Money Management | Vol. 35 No 22 | December 2, 2021

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MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

Vol. 35 No 22 | December 2, 2021

13

INFOCUS

The average advice firm

RETIREMENT INCOME

26

Longevity challenges

WRAP UP 2021

CGT for small businesses

Advisers should help change spending behaviour

BY JASSMYN GOH

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A case of deja vu FOR the world, 2021 may have been viewed as a continuation of the environment created in 2020 due to the COVID-19 pandemic, albeit now helped by the development of a successful vaccine.

For advisers, it is like a case of déjà vu as they battled with yet another round of compliance and legislation brought in as a result of the Hayne Royal Commission.

They also had to rush to complete the Financial Advisers Standards and Ethics Authority (FASEA) exam before the end of the year. Although an extension was announced until 30 September, 2022, this only applied to those who had failed the exam twice.

FASEA was also set to be wound up into the Australian Securities and Investments Commission (ASIC) from 2022 after the body was criticised for poor organisation and management, going through three chief executives in as many years.

Meanwhile, in markets the ASX 200 remained in positive territory with returns of 16% since the start of the year but lagged global markets as the second wave of the pandemic threw multiple states into an extended lockdown while other countries were opening up.

It was yet to be seen what the long-term economic effect of this would be but forecasters were optimistic Australia was already coming out of the worst of it.

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TOOLBOX

FINANCIAL advisers should focus on changing the behaviour of clients and delivering advice as retirees are not spending their retirement income, according to a whitepaper.

Speaking at a media briefing, MYMAVINS consulting partner, Jason Andriessen said despite people not intending to bequest large amounts of their superannuation, they were not spending it either as they did not know how much to spend.

Andriessen said many retirees used the government’s accountbased pension minimum level as their guide.

“Most of the value that we add in the short-term is helping a client feel more confident to spend, understanding what they control and what they can’t control, and having a plan B so that they feel more resilient. We are, as an industry, standing in the way of

that,” he said.

“Financial advisers should focus more on changing the behaviour of their clients and delivering advice is my observation.

“Delivering a statement of advice, and I get that that’s the legal requirement, with 20-point action plans is not helpful. It’s creating learned helplessness and not empowering at all. If we can get to a stage where we’re changing behaviour one at a time, I think that’s the key.”

He said changing behaviours started with redefining what a good financial decision was and if client satisfaction surveys were repurposed it could measure how confident and in control retirees felt and that would drive different outcomes.

Andriessen said MYMAVIN’s 'Retirement: The now and the then' whitepaper commissioned by Continued on page 3

Happy Holidays

from Money Management THIS is the final print edition of Money Management for 2021.

The entire Money Management and FE fundinfo team wish our readers a safe holiday season and a prosperous 2022.

Money Management will resume print publishing in February, 2022.

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December 2, 2021 Money Management | 3

News

Robo-advice as conflicted as vertical integration: AIOFP

BY CHRIS DASTOOR

ATTEMPTS to introduce robo-advice into the Australian market have overlooked the fact that it has not worked anywhere else in the world, according to the Association of Independently Owned Financial Professionals (AIOFP).

Peter Johnston, AIOFP executive director, said the introduction of roboadvice compared to the vertical integration model introduced by the banks.

“The greatest industry conflict over the past 30 years has been when the banks introduced the profoundly conflicted vertical integration advice model, this is a very similar concept without the human content,” Johnston said.

“It just another ‘sneaky’ strategy to only offer an in-house product to already existing clients regardless of their quality.

“It is about time academics and bureaucrats, who live in a different

world to most and never given advice or seen a consumer are removed from the industry debate.”

Johnston said politicians, the Australian Securities and Investments Commissions, and consumer groups failed to recognise the advice community did not want “bad eggs” in the industry.

“This failure has resulted in inexperienced humans making naive decisions resulting in massive red tape strangulation, duplication and ridiculous uncommercial conditions that ironically consumers are indirectly paying for,” Johnston said.

“There is a minor place for roboadvice going forward in conjunction with human advisers to assist when things go wrong with markets and/or products.

“The last thing we want are a bunch of academics trying to develop a conflicted product to ‘clip’ the ticket on industry revenue.”

Advisers should help change spending behaviour Continued from page 1 Fidelity found it was pre-retirees that worried about running out of money.

“Retirees realise that they can be flexible and they understand the difference between their needs and wants and they’re willing to give up on their wants if things go off track. What they’re particularly worried about is growing old with dignity and ageing well,” he said.

The whitepaper said to build client capability, financial advisers could make their strategy development more transparent and include the client in their deliberations.

“When the client co-creates their financial plan they feel more empowered because they better understand the considerations and trade-offs,” it said.

“The implementation of the strategy could be staged over time to embed behaviour change. When we change our behaviour and see the benefits, we feel successful, which builds our confidence and improves our emotional experience.”

For instilling spending confidence, the white paper said a helpful framework for contingency planning was needed to anchor clients’ consumption needs rather than their savings balance or investment capital.

“Ultimately, pre-retirees and retirees are seeking confidence to spend. If they’re comfortable that they can spend today and still be responsible for the future, they’re happier,” it said.

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Expect slowdown in regulatory change in 2022 WITH a Federal Election and multiple reviews in the industry that will be underway, 2022 will be a quiet year when it comes to regulatory change, according to the Financial Planning Association of Australia (FPA).

Ben Marshan, FPA head of policy, strategy and innovation, said things were already locked in from a regulatory change perspective.

Next year, Treasury would have its review into advice, which included the Life Insurance Framework review, and the Australian Law Reform Commission (ALRC) would have its review of the Corporations Act. “We’re not going to see a lot of regulatory change in 2022 because we have the reviews on, and we also have an election coming up, so 2022 is going to be fairly settled from a regulatory change perspective,” Marshan said.

“It gives us an opportunity to settle in, but we’ll get to the end of 2022 and we’re going to have more reports coming in which are going to say these are the improvements that need to be made around the regulation of financial advice to make it more accessible to consumers [and to] make sure it can be provided

efficiently and affordably, but we won’t see any of that next year.

“It’s a massive opportunity in 2022 to look at your business, look at your processes, look at your clients and just settle things down and re-engineer the business the way that you need to make it work.”

With a Federal Election due, the country was most likely to see more consumerfocused issues for financial services, similar to the 2019 election which followed the conclusion of the Royal Commission.

“We’re going to see the election fought on consumer issues, so there are likely to be policy positions that the two main parties will take in relation to superannuation, taxation, property investments and things like that,” Marshan said.

“From that perspective, the focus is terms of the election and probably the budget and the outcome of the election is going to be focus on the advice we provide, not the way we provide advice. “[This] is kind of where the last election was more fought in terms of the Royal Commission and implementing the Royal Commission [recommendations] because that was about how advice was provided, not how to fix clients.”

25/11/2021 2:00:22 PM

4 | Money Management December 2, 2021

Editorial

jassmyn.goh@moneymanagement.com.au

THE END OF YEAR RUSH

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

All eyes will be looking at the compensation scheme of last resort legislation in its final form as it could pass before the end of the year along with what direction the education authority will take on Standard 3.

AS 2021 draws to a close it will be a rush to the end of the year with a number of issues left to resolve.

As of writing, the compensation scheme of last resort (CSLR) legislation still has not passed but the government should reconsider its stance on expanding the scheme to managed investment schemes (MIS).

The minister for superannuation, financial services and the digital economy, Jane Hume, recently said that CSLR should not be expanded to cover MIS or highrisk investments despite multiple calls from industry associations to do so.

Hume’s reasons included that the CSLR was not designed to pay compensation to any consumer who lost money in an investment and that it was intended to cover unpaid compensation due to misconduct relating to a target range of products and services.

However, in the case of the Sterling Income Trust, it was complicated to understand and the information given to consumers was not enough to disclose its complexity.

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

If the government does expand the CSLR not much is stopping other complicated MIS with overly-ambitious business models from operating.

Another rush to the end of the year will be the Financial Standards and Ethics Authority (FASEA) amendment to its problematic Standard 3 of its code of ethics given by 1 January, 2022, FASEA would have folded into Treasury. This means, the amendment announced would need to be finalised before the end of this year.

The last 2021 FASEA exam results will also come out before the end of the year, the last chance for advisers who cannot

use the exam extension to pass.

The results will give an indication of how many advisers will have to walk away from the industry, before the 2026 education requirement deadline.

This is the last print edition of Money Management for 2021 and will be back in February 2022. The Money Management daily newsletter will continue through to Friday 17 December and resume in the second week of January, 2022.

The Money Management team wishes our readers a happy holiday season and a safe and prosperous New Year.

Jassmyn Goh Editor

WHAT’S ON Victoria Risk and Compliance Discussion Group

FPA ACT Chapter end of year gathering

AFA end of year celebration

FPA Sydney Chapter Christmas celebration

Online 7 December superannuation.asn.au

Canberra 7 December fpa.com.au/events

Melbourne 15 December afa.asn.au

Sydney 15 December fpa.com.au/events

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Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au

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6 | Money Management December 2, 2021

News

The days of one-man band advice practices is over

BY JASSMYN GOH

THE days of the one-man financial adviser band is likely a thing of the past and the profession will end up with a number of different business models, according to an adviser.

VISIS Private Wealth partner, Chris Smith, said there was not enough time in a week for one adviser to service a profitable client base while also focusing on compliance without sacrificing some quality of advice. He said every adviser would need at least one full-time staff member.

“Compliance is a time consuming activity. We use an external compliance consulting group as well because we just need extra expertise,” Smith said.

“The compliance consulting firm comes in and work with us one day a week plus do all of our compliance make sure that our processes are efficient and effective.

“They pick up all the fee disclosure statements and opt ins, spot checks on the quality of the document to make sure

they’re compliant, and they give us advice on how to improve our documents and make sure that they are complying with the laws. So that’s a fair bit of work.”

Smith noted there were still many ‘one-man band’ operators that had their own financial services licences.

“A lot of them were one man practices licenced under different aggregators, or licenced dealers, and they might have got compliance support from those licensees.

But all of the risk is resting

with the licensee so those costs are going up as the licensee doesn’t want to take the risk of having rogue advisers out there working unsupervised,” he said.

“That’s another trend against them. These one man operations won’t be able to survive.”

Smith said eventually there would not be any massive advisory firms that had their own product and once the big houses were gone there would be smaller boutique practices of partners with underlying advisers and a team of support staff.

Financial planner salaries to be similar in 2022 DESPITE Australia experiencing talent shortage issues and data showing salaries are growing, financial planner salaries will likely be similar in 2022, according to data.

Robert Walters’ latest salary survey found financial planners in New South Wales with one to five years experience had a salary range in 2021 of $120,000 to $150,000, and the expected range for 2022 was between $120,000 to $160,000.

In Victoria, this dropped to $100,000 to $150,000 in 2021 and $110,000 to $160,000 in 2022.

Similarly, senior financial planners with over five years of experience had a salary range in 2021 of $140,000 to $175,000. It was expected that range to be $140,000 to $180,000 in 2022.

Paraplanners in 2021 had a salary range of $85,000 to $110,000 and had an expected salary range of $90,000 to $120,000 in 2022.

For the banking and financial services sector, the survey found 55% of businesses were giving pay rises in 2022, 81% of professionals were looking for a new job in 2022, 71% of professionals were confident about job opportunities, and 61% of professionals

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were expecting a pay rise in 2022.

Robert Walters said as a sector banking and financial services had rebounded with strength and strong performance in 2021. Competition in the big four banks had created a war for talent.

The firm’s managing director for Australia and New Zealand, James Nicholson, said Australia had done a employment disservice over the past decade with its complex skilled migration visa process.

“We do not anticipate a definitive inflection point but rather a slowdown of the recruitment process as firms that have stretched to land a hire in 2021 look at their decisions in a new light, taking more time and involving more people in the due diligence process, particularly for senior hires,” Nicholson said.

“Having the happiest staff but the lowest profits will provide little comfort for business leaders as economic supports are removed, inflation returns, and artificial buoyancy prompted by restrictions on movement recedes.”

The survey noted 70% of surveyed firms said they were likely to hand out pay rises and almost one-inthree employees expected a remuneration bump.

Why most active strategies fail

BY LIAM CORMICAN

MOST active fund managers succumb to recency bias which is one of the reasons why nine-in-10 equity managers have failed to outperform the index over the last 15 years, according to Hyperion.

Speaking at a webinar, Jason Orthman, deputy chief investment officer at Hyperion Asset Management, said his fund was able to beat the index because it avoided the trappings of most fund managers.

“That includes recency bias, and that’s a large aspect that drives markets which is effectively overweighting recent news flow or extrapolating current data points into perpetuity,” Orthman said.

“But life, business and investing does not work like that.”

Orthman said most fund managers were failing to adapt to a more competitive and digitised world of business and that the Global Financial Crisis (GFC) showed investors that fund managers were struggling to adjust.

“If you think about it, a lot of the lead portfolio managers grew up as analysts in in the late ‘90s or early 2000s and it was a really different economic environment,” he said.

“You really had a growth bubble there, average companies did well, you had that tailwind of growth and the world wasn’t digitised.”

Orthman said Hyperion was able to accrue alpha because its companies grew earnings at higher rates despite the tougher environment.

“As we rolled through the GFC our alpha accruals increased because if you have these market leading companies that can take market share and have strong organic growth – that’s really valuable and scarce in a world that’s not growing,” Orthman said.

Mark Arnold, Hyperion chief investment officer, said value and passive investing would not produce the same returns in a structurally changed world of lower economic growth, higher technological disruption and rising interest rates.

“In these circumstances we think passive investing and benchmark hugging, which a lot of our competitors employ as part of their investment process, only really work well when economic growth rates are high and disruption levels are low,” Arnold said.

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8 | Money Management December 2, 2021

News

Advisers finding new homes in support roles

BY CHRIS DASTOOR

ADVISERS struggling to comply with the Financial Adviser Standards and Ethics Authority (FASEA) requirements are often finding a new home in the industry in support roles, according to industry recruiters.

Speaking at an Association of Financial Advisers (AFA) webinar, Amy Morgan, Itch associate director – recruitment and selection, said the firm found a lot of advisers they interviewed could not undertake what was now required of them.

“They have – believe it or not – gone into those support roles because they still love what they do and the industry they work in, but it’s just one step too far,” Morgan said.

Cara Graham, TWD financial adviser/director and AFA Inspire WA state chair, said TWD were lucky to avoid that situation.

“We felt so fortunate as a business when all of those changes came through that are all our advisers were university educated and most had post-graduate degrees,” Graham said.

Jodie Perram, Itch managing director, said as the availability of really good advisers shrank as the ratio of support staff grew.

“For an adviser where in the past they might have had to done everything themselves and had that support with paraplanning, what we’re finding at the moment they’re putting in as executive assistants, client services roles,” Perram said.

“So really the adviser is there to do that higher-level decision making and advice and they’ve got all the people around them.

“Which comes back to the working from home scenario which is why for some businesses it simply doesn’t work because they are so shortstaffed in that adviser space.”

Graham said as an adviser she found it was good to have other people reporting in other areas but it was not a perfect solution.

“At the end of the day it’s really important as an adviser that sometimes you actually just need time to sit and think about a client,” Graham said.

“It’s about finding the right balance between what the adviser does and what the team does.”

With competition for talent, the panel also discussed the importance of moving up career wise.

Morgan said it was important to ask yourself ‘why’ if you were not moving up in the organisation.

“If you’ve reached a peak and you need to move somewhere else to go that next part in your career, then it is time to shoot,” Morgan said.

Perram said people who had spent 10 years in the same business would often make a poor choice in their next role.

More HNWs but growing unmet advice needs

No reason to expand CSLR: Hume

BY JASSMYN GOH

THE compensation scheme of last resort (CSLR) should not be expanded to cover managed investment schemes or high-risk investments, according to Senator Jane Hume, and would likely make funding it more expensive, not less.

Addressing a summit in Sydney, Hume, minister for superannuation, financial services and the digital economy, told delegates the CSLR should not be expanded to include a broader range of investment types.

“The CSLR is not an insurance designed to pay compensation to any consumer who has lost money in an investment,” Hume said.

“It is only intended to cover unpaid compensation awarded because of misconduct relating to a targeted range of products and services.

“The CSLR will also not cover managed investment schemes or other high-risk financial products.”

Making the CSLR a broad-based scheme would mean higher costs for retirees and mum and dad investors, she said, and give a Government-

THE COVID-19 pandemic has fuelled historical growth in the number of high net worth (HNW) investors but there is a growing array of unmet advice needs for HNW Australian investors.

Research by Investment Trends, commissioned by Praemium, found there was a 31% rise to 635,000 in the number of millionaires since a year ago at 424,000. These millionaires controlled $2.77 trillion in investable assets, up 37% from a year ago.

However, the research found 13% of respondents said they were happy to use investment advisers, 52% said they were happy to use advisers only to validate their own thoughts, to gain access to a wider range of investments or for technical skills, and 33% said they did not use advisers at all.

During the past year, the percentage of HNWs using accountants for tax advice rose from 52% to 56%, while those using investment advisers fell slightly from 41% to 40%.

Praemium chief executive, Anthony Wamsteker, said there was a growing array of unmet advice needs for HNW investors particularly in inheritance and estate planning, and strategies to reduce tax obligations.

“This presents an opportunity for Australian investment advisers to help meet these needs via a holistic total wealth management experience,” he said.

“Articulating the value their advice can bring and adapting to provide HNWs with superior and sophisticated service and technology will help to meet the needs of this growing and important investor segment.”

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BY LAURA DEW

backed guarantee for Ponzi schemes.

“Everyone who makes sensible, cautious, informed investment decisions would end up having their returns clipped to underwrite people who punt their savings on emu farms or tulips or other too-good-to-betrue high-return, high-risk investments,” Hume said.

“If you want to punt a portion of your savings on something speculative, knock yourself out. No government should stand in your way.

But you should be prepared to wear it when it goes wrong.”

For those who had suggested a broad-based scheme would make it less expensive, she said experience in the UK had found its levy was forecast to be over £1 billion ($1.8 billion) a year, less than 10 years since it had been launched and compensation had more than doubled from £243 million in 2013 to £564 million in 2020.

“To those in industry who believe that expanding the scheme will make it less expensive, I say: be careful what you wish for,” she said.

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December 2, 2021 Money Management | 9

News

Is cryptocurrency a Ponzi scheme?

BY LAURA DEW

CRYPTOCURRENCY has elements of a Ponzi scheme, according to AMP’s Shane Oliver, and is creating a speculative mania among investors.

Speaking to Money Management, Oliver, chief economist at AMP Capital, said Bitcoin and other cryptocurrencies lacked fundamental value and relied on other people’s speculation to keep rising.

“It doesn’t generate any income or any dividend, I am sceptical about that. It is a global phenomenon but lacks any fundamental value and

that’s where the risk lies,” Oliver said.

“In some ways, it’s a Ponzi scheme because it relies on other people buying it, most of it is speculation and it does not provide a service which are elements of it being a Ponzi scheme.

“People also get very evangelical about it which concerns me as they are probably the ones who got in early but not everyone is in that category.”

He said that if people wanted to invest, they needed to be wary and aware it could see big falls in price, in 2017 the price of Bitcoin fell by 80% and lost half its value in two

days. However, at that time, the asset was only narrowly held so fewer people were affected by the fall.

“People need to have their eyes open and recognise it is a punt and that they could lose their money, just because it’s gone up doesn’t mean it can’t fall back again,” Oliver said.

“If [an 80% crash] happened now then people could lose a fortune and that would definitely be a prompt for regulators to impose tougher regulation.”

In the past 12 months, the price of Bitcoin had risen 236% while Ethereum had risen 765% over the same period.

How to get financial advice to middle Australia

BY OKSANA PATRON

THE re-emergence of digital advice coupled with hybrid models will help deliver advice to middle Australia, a cohort who does not require a face-to-face advice but often remains excluded due to high costs, according to Link Advice.

Duncan McPherson, general manager, Link Advice, said that one of the key things for his business is the re-emergence of digital advice and the importance of the advice support.

“The financial planning model needs to be able to provide more advice to more people. The key thing for us is how do we get advice to middle Australia to those everyday Australians who do not have complex advice needs or complex situations,” he said.

“We think that digital has a role to play because those people often do not have probably the situation that demands face-to-face advice.

“We are investing our time around telephone advice, so telephone and digital, the hybrid advice which would allow us to provide the service to that everyday Australian cohort who probably do not need to have face-to-face to advice for a number of different reasons.”

Asked about the advice opportunity and market consolidation, McPherson said that one of such sectors were superannuation funds.

“We have certainly seen the merger of superannuation funds, which we provide the advice to the members and we see that obviously that trend is continuing and we see it directly having a beneficial impact on their model and the advice opportunity,” he said.

“A lot of the clients sit in corporate and industry superannuation funds. So, we will see a lot of movement in that in the first six months of 2022 and the relationship between those funds and advisers is becoming really healthy,” he said.

According to McPherson, finding new clients along with operational efficiency and cost reductions were one of the key challenges for advisers.

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Financial advice complaints on a downward trend: AFCA COMPLAINTS about financial advisers have continued on a downward trend in the new financial year, according to the Australian Financial Complaints Authority (AFCA).

Speaking at the AFCA member forum, Natalie Cameron, lead ombudsman for investments and advice, said advice complaints were low during the 2020/21 financial year and had been continuing to decline.

Some 1.8% of all AFCA complaints related to advice or were made about a financial firm which identified as an advice provider. This was a total of 1,238 complaints.

The advice complaints which were received related to failure to abide by regulatory principles or industry best practice, as well as a handful of complaints where felt they did not receive advice at all.

“I am pleased to say since 1 June, 2021, we have seen a continuing reducing trend of complaints against advisers,” Cameron said.

“At this early stage, it is looking like a 33% reduction in the first couple of months of the new financial year.

“So well done to everyone out there who is trying to get it right and trying to provide great advice to their clients.”

Over half of advice complaints were resolved in favour of the financial firm, Cameron said.

Looking at the investment and advice sector specifically, AFCA received 3,888 complaints and the majority of these related to shares.

The top five issues were service quality, inappropriate advice, failure to act in clients’ best interests, incorrect fees or costs and failure to follow through on agreements.

Around a third were resolved at the registration and referral stage and Cameron said this was an area that could be improved.

“About a third of the 3,888 complaints received are being resolved in registration and referral.

“I think there’s still probably opportunity for investments and advice to be resolved more frequently at that stage but it’s still a decent proportion being resolved.”

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10 | Money Management December 2, 2021

News

Adviser numbers continue to fall to 18,735

BY OKSANA PATRON

ADVISER numbers continued to fall by 25 to 18,735 in the week to 19 November even though large licensees owners dominated growth with seven of those with more than 50 advisers seeing net growth of 26 advisers, according to Wealth Data.

The net change of 25 in advisers number was a result of 22 licensee owners seeing a net growth of 46 advisers while 30 licensee owners had net losses of 74 advisers.

The growth was driven by Centrepoint Group which picked 11 advisers, mostly off the back of Mortgage Choice-owned Finchoice, with 10 advisers having moved across to Centrepoint’s licensee, Alliance Wealth.

Additionally, four new licensees were reported as having commenced their operations with a total of seven advisers.

IOOF topped the losses, with a departure of 13 advisers while

AMP Group and Commonwealth Bank (CBA) reported a loss of eight and four advisers, respectively.

Following this, Mortgage Choice, after losing 10 advisers through Finchoice, had only 25 advisers and the big groups experienced the biggest losses with 13 licensee owners of more than 50

advisers having lost a net of 42.

Looking at year-to-date data, Centrepoint after their big week moved into second position for growth of licensee owners of 50 or more advisers with a net growth of 13 while Oreana was still out in front with net growth of 37 and Canaccord was in third spot with an arrival of seven advisers.

Consumers fail to understand when they are receiving personal advice

BY LAURA DEW

CONSUMERS who receive information about financial products at conferences or seminars often do not realise that does not constitute personal financial advice, according to the Financial Planning Association of Australia (FPA).

Appearing before the Senate Economics Committee to discuss the collapse of the Sterling Income Trust, FPA head of policy, strategy and innovation, Ben Marshan, said the way these types of products were sold made it seem to consumers that “their dreams were coming true”.

Sterling Income Trust, run by Sterling Group, was sold to investors as a “lease for life” as their long-term tenancy was linked to investment performance. Investors were told the returns from their initial lump sum would be sufficient to cover the rent on the lease and no other payments would be required towards rent. When it later collapsed, people were unable to pay their rent.

Marshan said: “These type of schemes are targeted through seminars and radio advertising, they are very complicated to understand because they’ve got complicated business structures.

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“But the information that consumers are provided at the seminars make them sound like all their dreams are coming true.

“There’s not enough requirements for products to disclose the complexity and the risks when they’re in these seminars.”

He said consumers often mistakenly believed they were receiving advice at these types of events and that product providers failed to correct them.

“Research shows when consumers go to a seminar or attempt to speak to someone directly about a financial product, they think they’re getting personal advice and that the advice has considered whether the product is appropriate for them,” Marshan said.

“From the other side, the product providers know they are not providing personal advice and there is none of the personal advice protection there.

“But they don’t make that apparent to the consumer because it is not in their interest to send someone off to a financial planner.

“Consumers do not understand when they are and when they aren’t getting professional advice and that advice often isn’t in their best interest.”

Sequoia expects 16% rise in wealth revenue in 2022 SEQUOIA, which has reported the revenue from its wealth division of $62 million in FY21, has said it expects further increase to $72 million in FY22 thanks to tailwinds created by advisers reconsidering their long-term licensing arrangements after the banks exit from wealth industry.

At the same time, Sequoia announced revenues from the wealth division accounted for 53% of the group revenue in FY21 and, in FY22, it would represent less than 50% of group revenues.

Following that, the company said it expected the industry overall adviser numbers to continue to fall until 2024 then begin to increase “with an internal goal to provide services in some capacity to 1,000 advisers by that time”.

The company said in its announcement made to the Australian Securities Exchange (ASX) addressing its 2021 annual general meeting (AGM), it was on track to realise its five-year business plan set out in 2019 to build ‘a much larger business’ with $400 million revenue by 2024/25 and confirmed its FY22 forecast EBIDTA was to increase by more than 15% on FY21 result.

In the chair’s address, Sequoia confirmed that it would remain focused on investing for growth and expected future growth to come from “a mix of organic and acquisitional activities”.

“We are particularly looking to increase the number of services we provide advisers, accountants and aligned businesses who can serve a community where there appears to be an emerging shortage of advisers able to serve demand for such services,” the company said.

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December 2, 2021 Money Management | 11

News

Consumers unwilling to face reality of failing investments

BY LAURA DEW

Easton confirms exit of 100 limited advisers

BY OKSANA PATRON

MEMBERS of failing investment schemes are unwilling to consider they might be in trouble if they are still seeing positive returns, making it hard for the regulator to crack down early.

Appearing before the Senate Economics Committee, Australian Securities and Investments Commission (ASIC), senior executive leader for insurers, Rhys Bollen, was asked why ASIC had not investigated the failing Sterling Income Trust earlier.

Bollen said it was difficult to convince people of problems at an early stage if they were still seeing positives from their investment.

“If you ask the investor ‘are you happy?’, and they have the benefit of a roof over their head and they’re living in the residence then they have no reason not to be happy,” Bollen said.

“It’s like if you went to the passengers on the Titanic in the main dining room and asked if they were having a pleasant journey. They would say ‘yes’ but the fact of the matter is there still aren’t enough lifeboats and it is a tragedy waiting to happen.”

ASIC chair, Joe Longo, added people had viewed the

investment as attractive which made it difficult for them to accept that it was not as good as they expected. Earlier in the day, Ben Marshan, head of policy, strategy and innovation at the Financial Planning Association of Australia, had told the committee investors viewed the scheme as “their dreams were coming true”.

Longo said: “If things are going smoothly at that moment, it’s very hard for someone to disrupt that

decision. If things are going well, they don’t want someone like me or ASIC coming along and telling them they have made the wrong decision and they shouldn’t be enjoying those returns.

“There’s a real ambivalence on the part of investors to face a reality that they didn’t expect to have to face.

“With the benefit of hindsight and knowing what happened afterwards, we could have moved more quickly.”

AFCA examines possibilities for fairer funding model THE Australian Financial Complaints Authority (AFCA) is examining how it can reduce crosssubsidisation when it comes to levy funding and treat smaller firms more fairly.

Speaking at the AFCA member forum, chief executive, David Locke, said AFCA was awaiting the results of a Treasury independent review into the body which was expected “any day now”.

Regarding what the review might advise on fees and funding, Locke said AFCA was already exploring how it could reduce cross-subsidisation in particular.

“This is something we have been considering and we are awaiting any recommendation from the independent review,” Locke said.

“Our starting point was to establish principles and one of us was around cross-subsidisation. You don’t want to have insurers cross-subsidising the

22MM021221_01-13.indd 11

work they handle with banks or financial advisers being granted fees related to other areas.”

Another area was how funding could work for small firms or those which received few complaints.

“We are also looking at how we can keep fees low, particularly for matters that involve a small amount of funds and where they are being resolved very early on, in the registration stage,” Locke said.

“We’re looking at how we can work with smaller members or members who have very few complaints.

“Clearly, when you make any changes to a funding model, it will mean you have some people who pay less and some who pay more so we will have to look at how fair that is. We are very conscious of that and want to have a sustainable funding model as we are very aware AFCA is funded by its members and we want it to be fair.”

EASTON Investments, which sought a change of company name to Diverger Limited at its 2021 annual general meeting (AGM), has confirmed 23 new full advisers in 1H will offset an approximate 100 limited advisers expected to depart due to the Financial Adviser Standards and Ethics Authority (FASEA) reforms.

Further to that, the company said it expected lower growth rate from continuing operations, higher corporate costs through re-investment in leadership and company infrastructure and continued exploration of strategic merger and acquisition opportunities to accelerate growth in net revenue.

The company also confirmed that part of its investment in growth strategy assumed the launch of a service offer to self-licensed advisers and a further development of HUB24 partnership.

As far as its wealth solutions were concerned, Easton said it would expect higher growth occurring in both net revenues and earnings contribution and a full year contribution from Paragem acquisition, with scale benefits improving margins.

Addressing its 2021 AGM, Easton Investments chair, Kevin White, said that following the resetting of the company’s strategic plan under the guidance of new managing director, the company would aim to build scale and expand the delivery of its core services to the accounting and wealth sectors with the support and backing of HUB24 as a significant shareholder.

Easton Investments also confirmed it rebranded to Diverger Limited, following shareholder approval, to better reflect its culture and growth strategy.

“A refreshed brand with a contemporary look is well overdue and the proposed new name, ‘Diverger Limited’, is considered by the board to better reflect the reset strategy and to differentiate the company in a competitive market,” the firm said.

24/11/2021 3:04:27 PM

12 | Money Management December 2, 2021

News

Financial advice delivery needs to be simplified

BY OKSANA PATRON

THE industry needs to work together to simplify the delivery of advice whilst keeping the wellbeing of clients at the core of its services, according to Australian Unity Advice.

Executive general manager, Matt Brown, said the financial advice industry had remained focused on complexities of its environment in 2021 but the year ahead would need to see a better solution aimed at simplifying the process of advice delivery.

This would be a solution covering legal, regulatory and technology reform, with the framework enabling both traditional and digital forms of delivery.

“With high vaccinations and international borders reopening, it is a crucial year for Australian clients as households reset their financial and investment goals. Advisers have a clear opportunity next year to support our nation through this period,” Brown said, commenting on the outlook for the industry for 2022.

“But for maximum impact, we must be looking toward a simpler advice framework that will lower the cost of advice, reduce the administrative time requirements for advisers, and therefore help a much larger client base.”

According to him, financial advice would belong in the ‘wellbeing domain’, which would be equally important next year.

Asked about his reflections on 2021 for the advice industry, Brown said: “The words complex and complexity are fitting terms to describe our industry’s operating environment this year. The rapid reforms introduced,

exiting advisers and a switch back to virtual services in many cities challenged our industry at a time where Australian households needed advice services most.”

At the same time, providers felt the pressures of introduced legislation, which greatly increased the cost of advice and placed higher responsibility and risk on individuals.

“The shifting framework has been a double-edged sword for clients, having been introduced to protect them but also leading to a more expensive and less accessible model of advice. Ultimately, it is Australian clients who are most impacted,” he said.

“Another year of COVID-19 uncertainty has reminded many that financial security is paramount, and good financial advice plays a vital role in supporting households.

“Despite the near-term challenges we face as an industry, adopting a model that sustainably protects and nurtures the wellbeing of more Australians must be our long-term priority.”

Advice ‘about emotions, not numbers’

PII key to CSLR viability

BY LAURA DEW

VIABILITY of a true compensation scheme of last resort (CSLR) is only ensured if all Australian financial services licensees have appropriate professional indemnity insurance (PII), according to CPA Australia.

In a submission to the Sterling Income Trust inquiry, CPA Australia recommended Treasury undertook a Government-funded thematic review of PII for the retail personal advice sector. It said the key risks included accessibility, adequacy, exclusions, and impact on capital adequacy of the licensee.

It also recommended the Australian Securities and Investments Commission (ASIC) require all licensees to submit their PII cover details as part of the existing annual compliance obligations.

CPA noted a contributing factor to the need for the CSLR was the failure of PII to respond appropriately to disputes, and this often led to awarded decisions by the complaints authority remaining unpaid.

“Accessibility and affordability of PII for the retail personal advice sector have been challenges for many years, with the impact of the Financial Services Royal

FEMALE financial advisers have the opportunity to highlight their different skill sets as female clients do not want to be “talked down to” by a male adviser.

Speaking to Money Management, Natallia Smith, principal financial adviser at Melbourne-based TruWealth Advice, said she had specifically focused her practice on female clients who were single, widowed or divorced.

She said there was a trend among women who had relied on men in their life to look after finances which meant they were unsure how to act after a death or divorce.

“I have women come to me who say they left the finances to their partners, or that they’re ‘bad at maths’ or are fearful so they haven’t achieved financial independence and my job is to give them the knowledge they need to do so,” Smith said.

“Women have the mentality that it’s the ‘man’s job’, they might be good at saving and budgeting but they haven’t got into investing. They accumulate this money and then they struggle to know what to do with it and have it sitting in cash.”

She said female advisers had a different skillset to male ones which meant female clients sometimes preferred to speak with an adviser of the same sex as them.

“It’s more about communication, women are more empathetic, men focus on the results achieved in performance terms but for women it’s about the impact and the outcome of the investments. Women don’t want to be ‘talked down to’ by a male adviser,” she said.

“Financial planning is about people and emotions, not numbers.”

22MM021221_01-13.indd 12

BY JASSMYN GOH

Commission resulting in some PII providers exiting the market,” it said.

“The shrinking nature of available cover and associated risk premiums have resulted in many Australian Financial Services (AFS) licensees increasing their excess payable or accepting exclusions in cover to secure PII on an ongoing basis. It is also not uncommon for the approval process for PII to take three to six months.

“To ensure adequate consumer protection and the viability of a true CSLR, AFS licensees must be able to access affordable cover that is adequate for the nature of the licensee’s business and can adequately meet the potential liability for compensation claims.”

CPA said the corporate regulator only assessed if PII cover was appropriate for a licensee at the time of application or as part of a surveillance activity.

It recommended that ASIC adopt a model that required AFS licensees to continue to hold and retain appropriate PII cover.

CPA said this would motivate some non-compliant or at risk AFS licensees and would provide insights to the regulator on trends and issues that might be occurring in the PII market.

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December 2, 2021 Money Management | 13

InFocus

SUCCESSFUL ADVICE FIRMS WILL NEED NEW OPERATING MODEL Financial advice businesses will need a new operating model if they want to remain successful which will be underpinned by technology creating more efficiencies, writes Oksana Patron.

THE RESULTS OF Iress’ inaugural Advice Efficiency Survey, which surveyed more than 100 advice businesses, have found successful advice practices are expecting to see their operating models change over the next three years. The new models will be underpinned by technology aimed at streamlining processes and creating more efficiencies.

Additionally, the survey results proved that those businesses that used a single technology platform to produce advice documents saw significant time savings across all key advice areas, including creating statements of advice (SOA).

According to the data, currently the average number of technology platforms used by advisers stood between two and three.

“Advice practices using one technology platform were able to produce basic new SOAs in 6.1 hours versus 8.7 hours for those using two or more technology platforms. By underpinning their operating models with efficient technology, advisers can optimise their processes, provide advice faster, and scale their businesses,” said Rod Bertino, owner of practice development consultancy Business Health.

Iress commissioned Bertino’s firm to conduct the research to rate the sentiment of Australian

WHAT DOES THE AVERAGE ADVICE PRACTICE LOOK LIKE?

financial advice practices regarding future growth.

According to Bertino, advisers could be making better use of digital tools to engage with clients at scale.

“The research showed that only one-third of advisers surveyed use digital tools to help visually present information to their clients, and just 13% use digital tools for client education,” he said.

“The survey results also showed that advice practices can create scale by minimising the technology platforms they use.

Advisers should look to continually optimise processes,

automate repetitive tasks and harness technology to enhance client engagement and increase productivity. This can create scale and boost profits in advice practices of any size.”

At the same time, Bertino stressed that there were some significant differences between the firms based out of a regional/rural location and those in major cities, with the first ones seeing advisers predominantly work from their office, spend less on technology and less likely to be outsourcing to external specialists. However, rural advisers were more confident when it came to

maximising their technology systems, with 21% having reported they did not need any additional training or support versus only 6% of the city-based practices.

Rural advisers were also able to conduct more client meetings but only 28% were willing to outsource the management of their IT infrastructure compared to 41% of those based in the city firms.

“The average spend [on technology] is $12,221 per fulltime employee in regional-based practices versus $13,310 for those in the city. Interestingly, a quarter of country-based firms did list rising technology costs as their number one technology challenge,” Bertino said.

Discussing how important technology was for advice businesses when it came to address growing compliance and administrative burden, Bertino said that 60% of the surveyed advice practices pointed to these two things as “the greatest impediment to growth”.

“Many advisers could better utilise technology to help meet their compliance obligations – over half of the advice practices we surveyed are still maintaining a manual complaint and breach register and one-third do not regularly leverage their technology platform to ease the burden of compliance audits.”

$1.1m

6.8

133

Average revenue

Average number of full-time employees

Average clients per adviser

Source: Iress Advice Efficiency Survey 2021

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24/11/2021 3:11:25 PM

14 | Money Management December 2, 2021

Wrap up 2021

A CASE OF DÉJÀ VU

There was no let-up in compliance and regulatory changes for financial advisers in 2021, writes Laura Dew, as they rushed to meet the FASEA deadline by the end of the year.

MUCH LIKE THE extension of the COVID-19 pandemic and lockdowns into this year which felt like déjà vu for many Australians, there was no let-up for advisers either as the volume of compliance continued unabated. Meanwhile, the ASX 200 returned 16% but lagged global markets and rates were held at 0.1%.

There was also a rush by advisers to pass the Financial Advisers Standards and Ethics Authority (FASEA) exam by the end of the year, even with the welcome introduction of an extension until

22MM021221_14-27.indd 14

30 September, 2022, for those who had failed twice.

Here, Money Management examines some of the key events to have taken place this year.

FASEA CEASED AND TAKEN OVER BY ASIC It was all change at FASEA when it was announced it would be wrapped up and management taken over by the Australian Securities and Investments Commission (ASIC) at the end of 2020, three years after it was launched.

During its tenure, the body had seen multiple chief executives in

the shape of Stephen Glenfield, Mark Brimble, and Deen Sanders.

The organisation had been criticised by politicians for its organisation, management and delays to measures such as the code of ethics with Labor’s Julian Hill declaring in the Senate that it had a “litany of stuff-ups” and was a “stunning admission of failure”.

The last exams run by FASEA were held in November but advisers were left confused by whether this was the actual deadline.

In June, Treasurer Josh Frydenberg announced there would be limited exemptions available to

people who had sat and failed the exam twice. It was later clarified that this deadline would apply until 30 September, 2022, as advisers rushed to book for multiple sittings by the end of the year.

However, it was expected advisers taking the exam again in 2022 would likely have to pay more for it when it was run under ASIC. Within Better Advice Bill legislation, it stated the exam would cost $948 to sit compared to $540 plus GST under FASEA, and candidates would need to pay $95 to be registered as a relevant provider.

As of 26 October, 2021, there

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December 2, 2021 Money Management | 15

Wrap up 2021

were still 4,213 advisers on the ASIC Financial Adviser Register (FAR) who were yet to pass the exam. Overall, 88.5% of advisers who had sat the exam had passed.

FASEA pass rate in 2021 January

67%

March

69%

May

69%

July

60%

September

61%

Source: FASEA

CONTINUED EXITS

BY ADVISERS As the industry bedded down recommendations from the Hayne Royal Commission, this led to the introduction of yet more regulatory measures for advisers to understand and comply with.

These included the single disciplinary body, independence disclosure, ongoing fee arrangements and fixed term agreements then breach reporting requirements, complaints handling requirements and design and distribution obligations (DDO).

Unsurprisingly with all this compliance, combined with the FASEA exam requirements, there was no let-up in the loss of advisers during the year as a result.

According to Money Management’s TOP Financial Planning Groups data, the number of advisers had fallen to 12,000 from 16,140 in 2018. The overall number of current advisers, as listed on the FAR, also slipped below the 20,000 threshold this year.

The smaller numbers of advisers led to higher costs for consumers to access advice, coinciding with the largest transfer of intergenerational wealth in history, while the end of

grandfathered commission was another prompt for advisers to exit the business or change their operating model.

At the same time, there were fewer entrants coming to the market with firms reluctant to take on entrants for a professional year and graduates unaware of the benefits of financial advice and deterred by the industry’s reputation.

The industry was encouraged to do more to show it had rebuilt its reputation and made improvements since the Royal Commission if it wanted to be recognised as a professional industry.

YOUR FUTURE, YOUR SUPER In one of the widest shake-ups of superannuation sector, the Government passed reforms under the Your Future, Your Super banner in June 2021.

This introduced a performance test for MySuper funds, a comparison site called YourSuper, stapling measures which attached members to a chosen fund for their

lifetime to prevent the creation of multiple accounts and increased transparency of how funds were using member’s savings.

In the first round of performance test results released in August, there were 13 MySuper funds which failed the performance test including funds from AMG Super, Colonial First State, and Maritime Super. Failed funds were required to notify their members of the performance result in order to offer them the opportunity to switch fund.

There were also calls from the Australian Institute of Superannuation Trustees (AIST) and other organisations that the performance test was extended to all types of super funds.

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

“More than one-third of super savings are currently excluded from scrutiny and disclosure and

these members have no way of knowing whether their fund would have failed the test.”

Regarding stapling, there were criticisms that members, particularly in certain jobs which required insurance or younger members, could be trapped in underperforming super funds for life if they were not engaged to move.

MARKETS While 2020 saw a market crash in March as the world went into lockdown, markets this year were steadier thanks to the global vaccine rollout. As of 18 November, 2021, the ASX 200 rose 16% since the start of the year but it lagged other markets with the S&P 500 rising 34% and the FTSE 100 up 22%, according to FE Analytics (see Chart 1).

Shane Oliver, chief economist at AMP Capital, said: “Markets continued to rise this year, led by the US, and have been more steady than 2020. Were it not for the vaccine, they would have lagged but the vaccine was the single biggest factor helping markets”.

Chart 1: Performance of ASX 200, FTSE 100 and S&P 500 since the start of 2021 to 19 November

Continued on page 16 Source: FE Analytics

22MM021221_14-27.indd 15

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16 | Money Management December 2, 2021

Wrap up 2021

Continued from page 15 The best-performing sectors were telecoms, financials and consumer discretionary stocks while the ASX 200 Value index rose 6% and the ASX 200 Growth index rose 14%.

“The big stand-out sectors this year were telecoms, financials and consumer discretionary. Finance is a big driver of returns and as people look for income then the strong dividends they pay out has helped,” Kerry Craig, global market strategist at J.P. Morgan Asset Management, said.

“I have a decent outlook for 2022, there will be rebound in growth, elevated savings levels, increased wealth from house prices and corporate capex is strong.

“2021 was a record year for merger and acquisition activity because of private equity activity, they have dry powder which is yet to be spent as it was hard to make deals in 2019/2020 due to the pandemic uncertainty. Now there has been a release of pent-up demand and I expect that positive trend will continue into 2022.”

However, in the bond space, the Reserve Bank of Australia (RBA) held interest rates at 0.1% for the duration of the year and indicated they would remain at this position until 2024. However, it did move to taper bond purchases which led economists to expect a rate rise could happen earlier.

Oliver said: “The RBA reckon rates could rise in 2024 but we think it will be 2022 and the money markets think this as well, they are more hawkish so there is a tug of war between central banks and money markets”.

Craig said the employment rate

22MM021221_14-27.indd 16

and wage growth would be a big factor for the RBA in deciding when to raise rates depending on how long it took for the unemployment rate to fall. Latest statistics from the Australian Bureau of Statistics state the unemployment rate was 5.2% in October.

“Any rate rises will be slow and gradual, the RBA is in no hurry, it would rather make a dovish mistake than a hawkish one,” it said.

Craig added he expected the big rise in equities could see investors rebalancing their portfolios to include more bonds in order to avoid an overly-high equity weighting from a risk perspective.

RETAIL TRADING Still confined by the pandemic thanks to NSW and Victoria’s second lockdown in the middle of the year, the trend for retail consumers becoming interested in stocks and trading continued unabated.

This year, there was particular interest in cryptocurrencies, often led by social media information,

which led the regulator to take a look at both.

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

While Senator Jane Hume, minister for financial services, superannuation and the digital economy, said she was pleased that young people were becoming engaged with finance, ASIC warned they were watching to see if creators were giving unlicensed advice which could incur harsh penalties. ASIC also warned it had noticed ‘pump and dump’ schemes which were being driven by social media.

Meanwhile, ASIC carried out a consultation into cryptocurrency covering good practice by providers, pricing and risk methodologies which was seen as a green light for firms to launch cryptocurrency exchange traded funds.

BetaShares chief executive, Alex Vynokur, said: “ASIC has

taken a significant step in providing a clear path for established cryptocurrencies such as bitcoin and ether to be made available to Australian investors via a familiar ETF structure. This is a welcome development for those investors and financial advisers who are seeking crypto exposure, but are uncomfortable with buying and selling cryptocurrencies on unregulated exchanges”.

Following the announcement, VanEck and BetaShares both announced plans to launch spotbased ETFs in the future. In the meantime, a Crypto Innovators ETF launched by BetaShares traded almost $40 million on its first day of ASX listing, indicating a burgeoning demand.

Advisers were hopeful the potential launch of these types of products on platform would enable them to discuss cryptocurrency with their clients as they were currently restricted by the fact it was an unregulated asset.

24/11/2021 11:25:24 AM

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18 | Money Management December 2, 2021

Emerging markets

ASSESSING CLIMATE RISKS FOR EMERGING MARKETS

In light of the recent COP26, Patrick Russel examines the sensitivities of climate change, in terms of risks and opportunities for the emerging market equity asset class.

TO START, ONE needs to understand the current situation in terms of how the world is tracking towards meeting the target of net zero emissions by 2050 (as measured by greenhouse gas (GHG) intensity, in carbon dioxide (CO2) equivalents). This sets the context for policy action over the next 10 years – defined as the ‘critical decade’.

Whilst global GHGs dropped in 2020 (with COVID-19 lockdowns), volumes have bounced back strongly in 2021 and are approaching their peak levels of 2019. Global energy-related CO2

22MM021221_14-27.indd 18

emissions are on course to surge by 1.5 billion tonnes in 2021 (+4%) – the second-largest increase in history according to the International Energy Agency (IEA).

And with mobility restrictions relaxing on global travel, emissions appear set to rise again in 2022. A recent UN report (released 17 September, 2021) shows global GHGs will rise 16% by 2030 on 2010 levels based on current National Determined Contributions (NDCs).

This is a massive miss on the -45% decline on 2010 levels cited by the UN as the level required to achieve net zero emissions by

2050 (and limit a global temperature rise on pre-industrial levels to 1.5°C).

The Intergovernmental Panel on Climate Change (IPCC) issues a report every few years updating the scientific evidence on global warming and climate change. This has a critical impact on the thinking and policy action emanating from COP events and their latest report (July 2021) highlights that the pace of global warming has accelerated over the past two decades, and the risks of overshooting the cap of 1.5°C to 2.0°C by 2050 are now very significant and increasing.

Under current business as usual, total net GHGs will only drop to 30 billion tonnes per annum by 2050 versus a target of zero to 10 billion tonnes under scenarios to limit temperature rise to 1.5°C. In short, under current policies, the world is on track to produce about 55 billion tonnes of GHGs annually by 2030 (before offsets from forestry, etc.), which is getting close to double the original target of 35 billion tonnes in 2030 – as per the 2015 Paris Agreement.

If unchecked, this will have substantial negative consequences to the global economy as the

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December 2, 2021 Money Management | 19

Emerging markets Chart 1: Global GHGs billion tons by country 2019

Chart 2: GHGs tonnes per capita by country 2019

Source: International Energy Agency

temperature could potentially lift by 4°C by 2050 on pre-industrial levels (source: IPCC, September 2021 report). According to climate scientists, this will lead to extreme rise in sea levels, droughts, storms, large food shortages – creating considerable social dislocation, mass migration and potentially regional/global conflict.

ASSESSING AT THE COUNTRY LEVEL First, we have to consider which countries are the large emitters on an absolute basis and where they are placed on a per capita basis (i.e., relative). Countries that have both high emissions on an absolute and relative basis will be under the greatest pressure to cut by 2030. Those that are high in absolute terms, but are lower than the global average on a per capita level GHGs will be given more time to reduce.

Chart 1 summarises the largest emitters globally China is the standout at 35% of global emissions (the largest by a quite a margin), followed by the US (17%), Europe and India (11% each).

It is worth putting the scale of China’s GHG emissions into perspective, according to Bloomberg data, China Baowu, the world’s largest steelmaker put more CO2 into the

22MM021221_14-27.indd 19

atmosphere in 2020 than Pakistan; and China Petroleum and Chemical pumped more CO2 into the air in 2020 than Canada.

On a relative basis when observing per capita GHGs, it is a slightly different picture and we find India drops in risk profile, as does Indonesia and Brazil.

In assessing emerging market (EM) climate change risks, we must consider the future plans of each country as well – as defined by their own nationally determined contributions (NDC) targets through to 2030 and 2050. In this regard we use data compiled by Climate Action Tracker (CAT). This assesses the GHGs of individual countries, and how existing NDCs relate to achieving net zero by 2050 (i.e., limiting a temperature rise to 1.5°C).

CAT then classifies the country from the top category: ‘Role Model’ – policies consistent with global warming well below 1.5°C (Paris Agreement) to the bottom category: ‘Critically Insufficient’ – policies consistent with global warming of in excess of 4°C. Sadly, there are no countries in the ‘Role Model’ category, as of September 2021, with only the UK and the Philippines with policies consistent with limiting global warming under 2°C. The CAT summary is:

Critically Insufficient – policies consistent with global warming >4°C (10% global CO2e emissions): • Argentina; • Russia; • Turkey; • Saudi Arabia; and • Thailand.

Highly Insufficient – policies consistent with global warming 3°C to 4°C (60% global CO2e emissions): • Australia (downgraded from Insufficient); • Brazil (downgraded from Insufficient); • Mexico (downgraded from Insufficient); • New Zealand (downgraded from Insufficient); • India (downgraded from Compatible); • Indonesia; • South Korea; • South Africa; • China; and • Vietnam (upgraded from ‘Critically Insufficient’).

Insufficient – policies consistent with global warming 2°C 3°C (30% global CO2e emissions): • Chile; • European Union; • Germany (Upgraded from Highly Insufficient); • Japan (Upgraded from Highly

Insufficient); and • United States (Upgraded from Critically Insufficient).

Compatible – policies consistent with global warming <2°C (1% global CO2e emissions): • Philippines; and • United Kingdom.

Compatible – policies consistent with global warming <1.5°C (Paris Agreement): • None.

Role Model – policies consistent with global warming <1.5°C (Paris Agreement plus): • None.

One of the key drivers of reducing GHGs is ‘paying for the cost of carbon’ a business produces.

Accordingly, countries that have carbon trading schemes are creating the ‘carrot and stick’ approach for companies to change their behaviour. This is the driving force in the EU’s success in reducing GHG over the past decade. Countries with no carbon trading schemes, or weak schemes are therefore at a clear strategic disadvantage in terms of creating pricing signals to convert to a low carbon economy. It is Continued on page 20

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Emerging markets

Continued from page 19 clear from the COP26, that countries that fail to pivot to low-carbon economies will be penalised, especially by carbon border taxes over the long-term by the countries that comply, and this is a facet that is into our assessment for EM climate change risks.

Our final overlay looks at both the willingness and ability of country to reduce GHG emissions.

Countries with high levels of gross domestic product (GDP) linked to producing and exporting vast quantities of fossil fuels, such as Russia, Saudi Arabia, Colombia and Indonesia have some of the weakest commitments to reducing GHGs given the potential income loss from decarbonising.

Some countries that have limited natural renewable resources (such as hydro, wind, solar, and geothermal) are forced to have a high proportion of energy created by domestic and/ or imported fossil fuels (coal, oil and gas) have made limited progress in cutting GHGs and/or have posted relatively weaker NDCs with regard to cutting future GHGs – South Korea, Taiwan, Thailand, Malaysia, South Africa, Turkey and Poland are guilty here.

The EMs that have the more proactive plans for reducing their GHGs tend to have a much lower exposure to fossil fuels and/or are more richly endowed in natural renewable resources, and as such, the pivot to cleaner energy is much less costly. Major EMs in this category are India and Brazil.

If we assess the climate change risks being material and growing, we can build this

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additional risk premium into our country cost of capital. In short, if required we can add an extra percentage point(s) on to our country discount rate to compensate for weak NDCs and an inherent unwillingness of the country to pivot to clean energy in order to meet the net zero target.

that requires a company to have all their energy created by renewable sources by 2050. A growing list of companies in EM are also joining the Task Force on Climate-Related Financial Disclosures (TCFD), putting themselves in a better position to manage climate change risks.

ASSESSING AT THE COMPANY LEVEL

CONSIDERATIONS FOR PORTFOLIO STRATEGY

Even though individual countries may have weak NDCs with respect to reducing GHGs, there are many examples where companies are taking the matter into their own hands and targeting net zero by 2050 for their own carbon footprint. These companies know that while there may not be a cost of carbon today in their country (due to absence of an effective carbon cap and trading scheme), it is almost inevitable that one will be in place, and if not, then the business will ultimately be penalised by investors and/or carbon border taxes.

To that end, some companies have openly committed to net zero themselves. Some have signed up to RE100 – which is an initiative

From a bottom up perspective, we take the analysis a step further and track the annual GHG emissions of every company on our EM approval list from year to year. We can then see if the GHGs are rising or falling in every company on our list.

Furthermore, we can undertake sensitivity analysis on the costs of carbon. For example, we have analysed our portfolio and found that if every company had to pay €60 ($93)/tonne CO2 (current spot price in EU – considered the global proxy price for carbon emissions) it would reduce average company profits by 2% (weighted). And if the carbon price rose to €160/tonne CO2 the profit reduction would be 5% (weighted).

Company engagement is also critical – as an example, we have exposure to an Indonesian cement company which has high GHG emission levels relative to its portfolio size. Rather than sell the stock, we are actively engaging with the company to encourage strategies to abate their carbon by adopting new technologies.

We highlight China as the country most at risk, given its high absolute and relative levels of GHGs emissions, reflecting its dependence on fossil fuels for its energy supply. This is a factor, among others, that supports a deep underweight position to China. We also have zero exposure to Russia and Saudi Arabia – EMs whose economies have substantial downside risks from fossil fuels being replaced by renewables.

We note South Korea and Taiwan have high per capita levels of emissions, and as such expect these countries will be under increased pressure to reduce their GHGs by 2030.

Patrick Russel is emerging markets portfolio manager at Northcape Capital.

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22 | Money Management December 2, 2021

Insurance

ADVISERS KEY TO INCOME PROTECTION CHANGES Advisers play a critical role in supporting the transition to sustainable insurance products, writes Aaron Newman, but the industry needs to support advisers with this transition.

THE FINANCIAL ADVICE sector has seen considerable change over the last few years, with many financial advisers regarding it as an existential crisis not of their making.

Increased regulation and education requirements have added considerable costs and complexity to advice businesses and led to a significant decline in the number of financial advisers.

This has put increasing pressure on advisers, leading to advice gaps for less wealthy Australians.

This has only been exacerbated by significant increases in income protection pricing, reducing the affordability of the products and increasingly limiting access to those clients who have greater capacity to cover increasing premiums. This is bad for the advice industry and it’s bad for consumer access to affordable income protection cover.

The Australian Prudential Regulation Authority (APRA) acted to address this affordability and sustainability concern, creating the necessary ‘circuit-breaker’ to over-ride inherent market mechanisms which were deterring individual insurers from rationalising products, while both the Actuaries Institute and Financial Services Council (FSC) have also played a role in enabling meaningful change.

Accordingly, insurers undertook to re-design and re-engineer more affordable and sustainable products, an unprecedented industry-wide undertaking and a positive step

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towards ensuring better outcomes and more affordable cover for customers over the long-term.

The role this plays in also preserving the ongoing viability of the financial advice sector can’t be underestimated, ensuring the important support, guidance and expertise offered by advisers remains accessible to more Australians, not simply those who can afford to pay higher prices.

However, more suitable and sustainable product solutions will only support the betterment of the financial advice sector if the life insurance industry also works closely to support advisers, enabling their vital role in this transition to new product constructs by helping clients identify and select the right levels of cover for themselves and their families.

It is insurers’ responsibility to design the right products, but it is financial advisers who will ensure that the products are being well understood by clients, and recognised for the sustainable, long-term value proposition that they are designed to provide.

FAIRNESS AND BALANCE IN PRODUCT DESIGN We think the sustainability of products comes down to the basic principle of fairness. Fairness firstly for those on claim, through a product that meets their core need to replace a portion of income while on claim. And fairness also in terms of balancing that against what all Australians need and deserve

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Insurance from their income protection, even if they are fortunate in not needing to claim on that policy: affordable cover that’s with them for the long-term.

What we have seen in market over several years is not balance.

A minority of customers who claim have received benefits that pay in excess of their need over the longer term. As a result, the majority of customers in the risk pool have seen their premiums continue to increase.

Fairness for all those in the risk pool is achieved when products are designed to meet customer needs in a measured way so that it does not continually put upward pressure on affordability.

DRIVERS OF PRODUCT SUSTAINABILITY It is important that all stakeholders, including financial advisers, understand what really drives sustainability in income protection products.

To support and enable better product design and more sustainable outcomes, the Disability Insurance Taskforce of the Actuaries Institute (Taskforce) developed clear principles for the redesign of these individual disability income insurance (IDII) products in the reports, ‘Provisional Findings and Recommended Actions for Individual Disability Income Insurance' and 'Reference Product Individual Disability Income Insurance’. It also recommended that insurers strengthen their product governance by conducting sustainability assessments against the reference product.

And while these products will continue to evolve over time, insurers have taken those first steps towards more long-term sustainable products, albeit with varying degrees of adherence to those sustainability principles and the taskforce reference product.

It is now essential that advisers grasp the opportunity to understand these new income protection products, in the interests of ensuring their clients are protected and their needs are met.

With new products in market, it’s challenging to compare and

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too early to accurately predict the long-term price certainty of these products. So how can financial advisers compare and assess the sustainability of one product against another? One way for advisers to consider this is to learn from the taskforce’s approach to sustainability.

The taskforce identified that certain product features, more than others, have contributed to the unsustainable position the industry found itself in. In summary, the taskforce identified these product features as key drivers of sustainability likely to put upward pressure on pricing: • Income replacement ratios – the taskforce identified higher income replacement ratios had been a driver of high claims experience. TAL’s internal research following an in-depth review of past claims indicated 92% of claimants were back at work within two years of claim. Products with higher replacement ratios over the long term may introduce sustainability risk and therefore pricing uncertainty; • Total disability definitions – to design for more sustainable outcomes, definitions should be clear and objective to support claimants when they have no capacity to work; • Long-term controls – for loss minimisation are important when looking at long benefit periods. The taskforce included multiple design features in the reference product across disability definitions and income replacement ratios to manage sustainability risk of longerterm benefit periods. It is critical advisers understand the need to consider these long-term controls when comparing products, otherwise without strength of these controls, sustainability risk heightens; • Benefits that support return to work – partial disability benefits are common amongst income protection products in market, to help claimants on their journey back to the workforce.

The taskforce highlighted the

importance of these benefits in supporting the return to work, without the design incentivising the customer to remain on claim when they are well enough to work.

These sustainability considerations, alongside existing product research practices, will help financial advisers identify how to assess the new range of income protection products. It’s critical that advisers consider whether their client really needs the many features and benefits of a given product versus the greater certainty on price in the long term which may be offered by another product.

THE ROLE OF ADVISER EDUCATION Almost 90% of those surveyed agreed advisers need help to better understand insurance pooling, and the importance of considering the needs of those on claim, but also those in the risk pool paying premiums.

Life insurers have an important role to play in supporting financial advisers through education, including what to look out for in products if they are considering long-term affordability and fairness of products for their clients.

The TAL Risk Academy is seeking to play a central role in this education journey for advisers by providing productagnostic classes to help them navigate this transition.

An adviser’s best interests duty requires the advice they provide be likely to put the client in a better position. A key question advisers will naturally ask themselves, therefore, is what are the client’s objectives around risk management.

Is the client cautious and safe, and wanting the product that gives them the greatest protection in any given situation? Or are they happy to accept a level of risk in their strategy, understanding that there will be circumstances where they may not have cover but perhaps a lower and more sustainable price?

There has been a view over time that best interest equals best

product, but ‘best’ is subjective to the author, and opinions can vary greatly from adviser to adviser, even when using similar research. In reality, ‘best interests’ focuses on the advice – does the advice meet the client’s objective, and from there it can be considered, does the product facilitate that advice?

Understanding the new products will mean advisers can better fulfill their role of meeting a client’s core need and providing better advice, while at the same time contributing to a more accessible financial advice sector for more Australians over the long-term.

STRONGER TOGETHER, FOR A BETTER FUTURE Life insurance is a competitive industry, but our industry as a collective also needs to ensure that product design aligns within the clear parameters and guidelines that have now been set.

Otherwise, we risk the same problem occurring again.

Advisers also have an important role to play here, by making sure their clients are aware of future pricing risks that come with products heavily laden with features and benefits that move away from their core need and the guidance issued by the taskforce.

Together, insurers and advisers should seek to ensure those customers in the risk pool who are fortunate enough not to ultimately claim can be confident that the product they are paying for supports long-term, affordable price stability; just as those who do ultimately claim should be confident that they will receive appropriate benefits that meet their needs and support them.

Constant price increases are good for no one – certainly not customers – and it will take a collective effort between insurers and the advice sector to ensure financial advice – and quality products – remain attainable for a larger portion of the community through these changes and the changes to come.

Aaron Newman is general manager, individual life product at TAL.

24/11/2021 9:21:36 AM

24 | Money Management December 2, 2021

Commercial real estate

CAPITALISING ON THE RECOVERY

Luke Dixon explains the outlook for commercial real estate for 2022 and the stand-out sectors plus whether Australia is a safe harbour for capital growth.

WHILE NEAR ZERO interest rates are prompting investors to hunt for alternative places for their money, many investors have already flocked to residential real estate, but commercial real estate shouldn’t be overlooked.

It’s a new era for commercial real estate in Australia – bolstered by cheap debt, structural changes and an under allocation to real assets- the outlook appears promising.

The success of the vaccination program and the way Australia handled the COVID-19 pandemic itself is a siren call for global property investors as Australia

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has reaffirmed its reputation as a stable safe-harbour for capital – with more growth still to come.

So, what are the other drivers for the strong outlook? And what risks remain on the horizon?

REASONS FOR OPTIMISM The first driver is interest rates.

Record low rates and accommodative central bank policy are here to stay for the foreseeable future.

It goes almost without saying that low rates are strongly supportive of capital-intensive assets like real estate, but there are a few mechanisms underlying

this: low rates make raising capital cheap for investors, they reduce the available yield on cash and fixed income investments and make real estate look more attractive, and they underpin business and consumer activity.

Bond yields over the next two to three years are likely to remain at the lower end of their longterm average, while commercial real estate can yield 4% to 5% – that 200 to 300 basis spread over the risk-free rate offers a healthy risk premium.

The second reason for optimism is the opportunities to come from the COVID-19 pandemic. Market

dislocations always produce winners and losers and we believe the COVID-19 cycle has left some commercial real estate sectors, notably retail, looking mispriced.

Technology disruption is a third driving force of the coming recovery, with demand buoyed by long term themes like e-commerce, remote working, health and wellness.

Fourth, investment volumes are forecast to rebound sharply in 2021/22 from the lull of 2020.

Investors have cash to spare after fresh equity raisings and given the low cost of debt, real estate is an increasingly attractive vehicle for that investment.

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Commercial real estate And finally, the high vaccination rate is underpinning a strong outlook for the Australian economy.

There are many reasons economic growth matters for commercial real estate, but chief among them is the low unemployment rate. The labour market is tight and consumers who feel positive about their job prospects are more likely to spend.

Next year is shaping as a very strong period for spending, especially on travel, entertainment and food and beverage as people emerge from closed borders and lockdowns.

INFLATION PROTECTION The outlook is not risk free. Inflation looms as the biggest potential threat and capital markets are clearly signalling they are concerned.

But we believe commercial real estate is well placed to ride out a bout of inflation. Most rental agreements are tied to inflation and carry an in-built hedge.

Inflation also typically accompanies strong economic conditions – low unemployment and higher wages – all factors that benefit real estate directly.

The threat of interest rate rises on the back of inflation movements will increase, but while rates will obviously rise at some point, they will remain at historical lows.

History shows commercial real estate values are not impaired by interest rates until the cash rate reaches at least 4%, which approaches commercial real estate’s average yield of 4.5%.

So, which sectors offer the best returns as the Australian economy emerges from COVID-19?

OFFICE There’s little doubt that the office market has borne the brunt of COVID-19, but there are already early signs of recovery. Office downturns are usually short and, in the past, have been followed by strong rebounds.

While the work from home phenomenon is here to stay, it is easy to overstate its impact on office demand. The white-collar sector – a key driver of office demand – is growing at 2.4% per annum.

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More people in jobs means more demand for office space and these fundamentals of growth and low unemployment look like balancing greater remote working.

In any case, not all businesses will keep flexible working from home policies. Many client-facing roles will migrate back to offices as quickly as they can. Some companies are realising that remote work does not suit many young peoples’ career development.

As businesses manage their post-COVID workplaces, with many prioritising getting people back into the office, the focus on green star ratings, amenity and the offering of a healthy, safe environment will drive demand at the premium end.

Supply is also a factor, with JLL Research estimating additional new supply from 2021 to 2025 already reduced by over 50% compared to the pre-COVID forecast.

Our real estate research team anticipate vacancies at the prime end of the market will decline to very low levels. In our opinion, deep liquid markets in Sydney and Melbourne will outperform. This will place further upward pressure on values.

Secondary stock unable to adapt to the technological, sustainability and wellness requirements of this new era of tenants will struggle.

RETAIL The story of retail is the story of household income and population growth – the combination of government stimulus and lockdown-reduced spending means the household savings rate hit a record high of 22% during 2020. Data from 2021 shows a decline in the savings ratio yet it remains historically high.

Considering the most recent lockdowns in NSW and Victoria, we anticipate the rate will push back up again in Q3 results. Australians have some ~$90 billion more socked away in bank accounts.

In our view, we expect this cash will underpin a very strong 2022 for retailers. Resumed population growth pressure will also boost the sector and an expected uptick in wages should put even more money in people’s pockets.

Still, there are headwinds.

The re-opening of borders will also see many spend their savings on international travel. And the rapid growth in online shopping will continue to take sales away from shopping centres.

But the industry has some tricks up its sleeve.

Retail is adapting away from purely shopping-focused to mixed-use alternatives, incorporating a greater emphasis on entertainment, leisure and other personal services. The pandemic has reminded us that the importance of local community, medical, health, fitness and many other personal services, are an important part of our wellbeing. Retail formats are adapting to the competition of e-commerce by focusing on these aspects of the retail offering, but only some centres are suitable.

Shopping centres are adopting whole new income streams – adding logistics, office space and even apartments to diversify.

Many shopping centres are on vast tracts of well-located, desirably zoned land and can unlock considerable value. The shopping centre of the future will be more akin to an airport, with multiple income streams and a sharper focus on placemaking, wellness, inclusion, and a wide offering of services.

LOGISTICS We expect logistics to be the strongest performing commercial sector over the next three years, forecast to deliver investors an average return of more than 9% over the medium term.

These are not the logistics and industrial assets of old. Bluecollar workers and heavy manufacturing have given way to high-tech, sophisticated pieces of supply chain infrastructure.

A logistics asset today could be a refrigerated food storage centre for a supermarket, a data centre for an internet company, an urban farm supplying the restaurant industry or even an energy generation facility.

The COVID-driven boom in e-commerce has seen online sales rise to 12% of all retail sales, below

markets like the UK and US, but growing more quickly. AMP Capital researchers forecast online share to reach about 25% by 2030.

This is fuelling record demand across all major markets in e-commerce, logistics, fulfilment and distribution.

Logistics and industrial are the number one asset class being acquired by Asia Pacific investors, surpassing office and retail for the first time, partly because most fund managers are materially under-exposed to the sector.

PORTFOLIO CONSTRUCTION Given the likely trends, we believe a few opportunities stand out for investors: • Logistics will deliver the strongest total returns of all the commercial sectors, driven by strong global investor demand, rising rents and limited supply; • In the retail sector, neighbourhood centres offering convenience-based retail services are set for strong, stable returns over the next decade, whilst super regionals may look favourably priced compared to their more expensive office and logistics counterparts; and • Office markets are diverging.

Premium offices in Sydney and Melbourne will do well as people return to offices and supply is limited. Perth will enter a sustained cycle of recovery. But secondary markets and fringe buildings will struggle unless they have the amenity and services on offer to attract the next generation of tenants adapting to new ways of working.

So, as we emerge from what has been a difficult time for all, with the investment community firmly focused on inflation, growth, interest rates and the continuing focus on environmental, social and governance (ESG) based solutions to our built environment, investors should be ready to capitalise on the recovery ahead.

Luke Dixon is head of real estate research at AMP Capital.

25/11/2021 1:10:22 PM

26 | Money Management December 2, 2021

Retirement income

LONGEVITY, THE UNCERTAINTY AND MANAGING THE RISKS With Australians living longer than ever, writes Aaron Minney, retirement plans focused on a life expectancy of 85 are looking out of touch.

A KEY TO any plan is knowing how long the plan is needed.

For retirement, the plan is often based on life expectancy, which has been steadily increasing over the past 100 years. While the concept of life expectancy appears simple enough, some common misunderstandings can create problems for financial advisers and their clients.

Today’s retirees are now typically living into their late 80s; 10 years longer than they did in the 1990s. In 2020, the most common age of death in Australia was 89. When compulsory super started in 1992, it was only 78.

Until very recently, the age of 85 was a convenient estimation of a typical lifespan. Many financial models just assumed that everyone lived to 85. Not only was this factually wrong, but it was based on only a 50% probability of being correct. How many retirees would be happy to learn that their retirement plan only had a 50% chance of success?

The Australian Bureau of

Statistics (ABS) estimates that the life expectancy of an Australian male is 81.2 years and 85.3 years for a female. While correct, these figures are estimates of life expectancies from birth, so they include the deaths of people who die young from accidents or illness. For that reason, they are misleading to use for retiree life expectancy. Having reached 65 or 66, you have a higher life expectancy because you are already a survivor.

The life expectancy of a 66-year-old female today, for example, is currently another 24 years to age 90. In practice, this means that around two-thirds of females of that age will live to somewhere between 81 and 99.

Based on the improvements in the mortality trend over the past 25 years tabulated by the Australian Government Actuary, half of today’s 66-year-olds will live to at least 88 for males and at least 90 for females. Surviving longer also increases a person’s life expectancy. A male alive at

Chart 1: Real returns on Australian equities by decade

Source: Challenger calculations on data from Morningstar, S&P and ABS

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Retirement Retirementincome income

Chart 2: Income layering portfolio

age 90 can, on average, expect to live to 94 while a female can expect to live to 95.

UNDERSTANDING LONGEVITY UNCERTAINTY Most investors are aware that equity markets can be volatile.

This volatility is clear even in rolling 10-year annual average real returns as shown in Chart 1.

Why is this relevant to life expectancies you might ask? While most of us are well aware of the risk posed by market uncertainty, many are not aware that a client’s longevity is just as uncertain. And while markets can recover, there is not an equivalent ‘rescue’ for a longer than expected life.

Using a measure based on completed actual lives (with no mortality improvement), the potential variability of lifespan for a new retiree is about the same as long-term equity returns. The average age at death in 2020, for those over 66, was 83.6. The standard deviation of this was 8.6 years, meaning that roughly two-thirds of people died between 75.0 and 92.2. The uncertainty surrounding longevity is as large a risk as the equity market.

WHO NEEDS PROTECTING FROM LONGEVITY? Not all retirees will need a specific plan to manage longevity risk and not all income needs to be protected. Retirees with little wealth will have access to the Age Pension and the very wealthy will have enough money to never fear running out. Those in between are more likely to seek financial advice, and these are the retirees who need help to manage their longevity risks.

It can be expensive to protect everything, so a targeted approach which manages the risks to retiree clients and ensures their needs will be met for life can provide the peace of mind they look for.

Retirees’ spending tends to change over retirement with total levels of spending usually declining as they age, therefore longevity risk protection might only be needed for the spending in

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the later stages of retirement.

As with any risk, there is a cost to managing longevity risk and retirees effectively have three ways to manage longevity risk.

Firstly, self-insurance is a strategy to try and protect a retiree against running out of money in case they live too long. The approach is to spend less, creating a buffer, so that their accumulated savings can last longer. This increases the probability that income will be available at later ages, but it means a diminished lifestyle for the retiree.

This approach also needs to consider market risk. If investment returns fall below expectations, then retirees will run out of money earlier. At the other end of the spectrum is a fully insured retirement through a solution that provides guaranteed income, such as a lifetime annuity. For example, using a Challenger enhanced liquid lifetime annuity a 66-year-old male would be able to get $46,507 a year indexed to inflation from a $1,000,000 investment (as at 8 November, 2021). This payment would be fully guaranteed and would be higher than many of the buffers that are needed in the selfinsurance strategy.

A recent alternative to insuring longevity has been the idea of pooling the risk, which pools the exposure across a group of retirees. This can take various forms, depending on the underlying investments and payment structure, but they usually have a common element.

Using the law of large numbers allows an accurate gauge of mortality and a large enough pool enables idiosyncratic longevity risk to be diversified away. By pooling, retirees can achieve an average result and agree to pass their capital on to the survivors to fund their longer lives.

However, just as an annuity provider must inject further capital when the pool lives longer than expected, surviving participants in the pool would have to ‘contribute’ to the shortfall by reducing their income entitlements. This has

Source: Challenger

happened in the Netherlands where both the indexation of pensions, and then pension payments themselves, were cut to maintain the sustainability of their (pooled) pensions .

INCOME LAYERING An income layering approach to retirement income portfolio construction, as shown in Chart 2, seeks to provide cashflow to meet retiree goals. This approach ensures that a retiree is at least able to meet a certain level of spending needs, including required lifestyle expenditures, for as long as they live.

The first layer is provided by the Age Pension (to the extent that a retiree meets the criteria) and pays for basic necessities. A second layer of lifetime income can be used to fill the gap between potential Age Pension payments and the level of spending required to meet their personal retirement needs. The rest of their retirement savings are then available for investing or added spending.

Layered retirement cashflows can be constructed using a range of different retirement products. A lifetime income stream, such as a lifetime annuity, can be used to provide the ’required lifestyle’ layer of cashflows, with the remaining funds invested in growth assets to provide for more spending or a bequest. Non-guaranteed options can also be used in the second layer, but the retiree will have the risk that their needs won’t always be met.

A LONGEVITY CHECKLIST FOR ADVISERS 1) Use up-to-date life tables – currently 2015-17 at aga.gov.au;

2) Use an appropriate mortality improvement table – 25-year improvements (explained in 2015-17 life tables) which are the ‘most optimistic’ and hence safest to use; 3) Never use a ‘from birth’ life expectancy. They are not relevant to retirees; 4) What confidence interval are your plans based on? Build in a margin of error such as a longer plan horizon – don’t let 50% of your clients down because, on average, that’s how many will live longer; 5) Use a range when talking to clients about how long they might live; 6) Consider gender differences and plan for them; 7) Beware the ‘joint lives’ issue – the age of the second death is potentially longer than each single life expectancy; 8) Research shows that pre-retirees materially underestimate their own life expectancies. Communicate the real numbers effectively; 9) Identify those clients who don’t need a longevity risk plan: a. the ultra-wealthy who can’t stop growing their capital; and b. modest clients whose needs would be met on the Age Pension alone.

10) Work with your client to figure out their essential spending requirements. This is what needs protecting from longevity risks; and 11) Consider a guaranteed solution for clients who want peace of mind.

Aaron Minney is head of retirement income research at Challenger.

24/11/2021 9:20:33 AM

28 | Money Management December 2, 2021

Toolbox

MINIMISING CGT: NAVIGATING THE RULES OF ACTIVE ASSETS Small business capital gains tax concessions, writes Peter Bembrick and Katherine Lloyd, can significantly reduce, or even eliminate, the tax paid on the sale of a small business.

ONE OF THE fundamental requirements for applying capital gains tax (CGT) concessions is the asset being sold must be ‘active’ and this is not always as easy or straightforward as it sounds.

The basic conditions that must be satisfied to access small business CGT concessions are that the taxpayer must either have an aggregated turnover of less than $2 million or aggregated net assets with a value not exceeding $6 million, with extra requirements when selling shares in a company.

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None of that matters, however, unless the asset being sold is an active asset, which is broadly defined in the legislation and has been the subject of much interpretation by the courts and the Australian Taxation Office (ATO), as it is a concept that depends on the specific facts and circumstances in each case.

WHAT IS AN ACTIVE ASSET? For the purposes of CGT concessions, an active asset is one the taxpayer owns and uses, or holds ready for use, in the course of carrying on a business.

Active assets may be tangible, such as land and buildings and equipment, or intangible, such as goodwill, patents, copyrights and other intellectual property, such as software.

When selling shares in a company, the shares will be active at a point in time if the market value of its active assets equal at least 80% of the total market value of all of the company’s assets.

It is conceivable that intangible assets may not meet the requirement that they be used in the relevant business; the rules require that such intangible

assets must also be inherently connected with the business that is being carried on by the taxpayer to qualify as an active asset.

The asset must have been active for the lesser of 7.5 years and one-half of the relevant ownership period. This means that, if an asset has been an active asset for at least 7.5 years, it will be an active asset indefinitely, regardless of when it’s sold or any other uses of the asset.

In addition, if an asset is used or held ready for use by a taxpayer’s affiliate, or another entity connected to the taxpayer,

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Toolbox

in the course of carrying on its business, then that asset will also be treated as active when sold.

A critical point is assets whose main use is to derive rent, even in the course of carrying on a business, are specifically excluded from qualification as active assets.

However, applying this exclusion is not straightforward and the ATO has provided guidance by way of examples in ‘Taxation Determination TD 2006/78 ’, explaining when premises used by a business will and will not satisfy the active asset test.

In any case, as discussed below, the specific circumstances of each situation need to be carefully considered.

So, what exactly does it mean to be carrying on a business?

Unfortunately, there is no definitive test as to whether a business is being carried on.

However, the ATO has indicated in ‘Taxation Ruling TR 2019/1’ the following factors may be relevant: • The intention to carry on a business; • The expectation, and likelihood, of a profit; • The size, scale and permanency of the activity; and • Whether the activity is repetitive and regular and organised in a business-like manner.

CASE STUDIES There have been a number of cases where the taxpayer has successfully argued that conduct of a rental property business is carrying on a business.

In one such case, YPFD and Commissioner of Taxation [2014] AATA 9, the taxpayer-owned nine rental properties and, although they were managed by an agent, devoted a considerable amount of

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time undertaking tasks in connection with the properties.

Despite the taxpayer’s methods being relatively unsophisticated, the Administrative Appeals Tribunal (AAT) concluded the taxpayer was carrying on a business.

However, while it’s possible to carry on a rental property business, the courts have rejected arguments that an asset whose main use is to ‘derive rent’ is an active asset even if it used in carrying on a business.

A hypothetical example of an asset being used in the course of carrying on a business is Ron, who owns the Very Good Building and Development Company. Ron uses one of its properties for storage only, while the activities of building, bricklaying and paving take place at building sites. It’s reasonable to argue the property is still used in the course of carrying on the company’s business, and is not merely preparatory, so should be treated as an active asset.

This example is highlighted by the recent Federal Court decision, Eichmann v Commissioner of Taxation [2020] FCAFC 155, where the definition of active asset was given a broad meaning. The relevant factors are the use of an asset and whether the asset is used in the course of carrying on of that business, which involve issues of fact and degree, and should be applied in a concessional way.

Recent private binding rulings and cases suggest that, where the occupier has a right to exclusive possession of the property, payments involved are likely to be rent.

On the other hand, if the occupier is only allowed to enter and use the premises for certain purposes (which do not amount to exclusive possession), the payments involved

are unlikely to be rent.

Other factors to consider include the degree of control retained by the owner and the extent of services provided (e.g., providing meals, room cleaning, supplying linen and shared amenities).

Some common scenarios have been analysed by the courts and the ATO, including the examples set out in TD 2006/78 and private rulings given to taxpayers, which help illustrate the specific factors that will determine whether an asset is used to derive rent, or if it is an active asset.

The first one is short stay accommodation – say, for example, that Ann operates the Pawnee Guest House, where visitors must leave the premises by a certain time. Ann has the right to enter rooms at any time, provides common areas and offers services such as cleaning and meals, and has the right to move residents to another room in the house at short notice. The ATO does not consider this to be a landlord/ tenant relationship and the property will be an active asset.

This can be contrasted with the decision in Tingari Village North Pty Ltd v Commissioner of Taxation [2010] AATA 233, where residents of a mobile home park were held to be paying rent for their sites despite the provision of additional services and the availability of common facilities.

Secondly, provision of commercial storage can sometimes be treated as rent depending on the specific arrangements. As an example, Chris runs Eagleton Storage Solutions, offering storage sheds for short or longer-term hire, with 24-hour security and various other services, with the right to relocate clients to another shed and importantly to enter without their consent. The ATO accepts this would not be a rental

arrangement, and the asset would be active.

There are, however, many other examples in ATO private rulings where short-term commercial storage providers were treated as receiving rent, so their properties were not active assets, with the deciding factors usually being a lack of other services and arrangements giving exclusive possession.

Finally, the ATO has consistently rejected arguments seeking active asset treatment raised by operators of shopping centres, often with very substantial operations. To illustrate, Donna operates Pawnee Mall, a large shopping centre with a wide range of tenants who enjoy the use of substantial common areas and a range of services. While the ATO does not dispute the scale and commercial nature of Donna’s business, its view remains that as her tenants each have exclusive access to their shops under their leases, Donna is receiving rent and the property cannot be active.

WHAT IS DETERMINED

BY MAIN USE? The term main use is not defined in the legislation and a number of factors will be relevant such as the comparative areas of use of the premises between deriving rent and other purposes; the comparative periods of use; and the comparative levels of income derived from the asset.

It would appear, based on review of relevant ATO examples that the most important consideration is the comparative level of income derived.

As an example, Andy owns land on which there are several industrial sheds. He uses one shed – which is 45% of the land Continued on page 30

24/11/2021 9:18:37 AM

30 | Money Management December 2, 2021

Toolbox

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

Continued from page 29 area – as a production studio for his business as a children’s entertainer and leases the other sheds (55% of the land by area) to two unrelated third parties, Ben and Tom. The income derived from Andy’s business is 80% of his total income, with the rest derived from leasing the other sheds. Having regard to all circumstances, the ATO’s view would be that Andy’s ‘main use’ of the land is not to derive rent, but rather the rental use is secondary to his business activities.

Further, in a recent AAT case, the term ‘use’ was argued to include ‘non-physical’ uses such as holding a property for the purpose of capital appreciation, but the tribunal held that the concept of ‘use’ referred only to physical use – The Executors of the Estate of the late Peter Fowler v FCT [2016] AATA 416).

WHAT ABOUT PASSIVELY-HELD ASSETS? Generally, owners of passively-held assets (such as factories, warehouses, or office buildings) are not carrying on a business and therefore cannot access the small business CGT concessions.

However, an exception is when a taxpayer owns a passively-held asset used in the small business carried on by an affiliate or an entity connected to the taxpayer.

So, hypothetically, Andy did not own the land; rather, it was owned by his wife, April, who leased it to Andy so he could carry on his business. While spouses are not usually “affiliates” for CGT concessions, a special rule applies in a situation like this to “deem” Andy to be April’s affiliate, which makes the land an active asset for April because it’s used in Andy’s business.

In the case of intellectual property, not only it is essential to show the IP is not merely being used to derive rent or royalties but the taxpayer must also convincingly argue the asset wasn’t simply developed for sale, rather it was held for use in an active business.

Developing IP that might be a target for a would-be purchaser may still be part of a company’s business plan.

However, to claim they are active assets, it is still necessary to show that using the IP in the course of carrying out the business was the main objective.

For example, Leslie has developed software for managing recreation facilities, and built up a subscriber base so that as she refines the software she is earning revenue from using it in her business, which is her argument for treating it as an active asset if it were to be sold.

There is little ATO guidance in relation to these situations and careful consideration needs to be given to both the financial and non-financial factors specific to each case.

There are many factors to consider when selling your business, of which tax is just one – albeit, a very important one.

It is vital to seek advice from a qualified tax professional to understand the likely consequences as well as information on any relevant CGT concessions available.

Peter Bembrick is tax partner and Katherine Lloyd is tax manager at HLB Mann Judd.

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1. A building will generally qualify as an active asset at a point in time for CGT purposes if: a) It is used for commercial purposes, no matter who owns it b) The main use by the owner is in the course of carrying on its business c) It has been used at some time in the past for business purposes d) It is not currently zoned residential by the local council 2. In the ATO’s view, a property will not be treated as mainly used to derive rent if: a) There are substantial common areas available for use by commercial tenants b) The tenancies are usually short-term (e.g. less than six months) c) The tenant is granted exclusive right of possession d) Some incidental services are provided by the property owner 3. The ‘main use’ of a property is usually best determined with reference to: a) The relative amounts of revenue derived from different activities b) The relative land area devoted to each activity c) The time required to be spent by the owner, its employees, and agents d) The number of people working on the site engaged in each activity 4. The active asset test will always be satisfied when selling an asset where: a) It meets the definition of active asset immediately before the sale b) It is currently being used in the course of carrying on a business c) It is used in carrying on a business and met the definition of active asset for the lesser of half the period of ownership or 7.5 years d) For the majority of the ownership period its main use was not to derive rent 5. When selling intellectual property such as software, the active asset test requires that: a) The main use of the software cannot be to derive royalties or licence fees b) The business has one or more registered patents in place relating to its software c) The software was developed with the intention of selling at a profit d) The software has been used in the course of carrying on the business

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ minimising-cgt-navigating-rules-active-assets For more information about the CPD Quiz, please email education@moneymanagement.com.au

24/11/2021 11:15:34 AM

December 2, 2021 Money Management | 31

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

Appointments

Move of the WEEK Philippa Kelly Board director AustralianSuper

Industry superannuation fund AustralianSuper appointed Philippa Kelly to its board of directors and selected her as chair of its investment committee.

Kelly would replace Jim Craig who joined the board in 2017 and also chaired the investment committee.

Kelly had worked as the chief

Local government superannuation fund, Active Super, appointed Nathan Hagarty to the board of directors as an employer-nominated director, effective 5 December.

Hagarty would fill the board seat left vacant by Domenico Figliomeni whose four-year term had come to an end.

Hagarty would continue his roles as councillor of Liverpool City Council, chair of the Western Sydney Migrant Resource Centre, director of Settlement Services International and chief of staff for federal MP Anne Stanley. He had also held various information technology roles throughout his career.

Hagarty was the second employer nominee to the Active Super board this year following the appointment of Declan Clausen in March.

U Ethical Investors promoted its deputy chief investment officer (CIO), Jon Fernie, as its CIO following the retirement of James Cook.

The investment manager said an external search to fill the role

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operating officer at the Juilliard Group and as head of institutional funds management at Vicinity Centres. Kelly also currently served as director of oOh!media and deputy chancellor of Deakin University.

AustralianSuper chair, Don Russell, said: “Kelly is a very highly skilled investment professional who brings a wide range of experience to

started in June and its selection panel determined Fernie, who was also the head of equities, was the ideal candidate.

Fernie had over 15 years of experience in the financial services industry and had been with U Ethical for five years.

“I look forward to building on the strong investment and ethical outcomes that James has delivered for investors over the last five years. We have a great team in place to maintain the momentum and I am excited about the future,” Fernie said.

Jamieson Coote Bonds appointed James Wilson as senior portfolio manager of its high-grade fixed income specialist investment team, bringing 15 years of experience across domestic and global fixed income markets.

Wilson joined from VFMC where he worked as senior portfolio manager of fixed interest and absolute returns, managing global and domestic active fixed income portfolios.

Prior to VFMC, Wilson spent over seven years at ANZ as a senior rates trader in Sydney

AustralianSuper.

“As the fund continues to grow, Kelly is ideally placed to help further build our global investment portfolio to help members achieve their best financial position in retirement. Her rich history in investment markets will make Kelly an integral part of the decisionmaking team.”

and London where he worked alongside Jamieson Coote Bonds’ executive director, Angus Coote.

Chief investment officer, Charlie Jamieson, said: “The appointment of James is another important investment in our business and will strengthen our team approach and ensure we are best placed to continue to deliver strong returns for our investors.”

Contrarian global asset manager Orbis Australia appointed Jenny Josling as its chair, while Jason Ciccolallo would move from head of distribution to fill the managing director vacancy left

by Josling.

Josling would move with almost 15 years’ experience at the helm as managing director but would continue as a director of the board.

Josling congratulated Ciccolallo for his instrumental role in building and managing many of Orbis Australia’s key institutional partners since he joined in 2008.

“He is well respected in the industry, and we are very fortunate to have someone of his

calibre taking Orbis Australia forward,” Josling said.

Aviva Investors made two senior appointments to its real estate team in Sydney.

Ben Sanderson would join the firm in January 2022 as managing director of real estate. He joined the firm from Federated Hermes where he was executive director of fund management with responsibility for global real estate, UK residential and real estate debt.

He would report to Daniel McHugh, chief investment officer for real assets and join the real assets senior leadership team.

The second appointment for the team was the promotion of James Stevens to head of real estate investment, reporting to Sanderson.

This followed his leadership of the team on an interim basis since February 2021. In the new role, he would be responsible for delivering strong performance for clients through investment opportunities and leading joint venture and co-investment programmes.

24/11/2021 9:17:54 AM

OUTSIDER OUT

ManagementDecember April 2, 2015 32 | Money Management 2, 2021

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

Putting family first BEING close to retirement, Outsider and Mrs O have been keeping their eyes on decumulation products and window shopping their options.

During an investor lunch with one such company, an account manager pointed to her mother’s attendance in the audience.

Later in the event, a portfolio manager also made such a reference to his mother, lamenting the fact she could not be attending in person but was watching via the internet.

While Outsider was a bit confused by the relevance of these references, he noticed that Mrs O was clearly quite impressed by the shout-outs and took a quick liking to them.

Having looked around the room and being quickly reminded of the demographic in attendance, Outsider realised it was no coincidence both had made note of their special attendees… he was very much surrounded by his peers who all most likely had children the same age as the presenters.

Now perhaps Outsider is being unfairly

A memorable appearance cynical and maybe they were not being used as sales props, but I’m sure they have plenty of time to meet with, what I would call, their VIP clients.

Outsider was disappointed his own children could not be in attendance, perhaps it was a nice reminder to them that they are more than welcome to call once a week.

APPEARING before the Senate economics committee via video link with all the associated technical difficulties and political grilling must be a nerve-wracking experience, Outsider can imagine, but it surely can’t be helpful or reassuring for you if the committee cannot remember your name.

While ASIC chair, Joe Longo, and commissioner, Cathie Armour, are regulars before the committee, Dr Rhys Bollen, has made fewer appearances at the hearings.

Bollen, who is senior executive leader for insurers, was speaking before the committee on the topic of the collapse of the Sterling Income Trust but not once, but twice, the committee forgot his name.

Outsider sympathises with the committee, he too sometimes forgets the names of men in financial services. They are not exactly a diverse group of people even if they are a very successful group of people. Going with ‘John’ is usually a pretty safe bet, given at one point there were 32 ASX CEOs hailing by that name.

Luckily, the committee are in good company at being forgetful, even US President Joe Biden cannot remember the name of his Australian counterpart, describing the Prime Minister as “that fella down under” at the recent AUKUS naval summit.

Free lunch, eye contact not included OUTSIDER is delighted to tell our faithful Money Management readers that he has finally scored his first free lunch since the 107-day Sydney lockdown.

Outsider was pleased to see that COVID-19 precautions were taken seriously at the restaurant even though it meant spending extra time waiting in the lobby. The restaurant did not rush checking vaccination certificates and made sure their foyer was not crowded despite the growing line of people who would usually waltz in.

“Finally!” Outsider thought as he spied notebooks on the table and felt a relief that his notebook stash could finally be replenished.

Outsider looked around and saw old faces and new faces galore as familiar journalists greeted each other for the first time in a long time while fresh-faced journalists tried to make their mark as friendly and overlyexcited about financial services.

OUT OF CONTEXT www.moneymanagement.com.au

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But one thing Outsider noticed was, despite the room agreeing that they had missed face-to-face events, it was clear it would take some getting used to as eye contact was scarce among guests.

Though, do not fret dear readers, as Outsider does not need eye contact to bring you the latest gossip from around the lunch table.

OFFLINE Outsider will be sure to share these lunch tales in the new year and wishes Money Management readers a happy holiday season.

"Just imagine lots of people without pants on, because that's what you do when watching a webinar."

- Cara Graham, AFA Inspire WA state chair

"I was always afraid my mug shot would get out."

- Senator Jane Hume jokes about her coffee mug picture

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25/11/2021 1:40:11 PM