, the immediate outlook has become

more complicated with the ongoing bushfire crisis.

It’s too early to be overly precise, but there’s likely to be a negative impact on growth in the March quarter as well as an upward pressure on prices with hikes in dairy, and meat prices obvious examples.

The recovery work will be significant as both private and public spending is likely to be boosted over the remainder of the year and into 2021.

There has already been pressure on the federal government to use fiscal policy to boost growth and both federal and key state governments are likely to step up over the year ahead, particularly given the recovery effort that will be required.

FINANCIAL MARKETS While there are reasons for optimism about the world and Australian economies for 2020, what does that mean for financial markets?

A combination of improving global growth and very low interest rates should provide a healthy backdrop for corporate earnings and share markets.

Notwithstanding the fact that the year ahead is likely to pose its fair share of challenges.

Tensions in the Middle East – most notably between the US and Iran persist and are likely to flareup again at some point.

While US and China trade tensions have eased they have not disappeared. Trade is more costly and less free than pre-Trump, and there is bipartisan support in the US for the view that China has not

Continued on page 34

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34 | Money Management February 13, 2020

Investment

Continued from page 33 behaved well in trade and in intellectual property.

While Brexit uncertainty appears to be off the table, we need to remember that a UK-EU trade deal needs to be worked out this year, and I don’t think anyone really believes a deal can be done by 31st December. The UK will almost certainly have to ask for an extension, but the EU will almost certainly agree to that extension and a deal will get done.

We need to acknowledge that geopolitics are going to be an ongoing source of volatility for financial markets over the years ahead, but over the coming years, shares should continue to perform well against bonds or cash.

However, that’s at least partly a reflection of the likelihood that bonds are likely to perform poorly.

It’s difficult to describe share market valuations as cheap in absolute terms. Even after the rise in yields towards the end of 2019, yields are still historically very low.

While there is some scope to enhance fixed income returns through an allocation to credit, after a decade of sustained global growth, we are late in the cycle, where excessive exposure to credit is probably something to be avoided.

For alternative asset classes – such as private equity, unlisted property and infrastructure – there are still opportunities to generate the kind of investment returns that superannuation fund members need, and these assets remain attractive relative to public equity and fixed income.

However, over the past decade these assets have also performed extremely well, and prospective returns are likely to be lower over the coming years.

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Warnings were undoubtedly issued at the start of 2019 too. But rather than bemoan the inaccuracy of those warnings, it’s important to acknowledge that those warnings are not meant as short-term market predictions – which are mostly folly – but rather a genuine effort to ensure that investors have realistic and achievable expectations for longer term investment returns.

ADVISERS IN 2020 As for the adviser community, heading into uncertain times could mean getting back to the basics with clients and educating and managing their expectations around low growth environments and what to expect during a correction.

New ways of thinking about portfolio construction should also be top of advisers’ minds this year with the old ways ofen thinking about asset allocation will not necessarily be the right approach in the current setting.

In the new decade, our prediction is that the way advisers undertake risk profiling and asset allocation will change.

For example, many advisers have historically shunned recommending diversified

alternatives to clients due to the perceptions of high risk, but there are a broad range of unlisted assets that can be classified as “defensive”.

As a case in point, Sunsuper invests in institutional-quality property assets, both within Australia and globally, and infrastructure assets typically characterised by several of the following key features: long duration, large initial capital outlays, monopolistic qualities, stable income, gross domestic product or inflation-linked earnings, and returns dominated by income, once an asset has matured.

There are still good opportunities for these assets to generate the investment returns super fund members need.

Not forgetting advisers have a fiduciary obligation to consider all the options on the table when constructing portfolios and, particularly in challenging times, needed to continue to recognise the power of diversification in helping clients maximise their retirement savings.

Brian Parker is chief economist and Anne Fuchs is head of advice and retirement at Sunsuper.

5/02/2020 3:18:50 PM

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4/02/2020 12:01:46 PM

36 | Money Management February 13, 2020

Toolbox

WILL YOU STILL NEED ME, WILL YOU STILL LOVE ME, WHEN I’M SIXTY-FOUR (OR FIVE) Advisers need to ensure contribution strategies for this financial year are carefully planned as there is no indexation of the $1.6 million super caps from July, Bryan Ashenden writes.

REACHING AGE 65 has always been a pivotal time when it comes to superannuation and retirement planning – from meeting an automatic age based condition of release to accessing preserved super benefits (no matter an individual’s work practices or intentions), right through to the requirements, and indeed complications, of meeting the work test in order to make additional voluntary contributions to super.

However, no longer will this time be a hard finish when it comes

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to final contribution planning as someone approaches, or indeed enters retirement.

Since 1 July, 2019, individuals aged between 65 and 74 who have recently retired, may be eligible to make additional voluntary contributions to super where they meet certain eligibility criteria around their previous year of work and their total super balance.

Add to this the 2019 Federal Budget announcements (although yet to be legislated) that provide individuals with more flexibility around planning for their

retirement, again particularly in the area of contributions. If legislated as announced, from 1 July, 2020, Australians under the age of 67 will be eligible to make voluntary super contributions without needing to meet the work test.

Finally, the recent confirmation that there is no indexation of the $1.6 million superannuation caps from 1 July, 2020, but the almost guarantee of an increase from 1 July, 2021, firmly places the spotlight on advisers ensuring that contribution strategies for this financial year are carefully planned

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February 13, 2020 Money Management | 37

Toolbox

and managed to ensure clients have the ability to maximise the potential to boost their super.

Whilst there is some cross over between these measures, we will look at each of them separately.

THE WORK TEST EXEMPTION Under current rules, a work test requirement applies in order for a member to make voluntary contributions to super after turning 65 years of age.

Generally, the work test requires that such a member needs to have been gainfully employed on at least a part-time basis during the financial year in which the contributions are made. A person is considered gainfully employed on a part-time basis during a financial year if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year.

However, since 1 July, 2019, additional contribution eligibility criteria now allows someone who has not been gainfully employed, either on a full-time or a part-time basis during the financial year to still make a voluntary super contribution where all of the following requirements are satisfied: • The individual met the work test in the financial year immediately prior to the year of the contribution; • The member has a total super balance of less than $300,000 at the end of the previous financial year; and • The member has not previously used the work test exemption in a previous financial year to make a contribution to any

01MM130220_36-40.indd 37

regulated super fund.

Whilst the $300,000 total super balance threshold is not subject to indexation, it is important to note that this work test exemption applies to voluntary contributions.

It therefore can apply for both concessional and non-concessional contributions. And if available, not all amounts have to be contributed at once, but must be made in the course of the one financial year.

Importantly, this measure is already law, so can provide some assistance to clients this financial year who have already turned 65 and are no longer working.

The other issue to note is that once used, the work test exemption opportunity cannot be used in a subsequent financial year.

However, if a client does qualify to use it, but chooses not to contribute in that particular year, it may remain available for another year (if the client qualifies again).

As an example, if Judith is 67 this financial year and has not (and cannot) meet the work test in 2019/20, but did work last financial year, she could access the ability to contribute to super this financial year (assuming her total super balance was below $300,000 at 30 June, 2019). However, if she doesn’t make a contribution, meets the work test requirements again in 2020/21, and then ceases to work again, she is potentially eligible to utilise the work test exemption in 2021/22.

THE WORK TEST DEFERRAL Yet to be legislated, the work test deferral will mean that from 1 July, 2020, the requirement to meet the work test to be eligible

to make a voluntary contribution to super will not apply until a member turns 65 – a two year deferral from the current requirements.

As a result of this deferral, it is also proposed to extend eligibility for the three year bring-forward rule around non-concessional contributions to the year in which a members turns 67, and to also extend the time frame for the receipt of spouse contributions to age 75. It is worth noting that with spouse contributions, whilst the need for the receiving spouse to be working to receive a spouse contribution will also move out to age 67 (if legislated) from 1 July, 2020, the work test exemption is not available for the receipt of a spouse contribution.

Whilst these changes seem relatively straight forward, it is the flow on opportunities and considerations that advisers will need to carefully navigate through, both for this year and next.

HOW MUCH SHOULD BE CONTRIBUTED THIS FINANCIAL YEAR? The answer will always be “it depends” as it will rely on a number of factors, such as the potential ability to contribute in future years, and the availability of funds to make a contribution, but timing can also be important.

As an example, consider Fred turned 66 in October, 2019 and hasn’t worked this financial year. He had $295,000 as a total super balance at 30 June, 2019, after retiring from full time work in that financial year. The options for Fred include: • An ability to make a $100,000

Continued on page 38

4/02/2020 12:57:56 PM

38 | Money Management February 13, 2020

Toolbox

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

Continued from page 37 contribution under the work test exemption provisions. Depending on his income, he may be able to claim up to $25,000 as a deduction for classifying some of the contribution as a concessional contribution; or • Not making any contribution this financial year and waiting to contribute next financial year. In doing this, he potentially will forego the opportunity to utilise the work test exemption as he has not met the work test in the 2019/20 financial year, and it is also possible that growth on his super balance may cause him to exceed the $300,000 total super balance by 30 June, 2020. Also, if the work test deferral measures are not legislated with a 1 July, 2020, start date, he will not be able to contribute under that option either.

However, if the proposed changes to the work test deferral are legislated (in time) with a 1 July, 2020, start date, then Fred could look to make his contribution next financial year, as the work test won’t apply until age 67. Provided he contributes before his birthday in October 2020, he won’t have to worry about the work test. However, if wants to contribute after that time, he will need to meet the work test.

Additionally, if Fred does contribute next financial year as a result of the work test deferral operating, he could contribute up to $300,000 utilising the bring forward provisions.

Or, if he has the funds available, he could consider both options, by making a $100,000 contribution this financial year under the work test exemption, and this still looking to make a $300,000 non-concessional contribution next financial year as a result of the work test deferral.

Overall, this is an ability to now contribute $400,000 to super in the space of a couple of months for someone over the age of 65, all without the need to work.

For someone where the work test exemption is perhaps not in play as yet because of their age, but are approaching age 65, considerations will arise this financial year about how much to contribute this year as: • By making a non-concessional contribution of no more than $100,000 this financial year may mean that the bring forward will be available in one of the next two years given the ability to now access until age 67, whereas triggering this financial year may place a limit on how much can be contributed; and • With the total super balance threshold of $1.6 million expected to increase to $1.7 million from 1 July, 2021, deferring the trigger of the being forward may allow for additional non-concessional contributions in future years, or may allow a member who had already triggered the bring forward to potentially access it again (when combined with the work test deferral measure).

Beyond this, considerations around other opportunities such as recontribution and account equalisation strategies will need to be carefully monitored and, perhaps, reconsidered over coming months. The changes to the contribution qualification criteria (both current and proposed) expand the opportunities for clients to get more money into super close to retirement. However, careful consideration of the interplay of a range of measures will be required to ensure the opportunities are inadvertently restricted.

Bryan Ashenden is head of financial literacy and advocacy at BT.

01MM130220_36-40.indd 38

1. For a contribution proposed to be made in the 2019/20 financial year, which of the following changes to contribution options are potentially available to a 66-year-old member: a) The work test exemption b) The work test deferral c) Both the work test exemption and the work test deferral d) Neither the work test deferral not the work test exemption 2. In order to utilise the work test exemption, which of the following is not a requirement: a) The member met the work test in the previous financial year b) The member utilised the work test exemption in a prior year c) The member had a total super balance of less than $300,000 at the previous 30 June 3. If the work test deferral is legislated as proposed, it will potentially benefit which of the following clients: a) Clients who turned 75 this financial year b) Clients who turned 68 this financial year c) Clients who turned 67 this financial year d) Clients who turned 66 this financial year 4. Under the work test exemption, the most an eligible client could contribute this financial (ignoring any bring forward or carry forward contribution amounts) is: a) $125,000 b) $100,000 c) $75,000 d) $25,000 5. If the work test deferral is legislated as proposed, a client will not be able to trigger the bring forward contribution rules in the financial year they turn 67 (assuming it has not been triggered in the previous three years). a) True b) False

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ will-you-still-need-me-will-you-still-love-me-whenim-sixty-four-or-five

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

4/02/2020 12:58:56 PM

February 13, 2020 Money Management | 39

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

Appointments

Move of the WEEK James Georgeson chief financial officer AMP

AMP has appointed James Georgeson as its new chief financial officer (CFO).

Georgeson had been the firm’s acting CFO since August 2019 and would now formally join AMP’s leadership team reporting to chief executive Francesco De Ferrari.

“He has proved his capability in the role of acting CFO and deputy CFO, earning the trust of his peers, the broader organisation, and our investors,” De Ferrari said.

“He brings the experience and deep knowledge of AMP that will help to drive the execution of our strategy as we

TCorp has appointed former Cbus head of infrastructure, Diana Callebaut, as its head of real assets.

In an announcement, the investment and financial management partner of the New South Wales public sector said Callebaut would be responsible for leading and managing the real assets team and driving the development of the team’s strategy, investment processes, and client outcomes across all unlisted investments.

Callebaut was at Cbus for four years and prior to that was director, transport and infrastructure at KPMG Australia, and also held roles at investment banks and venture capital organisations in the UK, South Africa, and Australia.

Callebaut also won Money Management and Super Review's Investment Professional of the Year award at its Women in Financial Services awards in 2019.

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transform into to a client-led, simpler, growth orientated business.”

Prior to his role as acting CFO, Georgeson was deputy CFO at AMP, and was also CFO of AMP’s Australian wealth management business, and CFO of AMP New Zealand.

Australian Ethical Investment has announced that John McMurdo has been appointed as its new chief executive officer (CEO) and managing director while acting chief executive, Steve Gibbs, will resume chair of the board’s position.

McMurdo’s appointment followed the decision by former chief executive, Phil Vernon, who announced in August 2019 that he would step down from the leading ethical fund manager.

In the announcement made to the Australian Securities Exchange (ASX), the company said that McMurdo was “an experienced CEO and director with a proven history of growth and success in the financial services industry”.

Charter Hall has announced the appointment of Miriam Patterson, former head of real assets at Telstra Super, to the position of fund manager, Charter Hall Direct.

Patterson would be reporting to Direct’s chief executive, Steven Bennett who sits on Charter Hall’s Executive Committee reporting to group managing director and chief executive, David Harrison.

The firm said that the creation of the fund manager role was a reflection of the strong growth of its Charter Hall Direct’s business.

Patterson joined from Telstra super where she was appointed head of real assets in 2016, after almost five years as an investment manager, in the property and infrastructure investment team.

Prior to this, she worked at Hastings Funds Management and Ernst & Young in corporate finance.

Boutique fund manager Perennial Value Management has appointed David Redford-Bell as senior investment specialist and Marjon

Crandall as head of researcher and consultant relationships.

Based in Queensland, Redford-Bell’s role would be pivotal in meeting the wealth creation needs of retail clients in the state, with a focus on the distribution through intermediary relationships including independent financial advisers, dealer groups and platforms.

He brought 17 years’ experience in financial services and previously worked in senior distribution and business development roles at QIC, UBS and BlackRock.

Crandall would be based in the Sydney office and would work closely with the investment teams.

She brought 17 years’ experience as a senior research analyst to her new role at Perennial, having previously spent nine years at Perpetual Investments as the research relationship manager.

4/02/2020 4:42:04 PM

OUTSIDER OUT

ManagementFebruary April 2, 2015 40 | Money Management 13, 2020

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

Broken leg, not legacy OUTSIDER knows that the girls and boys over at CommInsure have been just a bit distracted in recent times given the long, very long, nature of the transaction which will ultimately result

in the company being owned by AIA Australia Limited.

But has the distraction of the transaction been such that the inhabitants of its claims area have forgotten the really negative publicity that accompanied its claims handling arrangements back in 2016 and 17?

Outsider wonders this, because he happens to know that the wife of a well-respected industry executive took a nasty tumble in her back garden resulting in fractures and other injuries prompting the executive to seek to claim on the trauma policy the family had maintained over many years for just such an occasion.

Imagine his surprise, not to say anger, when he was told that notwithstanding that the premiums had been paid right up to date that it was a “legacy” policy so…

Outsider suggests that legacy policies just don’t expire.

Indy and Michael got a gong, what about Outsider?

ONCE again, Outsider found himself missing out on an Australia Day award, notwithstanding his contribution to the restaurant industry, single malt manufacture and the sport of golf.

It is not like Outsider has not been trying. He believes that he has helped ensure that some of Sydney’s finest dining establishments have managed to stay in the black and he last year even opted for the purchase of Australian single malts – what else is a chap to do?

But, if Outsider missed out then he is pleased to say that his old mate, Fiducian’s Indy Singh got a gong, not least for his charity work as did Rice Warner founder, Michael Rice, for his work in the industry not least his efforts around equity for women in superannuation.

Outsider also noted that a couple of television talking heads also got “gonged” on Australia Day but will not dignify the issue by mentioning their names, and he will certainly not be descending into the debate about whether a certain “clinical psychologist” and some time columnist should or shouldn’t have been gonged.

No, Outsider will simply bide his time. Continuing to make his small contribution to the restaurant and hospitality industry and to the furtherance of distilling techniques.

As to golf, well your venerable scribe experienced a bit of a golden patch over the Christmas/New Year period which he fears has come to and end.

Himbury heads off into the sunset, kind of AND, as the sun finally sets in the west, Outsider bids farewell to the outgoing chief executive of IFS Investors, Brett Himbury.

As readers of Money Management would well know, Himbury bowed out this month to be replaced by former Future Fund chief investment officer and chief executive, David Neal.

Outsider reckons it’s an interesting appointment given that it will see Neal move from working with Future Fund chair, former Liberal Treasurer, Peter Costello, to working with former Labor minister and now IFM Investors

OUT OF CONTEXT www.moneymanagement.com.au

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chair, Greg Combet.

Still, it is worth remembering that Himbury himself came to the IFM role via the funds management root, having been previously managing director of Tyndall Investment Management which later became nikko asset management.

Outsider is not sure what Himbury intends doing next but he reckons a board position or two is probably on the cards along with supporting the sporting endeavours of his family.

"The Prime Minister is trying to hoodwink people with his supposed climate action, but today's announcement amounts to little more than climate criminality."

"Humanity needs some country ready to take off its Clark Kent spectacles and leap into the phone booth and emerge with its cloak flowing as the supercharged champion of the right of populations of the earth to buy and sell freely among each other."

-Greens MP Adam Bandt, on the NSW/Federal energy deal.

-BoJo on his approach to negotiating a free trade agreement with the EU.

Find us here:

6/02/2020 12:23:58 PM