Money Management | Vol. 33 No 20 | November 21, 2019

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 33 No 20 | November 21, 2019

24

YEAR IN REVIEW

CLIMATE CHANGE

A year of uncertainty

28

Super ruling sets precedent

Look to EMD for yield

FASEA board accused of shunning industry

ALPHA MANAGERS

BY MIKE TAYLOR

Dr. Paul Jourdan

2019

Announcing Australia’s inaugural Alpha Managers

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ELEVEN Australian fund managers have made the grade to be named on the inaugural list of FE fundinfo/Money Management Alpha Managers.

In any given year there are fund managers who outperform their peers and, indeed, Australia has a handful of fund managers whose reputations are such that they have garnered a certain celebrity status, but Alpha Manager status recognises career-long performance.

FE fundinfo looked at the top 10% of Australia’s retail-facing managers based on their career track-records and came up with the following inaugural Australian Alpha Managers.

Name

Company

Jay Sivapalan

Janus Henderson Investors

George Bishay

Pendal Group

Darren Harvey

Smarter Money Invesments

Christopher Joye

Coolabah Capital Investments

Glenn Feben

Janus Henderson Investors

Tim van Klaveren

UBS Asset Management

Hamish Douglass

Magellan Financial Group

Manish Bhargava

APN Property Group

Anne Anderson

UBS Asset Management

Roy Maslen

Alliance Bernstein

Jacob Mitchell

Antipodes Partners

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30

EM DEBT

THE board of the Financial Adviser Standards and Ethics Authority (FASEA) is under pressure to explain why it has resisted engaging with financial planning groups for nearly two years despite persistent overtures from the major organisations such as the Financial Planning Association and the Association of Financial Advisers.

Questions are being asked about the level of engagement on the part of the board in circumstances where, for the first time, at least some board members were present at last week’s “consultation” around the FASEA code of ethics.

However, it was noted that while some board members were at the consultation

alongside at least some ministerial staffers, the chair of FASEA, Catherine Walter, was not present.

FPA chief executive, Dante De Gori has confirmed to Money Management that his organisation had written on numerous occasions to FASEA seeking at least some level of engagement with the board but had on every occasion been referred to the executive.

He said he found the situation puzzling in circumstances where Australian Securities and Investments Commission (ASIC) commissioners and members of the Tax Practitioners Board (TPB) had a long tradition of engagement with the industry.

The level of the FPA’s frustration was evidenced in a Continued on page 3

Merry Christmas

from Money Management THIS is the final print edition of Money Management for 2019.

The entire Money Management and FE fundinfo team wish our readers a safe and Merry Christmas and a prosperous 2020.

Money Management will resume print publishing in February, 2020.

Full feature on page 20

14/11/2019 1:42:03 PM

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November 21, 2019 Money Management | 3

News

Advised insurance pays off at claim time

BY MIKE TAYLOR

PEOPLE who obtain life insurance via a financial adviser are more likely to be successful at claim time.

That is the bottom line of the latest data released by the Australian Prudential Regulation Authority (APRA).

The latest APRA Life Insurance Claims and Disputes Statistics for the September quarter revealed what was described as a “significant variance in the admittance rate between different cover types and distribution channels”.

The data revealed a variation from 99% (group ordinary death and individual

non-advised funeral) to 36% (individual advised accident).

“Generally, individual advised business shows higher admittance rates than Individual non-advised for the same cover type,” the APRA analysis said.

It said this could be due to the policyholder having clearer expectations up front of what is covered by the product, or (related to the previous point) the adviser discouraging the policyholder from lodging a claim that is not covered by the policy.

The APRA analysis said the exception was individual advised accident, which had an unusually low admittance rate.

Would small IFAs be better off on salary?

THE days of small independent financial advisers (IFAs) turning over less than $250,000 may be numbered with dealer group authorised representative costs rising in the face of increased regulation and associated overheads.

That is the assessment of former dealer group head, Paul Harding-Davis who said that many smaller IFAs with relatively low turnovers might be better off becoming salaried advisers from both a financial and risk perspective.

Harding-Davis’s comments came amid reports that a number of dealer groups were signalling that authorised representative costs would be rising to as high $80,000 a year to cover increasing regulatory compliance costs, professional indemnity (PI) insurance and access to planning software such as X-plan.

He said that while some dealer groups were already charging as much as $80,000 a year, he believed that costs around $65,000 were more common.

However, material developed by Viridian after it acquired much of the Westpac planning business pointed to a practice fee of $48,000 a year, together

with an authorised representative fee of $22,000 a year for the first to authorised representatives and $15,000 a year for each subsequent authorised representative.

The Veridian material suggested that this meant that a financial planning practice with four authorised representatives would be paying a total of around $122,000 a year.

However discussion of the rising authorised representative costs have come at the same time as the Commonwealth Bank has confirmed a round of adviser and advice-related redundancies within Commonwealth Financial Planning.

Adviser redundancies confirmed at CBA THE Commonwealth Bank has confirmed a round of financial advice redundancies is underway.

The big banking group confirmed that it was in consultation with its advisers with respect to what is understood to be fewer than 100 advice and advice-related positions within Commonwealth Financial Planning.

Confirmation of the redundancies had come less than a week after CBA chief executive, Matt Comyn told a Parliamentary Committee of the company’s intention to remain in the advice arena.

In a formal statement, the CBA said that it was seeking to improve the quality of its service and customer experience and therefore needed to “reshape our business model and adviser footprint”.

“We can confirm unfortunately some of our advisers and some support roles are no longer required, while other roles have been reshaped,” it said.

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FASEA board accused of shunning industry Continued from page 3 recent formal statement over FASEA’s handling of code of ethics guidance when it publicly bemoaned the long period of isolation on the part of the authority’s board.

“After two and a half years, the FASEA board of directors has yet to consult with any financial planning professional bodies or their members and they appear to be more interested in academic theory than making a genuine effort to improve stadards in the financial planning profession for the benefit of consumers,” the FPA statement said.”

It said that, among other problems, FA SE A’s code clashed with the Government’s Royal Commission Road Map, released only two months ago, and the grandfathered commissions legislation passed by the Parliament two weeks’ earlier.

AFA chief executive, Phil Kewin said his organisation had been similarly declined access to the FASEA board, notwithstanding a former AFA president be a member of the board alongside a former FPA chair.

14/11/2019 2:19:00 PM

4 | Money Management November 21, 2019

Editorial

mike.taylor@moneymanagement.com.au

WILL THE RC STAND UP TO THE SCRUTINY OF HISTORY? The Royal Commission has proved to be the biggest disruptor of 2019 but the question needs to be asked: Will it stand the clear-eyed scrutiny of history?

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth

THIS IS THE last print edition of Money Management for 2019 and, as such, it is appropriate to reflect upon the year that was and to acknowledge that the past 12 months have probably been the most challenging ever encountered by financial advisers and the broader financial services industry.

Since January we have been witness to: • The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry; • The Government’s acceptance and response to the recommendations contained in that report; • The muscle-flexing on the part of the financial services regulators based on the Royal Commission findings; • The continued roll-out of the Financial Adviser Standards and Ethics Authority (FASEA) regime including the holding of exams; • The continued exit of the major institutions from wealth management including that of Westpac; • The exit of scores of financial advisers from the industry and the almost certain continuation of those exits.

But if the Royal Commission represented the most fundamental element in generating the change which has occurred throughout 2019, it

would seem not unreasonable to question, as the Association of Financial Advisers (AFA) has done, whether the Royal Commission deserves the almost unquestioning support it has thus far received from the Federal Government.

Given the amount of negative publicity which surrounded the financial services industry in the lead-up to the Royal Commission, the Government’s initial reluctance to even hold such an inquiry and the proximity of the release of the Commissioner Kenneth Hayne’s findings to the 18 May Federal election, it is understandable that the Treasurer, Josh Frydenberg, committed so heavily to their implementation.

However, any objective assessment of the Royal Commission must acknowledge that the Royal Commission was both briefer and narrower than it ought to have been and that perhaps, as a consequence, Hayne’s recommendations lacked the balance which might have been generated by a longer and more thorough approach.

The bottom line, however, is that notwithstanding the shortcomings of the Royal Commission it will continue to influence the direction of the financial services industry for years to come with too few people questioning the outcome lest they be tainted by the industry’s sins of the past.

The other major element which must be counted as impacting the financial advice sector in 2019 was, undoubtedly, the FASEA regime with the past 12 months representing the period during which the authority sought to implement the practical roll-out of its various elements, not least the financial adviser exam.

At the time of writing, the first two exams had been held generating pass marks of 90% and 88% respectively, suggesting that most of those advisers who felt confident enough to sit the test early were justified in doing so. The question is, however, whether the pass rate will remain so high this time next year.

For a significant cohort of advisers, the next two years are likely to be their last in the industry as they exercise their choice not to pursue the further education necessary to obtain a Bachelor degree or sit the adviser’s exam. As a result the look and feel of the industry is likely to be irrevocably changed.

As I mentioned earlier, this is the last print edition of Money Management for 2019 and so on behalf of myself and the entire Money Management team I would like to wish our readers a safe and merry Christmas and a prosperous 2020.

Mike Taylor Managing Editor

Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au 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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WHAT’S ON YFP: End of year Networking Event – Time to get shouted

2019 FPA Professional Congress

Adelaide, SA 22 November finsia.com/events

Melbourne, Victoria 27-29 November fpa.com.au/events

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IFRS 17 Conference 2019

Sydney Christmas Briefing

Sydney, NSW 28 November finsia.com/events

Sydney, NSW 4 December superannuation.asn.au

ACN 618 558 295 www.fe-fundinfo.com © Copyright FE Money Management Pty Ltd, 2019

12/11/2019 9:23:04 AM

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6 | Money Management November 21, 2019

News

CBA wants to stay in advice says Comyn

BY MIKE TAYLOR

THE Commonwealth Bank (CBA) intends remaining in financial advice delivery notwithstanding cutting loose its aligned advisers and selling Count Financial.

CBA chief executive, Matt Comyn has made clear to a Parliamentary Committee that the bank wants to remain in the financial advice arena, despite the difficulties.

His comment came amid continuing speculation about the big banking group’s future intentions with respect to wealth management, particularly once it finally exits Colonial First State (CFS).

Giving evidence before the House of Representatives Standing Committee on Economics, Comyn acknowledged the struggle the CBA was facing in staying in advice but signalled that it intended to do so.

“We’ve made a number of changes as a result of reviewing our strategy and where we’d like to focus as an organisation.

Specifically, we’ve exited life insurance. We’ve recently sold our asset management business.

We’ve sold or are exiting our aligned advice businesses, which are self-employed financial advice businesses,” he said.

However, he said that the bank was retaining and continuing to provide financial advice “at this stage” and “we would like to continue to do that, notwithstanding the enormous challenges in the financial advice industry”.

“We do think it’s important to be able to provide that service to customers. We worry about the unavailability of effective and safe and simple financial advice to customers over time,” Comyn said.

Asked by Labor’s Andrew Leigh whether the bank could withstand the reputational costs given past advice scandals, Comyn said CBA had made a number of changes “to make sure we’re providing a high-quality and consistent level of advice.

“It certainly is a very challenged business and industry at the moment but, as I said, even though we’re exiting some elements of the advice businesses in the past—our aligned advice in particular—we’re committed to retaining our current financial advice proposition,” he said.

57% of adviser practice income at risk UP to 57% of financial adviser practice income is being placed at risk by the Financial Adviser Standards and Ethics Authority’s (FASEA) approach to the Code of Ethics, according to the Association of Financial Advisers (AFA).

In a communication to advisers, AFA general manager policy and professionalism, Phil Anderson said that the FASEA board appeared to have chosen to use the code of ethics as an opportunity to rewrite the law.

“As a result, the entire financial advice sector is left completely uncertain as to what will be permitted under the code and what will not, with less than two months until commencement and no obvious way to fix this problem,” he said.

“With all forms of commissions and asset-based fees now in doubt, 57% of financial adviser practice income is at risk, as a result of this version of the Code of Ethics. This will impact both financial advisers, but also their clients, who might be forced to change their adviser’s remuneration arrangements at very short notice.”

Anderson said the AFA was concerned that the code was putting at risk the ability of advisers to provide cost-effective scaled advice by mandating the requirement for a much more comprehensive understanding of the client’s personal circumstances and likely future circumstances.

He said Standard 3 on conflicts of interests was completely inconsistent with longestablished requirements to manage and disclose those conflicts, and a ban on the receipt or provision of referrals would fundamentally challenge existing practices and impact on the flow of new clients.

Anderson said the FASEA approach had left the advice profession with no choice other than to oppose the Code of Ethics in its current and ask the Government to deliver a delay on its commencement.

NEVER MISS A BEAT Get the latest news and funds information delivered straight to your inbox.

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Systems, not planners to blame for fee for no service THE failure of bank operating protocols were a greater reason for fee for no service than the deliberate actions of financial advisers, according to Westpac chief executive, Brian Hartzer.

Giving evidence before the House of Representatives Standing Committee on Economics, Hartzer said that while there may have been some deliberate action on the part of advisers, “we would say that the majority of it is, effectively, a poor operating control around record keeping for the provision of advice”.

“There are some cases, of course, where we’ve had planners who perhaps have deliberately charged someone knowing they weren’t going to provide the service. There have been others where there have been errors in people not following up,” he said. “But the majority of it - from what we can see so far - is to do with gaps in our record keeping.”

“So if I had my time over again, we’d take a very different approach to positively collecting, storing, demonstrating and confirming that customers were happy with the service that they had received, before we charged them,” Hartzer said.

13/11/2019 12:07:32 PM

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4/11/2019 10:22:15 AM

8 | Money Management November 21, 2019

News

Pendal Group NPAT down 19%

BY JASSMYN GOH

PENDAL Group has reported a reduced profit on the previous year, for the first time in eight years, with a cash net profit after tax (NPAT) of $163.5 million, down by 19% over the year to 30 September, 2019.

Pendal chair, James Evans, said this was a result of cautious investor sentiment, ramifications of the Royal Commission, and reduced fees.

The FY19 results announced on the Australian Securities Exchange (ASX) said funds under management (FUM) was also down 1% to $98.8 billion, an 89% reduction in performance fees to $5.98 million, and base management fees were down 4% to $482.6 million.

Evans said there were significant shifts out of equities and into bonds, which affected both flows and margins, and the majority of outflows were from its European equity strategies – a direct result from Brexit and trade tensions.

On the Royal Commission, Evans said investor trust and confidence had affected flows across the financial services industry and the diversified financials sector had experienced a de-rating in Australia.

Pendal’s chief executive, Emilio Gonzalez, said: “The 2019 financial year has been one of

the toughest on record for Pendal, with investor caution about the word’s prospects exacerbated by ongoing geopolitical turmoil”.

“Despite record market levels in some regions, investors have become more risk averse, which has affected flows into our own investment strategies. A number of our key strategies have also underperformed,” he said.

“Pleasingly, our range of funds in the US continue to be well supported, and across the group we are getting good traction on our income-generating strategies. In Australia, there were good institutional flows of $2 billion, predominantly into cash and fixed interest, and US flows into the JO Hambro Capital Management (JOHCM) multi-asset strategy were very encouraging.”

However, it was JOHCM that impacted the group’s result with its significant reduction in performance fees.

In terms of FUM, the two significant drivers of net outflows was the $3.3 billion redeemed from the Westpac portfolio due to the ongoing run-off of the legacy book as well as further transitioning of corporate superannuation portfolios. There were also notable outflows from European equities of $2.7 billion.

The Pendal announcement noted that it was a particularly difficult year for active

management due to interest rate declines and global bond yields that fell sharply leading to a surge in outstanding negative yield debt.

“This turbo-charged asset markets in a way that distorted them, with growth outperforming value, large cap outperforming small caps, and a substantial outperformance of bond proxies creating a narrow market,” Pendal said.

“This confluence of factors negatively affected a number of Pendal Group funds, which underperformed during the year.”

However, Gonzalez said the firm’s financial strength and strong cash flow positioned it well to invest for growth and take advantage of opportunities.

ASIC acts against superannuation fund on general advice

BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has moved against a superannuation fund on the basis of it using a general advice model.

The regulator announced it had initiated Federal Court action against MobiSuper Fund, which is a division of the Tidswell Master Superannuation Plan.

It said the action was against: • Tidswell Financial Services Ltd (Tidswell), an Australian financial services (AFS) licensee and superannuation trustee; • MobiSuper Pty Limited (Mobi), the promoter of the MobiSuper Fund; • Mobi’s AFS licensee ZIB Financial Pty Limited (ZIB); and • Andrew Richard Grover, a director of Mobi and ZIB. The announcement said ASIC was concerned about potential harm to consumers if professional superannuation trustees failed to adequately monitor the activities of their promoters.

“ASIC is concerned that Tidswell and ZIB failed to do all things necessary to ensure the financial services covered by their respective AFS licences were provided efficiently, honestly and fairly,” it said.

“ASIC also alleges that both Tidswell and ZIB failed to adequately

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monitor Mobi’s promotion of the fund through a purported ‘general advice model’ that had insufficient regard for consumers’ best interests,” the ASIC announcement said. “Further, ASIC alleges false and misleading statements were made about superannuation, insurance products and services.”

ASIC claims that Mobi offered an obligation-free ‘lost super’ search to consumers through internet advertising campaigns with the primary objective to get consumers to join the fund and roll their other super balances into Mobi-promoted products.

ASIC further alleges that, in marketing telephone calls to consumers, Mobi customer service officers (CSOs) made misleading claims about fee savings and equivalent insurance cover if consumers joined the fund and provided personal advice that was not in consumers’ best interests.

ASIC is seeking civil penalties against: • Tidswell and ZIB for advice given to consumers by Mobi CSOs in breach of the best interest obligations; • Mobi and Grover for the misleading internet advertising campaigns; and • Mobi for the false and misleading claims made by CSOs during marketing calls.

12/11/2019 1:37:39 PM

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6/11/2019 1:36:05 2:02:11 PM 26/09/2019

10 | Money Management November 21, 2019

News

ASIC moves on SMSF auditors

BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has disqualified two selfmanaged superannuation fund auditors and imposed conditions on the operations of another.

The regulator announced that it had disqualified Darryl Iseppi of Queensland for significant auditor independent breaches and deficiencies and Alan Bentwitch of NSW for failing to comply with a condition to have peer reviews of three of his audits in line with a

condition imposed following a referral from the Australian Taxation Office (ATO).

ASIC said that it had also imposed conditions of Richard Hennessy of NSW for deficiencies in maintaining auditor independence and in audit work, including auditing the ownership and valuation of fund assets and ensuring compliance with legislative borrowing requirements.

The regulator said that information about the three auditors had been referred to ASIC by the ATO.

Investor relations remuneration increase

BY JASSMYN GOH

THE investor relations industry has experienced an uptick in remuneration thanks to the changing dynamics of the buy-side and sellside leading to increased interactions that investor relation teams have with the investment community, a survey finds.

A survey by the Australasian Investor Relations Association (AIRA) found the median fixed remuneration for investor relations professionals across all of the ASX200 and NZX50 at July 2019 was $301,000 - $325,000 compared to $251,000 - $275,000 in 2018.

The only cohort to experience a decrease in remuneration were the ASX50 companies with a median fixed remuneration of $376,000 - $400,000 in 2019, down from $426,000 - $450,000 in 2018.

“Anecdotally, this would seem to be explained by the trend for executives in large cap companies to have more of their total remuneration ‘at risk’,” AIRA said.

It noted that investor relations function was strengthening its importance within listed entities and respondents reported growth in tasks, team size, and responsibilities such as environmental, social, and governance (ESG) issues.

AIRA chief executive, Ian Matheson, said there had been an increasing trend of investor relations professionals managing larger teams of people.

“Changes in the way listed entities engage with the investment community as a result of structural change have meant the investor relations function has stepped up to fill the void leading to increased responsibility and larger teams,” he said.

The survey said increases in short-term incentive payments indicated there was a greater portion of total remuneration being based on the performance of investor relations staff.

“90% of respondents received short-term incentives as a percentage of total remuneration in 2019, compared to 86% in 2018. The short-term incentive payment range, as a percentage of fixed annual salary, increased in 2019 to 21-30% compared to 11-20% in 2018 and 2017,” the survey said.

However, long-term incentives decreased slightly from 56% in 2018 to 52% in 2019. The most popular long-term incentive was performance rights which remained unchanged at 39%.

The survey respondents who received shares decreased 5% to 19% in 2019. Similarly, options decreased to 5% in 2019 from 10%.

ASIC freezes assets of adviser THE Australian Securities and Investments Commission (ASIC) has sought court orders to freeze the assets of a financial adviser who it alleges failed to assist the Australian Financial Complaints Authority (AFCA) to resolve client complaints.

ASIC announced that it had obtained consent orders and undertakings in the NSW Supreme Court against Ross Andrew Hopkins, QWL Pty Ltd and QWL Asset Management Pty Ltd restraining Hopkins and QWL from dissipating or diminishing the value of their assets and providing financial services to clients without seeking prior approval from ASIC. The regulator said it had started an investigation into allegation that Hopkins and QWL failed to resolve client complaints and that it was continuing that investigation.

It said that the matter would return to court on 18 November.

ASIC said that clients of QWL who were concerned about misconduct could lodge reports with ASIC or complaints with AFCA.

Chart 1: Median remuneration

Companies

2019 median fixed remuneration

2018 median fixed remuneration

Increase or decrease

ASX50

$376,000 - $400,000

$426,000 - $450,000

Decrease

ASX51-100

$301,000 - $325,000

$276,000 - $300,000

Increase

ASX101-150

$276,000 - $300,000

$226,000 - $250,000

Increase

ASX151-200

$201,000 - $225,000

$226,000 - $250,000

Increase

Source: AIRA

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21/10/2019 4:55:52 PM

12 | Money Management November 21, 2019

News

Morningstar acquires AdviserLogic

BY MIKE TAYLOR

RESEARCH and ratings house Morningstar has acquired adviser software firm, AdviserLogic.

The company announced that Morningstar Australasia Pty Ltd had acquired AdviserLogic in a transaction expected to be completed by the end of the month.

The parties did not disclose the terms of the transaction.

Commenting on the transaction, Morningstar Australasia

managing director, Jamie Wickham said the company believed in the value of financial advice and was excited to expand its ability to support advisers.

“Financial planning software is at the heart of the advice process,” he said. “Combined with Morningstar’s deep data, analytics and research, AdviserLogic’s focus on user experience and advice workflow will enable us to elevate and differentiate our technology solutions.”

Advisers need flexible MDAs for best interest

BY JASSMYN GOH

WHILE the use and marketing of managed discretionary accounts (MDA) are rapidly increasing they are not for everyone and advisers and licensees need to make a considered decision when using them, according to Xplore Wealth.

Xplore Wealth chief executive, Mike Wright, said when deciding whether to use managed accounts financial advisers needed to find one that was in their client’s best interests by offering the right product at the right time.

Wright said it was important to remember not every client was the same under every Australian Financial Services Licence (AFSL).

“They’re all going to have different circumstances and stages in their life so advisers need an offer that allows them to flex between offers

20MM211119_01-19.indd 12

depending on the circumstances of their clients.

This would also assist in defending in best interests,” Wright said.

“Advisers would be able to articulate why it is the right offer for their client and why it makes sense and how that’s going to support their client’s needs moving forward.”

Wright said using MDAs was a significant strategic decision for advisers and licensees and that they needed to figure out if it was the right solution and model for their clientele.

“The licensee also needs to put infrastructure around an, ideally, independent investment management committee, and governance and policy procedures, to make sure they are adhering to their intent and meeting their obligations to the regulator and to the law,” he said.

“It’s not an easy decision and it should be a very considered and deliberate decision.

“While there are significant benefits for the client, adviser, and licensee when using MDAs, it’s not for everyone and not for every advice business.”

Wright noted there were a lot of misconceptions around the classification of an MDA and a separately managed account (SMA) that needed to be addressed.

“An SMA is in essence a product that has beneficially ownership that is tied to the client and it’s done at a portfolio level. An MDA is an individual proposition and in essence a service which is bespoke to that individual,” he said.

“There’s a lot of debate in the industry around classifying an MDA as a product and I don’t consider it a product. It’s a service that has a contract with an individual for that proposition whereas an SMA is a product.”

The multimillion dollar reasons Westpac exited wealth THE reasons for Westpac exiting its wealth management business were laid bare on the company’s balance sheet when it released its full-year results to the Australian Securities Exchange (ASX).

The company’s detailed analysis of its operations painted a gloomy picture, even with respect to those elements of the wealth business Westpac retained – the insurance and platforms business.

The analysis showed that net wealth management and insurance income decreased by $994 million or 49% compared to 2018, impacted by additional provisions for notable items mostly related to financial planning of $531 million.

However, it said that excluding notable items, net wealth management and insurance income was down $463 million or 23% mainly due to: • No contribution from Hastings, following exit of the business in full year 2018 (down $203 million); • Insurance income decreased $116 million (general insurance down $69 million, life insurance down $39 million); • Lower platforms and superannuation income (down $98 million) primarily driven by margin compression from full year impact of platform repricing, implementation of regulatory reforms (Protecting Your Super), product mix changes and outflows in legacy platforms; and • Cessation of grandfathered commission payments (down $42 million).

The banking group said the lower platforms and superannuation income had been partly offset by an 89% increase in BT Panorama funds to $23 billion due to inflows and higher asset markets.

12/11/2019 12:55:54 PM

The rain on Saturn

is made of diamonds.

Curious? So are we.

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It’s what shapes our investment philosophy, guides our investment process and drives our active approach to investment management. By digging deeper and going further, we explore the paths less travelled to uncover sustainable opportunities to create and protect wealth.

Visit curiousfirst.com.au This material contains general information only. First Sentier Investors is a business name of First Sentier Investors (Australia) Services Pty Limited ACN 624 305 595. © First Sentier Investors (Australia) Services Pty Limited, 2019

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7/11/2019 4:20:31 PM

14 | Money Management November 21, 2019

News

IFM investors completes Buckeye Partners acquisition

BY CHRIS DASTOOR

INDUSTRY superannuation fund owned IFM Investors has completed the purchase of US energy company Buckeye Partners.

It was the largest Australian cross border acquisition of a foreign company since BHP acquired Petrohawk in 2011.

Brett Himbury, IFM Investors chief executive, said IFM would actively lower carbon emissions at Buckeye to assist the firm’s next phase of the energy revolution and protect the investment long-term.

“In our experience, working to lower emissions is good for business and good for our investors,” Himbury said.

“As the largest owners of infrastructure in Australia, IFM has significant expertise now in responsible stewardship and we look forward to contributing more investment in infrastructure in Australia.”

Buckeye’s energy infrastructure assets

Hume defends APRA heat maps

BY MIKE TAYLOR

THE Australian Prudential Regulation Authority’s (APRA’s) proposed superannuation fund heat maps have been defended by the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume.

Hume has referred to Organisation for Economic Cooperation and Development (OECD) analysis that suggests that Australia’s superannuation operating costs are among the highest in the OECD cohort.

“Our administration and investment fees total around 0.8% of total funds under management compared with 0.1% in the Netherlands – one of our closest competitors for the number one position in private pension payments,” she said.

Hume said that, from this, it was clear that more come be done to improve efficiency in the system.

The Assistant Minister said that she believed that the APRA heat maps would provide an incentive for trustees of higher performing funds to continue working to outdo their competitors and for the trustees of under-performing products to lift their game.

20MM211119_01-19.indd 14

included 6,000 miles of pipeline, with over 100 delivery locations and 115 liquid petroleum product terminals, and a network of marine terminals in the East and Gulf Coast regions of the US and Caribbean.

“Our priority is delivering great returns for members. We also know that long-term

investment in infrastructure builds the productive capacity of the nation and generates employment,” Himbury said.

“We are committed to meeting community standards as investors in infrastructure the public relies upon and continuing to partner with federal and state governments.”

Westpac profit hit by remediation and planning exit

BY JASSMYN GOH

WESTPAC’S FY19 net profit has taken a 16% hit to $6.78 billion after the group was impacted by customer remediation costs, and a reduction in wealth and insurance income from exiting its financial planning business.

Also contributing to their net profit decrease were higher insurance claims and the impact of regulatory changes on revenue, according to the bank’s full year results report. Cash earnings were also down 15% to $6.85 billion.

Net wealth management and insurance income decreased $1.03 billion (50%) compared to FY18 due to additional provisions for estimated customer refunds, payments, associated costs, and litigation of $531 million, higher general insurance claims from severe weather events, and cessation of grandfathered advice commissions. Lower wealth management income was due to changes in platform pricing structures and exit of the Hastings business in FY18.

Westpac Group chief executive, Brian Hartzer, said: “2019 has been a disappointing year. Financial results are down significantly in a challenging, low-growth, low interest rate environment.

“Our result was impacted by customer remediation costs and the reset of our wealth business. Excluding these notable items, cash earnings were down 4% on FY18, which was

mainly due to a reduction in wealth and insurance income from the exit of our financial planning business, higher insurance claims, and the impact of regulatory changes on revenue.”

Hartzer said the bank had established a remediation hub to speed up the refunding process. Since 2017 Westpac had paid out around $350 million refunds to more than 500,000 customers.

He noted that re-setting the company for the future was a priority, and in particular strengthening its balance sheet in a low interest rate environment and dealing with potential uncertainties.

“We expect $500 million of productivity savings in FY20 as well as another $200 million from the wealth reset, including the exit of our financial planning business. This will be partly offset by incremental spend on improving risk management over the next two years,” he said.

Westpac’s annual general meeting notice said Hartzer recommended he forego his short-term incentives (STVR) and the board determined a zero STVR for 2019 was appropriate to reflect accountability for poor non-financial risk and financial outcomes, as well as some poor customer outcomes, including those highlighted at the Royal Commission.

Hartzer would also have no increase in his base pay and has not had an increase since he started in the role in 2015.

12/11/2019 12:55:36 PM

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16 | Money Management November 21, 2019

News

ASIC action against RI Advice will set new licensee obligations

BY MIKE TAYLOR

AFCA awards $185 million in first year

BY JASSMYN GOH

THE Australian Securities and Investments Commission’s (ASIC) Federal Court action against RI Advice and a former financial planner is looming as a test case of the extent to which a licensee can be held responsible for compliance and the actions of an adviser and how quickly it should act.

The Federal Court action has stemmed from a case-study aired during the Royal Commission and ASIC has raised with the court the due diligence entailed in RI Advice’s recruitment of the planner, John Doyle and its adherence to its own pre-vetting of advisers, including Doyle’s inability to complete a financial planning knowledge test or have client files pass pre-vetting without outside assistance.

The matters raised by ASIC in its notice of filing cover a litany of allegations with respect to RI’s handling of Doyle including maintaining him despite him receiving the worst possible rating in an Advice Quality Report and similar failures in successive reports and the issue of termination and suspension notices.

The filing also noted that RI

Advice consistently recorded Doyle as one of its high revenue earners and that he continued to write substantial business even after the issue of the suspension notice.

Importantly for RI Advice, now owned by IOOF, ASIC is seeking declarations from the court that the licensee did not take reasonable steps at various times between 1 November, 2013, and 30 June, 2016, to ensure that Doyle complied with key sections of the act.

It is also seeking a finding that RI Advice failed to do all things necessary to ensure that the financial services covered by its license were provided efficiently, honestly and fairly and that it failed to take reasonable steps to ensure that its representatives complied with the financial services laws.

ASIC is also seeking pecuniary penalties against RI Advice and orders with respect to compliance and remediation.

The ASIC filing said that the primary legal grounds upon which relief was being sought that RI Advice knew, or ought to have known that there was a substantial risk that Doyle was not complying with one or more sections of the act.

It is said that RI Advice “did not take reasonable steps to address that risk. Insofar as RI subject Doyle’s advice to pre-vetting, Doyle regularly bypassed this requirement, as RI knew or ought to have known”.

The ASIC filing also alleges that RI took too long to issue the suspension notice and to terminate Doyle’s authorisation.

RC fall-out continues to drag on adviser trust PUBLIC trust in financial planners and the banks is continuing to be crippled by the fall-out from the Royal Commission, according to new research from Investment Trends.

The research has revealed that when asked to rate their level of trust, the average Australian gave financial planners and banks the same rating of 4.8 out of 10 – a level similar to that recorded by the same survey a year earlier.

Commenting on the results, Investment Trends senior analyst, King Loong Choi said consumer trust in financial planners and the banks remained at all-time lows and were hovering in the ‘distrust’ zone.

However, he noted that while confidence in the financial advice industry remained low, Australians were optimistic that changes were occurring for the better with 76% of respondents expecting that regulatory changes would bring about positive and tangible

20MM211119_01-19.indd 16

improvements for the industry.

The Investment Trends research suggested that with advisers on the back foot, many Australians were turning elsewhere for information and guidance including the use of online tools to help them in making superannuation, insurance and investment decisions.

“The demand for digital self-help advice tools reflects Australians’ growing range of unmet advice needs, which centre around strategic advice, buying property and post-retirement issues,” Choi said.

“While there is healthy appetite for online advice tools, converting interest into actual usage will require these tools to satisfy a core set of demands.

For instance, non-advised Australians strongly prefer tools that blend digital engagement with human assistance, with the younger cohort being most open to receiving human support when using online tools,” he said.

THE Australian Financial Complaints Authority (AFCA) has awarded $185 million in compensation since opening a year ago, signalling there is still a lot to be done by financial firms to improve their practices and restore faith.

Over the year, AFCA said people made 73,272 complaints – an increase of 40% compared to its predecessor schemes which received a combined total of 52,232 during the 2017/18 financial year.

AFCA considers complaints previously handled by the Financial Ombudsman Service, the Credit and Investments Ombudsman or the Superannuation Complaints Tribunal.

AFCA said of the complaints made, 56,420 had been resolved with the majority within 60 days.

AFCA chief executive and chief ombudsman, David Locke, said: “The increase in complaint numbers we are witnessing at AFCA indicates that there is still work to be done by firms to improve their practices and restore public faith in financial firms.

“AFCA will continue to focus on member engagement to help firms to enhance their own internal dispute resolution procedures.”

Locke noted that resolving 70% of the claims within the past year had not been easy.

“Establishing AFCA as a new organisation and handling a 40% increase in complaints was never going to be easy and we are still improving the way we operate,” he said.

“AFCA has also been in a major growth phase of staff to meet demand and has launched the first leg of a national roadshow to promote its service across the country.”

12/11/2019 1:24:41 PM

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6/11/2019 1:15:44 PM

18 | Money Management November 21, 2019

News

AIA Australia’s CommInsure acquisition changes shape

BY JASSMYN GOH

AIA Australia has welcomed CommInsure Life to its business as the joint cooperation agreement between the Commonwealth Bank of Australia (CBA) and AIA commenced.

The joint cooperation agreement is an alternative completion structure for the purchase of CBA’s CommInsure, Colonial Mutual Life Assurance Society, and certain affiliated companies. The agreement includes a 25-year strategic distribution agreement.

AIA said the joint cooperation agreement would deliver strategic benefits for AIA by enhancing its competitive advantage in an underinsured Australian market.

AIA Group regional chief executive, Bill Lisle, said: “We are delighted to welcome CommInsure Life to AIA, and to commence our

25-year partnership with CBA. Our partnership with CBA provides a unique opportunity to help people by addressing their financial, life and health needs, by bringing the best of both our organisations together to deliver truly differentiated, innovative propositions to the Australian marketplace.

“This is a special time for AIA in Australia, having celebrated the group’s 100-year history in Melbourne earlier this week, and today with the implementation of our joint cooperation agreement with CommInsure Life following on from our acquisition of Sovereign in New Zealand last year. This underpins our commitment to helping as many Australians as possible live healthier, longer, better lives.”

In an announcement to the Australian Securities Exchange (ASX), CBA said it had received an upfront payment from AIA of $500

Former AON Hewitt adviser banned

BY MIKE TAYLOR

A former Aon Hewitt adviser has been banned from providing financial services for two years following an Australian Securities and Investments Commission (ASIC) surveillance which found he was not adequately trained or competent to provide financial services.

The regulator said that the former adviser, Thanh Huu Tran, was subjected to surveillance with respect to his part in 2016 conduct by Futura Financial Group in which he was a director and which resulted in 331 Aon Hewitt Trust default superannuation members not switching to an AMT MySuper product.

ASIC said Tran had acted in a manner which effectively turned MySuper into ‘opt-in’.

It said the AMT MySuper product generally had lower fees and costs than AMT’s legacy default employer superannuation product, partly because MySuper products are prohibited from paying commissions to financial advisers.

ASIC said its surveillance found: • Futura sent letters to 424 clients stating that if they did not respond to the letter within 30 days their superannuation accrued default amount and future contributions would not go to a MySuper product; • Following the issuing of the letter, Futura then sent an email and a text message to those clients for whom they had email and mobile phone contact details; • Mr Tran then instructed a staff member to log in to the adviser portal of the AMT website to make investment choices on behalf of clients who did not respond to the letter, email or text message. Where Futura received an automated notification to indicate the message failed to deliver to the mobile or email, no changes were made to the relevant client’s account; and • As a result, 331 clients’ default superannuation balances and future contributions were invested in the AMT’s legacy default superannuation product, instead of transitioning to MySuper, even though the clients had not given their instructions for this to happen.

ASIC said Tran’s conduct effectively required the clients to ‘opt-in’ to MySuper, even though the government had designed the MySuper system as an opt-out scheme.

20MM211119_01-19.indd 18

million and the full economic interests associated with CommInsure Life, excluding the group’s 37.5% equity interest in BoCommLife Insurance Company, had been transferred to AIA. It said AIA would obtain “an appropriate level of direct management and oversight of the business”.

Accounting bodies unite on advice THE major accounting bodies have grouped together to mount a campaign aimed at reducing regulatory complexity and therefore allowing their members to more easily deliver advice.

The three bodies – CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ) and the Institute of Public Accountants (IPA) – have announced they have joined forces to review the frameworks that regulate how financial and tax advice is provided in Australia.

The group approach comes at the same time as the Government reviews the future of the Tax Practitioners Board (TPB) and they have declared they are looking for a harmonisation of licensing regimes, definitions and obligations.

Commenting on the move, CA ANZ chief executive, Rick Ellis said the bodies were working together on a broader and more robust solution to the complexity of the current regulatory framework that would enable both businesses and Australians to not only access the advice they needed but to understand that advice.

“The failures that were revealed from the Banking Royal Commission brought to light the extreme complexity of the current frameworks in financial advice which are not in sync with each other,” he said.

CPA Australia chief executive, Andrew Hunter said accounting professionals needed the flexibility to talk and engage with their clients but this could prove problematic when that advice fell under multiple regulatory frameworks in the same conversation, or even the same sentence.

IPA Group chief executive, Andrew Conway said the shared goal was to reduce the regulatory burden on members so financial advisers could be retained in the industry.

“For the first time in the best part of two decades we are at a risk of creating an advice gap in the market,” he said. “This – coupled with the new education and professional standards under FASEA, the current review of the TPB and the implementation of the recommendations from the Banking Royal Commission – means there is a very real threat of added complexity.

“Given the impacts of an ageing population, forced retirement savings, and ongoing concerns around financial literacy, now more than ever Australians need access to affordable, quality advice.”

12/11/2019 12:55:02 PM

November 21, 2019 Money Management | 19

Practice management

MOVING PAPER-BASED CLIENT FILES TO DIGITAL With many advisers facing the need to move licensees, Scan2Archive’s Simon Harris explains how to deal with the challenge of moving from old, paper-based files to digital.

HAS YOUR LICENSEE notified you that they are closing and in the same breath told you that you need to provide them with a digital copy of all of your client files before they will release you? The good news is that there are easy ways to digitise your files and once they are digital there is a huge range of benefits which make the process very worthwhile.

Firstly, let’s explore the various options for scanning your client files.

Self-scanning using your existing multi-function printer Pros: No capital expenditure, utilises non-productive hours and your employees’ spare time, scanning, naming, and indexing files exactly the way you like.

Cons: Quality, speed and reliability of existing printer not suited to medium to large scale scanning projects; your time, and your employees’ time, is better utilised for higher-value work; boring and repetitive activity.

Self-scanning after purchasing a commercial grade scanner Pros: Great image quality, faster throughput, can be used for ongoing digitisation, utilises non-productive hours and your employees’ spare time, scanning, naming and indexing files exactly the way you like.

AFCA’S FIRST 12 MONTHS (1 NOV 2018 – 31 OCT 2019)

Cons: Large capital outlay, requires initial setup and training time; document preparation, i.e. staple and bulldog clip removal, post-it note repositioning, plastic sleeve removal, etc. requires significant more resourcing to leverage faster scanning capacity; your time, and your employees’ time, is better utilised for higher-value work; boring and repetitive activity.

Outsourcing to a professional scanning bureau Pros: Little-to-no involvement from you or your employees; up to 100 times faster than selfscanning; great quality images; Optical Character Recognition (OCR) (text search capability); secure destruction of files if required.

Cons: Cost; short-term access to files.

There are many and varied reasons why businesses chose to scan/digitise their hard copy materials. For many there is a trigger event or a burning platform that is the primary motivator. Following are the top five reasons financial planners choose to digitise their client files: 1) Moving licensee; 2) Corporate regulator requirement (ASIC review); 3) Moving office; 4) Running out of office space; and 5) Moving to a paperless work environment.

BENEFITS TO DIGITISING YOUR CLIENT FILES There are many benefits to going digital with your client files. Digital files that have been OCR’d are incredible easy to search and can save significant time when looking for information that may be buried deep inside a client’s file.

The risks related to fire, flood or theft are significantly reduced by moving from paper-based files to digital images stored in your CRM, in cloud-based storage, or on an office server. Storing paperbased files in filing cabinets, cupboards and on shelves can often use up a significant amount of office space that could be better utilised for other purposes.

Compliance audits are made far easier when all you need to do is transfer digital files rather than physical files. In an already highly regulated industry, any activity that can facilitate better compliance without additional burden to the business is a real win.

Once your files are digital you may be able to access them from any location enabling you to be more agile and responsive to your current and future clients.

So you’ve made the decision, or the decision has been made for you, to scan your client files. You may have attempted to scan them yourself and now you’ve landed on the decision to engage a professional scanning service but

don’t know how to assess the options.

WHAT TO LOOK FOR IN A PROFESSIONAL SCANNING SERVICE It is important that the service provider you choose has a certified quality management system in place, for example AS/ NZS ISO 9001:2015 standard so you can have confidence that they have externally audited processes to achieve the best quality outcomes. They should also have experience in your particular industry and understand financial planning software and how client files can be uploaded, named and indexed correctly.

Most reputable professional scanning suppliers will be able to offer you an end-to-end solution to scan all of your client files.

This includes file collection, document preparation, document scanning, post scanning quality control including OCR, naming and indexing and either secure destruction or secure return of your documents. They should also be able to articulate the privacy and security protocols they have in place to protect your client data. But most importantly, you need to feel comfortable that they understand your individual business and that they will make the process easy and painless for you.

73,272

77%

$185m

complaints received

cases had been closed

paid in compensation

Source: Australian Financial Complaints Authority (AFCA)

20MM211119_01-19.indd 19

12/11/2019 9:23:24 AM

20 | Money Management November 21, 2019

Alpha Managers 2019

Dr. Paul Jourdan

2019

AUSTRALIA’S INAUGURAL ALPHA MANAGERS NAMED Mike Taylor writes that Alpha Managers are those fund managers who have stood out from their peers in terms of their career-long performance, with 11 being named in the inaugural list developed by FE fundinfo and Money Management.

ELEVEN AUSTRALIAN FUND managers have made the grade to be named on the inaugural list of FE fundinfo/Money Management Alpha Managers.

In any given year there are fund managers who outperform their peers and, indeed, Australia has a handful of fund managers whose reputations are such that they have garnered a certain celebrity status but Alpha Manager status recognises career-long performance.

And the bottom line is that when FE fundinfo, the parent company of Money Management, looked at the top 10% of Australia’s retail-facing managers based on their track records over their careers, the following eleven managers

20MM211119_20-39.indd 20

emerged as Australia’s inaugural Alpha Managers.

What stands out from the list, is that while it contains some well-known and muchpublicised names such as that of Magellan’s Hamish Douglas and Coolabah Capital’s Christopher Joye it also contains some less well-known managers who have clearly been quiet achievers.

Importantly, amongst those quiet achievers is UBS Asset Management’s Anne Anderson, making her Australia’s first female Alpha Managers To determine the ratings, FE fundinfo looks at a manager’s ability to create risk-adjusted alpha, outperformance in both rising and falling markets, and those who consistently beat

their benchmarks.

Commenting on the launch of Alpha Managers in Australia, FE fundinfo Australia managing director, Mika-John Southworth said that the Alpha Managers concept was well-established and well-recognised in the United Kingdom, with some of Britain’s best-known managers had been recognised.

“We think the launch of the Alpha Managers in Australia represents a natural extension of what has been achieved in the UK and suitable recognition of the depth of experience which exists in the Australian funds management industr y,” he said.

The Alpha Managers exercise will be the subject of a rebalance ever y 12 months.

Name

Company

Jay Sivapalan

Janus Henderson Investors

George Bishay

Pendal Group

Darren Harvey

Smarter Money Invesments

Christopher Joye

Coolabah Capital Investments

Glenn Feben

Janus Henderson Investors

Tim van Klaveren

UBS Asset Management

Hamish Douglass

Magellan Financial Group

Manish Bhargava

APN Property Group

Anne Anderson

UBS Asset Management

Roy Maslen

Alliance Bernstein

Jacob Mitchell

Antipodes Partners

13/11/2019 3:07:50 PM

November 21, 2019 Money Management | 21

Alpha Managers 2019

Chasing the big goals THEIR ABILITY TO find and exploit alpha is the main reason Coolabah Capital is able to outperform their peers, according to chief investment officer, Christopher Joye.

His philosophy was centred around the fact they’re an active investment manager that sought to exploit mispricing in credit markets.

“We are driving returns through alpha not through beta, which means capital gains not yield,” Joye said.

In addition to building his private sector businesses, he had taken pride in using his technical expertise in the public sphere.

“I’ve done a lot of work advising governments over the years on bond markets, I advised the government during the GFC on the residential mortgage backed securities market and they injected $15 billion into that market,” Joye said.

In 2019, the Australian

government committed $2 billion to invest in securitised small-to-medium enterprise (SME) loans, based on a policy proposal he made to the Treasurer.

Not only had he worked on policy for the Australian government, he had also been invited by the Rockefeller and MacArthur Foundations to travel to the US in 2009 to advise the Obama Administration on the US housing crisis.

“I’ve made large contributions to the public policy domain, but at the same time establishing $3 billion fund manager run by 21 executives that has delivered consistent outperformance for its clients has left me pretty satisfied.”

From 2003-2007 he had served as director of the Menzies Research Centre, the Liberal Party associated public policy think tank.

His career started at Goldman Sachs in London and

Sydney in mergers and acquisitions, and principal investments.

Before that, he had also worked for the Reserve Bank of Australia.

He set up his own quantitative funds business in the mid-2000s, before having sold it later to Macquarie Bank in 2010.

In 2011, he co-founded Coolabah Capital with Darren Harvey, where he was responsible for investment decisions, portfolio management, research and asset pricing, and general business management.

They had a team of nine analysts and four portfolio managers, most of whom came from technical research backgrounds.

“We run up to 30 quantitative bond valuation models, to re-price every bond globally we can buy and sell, then we look for the cheap securities that are

Christopher Joye likely to appreciate in value,” Joye said.

“We’re focused on holding low-risk businesses that are low-risk to default, but at the same time we have consistently identified mispricing in bond markets that has contributed capital gains, which has driven alpha on top of any beta in the market.”

By Chris Dastoor

FE fundinfo Alpha Manager Ratings methodology FE FUNDINFO ALPHA Manager Ratings rate the performance of a fund manager over their career including all the funds they have managed and the places they have worked at. The ratings are designed to distinguish fund managers who have consistently performed well over the longer term.

The ratings are designed to exhibit the top 10% of fund managers analysed.

The methodology is comprised of two key components: • Risk adjusted alpha/Sortino (with track record length bias); and

20MM211119_20-39.indd 21

• Consistent outperformance of a benchmark overall.

The alpha component is weighted by its correlation to the benchmark, with the remainder (of the weight) coming from Sortino.

If a manager is a co-manager of any funds they will only receive half the weighting compared to any fund they are listed as lead or primary manager on.

Exclusions Managers will not be considered for the rating if: • They have active track record

• • •

•

of less than 48 months; If a fund is managed by four people or more; Any management team; Any manager whose track record exhibits excessively high or low beta; Any person who only manages one fund and is deputy or co-manager (as distinct from lead manager).

If they are deputy or co-manager of more than one fund then the following rules apply: - If two funds then at least one must have a size of £100m (AUD equivalent at

time) - If three funds or more then at least one must have a size of £40m (AUD equivalent at time) - If managing a single fund as lead, the manager must have a fund size £35m (AUD equivalent at time) - If managing more than one fund and at least one of them as primary • Where an individual holds the role of deputy manager on a fund this will not be considered for the rating; and • Any passive or tracker funds will be excluded.

13/11/2019 3:08:02 PM

22 | Money Management November 21, 2019

Alpha Managers 2019

Keep it simple and don’t forget about capital preservation JANUS HENDERSON’S CO-HEAD of Australian fixed interest, Jay Sivapalan has always had an eye for investments and started when he was a university student by investing in a handful stocks with money earnt from his part-time jobs.

Even then, Sivapalan understood the power of compounding, starting early, and diversification.

Sivapalan has been named one of FE fundinfo’s Alpha Managers after demonstrating consistent returns over the course of his career.

The fund manager started his career in life insurance, then moved into defined benefits and superannuation consulting, and then got into investment management at what was then Perennial Investment Partners. Now, 19 years later and numerous ownership changes to the firm, Sivapalan is at the forefront of the fixed interest team.

“It is important to keep things simple, especially in fixed interest,

as you have to take into account complicated instruments, central bank movements, and economic fundamentals to simplify what the most important three or four key drivers of the markets are,” he said on his investment philosophy.

“Capital preservation is another lesson that is important as a lot of people tend to focus on returns but not on getting capital back. It’s about ‘win by not losing’.

“And sometimes going against the tide of the market is important.

Investors tend to latch onto markets to themes and a lot of securities become incorrectly priced and indiscriminate.”

Sivapalan noted that one crucial lesson he had learnt over his career was that there could be long periods, and in many cases years, where the chase for returns could often go unchecked when the fundamentals did not support it.

He said managers could either be part of the chase or stand back. If

they stood back they needed to be disciplined and could face scrutiny about why they had not been performing well or keeping up with the market.

“It takes time for that to play out and eventually it does. So, the lesson is cycles have the tendency to ride so we should not forget the basic fundamentals,” he said.

“As an investor you can’t have the base case for your main forecast or prediction that a recession is around the corner. From a portfolio perspective one of the big lessons in my career is that you’ve got to manage to cycles and different parts of the cycle and can’t just sit out of the game.”

When looking for a fixed income manager Sivapalan said advisers needed to look for a fund that had an appropriate balance of risk in the pursuit of returns. He noted that there tended to be a desperate search for yield and return but when it came to fixed income investors

Jay Sivapalan

needed to understand that actual returns would not be that great for the risk they took.

“Maybe now is the time to preserve capital and accept a fractionally lower return for a much safer portfolio,” he said.

By Jassmyn Goh

Sniffing out value and market behaviour

Glenn Feben GLENN FEBEN, CO-HEAD of fixed interest at Janus Henderson Investors, has always been an active fund manager with the belief market inefficiencies created opportunities to add value.

This active-driven philosophy was backed by a belief market pricing doesn’t always reflect underlying fundamentals, which created exploitable opportunities.

“We’ve developed and refined an investment process over a long period of time that aspires to assess fundamental or fair value, and then look for situations where market pricing doesn’t reflect

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that,” Feben said.

“We’ve had a very clear understanding of the opportunities we’re trying to exploit, and we’re prepared to act on those opportunities with conviction and a willingness to allow strategies sufficient time to deliver the results we’re seeking to achieve, so we’re a long-term value driven investor.”

Two key achievements stand-out in his career, the establishment of a cash-in-hand fund and the establishment of the tactical income fund.

“We established a cash in hand fund in the early 2000s, which we started from scratch and grew into $2 billion,” Feben said.

“More recently, was the establishment of the tactical income fund which has become the flagship defensive fund used very widely across Australia.”

“It started from basically an idea that came out of the global financial crisis, it was established in 2009 and today it has $3.5 billion funds under management.”

Feben said he’s a fundamental investor, who thinks in the long-run fundamentals would ultimately shape the value and behaviour of markets.

“There’s a whole range of factors that from time-to-time will cause market pricing to deviate from fair value or fundamental value,” Feben said.

“We’ve stayed true to that approach over a long period of time, but we have refined it.”

They had developed an approach they believed worked over time, while staying true to that approach.

“As much as anything we’ve probably had a level of resolve and conviction, it’s allowed our strategies to have sufficient time to deliver the results we want to achieve,” Feben said.

“That doesn’t mean we’ve always outperformed, but over the longterm our process and approach has stood the test of time.”

Feben had started in financial markets in 1983 and was recruited in 1987 to IOOF where he had been

attached to the organisations in varying degrees, including a brief stint as chief investment officer.

“I worked in the internal investment team in IOOF from 1987 to 1999, mainly responsible for managing the fixed income portfolio,” Feben said.

“I worked in the internal investment division of IOOF for about 12 years, we’ve then privatised that, so that in a sense evolved into Perennial Investment Partners.”

Perennial started as a boutique investment management firm which was a joint venture with IOOF and a number of investment professionals.

“We were managing money primarily for IOOF, but we were able to build a solid diversified fixed income business over the ensuing 15 years,” Feben said.

“Then we’ve enjoyed four good years under the ownership of Henderson, which is now Janus Henderson.”

By Chris Dastoor

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November 21, 2019 Money Management | 23

Alpha Managers 2019

It’s all about data and quantitative analysis COOLABAH’S CO-FOUNDER, DARREN Harvey, had a fascination with the stock market from a young age and has now been named one of FE fundinfo’s Alpha Managers.

Harvey started investing in the stock market during high school after reading a weekly column about the broader investment market in the newspaper.

Harvey started in investment banking in a derivatives role in Deutsche Bank, and then moved onto being a trader in Sydney and London. After trading his own money in 2001 at a family office, he co-founded Coolabah Capital in 2011 with Christopher Joye.

The fund manager believes that time and effort has helped him achieve consistently high returns.

“You need an edge and strategy when you’re a trader or investor. It’s the ability to pick out and have an edge to beat the market and being able to control your emotions,” he said.

“I spend a lot of time around screens, reading, analysing, working to help synthesise the right conclusions as quickly as possible.”

He noted that one of the biggest challenges in investing was that markets had become more efficient and it was hard to manage these markets when unexpected events happened, such as 9/11 terrorist attacks or Fukushima.

“To minimise risks that come from these events that are out of our control I always participate in liquid markets.

Never be in illiquid positions because if a one-off event

happens you want access to your investments,” he said.

Harvey said his investment philosophy was about “analytics and doing the sums and numbers”. However, with the amount of data that everyone had access to, now it was about working with the data in the best possible way. He said Coolabah had data scientists who helped the investment team look for patterns and advantages.

Harvey said that advisers should look for an active fixed income manager somebody that does great quantitative analysis.

“Look at finding a team that has a great portfolio manager, analysts and great quantitative analysts. This will help give great top down bottom up analysis that look at bonds and investments, and consistent returns with low

Darren Harvey volatility,” he said Despite being named an Alpha Manager and has made his mark in the funds management world, Harvey said that while he liked markets, the interactivity and the problem solving it brought, he was not obsessed with money.

By Jassmyn Goh

A fastidious approach and dedication to ESG

George Bishay GEORGE BISHAY HAS been in the financial services industry for 25 years and has been named one of FE fundinfo’s Alpha Managers.

The Pendal fixed income fund manager said he started out in the industry in accounting at Westpac Investment Managers, then moved into a front office role as an assistant portfolio manager, became a money market portfolio manager, a repo trader, and credit analyst all within Westpac IM and the different owners the firm had experienced, including Pendal, where he now manages a combination of composite bond

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portfolios.

Bishay said his success in achieving a consistent outperformance was his fastidious approach to everything as he was not comfortable just taking information in at face value.

“I tend to dig deeper into any information when analysing credit issuers and markets and this helps to decipher what marketing versus reality is,” he said.

He said this helped when analysing companies and the ability to judge whether somebody was speaking truthfully or using marketing spin.

“I also have a solid macroeconomic foundation when determining the macro drivers and how that impacts global markets and follow through impact on Australian assets and thus how the portfolio should be positioned in a forward-looking fashion,” Bishay said.

Bishay noted that quantitative analysis was the backbone of his investment process. He said quantitative models were used to

give a bias in direction of markets.

“We’re not looking for a valuation per se, we’re analysing market directional bias, that is looking if credit spreads are going to widen or tighten or rates going up or down.

We do this via a combination of quantitative models, apply our qualitative view and then use technical analysis to get us in and out of markets,” he said.

He said one of the biggest lessons he had learnt over his career was the importance of focusing not only on the bottom up fundamentals but also the top down macro view.

“If the market is going against you, you need to ensure that you don’t sit there idlily and hope for the best but move that portfolio around,” he said.

Bishay currently runs a sustainable fixed income fund and said advisers looking for a manager that ran an impact, sustainable or environmental, social, or governance (ESG) focused fund needed to look at the tenor of the dedicated ESG portfolio.

“There are a lot of my peers that have always done ESG via quasi governance structure. And that is a correct statement because G is always a factor when you’re analysing credit.

“But a lot of managers now via the requirements of their clients have said they have integrated ESG into their process for many years.

This is somewhat questionable especially the E and S factors but it’s something that’s only been spoken about in the last year or two. We at Pendal Group have managed dedicated sustainable (ESG) fixed interest portfolios since 2009.

“Advisers also need to look at how detailed their manager’s ESG analysis is and how committed the business is to ESG as a whole.”

Bishay said the manager also needed to show the benefits of the E,S, and G as opposed to just talking about it.

“They need to be able to explain how ESG factors have impacted credit spreads,” he said.

By Jassmyn Goh

13/11/2019 3:13:23 PM

24 | Money Management November 21, 2019

Year in review

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13/11/2019 1:22:55 PM

November 21, 2019 Money Management | 25

Year in Strap review

2019 – A YEAR OF UNCERTAINTY FROM BEGINNING TO END Mike Taylor writes that 2019 proved challenging for the financial advice industry not least because of the Royal Commission and the Government’s determination to implement its recommendations irrespective of measures already underway.

THE FINANCIAL ADVICE sector will finish 2019 much as it began: Uncertain.

Importantly, the root cause of that uncertainty remains the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry even though the Commissioner, Kenneth Hayne, delivered his final findings and recommendations nigh on nine months’ ago.

The continuing uncertainty stems from the reality that the Federal Government has chosen to implement virtually all of Hayne’s recommendations, notwithstanding the amount of parallel policy implementation which was already on foot not the least of which being the Financial Adviser Standards and Ethics Authority (FASEA) regime.

Thus, primary amongst the uncertainties confronting advisers as they close out 2019 is what Hayne’s recommended Single Disciplinary regime for financial advisers will look like, what it will cost and how it will be funded.

Like much of Hayne’s findings, that applying to the single disciplinary body was vague, and there was little discussion about how it might impact the FASEA regime, particularly the legislated need for the

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establishment of code monitoring authorities to oversee the FASEA code of conduct.

Thus, the Financial Planning Association (FPA), the Association of Financial Advisers (AFA), the SMSF Association and the other members groups of a consortium established in the closing months of 2018 to establish a code monitoring authority were left wondering.

Initially, the Treasurer, Josh Frydenberg, signalled the Government’s intention to proceed along the path of having Hayne’s single disciplinary body sit in parallel with the FASEA code monitoring bodies but, over time, it became increasingly obvious that the Hayne solution sat in conflict with the industry selfregulatory concept of code monitoring authorities.

Thus, barely three months out from the code monitoring authorities becoming law, Frydenberg stepped away from the one element of industry selfregulation tied up in the FASEA regime by effectively declaring that code monitoring authorities would not be established and that the Government would be proceeding with the single disciplinary body.

So, after more than a year of work, the expenditure of

thousands of dollars and advertising to attract suitably qualified executives, the FPA, the AFA and the other members of the Code Monitoring Australia consortium found themselves high and dry.

Frydenberg offered token thanks to the industry bodies for their involvement but said the “the Morrison Government is accelerating the establishment of a new disciplinary system and single disciplinary body for financial advisers as recommended by the Royal Commission”.

“The Government will work towards establishing the new body in early 2021, subject to the passage of legislation which will be introduced into the Parliament next year,” he said. “A long term sustainable solution based on Commissioner Hayne’s recommendations will replace the role of code monitoring bodies which were due to be established by industry associations under professional standards reforms.”

Given the amount of work which had been put in to establishing a code monitoring authority it was hardly surprising that the FPA and AFA expressed their disappointment at the Government’s announcement.

Indeed, the FPA in particular

Continued on page 26

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26 | Money Management November 21, 2019

Year in review

Continued from page 25

had invested heavily in pursuing a part in the code monitoring regime in circumstances where all financial advisers would have needed to sign up to such a body.

The degree of the FPA’s commitment to the regime was revealed in a number of submissions to Treasury in which it supported draft legislation not least because it might have allowed the Australian Securities and Investments Commission (ASIC) to share information with code monitoring bodies.

While Frydenberg undertook to that Treasury would immediately begin engaging with the associations which made up the Code Monitoring Australia along with consumer representatives and other stakeholders including the holding of roundtables, little genuine progress appears to have been made.

FASEA REGIME STILL A WORK IN PROGRESS The roll-out of the Financial Adviser Standards and Ethics Authority (FASEA) regime remains a work in progress, but at the close of 2019 the foundations are firmly in place, particularly the centrality of the adviser exam.

However, the uncertainty continues to dog the Authority, not least because of the time taken to put key building blocks in place most recently around its conduct of ethics and especially Standard Three.

The degree to which continued uncertainty around the code of ethics was causing angst in the

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industry was revealed by the FPA’s angry response to FASEA’s release of guidance around the code which it described as raising more questions than it answered.

“With less than 50 business days before the code is due to come into effect, FASEA has completely failed both in their obligation to consult and to provide clear guidance on how its standards will work in practice,” said FPA CEO Dante De Gori.

“The process has again been greatly disappointing and completely inadequate, which has produced guidance that is confusing, out of touch and at odds with existing financial planning laws and standards.

“After two and a half years, the FASEA Board of Directors has yet

to consult with any financial planning professional bodies or their members and they appear to be more interested in academic theory than making a genuine effort to improve standards in the financial planning profession for the benefit of consumers.”

Among other problems, FASEA’s code clashes with the Government’s Royal Commission Road Map, released only two months ago, and the grandfathered commissions legislation passed by the Parliament just weeks ago.

“Financial planners and even the public are confused about which standards should be followed – those in the code of ethics set by FASEA or those in corporations law set by the Australian Parliament,”

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November 21, 2019 Money Management | 27

Year in review

added De Gori.

The FPA now urgently calls on the Government to step in, and to recognise that FASEA has again failed to deliver its mandate to consult and deliver, this time with the Code of Ethics and accompanying guidance.

“FASEA’s website still claims that it will release a draft of the guidance document for public consultation before it is finalised, demonstrating the scope of its failure to consult,” the FPA said.

The FASEA code of ethics remains contentious, with some financial advisers pointing the underlying make-up of the authority board and what they see as the undue influence of consumer representatives.

The AFA has been equally scathing of FASEA over its code of ethics, with the organisation’s general manager, policy and professionalism, Phil Anderson using a communication to members to argue that the FASEA board appeared to have chosen to use the code of ethics as an opportunity to rewrite the law.

“As a result, the entire financial advice sector is left completely uncertain as to what will be permitted under the code and what will not, with less than two months until commencement and no obvious way to fix this problem,” he said.

“With all forms of commissions and asset-based fees now in doubt, 57% of financial adviser practice income is at risk, as a result of this version of the code of ethics. This will impact both financial advisers, but also

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their clients, who might be forced to change their adviser’s remuneration arrangements at very short notice.”

Anderson then argued that the financial advice industry should reject the code of ethics as it had been produced by FASEA and, at the same time, ask the Federal Government for an extension.

On the upside for FASEA, the first two adviser exam have generated pass marks of 90% and 88% - well above what was originally expected.

Less certain for financial advisers is how much time they will have to prepare and sit the exam in circumstances where, at the time of writing and notwithstanding a undertaking from the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, the Government had still not introduced legislative amendments to extend the FASEA time-table by on year.

END DATE FOR GRANDFATHERING NOW CERTAIN One area which is no longer uncertain for financial advisers is the Government’s end-date for remuneration which was grandfathered under the Future of Financial Advice (FOFA) regime with the Treasurer, Josh Frydenberg, confirming it will be banned from 1 January, 2021.

However, what is not certain is when individual product manufacturers will actually end grandfathering with a number of

providers signalling that they will be moving much earlier.

Also uncertain is the degree to which some grandfathered commissions will be rebated to customers with both the AFA and FPA pointing out that the structure of some products making this almost impossible.

Also uncertain is the role which will ultimately be played by the ASIC with the Government having tasked the regulator with monitoring and reporting on the extent to which product issuers are acting to end grandfathering of conflicted remuneration in the period between 1 July 2019 and 1 January, 2021.

THE LIFE INSURANCE FRAMEWORK Risk advisers will be hoping that the fall-out from the Royal Commission will have dissipated before the Life Insurance Framework (LIF) is reviewed next year.

The Royal Commission final report took a negative view of the current regime but the Government signalled that it would allow the LIF regime to play out.

However, ASIC commissioner, Danielle Press flagged little more than a month ago that the regulator would be conducting a surveillance of life/risk advice as part of its broader work in reviewing the framework.

“In undertaking the review we will consider the factors identified by the Royal Commission and, if we think the reforms have not been effective, we will consider recommending to the Government that the cap on commissions be reduced further.”

13/11/2019 2:08:23 PM

28 | Money Management November 21, 2019

Climate change

SUPER RULING POISED TO SET CLIMATE RISK PRECEDENT An unpresented case could allow APRA to amend the existing risk management prudential standard to require super trustees to consider climate change as a material risk to portfolios, Jonathan Steffanoni writes.

THE HEADLINES HAVE recently been dominated by loud voices from around the world calling for political cooperation and action on climate change risks.

The theatrics of the Extinction Rebellion protests and the resonance of Greta Thunberg speaking to power have kept the issue in the public psyche.

Yet it might be that a judge in the Federal Court of Australia’s interpretation of superannuation supervisory statute and trust law result in a more significant shift in how the economy responds to climate change risks.

Trustees of Australian

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Prudential Regulation Authority (APRA) and self-managed superannuation funds alike should pay close attention to the upcoming case of McVeigh v REST, and the possibilities of either setting a precedent requiring consideration of climate change as a material investment risk or highlighting the need for more specific climate change risk focused regulation.

A WORLD FIRST McVeigh v REST is important, as it will test the issue of whether a superannuation trustee has a legal duty to consider climate

change-related risks when exercising its discretionary investment powers. It’s also unique as it’s a first in testing the law as it relates to superannuation or pension fund trustee duties and climate change risk.

Importantly, the case deals with a member with a long-term investment horizon, who defaulted into the fund and has not provided the trustee with instructions on how he wished his investment to be managed. Any judgement would be likely to relate to similar circumstances, rather than covering superannuation trustee duties generally.

While there is relevant case law which is likely to be relied on in the judgement, the question of whether the standard of care required of a professional superannuation trustee requires that the trustee identify and consider climate change as a specific financial risk has not been tested in court.

There are no specific statutory obligations which require climate change to be considered as a financial risk when exercising investment powers, however there are clear obligations of trustees to identify, monitor and manage material risks to

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November 21, 2019 Money Management | 29

Climate change

Chart 1: Model of super trustee obligations when exercising discretionary investment powers

investments generally.

The prudential framework includes binding standards which prescribe certain material risks to be identified and managed as part of a superannuation trustee’s risk management strategy. While the standards don’t include climate change as a mandatory material risk, it does require that any other material risks are identified by superannuation trustees.

NOT ABOUT RESPONSIBLE INVESTING OR ETHICS The case has been carefully framed through the lens of climate change being a financial risk, so it’s unlikely to focus on precedents related to ethical or responsible investing and the related questions of alignment with financial outcomes as the proper purpose of the exercise of trustee duties.

The case is focused on interpreting trustee duties in an environment where there is no conditioning of the best interests obligation beyond the foundational interpretation in the 1980s British case of Cowen v Scargill of the best interests of members of a superannuation or pension fund usually being their financial best interests.

There is a strong foundation of accepted analysis which identifies the macroeconomic risks that climate change poses.

As large, long-term investors, the financial performance of superannuation funds is generally correlated to the longterm performance of the economy.

However, there is an inherent reluctance for courts and regulators to interfere with the

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broad discretions of superannuation trustees to invest and manage investment risks as they see fit. This approach has the benefit of ensuring flexibility in complex environments with dynamic risk factors.

WHAT WOULD A DECISION IN FAVOUR OF MCVEIGH MEAN FOR SUPER TRUSTEES? Should the case be decided in McVeigh’s favour, it could create a binding interpretation and precedent of the law as it relates to superannuation trustees’ discretionary investment powers in circumstances akin to those of McVeigh. Specifically, where the member has defaulted into a MySuper product, not having provided any instruction to the trustee concerning investments.

While such a decision would require trustees in a similar position to identify and consider climate change as an investment related risk, it would not prescribe any approach to addressing the risk.

Trustees would still then need to determine whether the risk is best controlled though divestment from certain assets (such as coal), focus on impact investments (like carbon capture), or the use of its role as shareholder to advocate for changes in the manner assets operate.

While many large superannuation funds already have robust stewardship and environmental, social, and governance (ESG) risk factor aspects to their investment governance frameworks, a decision in McVeigh’s favour would be likely to focus these arrangements on ensuring that climate change aspects were integrated.

Source: QMV Legal

WHAT WOULD A DECISION IN FAVOUR OF REST MEAN? On face value, it would be easy to see a decision in REST’s favour providing certainty that there is no specific legal obligation for superannuation trustees to identify and manage climate change as a material investment risk. Importantly, such a decision would not restrict of prohibit superannuation trustees from identifying and managing climate change as a material investment risk.

Furthermore, a decision in REST’s favour may also identify the need for the regulator or Parliament to update the relevant law (in the prudential framework) to achieve the outcome which McVeigh is seeking.

In addition to its supervision role, APRA is a lawmaker with delegated authority to make and amend regulations and prudential standards under the relevant legislation.

If the case was to be decided against McVeigh, APRA has the power to amend the existing risk management prudential standard (if it wished) to require that

superannuation trustees considered climate change as a material risk for the purposes of their risk management framework.

Alternatively, a legislative approach similar to that adopted to modern slavery could be pursued to require superannuation trustees (and other long-term investors) to identify, address, and report to regulators on how climate change related risks were being managed.

This would require the political will, however.

A SIGN OF THINGS TO COME? The growing importance and influence of large asset owners such as superannuation trustees is likely to continue to attract the attention of activists with a broad range of views and issues. While this case is clearly focused on the role of climate change through the lens of financial performance, the positive and negative impacts or externalities resulting from the investment decisions of superannuation trustees are likely to see future scrutiny and debate.

Jonathan Steffanoni is a partner at QMV Legal.

12/11/2019 9:27:58 AM

30 | Money Management November 21, 2019

Emerging market debt

LOOK TO EMD FOR YIELD AND RETURN Raf Biosse-Duplan explains why treating emerging markets as a block makes no sense any more, why institutional investors are so underweight emerging markets debt, and how investors should go about investing in this complex, but exciting asset class.

EMERGING MARKETS OFFER strong income and total return opportunities, increasingly difficult to find in developed markets.

Emerging markets (EM) and emerging market debt (EMD) in particular should be of far greater interest to investors. Not only because many emerging markets have had strong economic performance based on good economic policy decision making, but because – and this is intriguing – most institutional portfolios are wildly underweight EMs. Investors have come to appreciate that EMs represent the bulk of the world’s economy and its population but more importantly, they account for 75% of the world’s growth and 50% of its savings. Why is then that one struggles to reach a neutral EM exposure of around 30% of a fixed income portfolio?

Emerging markets make up between 40%-60% of the world’s economy, depending on how you measure, 60% of the world’s population and their economies are on average growing at twice the rate of developed countries.

EMs will grow at around 4.2% this year and expectations are that they will achieve 4.5% next year.

These figures compare very favourably with the sub 2% expected in most developed economies.

Yet factors like domestic bias and a preconception that emerging markets must be high risk means that most institutional portfolios do not even have a neutral exposure to emerging markets, let alone a more meaningful exposure. From a structural, value and asset

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allocation perspective, this makes no sense at all.

HISTORY OF EMS – A TALE OF CRISIS AND RESPONSE The 1997 Asian financial crisis and the 1998 Russian financial crisis were devastating for EMs. The Russian stock, bond and currency markets collapsed in 1998 as the combination of a fixed exchange rate, excessive short-term debt and reliance on foreign investors left the Russian government little choice but to float the exchange rate and devalue the rouble – defaulting subsequently on its domestic and foreign debt obligations.

The so-called ‘Asian financial crisis’ followed a similar path: a series of currency devaluations which began in Thailand in 1997 and spread through other Asian markets, caused sharp market declines and a profound confidence crisis from non-resident investors, who had so far been instrumental in financing the continent’s economic growth. This phase of EM crisis finally came to an end with the 2001 Argentina debt default, the largest of its kind back then.

It’s important to understand these crises, because they set the scene for widespread implementation of comprehensive economic reforms in emerging markets throughout the 2000s which served to build up economic resilience ahead of the Global Financial Crisis (GFC) in 2008. In the early 2000s, EMs followed a common policy framework, consisting of a combination of fiscal rigour, monetary reforms involving inflation targeting and floating

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November 21, 2019 Money Management | 31

Emerging market Strap debt currencies, a subset of the so called ‘Washington consensus’. These drastic reforms underpinned the development of local government debt markets as credible alternative to external financing and – as government retrenched from crowding out the international capital markets – local corporates finally gained access to long-term USD funding.

As a result, many emerging markets came out structurally stronger than their developed market counterparts post GFC, in stark contrast to previous crises where emerging markets were hit disproportionately hard. Many EMs were able to run counter-cyclical fiscal expansion to kick start growth out of the post-crisis slump, thanks to their growing foreign exchange (FX) reserves and the good state of their budget and balance of payments.

The new found economic maturity of EMs became obvious in the first part of the last decade, when the combination of slumping commodity prices, slowing global trade and an end to monetary easing in the US (the 2013 ‘taper tantrum’) should have created a shock similar to 1998 or 2008. Yet despite regional fragilities, all but a few countries – such as Ukraine – recovered eventually, without any debt default or banking crisis.

This period of catching-up with industrialised nations was followed by an ever-growing diversification in the EM development models.

Countries traditionally focused on export of commodities – in Latin America for example – adjusted to export manufactured products and services. And countries focused on exporting manufactured products – China being a primary example – turned to their customers for further sources of growth, mimicking the model of many developed nations.

PLENTY OF POSITIVES, BUT CHALLENGES REMAIN Not all EM economies are moving at the same pace or implementing credible reforms, making for a wide dispersion in the level of returns across countries. Countries which have implemented fundamental structural and positive economic

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change, like China, South Korea, Chile and Russia are doing far better than repeat default offenders like Argentina and Venezuela.

Yet emerging markets on average are running more orthodox economic policies than many would think. Many influential economic policy makers and government ministers have been educated in the world’s best universities and come back to their home countries imbued with a belief in the benefits of neo-liberal and open-market policies. I would argue that some of the best economic administrations and central banks in the world are in emerging markets – Russia being a notable – if not always popular example. Asian nations themselves – and China in particular – have challenged the Washington Consensus and successfully developed an economic model where balance sheets are strong and the exchange rate float, but where the capital controls are in place to moderate the excesses of modern global finance.

On the economic front, balance sheets are therefore in good order generally – leverage is low, current accounts and government budgets in check, and policymakers encourage populations to save further, through pension and superannuation funds which are now reaching meaningful levels in places as far apart as Chile, Mexico, and South Korea. The result is that these countries now have a considerable domestic pool of capital to draw on, something they have lacked in the past. EMs represent today for the first time about 50% of the world’s savings.

CHASING TOO FEW OPPORTUNITIES In recognition of the resilience and attractiveness of the asset class, some of the world’s more progressive pension plans are seeking to aggressively expand into the emerging market debt space, ultimately overweighting the asset class in their global portfolios.

For investors looking for opportunities, however, the landscape can feel like too much money chasing too few opportunities. As economies grow, they naturally de-lever, further

reducing the need for them to borrow and making the demand imbalance worse. Having a domestic pool of capital to draw on, combined with falling financing needs are obvious positives for these economies. But for institutional investors still underweight EM debt, there are barely enough international or domestic assets to satisfy their potential demand.

If domestic EM investors were to be successfully encouraged to move out of cash, where they are currently overwhelmingly invested, into diversified EM fixed interest portfolios, this would compound the imbalance further.

FINDING VALUE From an investor’s perspective, EMD offers a unique set of diversified and scalable issuers with attractive ratings, compared with other asset classes. Interestingly it displays low correlation to more traditional asset classes as well. It represents more than 70% of the fixed income world – and more than 50% of investment grade bonds – with yields above 0%. In a world characterised by super-low interest rates and negative yields, there is positive yield and return still to be found in EMD across the board.

So, what about current valuations? In our view, valuations of emerging market investment grade bonds are currently unprepossessing: they are trading in the middle of a five-year range, offering decent carry but limited prospects of capital gains. There is arguably more value to be found in the higher-yielding sovereigns – such as the Ukraine and possibly distressed debt in Argentina and in high yield corporate debt, where spreads trades at three-year highs.

We also see value in selected unhedged plays in local currency markets in Latin America, Eastern Europe and Asia.

When it comes to the future macro factors which will be driving returns, it is clear that the dovish stance of the world’s central banks – the ‘policy put’– is largely positive for emerging markets debt. There may also be fiscal stimulus to come from Europe, and we believe that there is ample room generally for fiscal stimulus around the world.

AN UNCONSTRAINED, FLEXIBLE STRATEGY IS KEY Emerging market debt performance starts with income. Over the past 15 years, the income component of emerging market debt has accounted for more than 80% of both local and external returns and provided a steady annual income stream, in US dollars, of between 6%-8% gross.

The emerging market universe is no longer a bloc, rather, it is made up of 70 tradeable countries, 30 currencies and over 1,000 investable companies. Fundamental diversification between countries is imperative, bearing in mind factors likely to drive returns, because relative-value opportunities spring from the divergence between countries as well as well as unique opportunities which emerge from specific events.

Embracing active strategies is therefore important, since consistent alpha can only be found with the flexibility to time the market, select and de-select countries and strategies and the ability to systematically hedge the downside. Unsurprisingly, studies show EM total return managers achieve on average close to 85% of the market upside while capturing less than 61% of the downside. In August, 2019, Argentina served as a dramatic reminder of the risk to be exposed passively to EMs, when primary election results plunged the country into a new episode of market turmoil. In a year where the asset class provided investors with returns in excess of 10%, the Argentina index was down almost 40%.

In conclusion we argue that emerging market debt belongs to fixed income portfolios structurally because of its inherent characteristics of high income, diversification, low correlation to other asset classes, modest default rates and – in recent history – subdued volatility. And that the greatest returns over time will be made from portfolio construction which is index-aware but wary of falling into the trap of benchmark hugging.

Raf Biosse-Duplan is chief executive and EMD specialist at Finisterre.

12/11/2019 9:28:29 AM

32 | Money Management November 21, 2019

Interest rates

ARE THE RBA’S INTEREST RATE CUTS DOING MORE HARM THAN GOOD?

Anthony Doyle finds that lowering interest rates does not always increase spending on consumption.

DURING THE GLOBAL financial crisis (GFC) central banks across the world cut interest rates and resorted to unconventional policies to stimulate demand and generate economic growth.

Ten years later, the Reserve Bank of Australia (RBA) is following a similar playbook.

Concerned about the outlook for growth and inflation, the RBA has cut interest rates to a record low level and is investigating the possible implementation of quantitative easing (QE).

The shift in policy stance has been remarkable. Twelve months

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ago, the Reserve Bank Board in its monetary policy minutes told Australians that “members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy”.

Little did they, or the market, expect that the RBA cash rate would be cut three times in 2019. In a case of actions speak louder than words, Australian consumer confidence has fallen to a four-year low, and Australians are googling the words ‘Australia recession’ at a rate not seen since the GFC.

Why is the RBA cutting interest rates? To answer this question, it is useful to understand the objectives of Australian monetary policy. The Reserve Bank Act 1959 set out the objectives of: • The stability of the currency of Australia; • The maintenance of full employment in Australia; and • The economic prosperity and welfare of the people of Australia.

Since the early 1990s, these objectives have found practical expression in a target for consumer price inflation of 2-3% per annum. In 1992, the then

Governor of the RBA – Bernie Fraser – signalled the desirability of 2-3% inflation. In 1996, the new Governor of the RBA – Ian Macfarlane – and former Treasurer Peter Costello formalised the 2-3% inflation target in the ‘Statement on the Conduct of Monetary Policy’.

The statement which is used to outline the conduct of the central bank in implementing monetary policy was renewed by Treasurer Josh Frydenberg and Governor Philip Lowe.

Put simply, the inflation target is the centrepiece of Australia’s monetary policy framework.

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November 21, 2019 Money Management | 33

Interest rates

Currently the RBA is worried about meeting the inflation target and is hoping the lower interest rates will result in higher inflation over the medium term. Australia’s inflation rate has been below 2% for most of the past 5 years, and on reflection the RBA would likely privately acknowledge the interest rates were kept too high, for too long.

In 2020, the RBA will likely continue to reduce interest rates in the absence of a meaningful pickup in inflation. As monetary policy inches closer to zero, the RBA will become more willing to consider quantitative easing to assist in meeting the inflation target.

Low inflation is not only a feature of the Australian economy: central banks across the world are typically experiencing inflation below their targets, and they seem powerless to correct the problem.

discussed amongst monetary policy practitioners and academic economists. It was not too long ago that quantitative easing was also perceived as unconventional.

For the average Australian, low interest rates pose both costs and benefits. Borrowers benefit, while savers face lower returns.

Asset prices – like shares and property – tend to appreciate as investors seek the higher returns that they once enjoyed from defensive assets, exacerbating income inequality within a society.

Some have also suggested that ultra-low monetary policy has seen shifts to both the right and left of the political spectrum, leading to a shift in the political landscape. The RBA has acknowledged the distributional effects of low interest rates but believes that monetary policy is not well placed to address these societal issues.

RECORD LOW INTEREST RATES

SAVING

Interest rates in the UK, Europe, Sweden, Switzerland and Japan have been at or close to record lows for over a decade now and continue to grapple with low inflation. In Denmark, borrowers can qualify for mortgages with a negative interest rate, meaning the bank is paying people to borrow money.

The US has tried – and failed – to raise interest rates and has cut interest rates three times in 2019 in response to weakening economic growth. The question is whether the RBA is willing to follow the same path as its global peers.

Within the finance and economic community, there is some acknowledgement that monetary policy has reached its limits. For a long time, cutting interest rates has been the only game in town, with governments either unwilling or unable to expand their budgets fiscally.

There are now calls for a rethink of how central banks approach the goals of monetary policy, with unconventional approaches increasingly

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As the Australian economy is driven by consumption and household spending, it is particularly important that the RBA tries to assess these costs and benefits. Perhaps the most important consideration regards the assumed positive relationship between the interest rate and the desired level of saving.

While it is conventional wisdom that lower interest rates will stimulate consumption, it is not always clear that this is the case in practice. There is a point where the rate of return of interest becomes so low that the last resort is to save more in the first place, leading to lower spending on consumption.

For example, suppose that savers have a predetermined amount of savings that they wish to accumulate over time. A lower interest rate, or lower returns from their investments, implies a slower rate of accumulation.

Because the return on cash is zero, savers can no longer rely upon the “eighth wonder of the world” – compound interest – to boost their savings over time.

Chart 1: Australians Googling ‘Australian recession’

Source: Fidelity International, Google, October 2019.

If Australians are saving more, rather than spending, then lower interest rates will likely lower household spending rather than raise it. Economists have defined the interest rate at which accommodative monetary policy for an economy reverses and starts to become contractionary as the ‘reversal rate’. This poses the question whether lower rates would do more harm than good for Australia.

There is a question whether the Australian economy requires further stimulus. Three interest rate cuts in 2019 now has Australians questioning the economic outlook, with households and businesses wondering whether the RBA has identified issues they themselves are not seeing.

As a result, Australians are becoming increasingly cautious as indicated by weak retail sales data and anecdotal evidence that households are choosing to pay of their mortgages at a faster pace rather than go out and spend.

Monetary policy operates with a 12 to 18 month lag, and it’s likely the Australian economy will respond positively to the monetary policy stimulus seen in 2019.

However, there is a chance that the RBA, in pursuit of its inflation objective, may mistakenly cut interest rates again and implement a quantitative easing package in 2020. Ultra-easy monetary policy

creates mis-investments in the economy, threatens the health of the financial system, encourages governments to refrain from making structural reforms, and redistributes wealth in a highly regressive fashion.

Once on the drug of ultramonetary policy, it becomes difficult for the economy and financial markets to wean itself of it, as evidenced by the experience of other central banks that have experimented with QE.

SUPPLY-SIDE REFORMS The Australian economy requires supply-side reforms, ideally combined with fiscal policies, that will help to make the economy more competitive and productive. This can be done by improving the functioning of markets, upgrading educational systems, building critical infrastructure and unleashing entrepreneurship and innovation.

Such measures will increase the potential for future growth. If this is understood – and believed – by the public, it could also increase confidence here and now, boosting spending and growth. This should be the approach to supporting the Australian economy as we enter a new decade, not the dangerous cocktail of low interest rates and quantitative easing.

Anthony Doyle is the cross asset investment specialist at Fidelity International.

12/11/2019 9:31:18 AM

34 | Money Management November 21, 2019

Herd mentality

HUMAN NATURE IS OUR WORST ENEMY WHEN INVESTING People get overexcited about a positive story and suddenly everyone is competing against each other to buy a certain share and they bid the price up, writes Julian Morrison.

HUMAN NATURE CAN be our own worst enemy when investing, because all too often people tend to go with the pack and believe the market hype.

In life, it usually makes sense to go with the crowd. For example, if you’re an engineer, you’d want to follow the consensus on what’s best practice in bridge design. And, when choosing a restaurant, you’d probably want to eat in one filled with people enjoying themselves rather than one that’s empty.

But this usually doesn’t work with investments.

People get overexcited about a positive story and suddenly everyone is competing against each other to buy a certain share and they bid the price up.

They buy on the same expectations as everyone else and if they are correct, it probably won’t help them a great deal because it’s already built into the price.

As a result, they are more likely to have overpaid for that share and thus risk a potential

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loss of capital. They may have bought a brilliant, profitable company but if the price is too high and doesn’t represent the company’s fair value, this will be recognised by the market sometime in the future. The share price will revert to its fair value and investors could suffer a permanent loss of capital.

While it is possible to overpay and still get your money back in time, you also need to think about what inflation will have done to your investment over the long term.

Other human “flaws” revolve around the way people view risk and allow this to affect their decision-making. They may take on too much risk because their expectations are too high or because they are overconfident and see less risk than there actually is. Conversely, they may not take on enough risk, especially if they have lost money before.

It’s also human nature to panic when a share price goes too low and they sell out too quickly. And, on the flip side, it can be tempting to buy more of

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November 21, 2019 Money Management | 35

Herd mentality

an asset where the price has risen a lot.

At Allan Gray, we believe successful investing can often appear counterintuitive. As a result, our investment philosophy tends to go contrary to human instinct.

We never run with the pack - we usually buy when others feel the urge to sell. And if a stock falls further, we revisit our original valuation and the reasons why we invested in it. If that’s unchanged, we will often buy more. Our portfolio is usually filled with stocks that have been in the news for the wrong reasons.

Contrarian investing has been around for hundreds of years - it’s the basic idea of buying something when it’s cheap in a less optimistic environment and then selling it when things are on the up. But behaviourally, that doesn’t feel comfortable.

At Allan Gray, our confidence comes from knowing how these things have played out over many cycles. Our people understand that often the most challenging time for a stock provides us the greatest opportunity to buy it cheaply.

Our confidence also comes from our internal evaluations of the company and our belief in its fundamental strengths. If the company has more reliable or valuable underlying assets, you have a greater buffer and

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greater probability of a better outcome.

It’s also vital to have conviction and patience. But in the heat of the moment, stepping back and having discipline can be much harder than it sounds for most people.

It’s why we currently see good pockets of value in cyclical stocks, particularly in the energy and materials sectors.

The valuation disparity between cyclical stocks and defensive stocks (such as healthcare and utilities), is the widest we’ve seen for years.

This large valuation disparity means many cyclical stocks are now significantly undervalued.

As a result, for over a year, we have been increasing our exposure to cyclical companies and reducing our exposure to defensives.

The energy sector has been particularly depressed; it has underperformed globally with the energy sector index around long-term lows relative to the broader share market.

Furthermore, many energy companies are struggling to make an adequate return at current oil prices.

As a result, Allan Gray finds energy stocks very attractive.

And while there is always a risk to any investment, we weigh up whether we can be compensated for the risk by buying at a low enough price.

We believe that even if a few

things go wrong for our energy stocks going forward, they can still generate reasonable returns. But the upside could be significant if a few things go right, or even just ‘less wrong’.

This asymmetric payoff profile, repeated across many stocks, can help the portfolio deliver outperformance for clients.

We now have close to 20% of our portfolio exposed to the energy sector. The fall in oil prices, growing oil production from supposedly low-cost US shale, inventory builds, electric vehicles, and speculation on how climate change may impact the oil and gas industry have all soured sentiment in the sector.

But good investments often hide where sentiment is poorest.

We think there will still be demand for the gas that the energy companies in our portfolio produce. And we have sought similar asymmetric payoff profiles in other areas of the market.

Things don’t always turn out the way Allan Gray expects. But we have outperformed the market over the long term to date. And, if we apply our approach consistently, we believe it should be possible to perform well in future – in large part due to the persistence of human behaviour.”

Julian Morrison is the national key account manager, Allan Gray Australia.

13/11/2019 1:24:03 PM

36 | Money Management November 21, 2019

Toolbox

TAX (FINANCIAL) ADVICE, FIVE YEARS ON… David Barrett looks at the complexity of the tax (financial) advice regime.

IT’S NOW MORE than five years since the commencement of the tax (financial) advice regime. The Tax Agent Services Act 2009 (TASA) was amended, generally with effect from 1 July 2014, to bring individuals and corporate bodies that provide tax advice in the course of giving advice that is usually provided by financial services licensees, or their representatives, within the regulatory regime administered by the Tax Practitioners Board (TPB).

This article examines what is, and what isn’t, tax (financial) advice (TFA), and how financial services

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professionals can meet their compliance requirements in a practical manner.

WHAT IS TFA? The definition of ‘tax (financial) advice service’ in section 90-15 of TASA involves the following key elements: 1) a tax agent service 2) provided by a financial services licensee or a representative 3) in the course of providing advice of a kind usually provided by a financial services licensee or a representative 4) the service relates to

ascertaining, or advising, a client about liabilities, obligations or entitlements that arise, or could arise, under a taxation law 5) the client receiving the service can reasonably be expected to rely on the service for tax-related purposes.

For example, TFA services may be provided in relation to strategic advice about a client’s long-term financial goals, when providing advice about the relative merits of particular financial products or advice regarding non-financial products such as real estate.

Element 1 – tax agent service Providing factual tax information or general taxation advice is not a tax agent service, and so cannot be a TFA service. For example, giving a client information about the tax consequences that usually arise from managed investment schemes is not a TFA service.

Elements 1 and 5 - reasonably be expected to rely It must be reasonable to expect a client could rely on the service for tax-related purposes for it to be a tax agent service. This same test is also applied in element 5. The

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November 21, 2019 Money Management | 37

Toolbox

term ‘tax-related purposes’ includes satisfying liabilities or obligations, or claiming entitlements, that arise, or could arise, under a taxation law.

‘General advice’ (as defined in section 766B of the Corporations Act 2001) is unlikely to be considered a TFA service, as it does not take into consideration the client’s specific circumstances, hence it is not reasonable to expect the client to rely on it.

Services provided by online calculators or information in product disclosures are not TFA services because they do not take into account all of a client’s circumstances, so it’s not reasonable to rely on them for tax-related purposes.

It follows that TFA services are generally associated with personal advice. There is no distinction in TASA between wholesale and retail clients – if personal advice is provided and the above five key elements apply, the service will be a TFA service regardless of the retail or wholesale status of the client.

More generally however, the reliance test is not straightforward.

The explanatory memorandum (EM) to the TASA amending bill provides some guidance on reliance for purposes other than tax-related purposes.

Where it is reasonable to expect that advice is to be relied upon for purposes other than to satisfy tax obligations... such as making an informed financial or business decision...the advice is not a tax agent service.

The EM also states: ...it is often a fine line between whether an entity is merely providing information about the

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tax implications of particular financial products or giving tailored tax advice that could reasonably be expected to be relied on and therefore a tax agent service.

Example 1.2 indicates that advice stating real estate management fees of an investment property are generally tax deductible is not a TFA service.

A gearing recommendation is referred to from an earlier EM: In determining whether Adam has the cash flow to afford the interest costs on borrowed funds, Angelia [a financial adviser] estimates Adam's cash flow taking into account the potential tax deductibility of interest costs, the taxable nature of the dividends, the impact of franking credits on Adam's income tax position and his eligibility for certain tax offsets.

Although the taxation consequences are integral to Angelia’s advice, the advice is not a tax agent service (hence not a TFA service) as it cannot reasonably be expected that Adam will rely on the service for tax-related purposes.

Another example involves consideration of the capital gains taxation impact of selling certain parcels of shares.

Erica [a financial adviser] recommends that Caroline sells some of her existing shares and uses the proceeds for investment in managed funds to increase diversification of her investments. In assessing which shares Caroline should sell, Erica alerts Caroline to the fact that selling certain shares could

potentially raise CGT liabilities.

This would not ordinarily be a tax agent service because it is provided for the purpose of advising Caroline about an appropriate asset allocation that fits her risk profile.

The threshold between what is, and what’s not, a TFA service.

The threshold that elements 1 and 5 set appear clearer when the above examples are compared to Example 2.10: . ..In addition to providing advice about the tax implications of decisions about financial products, Norma [a financial adviser] provides extensive analysis of her clients' tax positions and details of the relevant entries into her clients' tax returns that would result from adopting certain financial product decisions. ... because the advice is extensive and sufficiently detailed to be able to be reflected in her clients' tax returns, it is reasonable to expect her clients to rely on the advice to satisfy their obligations under the taxation laws. As such, Norma is providing a tax agent service.

Norma provides “extensive analysis of her clients’ tax positions and details of the relevant entries into her clients’ tax returns”. This more detailed focus and the impact on the tax returns appears to cause Norma to cross the threshold into a tax agent service, hence the advice is a TFA service.

We have seen that providing tax-related factual information regarding managed investment schemes may not be a TFA

Continued on page 38

13/11/2019 3:01:40 PM

38 | Money Management November 21, 2019

Toolbox

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

1. In the article, how many elements are there to the definition of Continued from page 37

tax (financial) advice service? a) Four

service. However, applying that information on a more detailed and extensive basis to the specific circumstances of the client, to an extent that it is reasonable for a client to rely on it when completing their income tax return, may be a TFA service.

Similarly, providing factual information about SMSF establishment is not a TFA service, but advice on how an SMSF compares to an APRAregulated super fund in relation to the client’s particular circumstances may be a TFA service.

Current or future financial affairs If the advice relates to future income tax years, that issue alone will not preclude the advice from being a TFA service.

b) Five c) Six d) Seven 2. What do elements 1 and 5 have in common? a) They apply to registered tax agents only b) The service must be relied on for tax-related purposes c) They apply to retail clients only d) None of the above

Superannuation advice Paragraph 2.45 of the EM indicates that advice on the deductibility of superannuation contributions, or the extent to which superannuation benefits would be subject to tax, may constitute a TFA service.

With regard to superannuation advice, the distinction between factual information, general advice, and advice specific to the circumstances of the client are still relevant criteria for determining if a TFA service is provided, as well as the expectation of reliance on the advice for tax-related purposes.

Factual information about superannuation contribution caps is unlikely to be a TFA service. For example, advising a client that the concessional contribution cap is $25,000 in 2019-20, and the annual non-concessional contribution (NCC) cap is generally $100,000, is unlikely to be a TFA service.

However, taking into account a client’s recent NCCs and providing advice of their remaining maximum NCC capacity in 2019-20 is likely to be a TFA service, if it’s reasonable to expect the client may rely on that advice and make a contribution.

Similarly, providing factual information that the minimum pension payment requirement from an account-based pension for a person under age 65 is four per cent per annum is unlikely to be a TFA service. But calculating and advising a client of the amount of minimum pension based on their 30 June account balance is likely to be a TFA service.

3. Which of the following will generally not involve tax (financial)

WHY IS UNDERSTANDING TFA IMPORTANT FOR ADVISERS?

5. The tax (financial) advice regime generally became effective

Not all providers of personal advice are authorised to provide TFA or registered as a tax (financial) adviser with the TPB. For those who aren’t, it’s important they understand where the boundary lies between what is TFA, and what is not, so they don’t cross that boundary and provide advice they are not authorised to provide.

Given the ambiguity in the definition of TFA service, it would be prudent for all providers of personal advice to be either authorised to provide TFA services by a Financial Services Licensee that is registered with the TPB as a tax (financial) adviser, or be personally registered with the TPB themselves.

David Barrett is head of Macquarie Technical Advice Services.

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advice services? a) Factual information b) General advice c) Personal advice to retail clients d) Personal advice to wholesale clients e) a and b f) a, b and d 4. Which of the following is likely to be a tax (financial) advice service? a) Advising the amount of the current concessional contributions cap b) Advising the amount of the current annual non-concessional contributions (NCC) cap c) Advising a client how much they have remaining in their NCC cap d) Advising the minimum pension percentage prior to age 65

from 1 July 2009.

True/False

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ tax-financial-advice-five-years For more information about the CPD Quiz, please email education@moneymanagement.com.au

13/11/2019 3:01:51 PM

November 21, 2019 Money Management | 39

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

Appointments

Move of the WEEK Justin Untersteiner chief operating officer AFCA

The Australian Financial Complaints Authority (AFCA) has appointed Justin Untersteiner as chief operating officer, beginning from 2 December, 2019.

Untersteiner is currently assistant commissioner of integrated compliance at the Australian Tax Office (ATO).

David Locke, AFCA chief

Stuart Develyn is transferring from his role as general manager of customer service to a new role at AMP Capital, creating an opportunity for a restructure which would reflect the transformation strategy recently released by SuperConcepts.

Michael Pease, general manager of operations, would oversee Develyn’s responsibilities and assume the new title of general manager, operations and service.

Lara Bourguignon, SuperConcepts chief executive, said the company had a long history of promoting career pathways and the opportunities across AMP allowed for that exchange of talent.

“Stuart has done amazing things at SuperConcepts in running our client teams and I know he’ll be a major asset at AMP Capital,” Bourguignon said.

Bourguignon said the organisation’s operations are tightly linked to client service, so it

20MM211119_40-44.indd 39

executive and chief ombudsman, said Untersteiner had significant expertise in corporate services and operations that led to important programs at the ATO. During his time at the ATO, Untersteiner was responsible for leading the ATO’s approach on complex taxation and

made sense to have a single point of contact and accountability.

“This new role is acknowledgement of Michael’s value to our leadership team as someone who has successfully run an SMSF business, and has a deep understanding of linking operational processes to outstanding client outcomes,” Bourguignon said.

Fixed income investment manager PIMCO has appointed Annisa Lee as executive vice president and head of Asia Pacific credit research.

She would be responsible for active issuer coverage and lead a team of eight credit analysts across Tokyo, Hong Kong and Sydney in delivering research for the broader platform.

She would partner with PIMCO’s Asian portfolio management team, led by portfolio manager, Asia, Stephen Chang to expand the firm’s credit strategy offerings

superannuation matters.

He was also previously chief financial officer, responsible for an annual budget of $3.5 billion, led the ATO’s corporate procurement and tax management branch, and the delivery of the ATO’s strategy and client experience work in the individual taxpayer market.

across Asia.

Based in Hong Kong, she would report to Christian Stracke, global head of credit research based in Newport Beach, California.

The Financial Planning Association (FPA) has added William Johns as a new board member, while Alison Henderson and David Sharpe have been re-elected for second terms.

Johns had been a member since 2008 and was chief executive and founder of social enterprise Health and Finance Integrated, which offered financial advice for people with disabilities and chronic health conditions.

Henderson was previously appointed to the board on 22 November, 2016, and was director and practice principle of SWA Financial Planning (previously known as Symes Warne and Associates).

Sharpe, who runs his own self-licensed financial planning firm Global Financial Planning, was also originally appointed on 22 November 2016 and had been a member since 2003.

All three positions were for three years and they would be officially appointed at the annual general meeting on 27 November, 2019.

Plato Investment Management has appointed Charles Lowe as a senior quantitative analyst, joining from Macquarie Quant Hedge Funds.

In an announcement, Plato said Lowe had worked as a quantitative analyst for more than six years for Macquarie and had over 15 years’ experience in investment management.

David Allen, Plato Investment Management head of long/short strategies, said: “In the information age, data is the new oil.

13/11/2019 11:41:13 AM

OUTSIDER OUT

ManagementNovember April 2, 2015 40 | Money Management 7, 2019

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

You won’t die wondering what P2 thinks

O Little Code of FASEA O little board of FASEA How still we see thee lie Above thy deep and dreamless sleep The silent months go by Yet in thy ineptitude shineth Every poor adviser’s plight Exams and codes and many fears Are met in thee tonight

GIVEN that this is the last Money Management print edition before the festive season, Outsider believes it is appropriate to launch a new award – the Outsider/Money Management you won’t die wondering award.

It is an award that is up there with giving someone a warning shot right between the eyes.

And the winner of the inaugural award is (drum roll) none other than the Association of Financial Advisers general manager of policy and professionalism, Phil Anderson.

Anderson is, of course, P2 alongside the AFA’s P1, its chief executive, Phil Kewin, but the judges awarded Anderson the inaugural gong because of his outspoken defence of the industry against all comers in 2019 from Royal Commissioner, Kenneth Hayne, to the entire board of the Financial Adviser Standards and Ethics Authority (FASEA).

Indeed, if there were any doubts about P2 being named the inaugural winner they were scotched by his latest missive to members in which he not only accused the FASEA board of trying to rewrite the law but also enjoined the industry to reject the code of ethics and ask the Government to delay on its commencement.

Outsider feels sure that Phil’s message has been received loud and clear and his award certificate is in the mail.

Outsider is not game to ask P2 what he thinks.

For FASEA is born of O’Dwyer And gathered all above While advisers weep, the regulators keep Giving legal action a shove O planning groups together Proclaim the unholy birth And lobbying ring to Frydenberg the King Of policy there is a dearth How silently, how silently The wondrous code is given So FASEA imparts to adviser’s hearts An exam timetable that is driven No ear may hear FASEA coming But amid Royal Commission sin Where weak souls will receive it still FASEA enters in.

Confusing ESG with sodium glutamate OUTSIDER chuckled as he sat back in the large auditorium at the Association of Superannuation Funds of Australia (ASFA) conference in Melbourne while the event opened with a video that had ‘regular people’ interviewed about various superannuation questions.

One of the questions asked: “Do you know what ESG is?” in which the participant answered: “Is that a Chinese food?”.

Perhaps, Outsider thought, the chap misheard it for ‘MSG’.

Now, Outsider is not a young lad but likes to think of himself as being in the second prime of his life and was surprised

OUT OF CONTEXT www.moneymanagement.com.au

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that people who were generations younger than him did not know what a simple acronym stood for when it was something most studies found that ‘young people’ cared so much about.

Perhaps these young folk are more interested in the ‘E’ part – environment and have been neglecting the social and governance side, Outsider pondered.

In any case, Outsider thought, all the delegates at the conference would know what ESG stood for, at least by the end, as so far from what he’s heard every speaker has made it a point to discuss some form of sustainability and ESG.

"Boris, from a young age, has known that it's better to make a joke than be diligent."

"Australia's addiction to single use prime ministers is problematic."

- Sebastian Mallaby speaking about his high school days with UK PM Boris Johnson at the ASFA conference

- Annabel Crabb opening the ASFA conference

Find us here:

13/11/2019 4:27:53 PM

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Sustainable and quant investing: Two powerful forces, one positive outcome Discover a winning combination for strong returns Robeco is a leader in two very different investment fields: sustainable and quant investing. By combining the strengths of both, we can meet our clients’ needs with the best possible solutions. These include a range of quant strategies that take into account various sustainability considerations. As pioneers in factor investing, we also offer single and multi-factor solutions, for both equities and fixed income. And all these strategies benefit from sustainability research by our center of sustainable investing expertise, RobecoSAM.

Harness the potential of SI and quant.

Visit www.robeco.com/au

Important information This document is distributed in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (‘Robeco’) which is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission under the laws of Hong Kong and those laws may differ from Australian laws.

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www.moneymanagement.com.au

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

Vol. 33 No 20 | November 21, 2019 PRINT POST APPROVED PP100008686

Sustainable and quant investing: Two powerful forces, one positive outcome THE NUMBER 1 IN SUSTAINABLE INVESTING* * FundBuyer Focus Report 2019. Brand survey on independent asset managers amongst >850 European fund selectors

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