FS Advice Volume 15 Issue 02 by financial.standard

Volume 15 Issue 02

SILVER LININGS PLAYBOOK

Donna Lee Powell, DLP Life Design

TPD claims in super Fitzpatricks Private Wealth

Psychological investment traps Koda Capital

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Goals-based advice Winding up an SMSF Accountability regimes

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Contents

www.fsadvice.com.au Volume 15 Issue 02 I 2020

COVER STORY

SILVER LININGS

PLAYBOOK Donna Lee Powell, DLP Life Design

18 NEWS HIGHLIGHTS

FEATURES

REGULATORY RELIEF AMID COVID-19

ASIC has provided regulatory relief in a move to allow financial advisers to better serve clients impacted by the pandemic. The regulator also delayed its

work on grandfathered commissions. PANDEMIC INTENSIFIES ADVISER EXODUS

Welcome note Christopher Page

With approximately 1500 advisers leaving the industry by the end of May 2020, some are concerned COVID-19 could be the straw to break the industry’s back. COMPLIANCE IS WORSE THAN COVID-19

Whitepaper Financial planning for primary producers

Financial advisers have revealed that the regulatory and compliance burden is a bigger challenge to them than any disruption from a global pandemic. FASEA TOO SOFT ON ETHICAL INVESTING

For news updates like this follow us on social media 9

Some advisers suggest that FASEA’s Code of Ethics doesn’t go far enough in terms of ensuring clients’ ethical preferences are considered in investments.

FS Advice

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

Contents

www.fsadvice.com.au Volume 15 Issue 02 I 2020

06 Published by a Rainmaker Information company. A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Elizabeth McArthur elizabeth.mcarthur@financialstandard.com.au Production Manager Samantha Sherry samantha.sherry@financialstandard.com.au Graphic Designer Jessica Beaver jessica.beaver@financialstandard.com.au

Advertising Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media and Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

FS Advice: The Australian Journal of Financial Planning ISSN 1833-1106 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Advice are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rainmaker Information company. ABN 57 604 552 874

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TRUST LIFTS AMID PANDEMIC IT’S NOT YOU, IT’S QUARANTINE

07 08 09

Technical Services Roger Marshman roger.marshman@rainmaker.com.au

News

10 12 13 15

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News

SEEK FINANCIAL ADVICE: HUME FEEDBACK THE WAY FORWARD

News

INDUSTRY FUNDS A BRIGHT SPOT COMMISSIONS FIGHT RENEWED

News

FIGHT FOR MYSUPER ADVICE FEES EARLY RELEASE OF SUPER TOP OF MIND

News

RISK ADVISERS UNDER FIRE JANA LEAPS INTO RETAIL News

COVID-19 CREATES CASE FOR ROBO ADVICE RICH DAD’S EMPATHY News

2020 ADVISER SALARIES REVEALED ME BANK BACKTRACKS News

COVID-19 COULD END CENTRELINK STIGMA

FS Advice

Contents

WHITE PAPERS

www.fsadvice.com.au Volume 15 Issue 02 I 2020

Compliance

ACCOUNTABILITY REGIMES AND CORPORATE GOVERNANCE By Lynda Dowling, BGC Partners

This paper explores the state of play in Australia in terms of accountability regimes following the Royal Commission.

Communications and marketing

OW FINANCIAL ADVISERS CAN IMPROVE CLIENT H ENGAGEMENT By Scott Brewster, ümlaut

In the new world of financial advice, holding a client’s attention can separate you from the crowd and give your business a competitive edge.

Retirement

COMMON FAQS FOR LOW MEANS RESIDENTS By Minh Ly, Challenger

Aged care residents assessed as low means are eligible to receive government support but the rules around this can be complex.

Superannuation

WINDING UP AN SMSF By Netwealth

There are several key considerations to be made before transferring an SMSF to a public offer fund, these are explored in this paper.

Investment

PSYCHOLOGICAL INVESTMENT TRAPS IN A MARKET CRISIS By Sabil Chowdhury, Koda Capital

This article examines seven psychological traps that investors commonly fall into during a market crisis and considers how to avoid them.

Applied financial planning

WHY GOALS-BASED ADVICE? By Matthew Walker, Dynamic Asset How goals-based financial advice can unlock more value for clients.

Investment

FIXED INCOME AT LOW YIELDS By Louis Crous, BetaShares

Why investing in fixed income does continue to make sense, even in the current low yield environment.

Insurance

TPD CLAIMS WITHIN SUPERANNUATION By Andrew Reynolds, Fitzpatricks Private Wealth

An unintended consequence of the Protecting Your Super reforms is that many TPD claimants have a higher tax rates when they access benefits.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

FS Advice

Welcome note

www.fsadvice.com.au Volume 15 Issue 02 I 2020

Christopher Page managing director Financial Standard

A path through here was no difficulty filling the pages of this issue of T FS Advice. Since our last edition of this journal, a lot has happened. I want to first acknowledge how difficult recent months have been for so many. COVID-19, the market volatility and the economic pain it has brought with it has touched everyone. A health crisis has been joined by an economic one. And fears about the health and safety of our loved ones and ourselves have been joined by a dashing of dreams. It is not difficult to imagine that the restauranteur who opened a new location in February may now be looking at their home and their superannuation, desperate for a way to keep their dream alive. Among those who have had pay cuts or lost jobs altogether will be someone who bought their first home in March after years of saving. They too had high hopes for 2020. Of course, I don’t have to tell you these stories. These are your clients. At the time of writing, the Australian Bureau of Statistics was criticised by Roy Morgan for hiding the true unemployment rate in its April data. The ABS recorded 594,000 people losing their jobs in April but claimed only 104,000 became unemployed. That was because the vast majority of those 594,000 people who lost their jobs are not looking for work, so the ABS records them as having left the workforce alto-

gether. Roy Morgan estimated the true unemployment figure in Australia in April to be 15.3%. The government’s stimulus packages have softened the blow of joblessness for some, but if so many aren’t even looking for work is stimulus enough to keep the dream alive? Financial advisers are on the other front line of the COVID-19 pandemic. They have the tall task of guiding people through this crisis, dreams in tact. Australia’s need for financial advice has never been more pronounced. The government responded to this by offering regulatory relief so advisers can help people make decisions about early release of super. Whether that is enough to help remains to be seen. This edition of FS Advice highlights some of the brightest minds and most inspirational stories in the industry, those with a path through these challenging times. We hear from Donna Lee Powell on working with clients who are grieving and what she learnt from her own loss, Josh Dalton on the role of advisers in super, Barry Daniels on the challenges advisers have in helping consumers right now and William Johns on how COVID-19 will change our relationship with Centrelink. This edition also includes a special featurette on financial advisers’ mental health. The coming months will be difficult for the industry and your clients, but support is out there. With a proper plan there is a way through anything. fs

The quote

Advisers are on the other frontline of the COVID-19 pandemic.

Christopher Page managing director, Financial Standard

FS Advice

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News

www.fsadvice.com.au Volume 15 Issue 02 I 2020

Regulatory relief for financial advisers

It’s not you, it’s quarantine Eliza Bavin

Many financial advisers may need to gear up to handle the aftermath of couples growing apart as they’re forced together. China was expecting a boom in births when it eased mandatory quarantine laws, instead it has seen a surge in divorce applications. If Australia is facing the same fate, it’s more important than ever to understand how complex divorce can be and how lawyers and advisers need to work together to benefit their clients. In Australia, a couple cannot get divorced until they have been separated for at least 12 months, and it is during this time they need to start getting the paperwork prepared. Anna Hacker, national manager of estate planning at Australian Unity, said most people don’t realise that up until the time the divorce is finalised their partner is still a power of attorney or beneficiary of their estate. “Initially, most people don’t think about things like power of attorney or wills,” Hacker said. “Even though a divorce can prevent someone from inheriting your will, up until the point it is finalised they’re still a beneficiary.” Another thing to consider, Hacker said, is that a divorce does not stop power of attorney operating. “That is a really critical part, because even though the will may take an ex-partner out as an executor, a power of attorney is not impacted in every state,” she said. “That can end up giving the wrong person a lot of power when it comes to your client’s assets.” Even if a person has removed their ex-partner as an executor and a beneficiary, they may still be listed as the trustee of any trust that was established within the will. fs

Jamie Williamson

The quote

Australians sleep better at night knowing they have a professional financial planner assisting them in managing their financial position.

SIC has announced three temporary measures to assist the industry with providing affordable and timely advice during the COVID-19 crisis. It has also confirmed it is delaying its work on grandfathered conflicted remuneration and life insurance advice. To assist the provision of advice around the government’s early access to super scheme, ASIC has allowed advice providers to not give a Statement of Advice (SOA) when doing so; permitted registered tax agents to give advice to existing clients about the scheme without an AFSL; and issued a temporary no-action position for super trustees to expand the scope of personal advice that can be provided under intra-fund advice. The relief is temporary and comes on the back of stakeholder consultation, including with industry associations, consumer groups and related regulators. It is also subject to strict conditions. Conditions include providing clients

with a Record of Advice and capping the advice fee at $300. The adviser must also establish that the client is entitled to access their super early and the client must have approached the advice provider for advice, not vice versa. ROAs will also be allowed to be provided to existing clients where their personal circumstances have changed due to COVID-19 and the client sees an advisers from the same licensee or practice, not their usual adviser. ASIC will conduct surveillance on the advice provided under the new measures to ensure consumer best interests are being met. ASIC will monitor the ongoing impact of COVID-19 and provide 30 days’ notice to the industry before revoking the relief measures. FPA chief executive Dante De Gori said: “Australians sleep better at night knowing they have a professional financial planner assisting them in managing their financial position, which is second only to their health in personal importance.” fs

Trust lifts amid pandemic Ally Selby

Advisers are the most trusted source of information surrounding the impacts of COVID-19, above government sources and the media, according to research coming out of MLC Wealth. It’s a key finding of a survey of over 1600 MLC clients and members of the general public. The survey found investors and clients of the wealth management business were most concerned about the economic impacts of the coronavirus (8.5/10 concern level), as well as market volatility and its ramifications on their investments and superannuation (8.2/10 concern level). The health and wellbeing of the community (7.8/10 concern level) and family members (7.7/10 concern level) also rated highly as key areas of concern. MLC Wealth chief executive Geoff Lloyd said the research highlighted the financial and emotional

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

support that advice professionals bring to their clients. “Advised Australians, including our clients and those with financial advisers in other groups, told us their adviser was their primary source of truth for information on the pandemic, suggesting many see their adviser as a ‘life coach’ in moments that matter, like now,” he said. “MLC’s enduring belief is that good financial advice is worth it. This research shows that in moments like these, clients share this view.” Lloyd said the current period of uncertainty was an opportune time for advisers to step up and address their client’s needs. “These are very tough times for Australians, in particular - but not limited to - those who’ve never experienced a major market downturn, and those nearing or in retirement,” he said. fs

FS Advice

News

www.fsadvice.com.au Volume 15 Issue 02 I 2020

Pandemic intensifies adviser exodus

Feedback the way forward Eliza Bavin

Professional service firms need to better accept feedback from their clients, according to HBL Mann Judd. HBL Mann Judd’s Australasian association chair Tony Fittler said accepting feedback is necessary if firms want to institute consistent service across the breadth of their organisations. Fittler said after conducting a formal net promoter score (NPS) program for the last three years the company found they were able to capture client criticism that would otherwise gone unspoken. “While clients are usually very positive, you also shouldn’t assume what clients are thinking and how satisfied they are; this tool allows for raw, honest and occasionally confronting feedback that can be difficult to hear but, ultimately, can only serve to benefit the quality of the service offering,” he said. The program was run by Client Culture, a Melbourne-based consultancy firm, which has collected over 4000 individual pieces of feedback form clients to date. Client Culture director, Greg Tilse said the methodology assists with not only managing the client relationship, but also helps inform the value and trust perception held by the client. “For professional service firms, it’s the trust aspect that will determine whether the client will recommend the firm - and that’s the barometer for the effectiveness and efficiency of client service,” Tilse said. “The challenge for all professional service firms is being able to provide service consistency across the entire firm. fs

FS Advice

Elizabeth McArthur

R The quote

We will have 15,000 financial advisers looking after 25 million people.

ainmaker analysis of the ASIC Financial Adviser Register shows that during the COVID-19 pandemic, in less than three months from 27 February 2020 to 21 May 2020, the number of registered advisers dropped by 916. From the start of 2020 to May 21, the ASIC FAR dropped by 1488 advisers. Even more have left the industry, Rainmaker analysis indicates, as there were approximately 50 new entries to the ASIC FAR in the same period. ASIC chair James Shipton insists the regulator is concerned by the number of financial advisers leaving the industry and how COVID-19 could amplify the issue. “This is a question that was confronting us before the pandemic and is being effected by the pandemic itself,” Shipton said. “It’s always been our desire to have a healthy, functioning and effective financial advice industry in this country.” He said that ASIC wants to work with the advice industry to achieve positive outcomes for consumers. “But we also need to ensure it is of

the highest quality and highest standard - that is absolutely crucial,” he said. Paul Tynan, chief executive of Connect Financial Services, was not surprised to see almost 500 advisers leaving the industry in less than two months. “There’s going to be more,” Tynan said. “It’s the over-regulation. You’ve got the regulation from ASIC, then you’ve got FASEA, then you’ve got the dealer groups and the institutions. People are being strangled by bureaucracy and red tape.” Tynan predicts that the ASIC FAR will get as low as 15,000 registered financial advisers as people are pushed out of the industry by red tape, with COVID-19 only adding to the burden. “We will have 15,000 financial advisers looking after 25 million people,” he said. COVID-19 and the economic havoc it has brought has resulted in demand for advice, Tynan said, but he also thinks the pandemic could be “another nail in the coffin” for the industry. “The demand is there. People want advice,” Tynan said. “But in Australia we have made advice unscalable and unaffordable.” fs

Seek financial advice: Hume As the government was expecting close to two million Australians to apply for early access to super, assistant minister for superannuation, financial services and financial technology Jane Hume urged those who are confused to seek financial advice. In an interview with Sky News, Hume said the government expected up to 1.7 million Australians to apply to access up to $20,000 of their super early ahead of the scheme coming into effect. Asked whether people should consider accessing super as a last resort, Hume suggested some of the numbers about what $10,000 could amount to in retirement are overblown. “There are some pretty wild numbers floating around about what taking $10,000 today means for you,” Hume said.

“We would suggest that people either talk to a trusted financial adviser if they’re confused or a registered tax agent or there’s also a very handy calculator on ASIC’s Money Smart website that will tell you exactly what taking out money from superannuation means for you.” The suggestion that speaking to a financial adviser may be necessary for some consumers grappling with the fallout of COVID-19 comes asthe government implements regulatory relief for financial advisers. The relief will allow advisers to give clients guidance on early release of super without doing a statement of advice but advice fees on the stimulus measures will be capped at $300. fs

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

News

www.fsadvice.com.au Volume 15 Issue 02 I 2020

Compliance worse than COVID-19

Commissions fight renewed The COVID-19 pandemic and subsequent economic slowdown has spurred a fight among financial advisers to retain commissions, amid news big institutions are turning them off earlier than the law requires. The Association of Independent Financial Professionals (AIOFP) has made a submission on the implementation of the Royal Commission recommendations calling for the banning of grandfathered commissions to be pushed back by two years to help advisers through the COVID-19 crisis. The proposed new date for the banning of grandfathered commissions would be 1 January 2023. The AIOFP also requested that ASIC “stop its current activity of encouraging manufacturers to terminate grandfathered revenue before the legislated 1 January 2021.” The association has previously accused ASIC of prompting institutions to turn off grandfathered commissions early, even when a High Court challenge of the grandfathered commissions ban was on the cards. “LIF, FASEA, the banning of grandfathered revenue and resultant structural change has led to 23 suicides (COVID -19 death toll is currently 22 at the time of writing), thousands of experienced advisers leaving the industry and threatened the existence of thousands of small business owners and their mostly women employees and their families,” AIOFP said in the submission. The AIOFP’s renewed fight came as AMP wrote to customers saying that it would turn off grandfathered commissions before the January 1 deadline. A spokesperson for AMP said the majority of commissions are expected to be turned off in the first half of 2020. fs

Ally Selby

The quote

As big a disrupter as COVID-19 has been, it still hasn’t topped FoFA and the Royal Commission.

egulatory and compliance burden is a bigger challenge and disruption for financial advisers than COVID-19, the global pandemic that has ripped both economies and lives to shreds. In an interview with Financial Standard, Investment Trends research director Recep Peker revealed 69% of advisers named compliance burden as their biggest challenge, with advisers spending an average of 6.2 hours to produce a Statement of Advice for the typical client. “So as big a disrupter COVID-19 has been, it still hasn’t topped the impact of FoFA and the Royal Commission and what it’s been for planners businesses from a compliance burden perspective,” he said. “Becoming more efficient in providing advice is an urgent matter for financial advisers, as the cost of advising a new client outweighs how much they

charge them, with the average adviser losing $550 on the upfront relationship.” Association of Financial Advisers general manager of policy and professionalism Phil Anderson said regulatory requirements had increased the cost of advice. “There is a strong view that the cumulative impact of a series of regulatory reforms over recent years and other regulatory interventions has materially increased the cost of and complexity of compliance in the financial advice sector,” he said. With much of the impacts of these reforms yet to hit the adviser community, Anderson argued there was a consensus that more was to come. In the last few years, advisers had faced FoFA reforms, the FASEA Code of Ethics, Royal Commission recommendations, ASIC Project 515 and “lookback” projects as a result of the fee for no service issue, he said. fs

Industry funds a bright spot Elizabeth McArthur

Many financial advisers have left the advice sector since the start of 2020, but industry superannuation funds are recruiting. By the end of May 1500 advisers had dropped off the ASIC Financial Adviser Register. During that same period, industry funds have picked up new advisers, according to Rainmaker analysis. Of the advisers who left the industry, less than 50 were from industry super funds. Profusion Group director Chris Gordon specialises in recruiting financial advisers. He said he’s recently seen industry funds hiring at a greater pace than the rest of the advice industry. Gordon works with about 10 industry funds, and he says most of them have been hiring recently. “From an industry point of view, it’s probably the most positive area,” he said. He’s predicting that the industry funds will continue steadily growing their adviser numbers as their member bases grow.

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And, the super funds are also proving to be more attractive employment options for advisers. “Adviser numbers at industry funds are growing at a steady pace, and I think that will continue,” he said. Gordon suggested that as industry funds continue to grow through mergers the advice services their diverse member base might require are likely to expand. “There seems to be a high level of trust of industry funds form their member base,” he added. “From a market point of view, the industry funds are in a positive place at the moment and they’re one of the growth areas of the industry.” Gordon said when he’s advertising advice roles with industry funds he makes sure to make it clear the role is with an industry super fund, saying he’s seen a boost in application numbers from this factor. “It’s an attractive option for a lot of people,” he said. “They didn’t get as much bad press through the Royal Commission and they’re in growth-mode. Then there’s that trust factor with the member base.” fs

FS Advice

News

www.fsadvice.com.au Volume 15 Issue 02 I 2020

FASEA too soft on ethical investing Elizabeth McArthur

ERS front of mind Eliza Bavin

Early release of super (ERS) was the topic most frequently asked about by advisers during March and April, according to new figures from AMP’s technical adviser support team. The next most asked about issue was minimum pension drawdowns as the government relaxed the rules and retirement balances were hit by the volatility in financial markets. This was followed by enquiries about the federal government’s JobSeeker payment and JobKeeper wage subsidy. AMP technical strategy manager John Perri said the government was making it relatively easy to apply for super withdrawal, so people needed to carefully consider their decision and ensure they met the eligibility criteria. “This is a great initiative by the government, which is supporting Australians doing it tough, but it will impact retirement balances,” Perri said. “We’re therefore encouraging people to make sure they understand the implications and all available options to support their finances before applying for early release.” ASIC’s retirement savings calculator shows that someone aged 25 withdrawing the maximum $20,000 this year would have $47,000 less in today’s dollars by the time they retired at 67. Perri said a range of measures were available to help people through a period of lost income, both from the government and private sector, such as the mortgage payment pause offered by the banks. fs

FS Advice

The quote

They should have gone further.

uring a Responsible Investment Association of Australasia webinar some financial advisers have suggested that FASEA’s Code of Ethics doesn’t go far enough on ethical investing. Appearing on the webinar, Federation Financial Services adviser Dave Rae pointed to an example provided along with the FASEA Code of Ethics’ Standard 6. In the Code of Ethics Guidance, released by FASEA in October 2019, this example was given: “Where your clients indicate they only wish to invest in ethical or responsible investments, you will need to consider whether limiting your product recommendations in this manner is appropriate.” “My reading of it was that you should be understanding the preferences of your client,” Rae said. Rae said FASEA’s first explanatory statement on the code seemed to suggest that advisers may have to limit their advice to responsible investments if the client expressed such a preference. However, further guidance from FASEA indicated the reference to responsible and ethical investments actually demanded advisers consider whether those investments were really

in the best long term financial interests of the client. FASEA never said advisers had to have a discussion with their clients on their ethical preferences when it comes to investing. “I don’t see how you can consider the preferences of your client without expressly asking those questions,” Rae said. Asked whether FASEA took a strong enough stance on ESG issues, Goodments chief executive Tom Culver said no. “I personally think they should have gone further. However you want to look at this, it’s critical that this is taken into account,” Culver said. Invest with Ethics founder Alexandra Brown agreed. “There’s a trend already towards ethical and responsible investing... then there’s ASIC updating its climate change risk disclosure reporting levels and the Modern Slavery Act,” she said. “There’s this pull from regulatory and this push from climate demand. Larry Fink just announced all of Blackrock’s [active] funds will take sustainability into account. He mentioned this is being pushed by client interest.” fs

Fight for MySuper advice fees kicks off Financial advice industry groups are being joined by superannuation funds in a fight to retain the ability to charge advice fees to MySuper members as the government implements recommendations from the Royal Commission. Draft legislation currently open for consultation would stop Australians paying for financial advice from their MySuper accounts. The Financial Planning Association of Australia is among those who oppose the move. The FPA is arguing that it will create two classes of super and take away the ability for consumers to choose where they get advice and how they pay for it. FPA chief executive Dante De Gori said that the argument that MySuper members are disengaged

because they are in the default option and therefore do not require advice is incorrect. “Many people choose to stay in a MySuper investment option because it is the right one for them and they have the same need for financial advice on their superannuation, insurance needs and retirement planning,” De Gori said. “Stopping the payment of advice fees from MySuper investment options will disadvantage many Australians who currently use this arrangement to access affordable advice from their choice of financial planner.” First State Super, which is merging with VicSuper to create a $130 billion fund, is also arguing changes to the ways super members can pay for advice could disadvantage the most vulnerable. fs

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

News

www.fsadvice.com.au Volume 15 Issue 02 I 2020

JANA leaps into retail

Help to recognise financial abuse

Eliza Bavin

JANA said it will be expanding its service offering to financial advice and private wealth firms in response to the needs of the “growing and evolving” sector. Speaking with Financial Standard JANA chief executive Jim Lamborn said the move is in response to a growing demand in the market. “Our focus for 32 years has been exclusively institutional grade, but we then realised there was a whole market segment out there that was a natural growth area for us to look at,” Lamborn said. “We have also seen the evolution of that marketplace and the importance of good governance and of non-conflicted business models.” JANA said it will draw on its advisory and implemented consulting expertise to offer managed account and consulting services to high quality financial advice and private wealth practices. Michael Karagianis has been selected to lead the roll out of JANA’s retail partnerships offering. Karagianis joined JANA in January 2019 as senior consultant and he will be supported by John Ryan, who has joined as business development lead for retail partnerships. “At present the advisor focussed consulting market is highly fragmented with a wide range of players ranging from individual consultants through to boutiques to larger institutionally owned consulting firms,” Karagianis said. “Not all of these are likely to survive moving forward. JANA has a unique blend of the culture of a boutique consultancy business but with the strength of its institutional presence and balance sheet.” fs

Julia Newbould

The quote

We just need to be aware of what to look for.

inancial advisers will soon have access to a tool which will make it easier to recognise some of the tell-tale signs of financial abuse, which may be affecting their clients. The Financial Abuse Specialist certification course is a program designed by Queensland-based financial adviser Amanda Cassar, and issued by by Standards International, will be available in the second half of 2020. At this stage, the program will be launched to advisers globally starting with a special focus on the UK, USA and Canada, Australia and NZ before moving into Asia, then the rest of the world. The course will be delivered online with the learning materials, video case studies and assessment all available via the Standards International portal. At this stage, it is estimated the course and designation will be available for around $1355. For those completing the course, the designation of Financial Abuse Specialist will be issued by Standards International, based in the UK. “We break down the differences between financial abuse and elder finan-

cial abuse, what are the signs to look out for and practical steps we can take to assist,” Cassar said. After completing the course, advisers should be able to produce a policy or procedure for their individual practice to follow, and proudly display the Financial Abuse Specialist certified logo to let potential clients know they’re qualified to assist and understand, Cassar said. “We have also had interest from practice management staff and team members who would like to complete the course for their own personal interest and the ability to support advisers,” Cassar says. According to Cassar, a red flag for abuse might be if one person is constantly talking over their partner during the meeting and the suppressed person seems afraid to share their opinion. Another red flag may be if all of the assets are in one person’s name and the other is left out, or the spouse is unnamed as a beneficiary. “It’s a fact-finding situation; we just need to be aware of what to look for,” said Cassar, who estimates that she has seen about a dozen cases of abuse. fs

Risk advisers under fire Elizabeth McArthur

A joint report from ASIC and APRA has prompted law firm Maurice Blackburn to question the value of retail life insurance. Maurice Blackburn superannuation and insurance principal Josh Mennen said the report did not find favourably for life insurance policies recommended by financial advisers. “This report has some very compelling data that makes clear that group insurance through super remains a crucial product that delivers significantly greater value for consumers than other policies, including those supposedly tailored by financial advisers,” Mennen said. The data indicated that the claims paid ratio for group total and permanent disability insurance was

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85%, compared to 45% on retail policies. “It also shows that income protection through super led to just 33.7 disputes per 100,000 people insured, compared to retail income protection policies, which came in at a staggering 150.5 disputes per 100,000 people insured,” Mennen said. “This reinforces that while adviser-sold policies are often marketed as a bespoke product, too often they are compromised by conflicts of interest, including insurers paying trailing commissions that result in poor product selection and claim disputes caused by underwriting complications.” Mennen went so far as to say that the financial advice industry will have to justify how consumers could be better off consulting a risk adviser in light of the data. fs

FS Advice

Opinion

www.fsadvice.com.au Volume 15 Issue 02 I 2020

Barry Daniels chief executive Property Funds Management

Scared consumers turn to wounded financial advisers s the flattening of the COVID-19 curve A inches downwards and a glimmer of hope appears on the horizon, it’s appropriate to reflect on the myriad of issues and lessons derived so far from the pandemic, in particular the lack of recognition that is afforded to the role of financial advisers. With the ranks mercilessly depleted by two decades of unprecedented reforms - and many wounded financially and/or battling deep mental health issues, it’s been the advisers that have stoically been at the front line helping consumers and clients engulfed by fear. Fear that literally erupted as the enormity of the pandemic engulfed the nation resulting in consumer confidence being smashed to the lowest on record according to Westpac’s recently released survey, by the resultant share and property market downturns. Savings, jobs, businesses, retirement plans and property values were washed away as the tsunami of economic terror and realisation grew in intensity that evolved into a ‘circle of fear’ that overwhelmed the populace from young to old. Fear of contracting the virus or dying from infection was soon compounded by fear of being unemployed and resultant financial hardship. Fear of losing the family home; fear of falling living standards; fear of isolation and loneliness at home for months; fear of being detached from family and friends; fear of not finding employment; fear by children that an embrace could kill an elderly grandparent or relative! From the onset, advisers have quite literally been inundated with an unprecedented volume of calls from clients and consumers

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as they dealt with both the emotional and financial consequences of unemployment and lost value of investments and savings. However, cost has made access to affordable financial advice prohibitive and out of reach of the very Australians most greatly affected. To assist clients and consumers, many advisers and their businesses are wearing many of the charges. In fact, I know a number of very dedicated individuals that have been working for less than $10 per hour before this pandemic! In addition, advisers who normally work long days, have been asked to double their efforts working even longer days, and through weekends in order to deal with the increased volume of calls and enquiries. The folly of the regulators two-decade approach to unrelenting reform that believed there was a ‘one size fits all’ solution has been exposed. The fallacy that more scrutiny, administration and compliance would herald a ‘new golden age’ of advice has only served to hasten the demise of the sector, culminating with the Hayne Royal Commission that proved even the institutions with all their resources and funds could not comply. Above all, COVID-19 has been the black swan event that has revealed the gaps and monumental shortcomings of the current financial service system. At a time when professional financial advice has never been more important or needed by so many Australian consumers, it is unaffordable, and worse there simply aren’t enough practitioners. Yet another black swan is the concern about liquidity and ability of superannua-

tion funds to handle in excess of 700,000 applications for earlier release. Had there been more advisers, they could have provided much needed advice and support that would have been of immeasurable value to both the members and super funds. If this perfect storm couldn’t get any worse, a recent industry survey predicted 2020 would see a record number of practitioners exit the industry fatigued by two decades of structural reform, the value of practices plummeting and prospects of even more reform to come. Exhausted and many battling significant mental health distress, is it any wonder that capable advisers have had enough and are choosing retirement. The COVID-19 pandemic and resultantblack swan events have provided an opportunity to pause, reflect and take stock of what has occurred and the lessons contained. I note with interest the manner in which a great portion of our politicians are acknowledging new insights on previously long held views, and even mistakes that have been made in past years in other key industries. While time is still on our side, I call on the federal government to undertake a review of financial services looking through the lens of a perfectly imperfect world. To back test the real impact of reform that has failed so appallingly when it was needed most in the context of ensuring a strong, viable financial services industry and affordable advice is available to all Australians. Finally, to take steps immediately to limit the risk of losing more advisers from the ranks of an industry that needs them so desperately at this time of need and in the future. fs

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Rich Dad’s empathy Author of ubiquitous personal finance self-help book Rich Dad Poor Dad Robert Kiyosaki says he feels for financial advisers amid the COVID-19 pandemic - though he won’t be taking their advice. “They have a tough job, a very tough job,” Kiyosaki said. Kiyosaki’s own financial adviser is John MacGregor who recently released his own book titled The top 10 reasons the rich go broke. “He explains how tough it is to be a financial adviser even when you’re talking to a rich person. Sometimes the rich person won’t change,” Kiyosaki said. Aside from recommending the book to financial advisers, the founder of Rich Dad Company said he feels empathy for those in the profession right now. However, that empathy came with a grain of salt. “I don’t like what they advise, I don’t need to follow their advice,” he said. “I’m not against anybody, I’m just pro doing what you do and doing what you can to educate people. You know what it’s like, when it comes to money everybody is an expert.” Kiyosaki says he is investing in gold, silver and bitcoin right now. He was recently promoting a seminar for Australian audiences with The great depression ahead author Harry Dent. Dent has a decidedly bleak view on the economic recovery post-pandemic. “I don’t think this virus is going be around that long but what we’ll find is that we don’t come out of this because the economy is so weak, so over stretched, so long that all it takes is this one punch to the gut,” Dent told Financial Standard. He believes stimulus packages will have unforeseen consequences. fs

FASEA unclear why advisers are quitting Elizabeth McArthur

The quote

Do we want to see advisers leaving the industry?

ASEA chief executive Stephen Glenfield has said it is outside the authority’s remit to look into why financial advisers are exiting the industry in droves. Rainmaker analysis of the ASIC Financial Adviser Register indicates that the register has dropped by 1500 advisers since the start of 2020. With just 53 new entrants to the industry in the same period, more than 1500 financial advisers exited between 1 January 2020 and 21 May 2020. Since COVID-19 hit, in the less than three months from 27 February 2020 to 21 May 2020 alone, the number of registered advisers dropped by 916. Speaking to Financial Standard, Glenfield admitted the number of new entrants to the industry was low. However, he said they were stronger than last year - just 54 people joined the industry in 2019. “They are small numbers. I guess that’s reflective of change in the industry until this point,” Glenfield said. “We want to see a strong advice community. I think the reduction in numbers can have any number of

causes but a lot of it is coming from the restructuring of the businesses of some of the bigger players in the market.” He added that decisions by the big players was driven by consumer demand, which in turn had been impacted by a lack of trust in the advice industry. “Do we want to see adviser’s leaving the industry? Again, it’s a matter of looking at the causes for that. We make sure the exam is fair across the board, not favouring one group over another. We sought to make education requirements that are fair,” he said. Asked whether FASEA has undertaken any research into why so many advisers have left the industry, Glenfield said it was outside the authority’s remit. However, he did say FASEA takes enquiries directly from advisers and corresponds with advice associations including the Financial Planning Association of Australia (FPA) and the Association of Financial Advisers (AFA), as well as the SMSF Association among others. There are just over 22,000 financial advisers on the ASIC FAR. About 8000 have had sat the FASEA exam by the end of May, Glenfield said. fs

COVID-19 creates case for robo-advice After ASIC issued a stark warning to people using retail broking services to try their hand at day trading, robo-advice services and financial advisers say this is why financial support needs to be accessible. ASIC observed an average of 4675 new identifiers (signifying a new retail trader) per day in the period of COVID-19 induced volatility on March 2020. A total of 140,241 identifiers ASIC had previously not observed were trading. Prior to this volatility, ASIC said an average of 34,502 new identifiers appeared in a period of the same length. Speaking to Financial Standard, Six Park chief executive Pat Garrett said he was disappointed to see so many hobby day traders losing money in the markets. “I wasn’t surprised that the numbers increased but I was very surprised at the magnitude of the

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increase,” Garrett said. “What was so distressing about it was seeing three to four times the number of accounts becoming active every day and the holding period for the stocks being purchased compressing to one day.” Six Park has now lowered its minimum investment to $5000 from $10,000 and is waiving investment management fees for three months. “There’s too many people that aren’t accessing the services that are available to help them with their investment management,” Garrett said. He hopes the way retail broking clients are losing out in markets, as evidenced by the ASIC paper, might help convince the regulator that robo personal advice should be widely available in Australia. Six Park has a direct to consumer offering but also works with financial advisers. fs

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Practice valuations avoid COVID-19 hit Harrison Worley

ME Bank backtracks

Elizabeth McArthur

ME Bank has come under fire after customers received letters telling them the redraw balances on their mortgages had been dramatically slashed without any warning, with the bank forced to backtrack on the decision. One letter from ME Bank, seen by Financial Standard, showed a customer’s redraw balance had been slashed from $92,700 (as at 17 April 2020) to $76,200 on 23 April 2020 (or by $16,500). The customer, who has less than $10,000 remaining on their mortgage and has been an ME Bank customer for over a decade, received the letter days after the redraw balance had been lowered. Compounding the confusion, this customer hadn’t had any communication from the bank about their redraw balance changing for at least a year. The customers who were impacted from this move by ME Bank held what the bank terms “legacy home loans” written more than five years ago. Most of them have their mortgage with ME Bank because they were a member of one of the 26 industry super funds that own the bank. Financial Standard reached out to several of the bank’s industry fund owners but all declined to comment. Centaur Financial Services managing director and financial adviser Hugh Robertson pointed out ME Bank might have just passed on the problem. “If these customers suddenly can’t access this money and they need $10,000. Guess where they’re going to get that $10,000 from now?” Robertson said. fs

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It’s so much red tape it’s not funny.

inancial advisers looking to sell their business in the midst of COVID-19 would be wise not to accept discounted offers, with experts saying the pandemic has barely touched the market. Speaking with Financial Standard, Radar Results founder John Birt said COVID-19 is not impacting practice valuations or the market more broadly, though said some buyers are trying to use the pandemic as leverage. “I think some of the buyers are probably using it as an excuse, to try and get a little bit more leverage or discount in the negotiations,” Birt said. “But really, a quality financial planning business today is probably selling for a very similar price to what it was six months ago.” Connect Financial Service Brokers chief executive Paul Tynan agreed, and said the majority of the impact on valuations at the moment still comes back to “overregulation”, the age of advisers and the FASEA requirements.

“It’s so much red tape it’s not funny,” Tynan said. He added that with the majority of advisers still under a corporate structure, the additional tier of regulation they faced is also impacting valuations. For those who are looking to sell, Tynan said it remains the case that those in a major city will have an easier time finding a buyer. “Again, the cities are easier to get things away because you have more buyers,” Tynan said. “The people that are really going to struggle, are poor, old, regional and rural Australia.” Perhaps surprisingly, Perth and Tasmania have emerged as hotspots for those looking to pick up or sell an advice practice at the moment. “We’re very busy at the moment in Perth, we’ve got about five or six transactions in play there right now,” Birt told Financial Standard. Birt said this is a record, with Radar Results typically only taking part in one or two transactions a year in Perth. fs

2020 adviser salaries revealed Jamie Williamson

Despite current uncertainty, latest insights show a senior financial adviser with more than 10 years’ experience can still expect to take home up to $160,000 per year. Riva Recruitment’s Financial Adviser Salary Guide 2020 shows a senior adviser in Sydney or Melbourne who has been in the role for at least five years and has a minimum of 10 years’ total experience can expect annual remuneration of $120,000-$160,000. That is inclusive of superannuation, but does not take into account any possible bonuses. For a financial adviser with up to five years’ experience, a salary in the range of $90,000 to $120,000 is the benchmark, while associate advisers with up to three years in the role can take home between $75,000 and $90,000. For paraplanners, those in a senior role - or more than three years’ experience can expect between $85,000 and $100,000, while the benchmark salary

for those with less than three years’ experience is between $55,000 and $85,000. Finally, those working as client services managers could expect a salary of up to $90,000 while client services officers are generally paid between $50,000 and $70,000. Riva Recruitment said with all big four banks’ having now signalled their intention to exit financial planning, there will be an influx of candidates for advice roles, many of which will need to adjust their expectations. “Majority of bank financial advisers have been earning over $130,000 packages plus bonus, with some advisers earning north of $145,000 package plus bonus... Given the current environment, financial advisers need to reset their salary expectations to be aligned with the current market,” the research said. Further, Riva said recruitment has slowed due to business uncertainty and the difficulty in onboarding while most in the industry work remotely. fs

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Josh Dalton director Dalton Financial Partners

We are not in competition with industry superannuation funds he recent wave of mass job losses comT bined with the government allowing early access to superannuation has become a perfect storm situation for certain industry super funds, especially those with a lot of casual members and exposure to industries such as hospitality. Most of these funds carry a high level of unlisted investments in their ‘flagship’ strategies and with inflows coming to a grinding halt, could need government assistance to provide liquidity if early access withdrawals are greater than expected. This is an extremely unfortunate situation and one that is difficult to ‘stress test’ for. Over the last two weeks I’ve noticed a lot of financial advisers have been quick to jump on this opportu-

nity to criticise and denounce industry super funds for misleading members and having too much exposure to unlisted investments. In some cases, almost celebrating this as some sort of victory or ‘I told you so’ moment. In our industry, there appears to be a lot of financial advisers who still see the industry funds as competition. This will definitely be the case when it comes to advisers who have built their business model around attracting assets under management. I don’t feel that this public criticism helps our cause, as it may give the impression that financial advisers are threatened by these funds and that we are not truly ‘product neutral’. I do agree that industry funds need to do a better job with providing investment transparency and that they have blurred the lines of what is a ‘balanced strategy’. You could also argue that members may not really understand the risks (including liquidity) of the investment strategies promoted. However, the issue here is an unexpected event causing substantial early withdrawals from super, not investment failure. It doesn’t help when unadvised members also switch to cash irrationally. This can be an issue when there is too much focus on investment returns and the majority of members are unadvised and don’t really

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understand the nature of the investments or how to react in situations like this. Despite criticism, I think that a healthy exposure to unlisted investments makes a lot of sense in a long-term scheme like superannuation. If you have the inflows, why wouldn’t you seek to maximise member returns by accessing larger scale investments and projects that might otherwise be out of reach? This is one of the advantages I cite when talking to clients about the pros and cons of industry super funds. I can’t access the same investments in retail platforms. I also think a healthy exposure to unlisted assets reduces portfolio volatility, which is important for giving investors a smoother ride. Industry super funds have always been a good option for our younger clients, but it’s important to make sure they understand the underlying investment strategy. There was a time when I also used to view industry super funds as competition, but financial advice is evolving, and we are no longer ‘representatives’ of the retail fund sector. I believe that part of this evolution is being completely impartial when we give advice, but this can be difficult to do with an assets under management-focused business model. Your own agenda can get in the way of providing unbiased advice. At the end of the day, industry super funds are just another superannuation product we can consider when advising clients. We need to set our agendas aside and assess all products on their individual merits. fs

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COVID-19 could end Centrelink stigma Elizabeth McArthur

ong lines outside Centrelink branches have become defining images of the effect the COVID-19 pandemic has had on the Australian economy. But what impact will it have on the stigma associated with welfare? When Prime Minister Scott Morrison said 2020 was going to be the hardest year of many Australians’ lives, he was referring to the people in those lines - many of them, he said, probably never thought they’d be unemployed. “I think it’s pretty clear to most people, if not every person in this country, that the coronavirus is having an impact on our country and on the lives of Australians. I mean, it’s hard to avoid when you look at the Centrelink queues,” Morrison said in late March. As the government shut down entire industries in its attempt to slow the spread of the virus, demand for JobSeeker (a rebrand of Newstart) unemployment benefits was so high that the MyGov website repeatedly crashed. The Prime Minister has since said that 6000 public servants have been redeployed to process JobSeeker payments. The exact number of people left unemployed by the shutdowns is yet to be clear, but estimates suggest one million people could be jobless by the end of 2020. Managing director of Health and Finance Integrated and founder of ClaimRight William Johns is deeply familiar with Centrelink. ClaimRight is a claims administration technology company that is designed to streamline Centrelink and NDIS claims. He hopes a silver lining from the economic havoc COVID-19 has wrought on Australia will be a greater empathy for those who rely on our welfare system.

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“I think there is stigma and negativity towards people who find themselves reliant on government assistance during a time of personal crisis or vulnerability,” Johns told Financial Standard. “I hope people will be more empathetic now and demand better, more dignified treatment of those seeking our societal support.” Johns has seen for himself the stigma that exists when it comes to accessing Centrelink. It’s something financial advisers often have to negotiate. “Many people feel immense guilt and shame when they are recommended to go on Centrelink. I explain to the client that in Australia we take care of our own. So go ahead without the guilt,” Johns said. “The primary reason for this guilt, by the way, is the term ‘dole bludger’ which was designed to make people feel guilty about seeking help when they are most vulnerable.” However, the government’s stimulus package and extra $550 a fortnight for those on JobSeeker payments means that people who access Centrelink for the first time during this crisis will be much better off than those who were unemployed before. Not only will those left unemployed by the COVID-19 shutdowns get the extra $550, they also won’t have to attend JobSeeker meetings or prove that they’ve applied for the required number of jobs. Additionally, the government has lowered the asset and means testing threshold for people accessing JobSeeker including allowing those with partners who earn over $48,000 a year to be eligible. “Centrelink payments are the bare minimum of what people can usually survive on. Payments like Newstart (JobSeeker) are not designed to be long term, and if unemployment becomes chronic, then people become

The quote

The term ‘dole bludger’ was designed to make people feel guilty about seeking help when they are most vulnerable.

more anxious about meeting future expenses,” Johns said. He worries that some of those who have had to access Centrelink due to the COVID-19 pandemic will be on these payments for the long term. “I worry about children having to move schools or simply not participating in social activities such as trips because of the family’s financial issues. Those are all things that really hurt people much more than not being able to take the family on an annual trip,” Johns said. “I am also concerned about stress levels causing strain on the family fabric.” As for what financial advisers can do to help, Johns suggests they familiarise themselves with how Centrelink claims actually work. “Get familiar with PRODA, which is the online system for Centrelink,” Johns said. “If your licensee allows it, you may become the client’s nominee allowing you to lodge things like supporting documentation online which can save time and money.” Johns’ staff at ClaimRight tell him that they are experiencing delays and seeing disruption to things like physical assessments and medical reporting for Disability Support Pensions. Unfortunately, many Australians got a taste of how frustrating and disempowering our welfare system can be when they stood in long queues, waited on hold on the phone and found the MyGov website had crashed. These experiences are all damaging but, Johns hopes, a new empathy for Australia’s most vulnerable might come from this crisis. fs

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Deadly silence The mental health toll of upheaval in the advice industry is an often unspoken struggle. What can be done to lighten the load? Harrison Worley writes.

t’s fair to say 2020 has been a very different year, and we’re not even halfway through. But that doesn’t mean that some good won’t come from it. Early in the year, the AFA United Roadshow took several of the advice sector’s best and brightest on tour, in an effort to bring battle-weary planners in all corners of the nation “the very latest in policy, education and professionalism”. The most profound presentation was delivered by Master Your Money founder and adviser Chris Carlin. After a purposefully nondescript beginning which saw him take attendees through the clean, LinkedIn-friendly story of an advice star on the rise, Carlin paused. Seemingly out of nowhere Carlin changed tact, and launched into a real, raw and powerful mono-logue detailing the realities of a “constant little voice” he has dealt with in his head since the age of nine. A victim of childhood bullying, Carlin began to tell the story of a young person struggling to deal with mental illness. He recalled the worst of his mental health journey came as a teenager, shocking the AFA crowd with a graphic retelling of suicidal thoughts he eventually overcame. “I was carrying a lot of pain and anger for reasons I won’t go into today,” Carlin told the crowd. “But I used to think to myself for hours upon hours upon hours on end about how stupid I was. How useless I was. How pathetic I was. That small voice inside my head going ‘You’re a freak. You’re so useless. You have no friends. No one will care if you die’”. As Carlin demonstrated to the audience that day, mental health

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journeys are life long, and they impact more than most people realise. Lifeline, Australia’s 24-hour crisis support and suicide prevention service provider, takes a call every 32 seconds, receiving more than one million contacts each year from people in need. Anecdotally, the industry has heard of numerous tragic instances in which financial advisers have taken their own lives in recent years. However, there are currently no solid figures available to draw on. According to Association of Financial Advisers chief executive Phil Kewin, at least two AFA members have taken their lives in the last two years. Referencing speculation the number of financial advisers to have recently committed suicide was above 15, Kewin says he couldn’t live with himself if it were the case. “If people say that there are that many suicides… I feel responsible for the health and wellbeing certainly of our membership. I couldn’t live with myself if there were that many suicides with part of our membership and we weren’t doing more,” he says. “Any suicide is one too many and all I can do is try to offer what services we can to ensure the members have the best support available to avoid that.” By next year, the Financial Services Council and KPMG expect their world leading life insurance data project to drill into which occupations are responsible for the most claims. So far, the program has already revealed mental health is the top cause for total and permanent disability claims in the nation, accounting for almost 25% of all TPD claims made during 2018. But while the statistics remain opaque for the moment, stories

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like Carlin’s provide clarity, and the AFA Rising Star’s openness and honesty about his mental health ensures he is able to lend a hand - and an ear - to those who need it. Fellow advisers often come to him to share their stories of struggle, he says. Connect Financial Service Brokers chief executive Paul Tynan told Financial Standard he has heard many tales over a career spanning more than 30 years, almost 25 of which were spent at AMP. According to Tynan, who in recent years turned his attention to helping advisers sell their practices and client books, counselling planners with anxiety and depression is a regular part of his job. “It’s dire. I know the whole of society is dire at the moment but this industry’s been going through it for years and years,” Tynan says. “I’ve dealt with mental illness for a long time, so I do know this area.” Tynan says mental illness is still “one of those things” that people just don’t talk about. “If they trust you, they talk to you about it. But they’re not going to be running around the marketplace,” he says. Tynan says advisers may not speak to their dealer group about the issues they’re facing, noting the personal nature of mental health. “They’re battling to talk to their spouse for Christ’s sake,” he says. Playing their part, the two biggest associations representing financial advisers - the Financial Planning Association of Australia and the Association of Financial Advisers - both offer members access to support, through their programs AFACare and FPA Wellbeing. Launched in 2017, AFACare provides members with access to the Best By You program delivered by leading Employee Assistance Program provider Benestar. According to the AFA, the program provides “support and coaching to help people navigate through life”. “It’s for times when you need support as well as when you are looking to be better than you already are,” the AFACare website says. The FPA’s offering is also a Benestar program, and offers “personal, confidential support sessions with qualified counsellors or psychologists” over the phone, through Live Chat or face-to-face. Major dealer group IOOF offers a Benestar Employee Assistance Program to its staff, which is also available 24 hours a day, 365 days of the year. In a September 2019 post to its website, IOOF said addressing the mental health issues of financial advisers and clients is “vitally important” to it. The firm said it will introduce a “a more comprehensive program of mental wellbeing support” in 2020, including practical tools and resources. “This program will be accessible to all advisers who are part of our licensed advice groups,” IOOF said. However, usage of these programs among advisers is not always clear. The FPA did not respond to Financial Standard’s requests for figures detailing members’ use of its wellbeing program. In a statement, FPA chief executive Dante De Gori acknowledged the pressures advisers are under. “Like many Australians, financial planners have been adapting to the new normal of remote working. For some this will be a big change while others may have been operating digitally enabled practices for some time,” De Gori said.

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“Based on the recent discussions we have had with our members, it is clear that they have been inundated with enquiries from new and existing clients in recent months.” De Gori points to the ongoing uncertainty around the FASEA education requirements - a result of the parliament’s failure to pass legislation which would have provided advisers with more time to pass the FASEA exam - as a key factor in the pressure on the sector. “Financial planners must pass the FASEA exam by the end of this year or they will not be able to practice. Almost 7500 financial planners have already sat the exam. This leaves nearly 16,000 planners to fill just three more exam sittings before the deadline,” he said. “We’re encouraging members to prioritise their wellbeing and reach out if they need more support to navigate the changes affecting all of us in different ways. Our FPA Wellbeing support program is one way to do that.” Kewin says AFACare usage is “in the tens”, rather than the hundreds, over the last 12 months including advisers, their staff and family members. “We seem to get seasonality. We seem to get spikes in the beginning of the year,” he says. While the numbers are small, Kewin says the association saw usage spike around the end of the Royal Commission. He says the program receives good feedback from advisers, and now sees Benestar’s counselors and support agents more understanding of the advice sector’s specific circumstances, following adviser feedback. “When we introduced AFACare in 2017, we didn’t have a budget for it,” Kewin says. “I had experience in previous occupations with employee assistance programs, and I remember before I even joined the AFA being the angst and the anger and the desperation in comments around the life insurance debate.” According to Kewin, part of the problem with the program’s relatively low use is awareness. “That’s still part of the challenge, that a lot of our members are not aware of the service,” he says. Still, Carlin is full of praise for the association. “The AFA is doing great things, particularly with the AFACare program,” Carlin says. But despite this, he is adamant the problem is that those within the sector still need to find their way past the barrier to discussing their mental health. “And again, particularly for guys, we’re not good at that,” he points out. “Financial advice being a male-dominated industry, I think that societal construct that we’ve got in the industry means that this conversation is more important than ever. During his roadshow presentation, Carlin outlined why mental health experiences should be shared more freely. “When I hear the stories of the mental health, the breakdowns and the suicides in our industry, I firmly and passionately believe that we need to drop this facade, this professionalism bullshit that we put on, and start having real, raw, honest to god conversations about who we are, where we’re at, and what we’re going through,” he told the crowd. “Can we all agree on that?” fs

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SILVER LININGS

PLAYBOOK Donna Lee Powell, DLP Life Design

Donna Lee Powell’s story has become her super power. Through hardship and heartbreak, she found a way to help others and built a business in the process. Elizabeth McArthur writes.

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ife with a young family and a small business in the middle of a global pandemic isn’t easy for anyone. But Donna Lee Powell has found the silver linings. While she works from her home she takes a moment to count the blessings she’s already found in these strange times. Her family is spending more time together, things are slowing down, there’s a welcome feeling of going back to basics. Powell started her first business one year before the Global Financial Crisis. She made it through that, learning a few lessons along the way and began her current business, DLP Life Design, just three years ago. “What I have learned throughout my life is that things can change so quickly,” Powell says. “You should protect and plan for whatever life may throw at you because no one is exempt from these challenges. COVID-19 is confirming this.” Powell has built DLP Life Design to fill a gap she identified in the financial advice industry. She estimates that advisers are losing up to 80% of their female clients once their male partners pass away. Powell has developed this hypothesis because she knows these women; once they leave their adviser they come to her. Sometimes these women had been with their previous financial adviser for decades while their husbands were alive. But Powell can offer them something most other advisers can’t. “I’ve worked with clients experiencing grief for the last three years. That has become one of my niche markets,” Powell says. “Working with these clients, I often find myself having hard conversations.” She identified the specific advice gap that exists for those who have lost their spouses, especially suddenly or at a young age, through her own experience. Powell’s husband died while swimming an Ironman event in 2015, as she and their children watched on from the beach. “He was a fit and healthy 39-year-old. There were no findings in the coroner’s report that could explain his death,” she says. “I was very fortunate to be in a good financial position with my husband, he was a paramedic working full-time and I was consulting part-time. “We had an amazing life, a beautiful and supportive family and friendship group. We were very much in love, life was perfect.” Amid her grief, and while learning to parent alone, Powell discovered a unique administrative hell. “Before I lost Brett, I had no idea how traumatic that kind of experience is,” she says. “You expect the emotional side of things, but not the administrative burden. I had even worked with clients before who had experienced this.”

Despite that, Powell found that the administrative hurdles that are thrown at people who are grieving are hard to fathom until you experience it yourself. Now, she completely understands why other financial advisers are losing widowed clients and she says it’s not their fault. “You don’t know what you don’t know,” she says. Part of Powell’s ambition in sharing her story is that she might do her bit to change the industry for the better. She points out that with women living, on average, longer than men they do tend to be the ones who end up with a family’s wealth. No smart financial adviser should continue with the old status quo of talking to the man of the house about money matter. It’s guaranteeing that the money ends up walking right out the door. One of the most surprising things about Powell’s story is that even she, as a financial adviser and someone who has taken care of her personal finances her whole life, found the administrative process after her husband’s death confronting. Financial advisers deal with death every day. They speak to their clients about wills and life insurance and what might happen to a client’s superannuation in the event of their passing. But Powell’s story illustrates just how far the industry has to go. “Enduring the process of the insurance claims, having the death benefit super paid out and sorting probate made me realise that some advisers do those things well but most don’t,” she says. “Most professionals, including financial advisers, who deal with these processes often struggle with the tough conversations and shy away from talking about death and dying.” Living the experience of losing a spouse opened Powell’s eyes to the urgent need for financial advice to do better for those grieving. Not only do they often find themselves with a mountain of administrative tasks to undertake when they have lost someone, but many also lack the necessary level of financial literacy deal with it. Still today, there are many Australians whose financial situation is such that if their partner passed away they would struggle to maintain the lifestyle they currently live. Because women are still more likely to be the primary carers for children and elderly parents, and are more likely to have more time off work as a result, men remain the primary breadwinner of many families. Powell says that in the time after her husband’s death she started seeing this situation in a new light. “I remember looking around at my girlfriends and my family and realising how vulnerable many people are if they were to lose their partner,” she says. “It’s one thing taking on the role as primary breadwinner in your family, but it’s another to do that while you’re grieving and trying to be a sole parent to children who have just lost their dad.” She wanted to help these women, and she discovered a way to do it - by telling her story.

It’s one thing taking on the role as primary breadwinner in your family, but it’s another to do that while you’re grieving.

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Powell says she loves financial advice because she enjoys helping people and seeing them succeed, and her background set her up well to understand the joy of money. As a young girl Powell had the benefit of experiencing the importance of good money management first hand. She grew up in a mining family and as big jobs came and went, her family’s financial fluctuations were keenly felt. “As a child, my family experienced sudden financial change through the ups and downs of the mining economy,” she says. “We went from being quite wealthy, living in nice houses, eating nice food, driving nice cars, travelling the world to losing almost everything.” The experience made Powell learn the fundamentals of financial planning at a young age. “It taught me that money is not the most important thing in life, and it does not bring happiness,” she says. “However, it does give us security, choice, and freedom. I guess when you have less money, you learn to be grateful and mindful of the simple experiences in life.” Those formative experiences created an interest in wealth creation and security for a young Powell. “It forced me to be interested in making money very early in life. I wanted to provide my family with security, choice and freedom,” she says.

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“I bought Coles Myer shares at 17, my first house at 21 and owned my dream home at 34. By this time, I was married with two kids and had sold my first financial planning practice.” Her experiences growing up had instilled in Powell not just the importance of saving but of having cash reserves and not over extending yourself with debt. “It was a natural progression for me to end up in financial advice. I love helping people and have experienced the importance of good money management firsthand, so I wanted to help people create just that,” Powell says. But, despite her deep understanding of the value of financial security, when Powell’s husband died she still found herself in a financial tangle for the first time in her adult life. Even she was left unprepared for some of the tasks she would have to undertake. Now, it’s Powell’s mission to not see other women in the same situation. “Most professionals, including financial advisers, who deal with these processes often struggle with the tough conversations and shy away from talking about death and dying and most importantly often lack empathy to what the client might be experiencing,” she says. “The feedback I get from my clients who have been

The quote

As advisers, we’ve been through the wringer.

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in this situation and gone to other advisers is that they often feel confused, overwhelmed and powerless. My goal is to empower and educate them and not to overwhelm them.” Having insight into what it’s like to deal with paperwork, jargon and bureaucracy while grieving means Powell can avoid creating the situation other advisers sometimes fall into that leaves clients feeling overwhelmed. But, she also has insight into broken systems and the desire to change them for the better. “People have to provide documentation of a death over and over again to so many institutions,” Powell says. “That alone triggers so much emotion. Imagine if the Department of Births, Deaths and Marriages could notify institutions on behalf of relatives when someone dies.” These tasks aren’t often what people think about when someone dies, but financial advice has the ability to do what it can to relieve this burden - and that could have a profound impact. “That would result in a lot less anxiousness and stress on people who have just lost someone,” Powell says. “People don’t realise the importance of getting it right until it’s too late most of the time.” The irony, Powell finds, is that although so much of what financial advisers do skirts the perimeters of death as it implicates the estate, talking about death still doesn’t come easily for most. “In the first meeting clients are usually sharing their grief and a lot of information about what needs to be done,” Powell explains. “My role is listening and deciding what’s important and a priority. A lot of clients come to me to talk about getting an insurance claim paid out, so I’ll just focus on that. “I won’t get into what to do with the money or anything like that. I’ll just do the thing they’ve asked for and quote my fees based on that alone.” That might sound like a simple plan, but it actually comes from Powell’s empathy for their situation. “I keep it simple because I know what it’s like and how overwhelming it can be,” she says. “I prepare clients so they know what trustees are going to be asking because I’ve dealt with a lot of trustees, a lot of super funds. “I want to educate clients about the process, how long it takes and what questions they are going to be asked because some of the process is out of my hands as an adviser.” Many of the women, if not most, who come to see Powell are not the main income provider for the family. But, they are educated. They have careers of their own and don’t necessarily fit into old stereotypes about a woman’s role in a family.

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However, Powell finds they are often still not that interested in money. Instead pursuing careers they love without making job choices based on salaries. This isn’t necessarily a negative trait, but it can leave these women less engaged with the family’s finances. “I very much feel that over time it will change,” she says. “More women will be interested in money and will value financial freedom and independence more. Women live longer, so over time women will be the ones who end up with the majority of wealth.” In her initial meetings with new clients, Powell does often find herself sharing her own story. “I am a big sharer of my life experiences. Clients relate to that and they like it. I let clients lead the conversations, and it’s interesting,” she says. Though the conversations can sometimes be challenging and emotional, she says it’s ultimately worth it. “I’m a spiritual person and I guess when people die it’s natural to think about the greater purpose of life and the lessons in this,” Powell explains. “I often find myself having spiritual conversations about the greater things in life with my clients. Some of the things that we talk about still surprise me. I guess I’m open and non-judgemental, so clients feel safe and comfortable to share.” It’s natural, in times of upheaval, for people to want to have these conversations, she says. “When someone is dying or someone has died, you reflect on what’s really important,” Powell says Reflecting on what is really important is something many of us might find ourselves doing amid the current economic downturn, triggered by COVID-19. Powell, like everyone in the financial advice industry, is wading her way through the waters of the pandemic and its economic consequences Her clients need her more than ever, and she hopes she can offer support and perspective that can make their journey through this turbulent time a little easier. Powell finds herself not just speaking to clients about how their investments are performing and what to expect amid market volatility but how to, practically, make the best of a challenging situation. “Financial advice is more important now than ever,” she says. “Our clients are realising this because those with strong cash reserves, good cash flow management, diversified income and manageable debts levels are the ones that will be able to get through this and potentially come out the other side with good learnings to be better positioned for future years.” However, financial advisers aren’t exactly well equipped across the board to jump the hurdles that have landed in front of them. “As advisers, we’ve been through the wringer in the last few years with what’s required of us, the way we’re remunerated, additional educational and administra-

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The quote

Some of the noise in our life might reduce.

tive requirements and then to add to that, the markets act as a result of COVID-19!” Powell says. “There’s going to be a lot of advisers experiencing pain. It’s really tough out there.” It is a shame that consumers might be less likely to have an ongoing relationship with a financial adviser as a result of the upheaval the industry has been going through because, as Powell points out, experience through market downturns is incredibly valuable in times like these. “It’s not easy, as an adviser. When COVID-19 first started hitting the markets I reflected back to my experiences during the Global Financial Crisis,” Powell says. While Powell says she had hoped to experience such a global downturn only once in her career, she feels personally better positioned to handle this one. “The difference is we understand the key principles behind what is happening and have the knowledge and experience to know that the markets will recover. “However, our clients are often not in this position. This is where our role becomes invaluable.” Despite the rough road ahead, Powell is conscious of the silver linings. And, she knows we will all emerge on the other side. “I know what it’s like to go through awful things

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that you wouldn’t wish on anybody but I also know there’s always light at the end of that tunnel,” she says. “When we get to the other side we’ll appreciate things. “Some of the noise in our life might reduce.” And, as for the future Powell doesn’t plan on slowing down any time soon. “I genuinely love doing what I do and helping clients, even as tricky as that’s becoming during a time like this,” she says. Her advice for other financial advisers wanting to start their own business, discover their niche and follow their own path is, “go after what you are passionate about and back yourself.” Powell’s own dream is for her business, currently based in Perth, to one day have a national presence and she has plans to open an office on the east coast. She’s also working on a book about her experiences. Something which surely could help many in the same situation. “My husband Brett was a paramedic, he was very selfless. I do want to create a legacy of him and for my kids” Powell says. “I wouldn’t be doing what I’m doing if he hadn’t died. And I’ve created a life, through adversity, that I love and am completely fulfilled in.” fs

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Applied Financial Planning:

Why goals-based advice?

By Matthew Walker, Dynamic Asset

Financial planning for primary producers

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By Justin Chandler, Chandler Private Wealth

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Goals-based advice focuses specifically on meeting clients’ lifestyle objectives compared with traditional risk-profiling. Further, it has been shown to result in more meaningful adviser-client conversations and satisfaction levels. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Why goals-based advice? A profitable, client-centric model for progressive financial advisers

T Matthew Walker

How is it different from traditional advice?

he purpose of any advice business is to help its clients to achieve what they want to achieve. So, why is talking about goals-based advice seen as being ‘different’ from what financial planners have always done? We believe advisers are talking about goalsbased advice more because it represents a paradigm shift in the industry away from selling products to focusing on each client’s specific needs. Client expectations are changing. Technology and interconnectivity mean clients have access to more information and choice than ever before. Clients are more demanding of advisers to deliver strategies and solutions that match their specific needs. The potential impact of the goals-based advice approach to improve the outcomes for clients and financial advice businesses are significant. This paper focuses on the advice side of helping clients achieve their goals and looks at why taking a ‘goals-based’ approach is so vital for the future of any advice business. We have differentiated goals-based advice from goals-based investing, which is a separate topic.

Goals-based advice is an alternative to the traditional risk-profiling approach based on modern portfolio theory. Instead of starting with risk tolerance, goals-based advice focuses specifically on meeting clients’ lifestyle objectives, including investment portfolios. The first and most crucial task involves developing an understanding of all relevant client needs and issues in order to establish a suitable client-centric solution. Therefore, while understanding risk tolerances is a factor, the formation of goals is the starting point for developing strategies and portfolios. The question for many advisers is how to implement goals-based advice.

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Clients most satisfied with goals-based approach An Investment Trends survey conducted in early 2018 provided some simple, logical and interesting observations about what goalsbased advice meant for clients: • Financial planners with the most satisfied clients “are often those who are successful in creating congruity between the client’s investments and their goals”. • Many of the financial planners surveyed said they intend to become more goal-orientated in their approach.

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• However, 87% cited challenges in the provision of goals-based advice as new models are in their infancy. • Over half of the surveyed planners were unable to nominate any provider as ‘best-in-class’. • The adoption of managed accounts has seen strong growth as more planners choose them for the efficiency benefits offered over investing directly in shares and traditional managed funds. In summary, clients were more satisfied with goalsbased advice, and advisers are seeking such a solution for their business.

Communicating with clients When using the goals-based approach, there is no fundamental change to the general nature of conversations that financial advisers have with clients. Advisers have always asked the question, ‘What are your goals?’ What does change is the focus of the conversations. The conversation is focused more on the client and less on investments, markets and products—the technical aspects. It is focused on what clients want to achieve in their lives. This approach helps foster a deeper sense of understanding and empathy that, in turn, helps to develop trust and client engagement. In a purely practical sense, advisers have a limited amount of time to meet face to face or talk with their clients. Over a year, it is usually measured in hours. This means there is literally not enough time to go through all the specific details of each product or investment. In reality, achieving a genuine understanding of technical matters is close to impossible. Clients can be left confused and underwhelmed. If an adviser aligns strategies and investments with specific goals, it changes the focus from investments, markets and arbitrary benchmarks to a focus on goal completion. In the ‘Seven steps to goals-based financial planning’, Morningstar Investment Management’s head of retirement research, David Blanchett, summarised it as follows: “Most individuals aren’t financial experts. They don’t speak in terms of alpha and beta, or even keep up with their accounts on a daily basis. However, when the time comes for them to accomplish one of their financial goals— whether it’s funding a child’s wedding or settling into retirement—they need to know the money will be there. “This is why the financial planning profession must be built around helping people accomplish their goals. It’s not only an opportunity for you to provide better advice to individuals; it’s a way for you to speak their language and make closer, long-lasting connections with your clients.”

the current approaches involve substantial quantitative input, whereas client input is highly qualitative around themselves and what they want. It can be difficult for clients to understand and engage because they are speaking a different language. When a client does not fully understand what they are doing and why, either strategically or at the portfolio level, then it is very hard for them to see the value and buy into the solution. They are prone to base psychological influences of ‘fear’ and ‘greed’ and act accordingly— usually at the most inopportune times. Example 1. Risk profiling and suboptimal decisions If using a typical risk profiling approach to make investment decisions, what we find is that when markets are buoyant, investors typically feel euphoric and want to invest (at the top). However, when markets are correcting people become fearful and want to release their investments (at the bottom). This is completely the opposite to what advisers know is the right thing to do.

EY summarised the challenge in its Goals-based planning: a personalized service for strengthening client relationships report: “Since the global financial crisis and ensuing recession, the desires — and fears — of investors have changed dramatically. Investors seem less confident and more risk-averse than they were just a few years ago. They want more — and better — advice from financial advisors, yet they also want to wield more control over their financial lives.”

Matthew Walker, Dynamic Asset Matthew Walker is Dynamic Asset’s managing director. He has been a financial planner since 1991 and holds a Bachelor of Commerce (Economics and Finance), Diploma of Financial Planning and CFP qualification. Matthew has been a practitioner of goals-based advice for many years, and goals-based investing through Dynamic Asset.

Investor behaviour and psychology It is well documented and understood that investors often make irrational decisions when it comes to their finances and investments. Part of an adviser’s role has always been to help educate and guide their clients through the process. However, the challenge has always been that

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Simply, aligning strategies and investments with specific goals to help clients with their mental accounting at a granular level changes the focus from investments, markets and arbitrary benchmarks to a focus on goal completion. The result is better understanding, continuity and control. In these circumstances, clients are less likely to be reactive to short-term market conditions and more focused on their goals.

Operational aspects So how is goals-based advice delivered effectively and efficiently? While the adviser’s role and function does not change significantly, there are some operational and business issues to consider: • How to communicate with clients (e.g. newsletters, seminars, oneon-one meetings, build into it through a review cycle)? There are many ways to get the message across to clients depending on the approach, but it should be carefully thought through before delivery. • Will professional indemnity provide cover the model is changed from the more common risk profile approach to explicitly focusing on clients’ goals? • Can an adviser do what is necessary under their current Australian financial services licence? • What alterations need to be made to the statement of advice and disclosure documents to reflect a consistent message across client conversations and reporting? • How does one build investment portfolios that specifically match client goals? • How does one find true-to-label goals-based investment managers that match clients’ needs? • How does one administer, measure and report on what is required? All of these questions have established answers that are relatively simple to implement. Advice groups have and are moving down this path in increasing numbers because they know it is the right thing to do and because clients are increasingly demanding it.

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True-to-label goals-based investment portfolios not only meet clients’ needs across both investment and superannuation directly, but can also capture the benefits of technology, administration and reporting that allow advisers to increase profits. The industry is also evolving behind the scenes to provide effective solutions for advisers—the use of improved technology such as planning software, platforms or managed accounts all increase operational efficiency. Each advice business needs to consider its identity, what their clients want, what they want to do and then find the best people to work with to ‘plug any gaps’. Example 2. Leveraging business efficiencies through managed accounts A managed accounts research paper issued by BT in 2017 found that using managed accounts saved an advice business 14.4 hours a week overall, giving the adviser an extra 4.8 hours a week to focus on new revenue-generating activities, thereby growing profits overall.

Better client outcomes Morningstar Investment Management’s head of retirement research, David Blanchett, argued that an optimal, goals-based strategy can add more than 15% in utility-adjusted wealth. That is a significant number that has a meaningful impact on a client in helping them achieve their goals. In its goals-based planning report, EY found that focusing on meeting tangible short-, medium- and long-term financial needs on a lifetime basis helped give clients “a greater sense of clarity and control over their financial lives and increased “confidence in making investment-related decisions”. Advisers understand this. They know that by specifically focusing

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on the client and helping them to achieve their specific goals, they will have happier clients. It is an entirely logical outcome because the adviser has done precisely what clients have asked. Further, a happier and wealthier client base is both more satisfying and profitable.

CPD Questions

Better business results Today, more than ever, advisers and their businesses are under pressure. For instance: • consumers are demanding more and better service at a lower cost • public and press scrutiny are resulting in lower levels of trust • there are increasing regulatory requirements and compliance burdens • there are increasing training and education requirements. Advisers must increasingly renew their value proposition and how they differentiate themselves from their competitors to become a ‘provider of choice’. Goals-based advice plays very strongly to that theme. As EY stated in its goals-based planning paper: “Savvy financial advisors are using goals-based planning as a firm-wide strategy to attract clients, gain their trust and build longterm relationships”. Today’s most progressive advisers are increasingly focused on building a more client-centric approach to doing business. They are finding that client relationships and strategic advice are central to the value they provide. Further, to open up the capacity to service more clients, they are seeking outsourcing solutions to simplify the delivery of services that best meet their client and business needs. As EY observed in its goals-based planning paper: “Institutional investors, such as pension funds, endowments and insurance companies, have used goals-based planning for decades to make sure they have adequate funds available to meet future liabilities.” Advice businesses are now looking at how to bring that to the retail market to provide leading-edge solutions.

Completing the cycle: implementing goals based investing The most critical question for an advice business to answer is how to deliver goals-based investing. Goals-based investing provides the business with the complete capability to deliver transparent goals-based services that align with client needs. Because goals-based investment portfolios are decoupled from a benchmark, managers have much more freedom in finding new opportunities that help the fund achieve real returns for clients.

It’s time The shift to true goals-based advice is now underway. It provides an opportunity for advice businesses to better meet the demands of today’s clients. Market leaders are providing the more holistic goals-based service through progressive service offerings, technologies and solutions. These will not only help them survive, but thrive in the current environment. fs

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Earn CPD hours by completing this quiz via FS Aspire CPD 1. What is the starting point for goals-based advice? a) Clients’ risk tolerance b) Clients’ lifestyle objectives, excluding investment portfolios c) Clients’ lifestyle objectives, including investment portfolios d) None of the above 2. Which of the following are consider ations in relation to implementing goal-based advice? a) Tools and techniques for client communications b) Reporting and administration metrics c) Professional indemnity cover d) All of the above 3. Goals-based advice works from the premise that: a) Client input is often highly quantitative b) Clients are more educated about what they want c) Client input is often highly qualitative d) Clients are more confident and less risk-averse 4. In terms of helping clients, the author found that goals-based advice: a) Counters kneejerk behaviour to short-term market conditions b) Reinforces the need to heed market benchmarks c) Relieves the need for granular-level mental accounting d) Loosens the desire for more control over their financial lives 5. Goals-based advice changes the general nature of adviser-client conversations. a) True

b) False

6. Goals-based advice is self-contained and decoupled from outsourcing. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper looks at how farmers can diversify risk, address succession planning concerns, reduce debt and enhance cash flow. It also discusses the applications of farm management deposits and specialist farm management software. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Financial planning for primary producers

Justin Chandler

Self-managed superannuation

n terms of managing farm operations there are a multitude of financial considerations, including: • debt repayment and lifestyle goals • off-farm investments • planning/budgeting for farm acquisitions • re-forecasting as conditions and/or prices change. Financial advisers can help farmers to obtain an accurate and complete picture of farm performance and connect them with other relevant parties such as accountants, bankers, farm consultants and lawyers. This paper explains the types of things that financial advisers specialising in agricultural businesses help clients with on a daily basis.

A self-managed superannuation fund (SMSF) is a private superannuation fund, regulated by the Australian Taxation Office (ATO), that people manage themselves or with the assistance of trusted advisers. SMSFs can have up to four members. All members must be trustees (or directors if using a company trustee) and are responsible for decisions made about the fund and for compliance with superannuation rules. An SMSF can provide more control over investments and can invest in other assets such as shares, property (including primary production land), managed funds, cash/term deposits etc.

Farm succession Farm succession is usually the ‘elephant in the room’, but also one of the greatest challenges facing farmers Australia-wide. There is no single easy solution, and families and farms can be destroyed if not undertaken properly. Farmers want to ensure that the family farm is passed onto the next generation while making sure the business stays viable and profitable. The best-case scenario is that the retiring farmers have an adequate income and some provisions are made for the non-farming children. Due to the intricacies of family groups, it is very important that farmers receive personalised financial planning advice, tax and legal advice.

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Example 1. SMSFs to buy primary production land An SMSF can acquire a farm from its members and carve out the homestead from the transaction to allow it to retain its tax exemption as principal place of residence.

The main benefit of using superannuation as a tax structure is that it is taxed on a concessional basis with a maximum rate of 15% and in retirement as low as 0% (up to a maximum of $1.6 million per member).

Personal and farm protection Farmers, just like any other small business owners with debt and financial dependants, should have sufficient protection in place if

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something unforeseen should happen. Some insurances can be paid through superannuation, which can be a taxeffective option.

and not pay income tax until funds are withdrawn. Further, they must have no more than $100,000 in taxable non-primary production income in the income year they make the deposit.

Life cover (death cover)

Such cover provides a capital payment in the event of death. This payment can be used to clear/reduce debts and to fund income requirements for the family. Total and permanent disablement cover

This cover provides a capital payment in the event of an accident or illness which prevents someone from ever working again at their own or any other occupation (policy wordings differ). This can be used to pay for medical expenses or changing the home or car to cater for a disability, debt reduction and to fund income requirements for the family. Income protection

Income protection cover pays an ongoing monthly payment if a person is unable to work due to sickness or injury. A person can normally get up to 75% of income after expenses, depending on financial history and profitability. Critical illness (trauma)

Such cover provides a capital benefit upon diagnosis of a specified illness or injury, for instance, cancer, heart attack, stroke etc. This can provide a benefit to reduce debt, help pay for uninsured medical expenses or used to employ someone to undertake particular work duties.

Cash flow and farm management deposits Farm management deposits (FMDs) are very useful and help primary producers deal with uneven cash flow. FMDs allow farmers to set aside pre-tax income in years of good cash flow to draw on in years of lesser cash flow. Some special rules apply to withdrawals made during a severe drought or natural disaster. A positive change is that the government now allows farmers to use FMDs to offset any farm loans. This means that instead of being paid interest, a person can be saving interest from their borrowings. This can provide a much better financial outcome for most farmers, however, there is only one bank currently offering such a product. FMDs or superannuation?

It is common for farmers to ask if they should put money into FMDs or superannuation. The short answer is it depends what a person is trying to achieve. However, there are strategies that will improve what farmers can do in the future. As mentioned, an FMD scheme is a way primary producers can deal with uneven cash flows. Uneven income is quite common in primary production due to things like market variables and the weather. Farmers can hold up to $800,000 (assuming eligibility) per person in FMDs

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Example 2. Reducing taxable income through FMDs Thomas and Sally have an outstanding year and sell a large number of cattle. During this time, their income is $1.8 million. They know the future years will not be this good, so they put $1.6 million into FMDs ($800,000 each). Thus, their taxable income is $100,000 each.

Another way for people to reduce tax is through superannuation. Superannuation is just a tax-effective vehicle to save for retirement. Once money is in the superannuation environment can be invested into shares, property, cash or even more primary production land, depending on a fund member’s risk tolerance and preferences. Primarily, superannuation savings cannot be accessed until a member reaches their preservation age and retires, or if they reach age 65 and have not retired, or transition to retirement from preservation age. A person’s preservation age depends on the year in which they were born. This information is available on the ATO website. It is usually recommended that people start contributing at least something into superannuation so that they can benefit from compound interest over time. Contribution amounts would depend on a person’s cash flow and whether they are carrying any farm debt, or how quickly they are paying it down. In the preceding example, Thomas and Sally could deposit $15,000 each into superannuation, and their taxable income would reduce to $85,000 each. In July 2018, the government introduced a change so that previous years’ contributions can be used through ‘catchup concessional contributions’. Thus, if a person’s superannuation balance is below $500,000 and they have not used their total concessional contributions cap for the last few years, they can carry the amounts forward and make a larger tax-deductible contribution to superannuation.

Debt reduction and cash flow Cash flow is the key to survival of any farm or business. Most farmers have experienced some form of financial stress, so it is very important to have a budget and work out a budget plan. The key is to seek advice to balance debt repayments with other strategies such as FMDs and superannuation etc. While interest rates are low, a desirable move is to pay down as much debt as possible. This reduces risk of default and lets most farmers sleep a lot easier at night. Once debt levels are at an acceptable level, it may be possible to look at another farm acquisitions or some offfarm investments.

Justin Chandler, Chandler Private Wealth Justin Chandler is a director of Chandler Private Wealth. He has been an adviser since 2010 and specialises in assisting farmers, other business owners and SMSFs. Justin holds a Bachelor of Commerce (Finance) and an Advanced Diploma of Financial Planning.

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Diversifying and reducing risk

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. With regard to FMDs, a person must have no more than $100,000 in taxable: a) Primary production income in the calendar year they make the deposit b) Non-primary production income in the calendar year they make the deposit c) Primary production income in the income year they make

Investing in assets such as property and shares away from a farm can be an effective strategy to diversify and reduce risk. This greatly reduces exposure to factors such as weather cycles and commodity price fluctuations. It is also much easier to sell a parcel of shares in a period of severe drought then it is sell a farm. Off-farm investments can also be used to equalise an estate if one beneficiary wants to work on the farm but another beneficiary does not. When times are good, farmers sometimes want to continue buying more land to grow the farm. This can be an effective strategy, but it does also come with more work and risk.

Funding education expenses Children’s, and sometimes grandchildren’s, school and university fees can be expensive. Further, boarding fees can make things even more expensive. It is essential to start planning early and investigating strategies to make sure funds for education are available when required.

the deposit d) Non-primary production income in the income year they make the deposit

Family trusts can be a useful tool to hold assets or property for the

2. Tax averaging evens outincome and tax payable over a maximum of: a) Five years b) Three years c) Four years d) Six years 3. T he author highlights that the greatest often unspoken issue facing farmers is: a) I nadequate insurance cover b) Farm succession planning c) Reducing taxable income d) Low superannuation savingsd 4. I n terms of farmers diversifying risk in hard times, an effective strategy could be: a) Buying more land b) Off-farm investments c) Borrowing when interest rates are low d) Rationalising plant and equipment 3. Not all farm loans can be offset by an FMD. a) True

b) False

6. A couple can hold up $800,000 each in an FMD. a) True

Example 3. Family succession trusts

b) False

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benefit of someone else. Trusts can be used to assist with farm succession, to protect family assets and can also divide income to minimise tax. Family trusts have many intricacies, and it is always best to seek specific legal and tax advice on the implications of buying or moving assets into trusts.

Software resources On a granular level, there are specialist farm management software tools that can assist with production planning, budgeting and administration in areas such as: • benchmarking against farms with similar operations • ‘scenario planning’ (i.e. assessing profitability and cash flow impacts of changes to particular strategies) • integrating budgeting and stock-on-hand positions with profit and loss (e.g. working out which areas are doing well and which areas are barely breaking even on a dollars-per-hectare, per-carcassweight basis and more) • stock reconciliation and bank reports.

Taxation Farmers can take advantage of tax averaging to allow for the good and bad years. Tax averaging evens-out income and tax payable over a maximum of five years to ensure that primary producers do not pay more tax over a number of years than taxpayers on comparable but steady incomes. Farmers can also claim depreciation on any plant and equipment used on the farm. There are special rules for fencing, water facilities and fodder storage. Finding a good accountant who works with other farmers is paramount.

Conclusion Life as a farmer can be extremely tough and lonely, but also tremendously rewarding. Many farmers would not have it any other way. Advisers can help farmers realise their idea of financial freedom by allowing more time to focus on ways to improve their farm and lifestyle. fs

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Compliance:

Accountability regimes and corporate governance

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By Lynda Dowling, BGC Partners

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Accountability regimes will eventually be in place for all entities regulated by APRA and ASIC. It is essential that an ‘accountable person’ understands their responsibilities obligations, as stringent penalties will apply.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Accountability regimes and corporate governance The state of play in Australia

Lynda Dowling

t may have been over 10 years since the global financial crisis (GFC) unfolded, but the regulatory and political fallout is still driving change for the financial services sector. The UK was at the leading edge of developing a new approach to individual accountability with the Senior Managers Regime (SMR) which came into effect on 9 December 2019 for solo-regulated firms, impacting approximately 47,000 financial entities. The UK’s Financial Conduct Authority has already implemented this regime for larger firms. Culture and governance issues after the GFC have caused financial services entities and regulators, in Australia and elsewhere, to give close attention to financial risk. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) Final Report, released on 4 February 2019, stipulated that in Australia’s case, too little attention has been paid to regulatory, compliance and conduct risks along with evident connections between compensation, incentive and remuneration practices.

The focus on conduct risk Since the GFC, regulators globally have spent a great deal of time

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emphasising the importance of conduct risk. This is the human factor—the risk of inappropriate, unethical or unlawful behaviour. It can be either deliberate, or inadvertent due to inadequacies in a firm’s processes, frameworks or training programs. While in recent years, Australian financial institutions have been focusing on conduct and culture, in past years there were no real consequences attached to conduct risk failures. There was what appeared to be an absence of credible deterrence regarding a real risk of being caught doing something wrong, and the consequences of being caught. This has all changed now with key accountability regimes being implemented

Australian accountability regimes Banking Executive Accountability Regime

On 7 February 2018, the Banking Act 1959 (Banking Act) was amended to include the Banking Executive Accountability Regime (BEAR), the accountability framework for authorised deposit-taking institutions (ADIs) for persons in certain positions with prescribed responsibilities. These persons are known as ‘accountable persons’. BEAR, which came into effect for large banks in July 2018 and for small- and medium-sized banks on 1 July 2019, was modelled on the UK’s SMR regime which is also being extended beyond the banking sector.

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The introduction of BEAR in mid-2018 also represented a material step forward in that BEAR requires banks and their accountable executives to meet certain obligations. These obligations are summarised as follows. Accountability obligations

BEAR obligations include an ADI taking ‘reasonable steps’ to: • address how the ADI should conduct itself (e.g. with honesty and integrity) • engage with the Australian Prudential Regulation Authority (APRA) in an open manner • safeguard its prudential standing and reputation and ensure compliance by accountable persons. Key personnel obligations

• How responsibilities are allocated to accountable persons. Deferred remuneration

• The ADI must defer 40% of the variable remuneration of its accountable person’s variable remuneration for a minimum of four years. Reporting obligations

There are certain reporting obligations ADIs are required to provide APRA on an ongoing basis, which includes: • list of accountable persons • accountability maps • accountability statements. The key items from BEAR have been the deferring of executive remuneration, and detailed expectations on senior bankers.

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In response to the Royal Commission’s Final Report, the government proposed to extend BEAR to all: • Australian financial services licence holders • Australian credit licence holders • market operators (e.g. the Australian Securities Exchange, Chi-X) • clearing and settlement facilities • insurance firms. In due course, The Australian Securities and Investments Commission (ASIC) is to enforce the BEAR standards against the categories in the preceding list. This accountability regime is now known as the Financial Accountability Regime (FAR). Federal Treasurer Josh Frydenberg announced on 28 October 2019 that Treasury was working on a proposal paper with regard to FAR. This paper was scheduled to be released for public consultation by the end of 2019, however, was released on 22 January 2020, and titled Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime. It appears from the Treasury’s proposal paper that FAR will classify entities as either: • core compliance entities, or • enhanced compliance entities. Core compliance entities will be subject to all the obligations under FAR except for the requirement to submit accountability maps and statements to APRA and ASIC. Enhanced compliance entities will be required to

Lynda Dowling, BGC Partners Lynda Dowling is a senior compliance specialist with over 20 years’ financial markets experience. She provides consultancy services to large financial institutions dealing with retail and wholesale clients.

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meet all obligations under FAR. This will replace the small, medium and large classification of ADIs under BEAR. As a start, however, BEAR will be extended to all Registrable Superannuation Entity licences and all APRA-regulated insurers.

So where exactly does accountability lie? All accountability lies with the board of a firm which, in turn, delegates to the firm’s chief executive who is then directly accountable. In reality, chief executives cannot undertake every single task, so they usually delegate all or most of their accountability to accountable persons, thus allowing the chief executive to not only delegate accountability, but also authority.

Definition of an accountable person The term accountable person derives from BEAR and, as such, in accordance with section 37BA of the Banking Act, accountable person is defined as the following: • A person with actual or effective senior executive responsibility for management or control of the ADI (or of a significant or substantial part of aspect of the operations of an ADI). • The members of the board of an ADI. • Senior executives with responsibility for: • management of the ADI’s business activities (e.g. chief executive) • financial resources (e.g. chief financial officer) • risk management (e.g. chief risk officer) • operations (e.g. chief operating officer) • information technology systems (e.g. chief information officer) • senior executives responsible for management of the ADI’s internal audit, human resources and anti-money laundering functions. Note: although the term accountable person comes from BEAR, throughout FAR, the term has been transitioned using a principlesbased element and a prescriptive element. Similar to BEAR, under the principles-based element a person is an accountable person of a FAR entity or a subsidiary of a FAR entity if they are in a senior executive position with actual or effective management or control of the entity.

Accountable persons registrations Under BEAR, all accountable persons must be registered with APRA. This will apply under FAR where FAR entities will be required to apply to APRA or ASIC to register someone as an accountable person. Registrations made with APRA or ASIC will be shared in the case of dual-regulated entities.

Accountable person’s register Tip To assist firms captured under the accountability regimes, it is a good idea for a firm to create and maintain a current and up-todate accountable person’s register. This register should contain the following (this list is not exhaustive) details: • Full name of the accountable person. • The role the accountable person has within the firm. • Details of any disqualifications. • Information regarding any APRA directions upon the person.

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Accountability maps Currently under BEAR, banks are required to create and register accountability maps with APRA. These accountability maps must specify precisely which managers (accountable persons) are responsible for each function. This allows regulators to know whom to target when something goes awry. The accountability map is a list of all accountable persons, detailing all reporting lines and lines of responsibility. It must be set out in a manner that enables the regulator to easily identify each accountable person. Depending on how FAR entities are captured under the Treasury paper, some entities will not be required to submit accountability maps.

Accountability statements Under section 37F(1)(a) of the Banking Act, an ADI is required to provide APRA with an ‘accountability statement’ for each of its accountable persons describing the areas of responsibility attributed to that person. APRA has in place a template for this which most ADIs use accordingly where APRA expects the accountability statement to: • clearly articulate what an accountable person is accountable for with respect to the ADI or ADI group • be comprehensive, covering all areas of responsibility for an accountable person, with no gaps in accountability—where there is joint accountability, this should be explicitly identified and defined • align with the actual practices and governance arrangements of the ADI.

Reasonable steps frameworks Reasonable steps frameworks are control environments that when implemented are effective. Reasonable steps must include having in place: • appropriate governance, control and risk management elements • safeguards against inappropriate delegations of responsibility • appropriate procedures for identifying and remediating problems that arise or may arise. It is important to note that ASIC and APRA have stipulated that as long as a firm can provide evidence that it has in place reasonable steps and undertaken them, then when breaches occur, this may reduce any potential disciplinary outcome. Example: Elements of a reasonable steps framework A reasonable steps framework could be: • all risks documented; • all controls documented • evidence in place, including: • committees (agenda, minutes, committee packs) • committees being the vehicle for the authority of the individual (in that the individual cannot have more authority than the chair of the committee) • relevant evidence of monitoring (from first line and second line).

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Shifting BEAR to FAR

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The definition of an ‘accountable person’ under FAR: a) Is purely prescriptive b) Is principles-based and prescriptive c) Excludes internal audit functions d) Excludes subsidiaries of FAR entities 2. The government has proposed that: a) Enhanced compliance entities will be classified as small, medium or large b) Core compliance entities will be subject to all the obligations under FAR c) Enhanced compliance entities must meet certain obligations under FAR d) Core compliance enti-ties must submit accountability maps to ASIC and APRA 3. In terms of accountability: a) Boards cannot make CEOs directly accountable b) CEOs cannot delegate their authority to accountable persons c) CEOs can delegate accountability and authority to accountable persons d) Boards can bypass CEOs and delegate all authority to accountable persons

Similar to BEAR, FAR will impose: • accountability obligations • key personnel obligations • accountability map and accountability statement obligations • notification obligations • deferred remuneration obligations. Transitional arrangements will apply to ADIs to ensure that obligations which have been met under BEAR, and which will be the same under FAR, will be taken to have been met. Although FAR adopts the essential structure of BEAR, there are differences to reflect: • that APRA and ASIC will jointly administer the regime, and that may detailed aspects will be set by APRA and ASIC to allow greater flexibility in recognition of the broader range of industries and number of entities subject to FAR • the commencement of the stronger penalty framework for corporate and financial sector misconduct. Upon government receiving feedback from its paper of January 2020, it then intends to consult on and introduce legislation by the end of 2020 to implement the FAR model.

Conclusion Accountability regimes will eventually be in place for all entities regulated by both APRA and ASIC, establishing clear standards of conduct and clearly identifying who is accountable within such entities. Penalties for the entities will be severe, aligning with the newly imposed maximum penalty regime under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001. As such, it is imperative entities ensure that their accountability regime, whether it is BEAR or FAR, is implemented in accordance with the relevant obligations. fs

4. A reasonable steps framework must include: a) Appropriate governance, control and risk management elements b) Safeguards against inappropriate delegations of responsibility c) Appropriate procedures to identify and remediate problems d) All of the above 5. Mel is a middle manager in a company’s HR department. Under FAR, she is an accountable person. a) True b) False 6. Under FAR, all firms must register accountable persons. a) True

b) False

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Communications and marketing:

How financial advisers can improve client engagement

By Scott Brewster, Ăźmlaut

Communications and marketing

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The right technology can enhance engagement with clients, increase retention prospects, and free up advisers to concentrate on what clients see as meaningful and important.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

How financial advisers can improve client engagement

A Scott Brewster

ccording to Business Health’s Catscan survey data, 25,000 clients in Australia rated the review service delivered by advisers as the worst-performing area from the perspective of client satisfaction. So, it is safe to say the industry has some work to do when it comes to engaging clients. The media, on the back of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, profiled cases of financial advisers who did not really care about engaging with clients and tried to compensate by lowering costs. We have entered a brave new world. Clients’ needs are changing, and it will come as no surprise that value, trust and transparency are the most important factors financial advisers need to address in order to improve client engagement. However, in today’s world where clients have information, literally, in the palm of their hand, when they are being influenced by the likes of Google and Facebook, information alone is not enough to keep them coming back. Advisers must engage with clients in a meaningful way, and this begins by understanding what they need and want.

It’s not them, it’s you To see client uplift, a savvy financial adviser will realise their clients are no longer comparing their services to other advisers or the banks. Instead, what they are seeing is their clients’ willingness to

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integrate technology and apps into their day-to-day lives. This is good news for the financial advice industry. Consider If clients are keen to use technology, do you not owe it to them, and yourselves, to deep dive into your processes and see where your business can evolve?

It is important for firms to embrace new technologies and to realise the benefits that will flow naturally into their business. Moreover, the experts agree. For instance, The Financial Planning Association of Australia’s Mapping fintech to the financial planning process: why fintech is not a threat report of 2017 discussed how some aspects of financial management can be automated and replaced by algorithms. However, at the core of the financial planning experience is client engagement. When a client feels listened to, valued and involved in the process, a deeper (and more profitable) relationship follows. By adopting fintech solutions, financial advisers can see an increase in client engagement, increased revenue and improved productivity within their teams.

It's not just about what you know Financial adviser will have likely spent long hours honing technical

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skills, becoming highly competent in their ability to deliver effective outcomes for clients. However, as they are working in an industry surrounded by negative commentary in recent years, building trust and clearly articulating the value that they offer has become increasingly important. The relationships advisers have with their clients, new and existing, must be cultivated, developed and nurtured, and this takes time. It is easy and natural for advisers and new clients to be curious about each other, so new relationships should be built on good communication from the start. But what of existing clients? How can they be kept engaged and coming back for more? As with any relationship, clients want to know that their adviser cares about and listens to them. They need to know they are more than just a number. In its ‘7 ways to engage with your clients’ article, the Macquarie Group suggested that this entails not only capturing financial information and using available customer relationship management tools, but paying attention to personal details such as: • birthdays and anniversaries • children’s names • hobbies and interests • their favourite coffee (ready for when they visit). Taking care to note and remember such details about clients means they are going to almost certainly understand that the service they receive is tailored just for them. Make no mistake, a loyal and happy client is one of a business’s most valuable assets. Not only will an engaged client provide ongoing business, they will also be a mobile marketing team, generating new referrals that create more ongoing business. We can no longer ignore the fact that building great client rapport into a business model is a smart strategy. So, how do you ensure every client walks away from their interactions feeling happy with the service they receive? It all starts with the very first interaction.

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A missed opportunity from the start It is a given that the advice space is competitive. It is also known that clients will often leave an adviser and go somewhere else if they are not satisfied with the service they receive. It seems it can no longer be denied that winning new business and retaining existing clients is often down to the client’s personal experience, not just the financial adviser’s business knowledge or acumen. Therefore, the first face-to-face meeting with a new client is vital. It sets the foundations upon which to build rapport and trust. But what if rapport can be built even before the client has come into an adviser’s office? Can an advice business add them to a marketing email automation set up specifically for their life stage that shares with them blog posts and interesting information to get them thinking about their first interaction so they are already feeling like they have been helped before they have even sat down with an adviser? It is essential to ensure that the first-time consultation is not slowed down with much time spent on the paperwork, filling out forms, data entry and signatures. Often, a client will not have the relevant forms or relevant supporting documents. Or if there are multiple documents to view and sign, it is not uncommon for a signature box to be missed. All this data entry is taking valuable time from an adviser’s core work. They may find themselves left with little time to sit with the client and have meaningful, focused conversations. At this point, the hefty labour costs involved when financial advisers manually complete all these administrative tasks are often not taken into consideration. Inexperienced financial advisers may be tempted to open the initial meeting with a prospective client by sharing information about themselves and their history. In reality, clients do not care how much an adviser knows until they know how much they care. This is what truly counts when it comes to engagement uplift.

Scott Brewster, ümlaut Scott Brewster is a co-founder and director at ümlaut. With over 18 years’ experience in IT-focused management and professional services, he brings an extensive knowledge of data applications and ecosystems to deliver tailored business solutions to help improve clients’ business procedures, fix data disorders, more easily meet compliance requirements and add value.

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Tip Turn your first meeting on its head and change the conversation from ‘I want to win the client’ to ‘how can I better understand the client?’

Delivering from the very first meeting When a client first comes for advice, they will want to see how easy the process is and how easy it is to deal with the adviser. If an adviser only has an hour with a client who has taken time out of their day to come into their office, they will want to feel they have ‘got their money’s worth’. Further, because clients are being charged for these services, they want to spend as much time getting value from their adviser, and that value comes not from the filling in of paperwork, but from the advice provided. After all, that is what they are paying for. In a client’s eyes, they are not paying to watch an adviser process data. They are paying to be shown how to plan for and manage their wealth. They want to walk away from their interaction excited about their future and goals. Tip Think about using technology to set up visual representations of how clients are tracking towards their goals. Provide charts and graphs to help clients feel engaged and that you really do care about their financial future.

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Getting to know you before I get to know you If an adviser spends most of the time at an initial meeting looking down as they ask questions and fill in forms, the engagement is just not going to be there. The more and adviser knows about a potential client before the first discussion, the more rewarding the meeting will become. Tip Sending a form to a client pre-meeting and collecting much of the basic data such as names, addresses, birth dates etc. in advance, means more time can be spent discussing opportunities or options with the client. This allows the first meeting to be a real conversation, with the client feeling fully valued and getting their money’s worth. Having all this information in advance also means you: • will be well prepared for the meeting, impressing your client from the moment they step into your office • can begin asking meaningful questions, tailored specifically for the client • can focus your conversations on the client’s future because you already know their past. While this might sound like only a small change, the impact it may have on your business could be profound.

Getting personal Personalising interactions will deepen the connection, allowing trust to build much faster. Essentially, this is the key to being a standout financial adviser—communicating well and sharing knowledge and skills effectively so clients can achieve their goals. Go deep when it comes to understanding clients’ financial affairs. Go past the obvious assets, liabilities and income. Seek to discover: • What motivates and drives them? • What excites them? • What is important to them? • What are their fears for their financial future? • What kind of lifestyle aspirations do they have? Asking any or all these questions will show new clients that an adviser really cares, and puts them on a strong footing to build solid relationship from the outset. Consider What of existing clients? When was the last time you asked them about their hopes, dreams or financial aspirations? Until the client has walked out the door for the final time, it is never too late to start building a stronger, deeper and more meaningful connection. People’s goals and what is important to them change over time. So, if an adviser can integrate automated processes to revisit some of these questions with existing clients on a regular basis, what they may discover is that clients’ needs are evolving. Further, there may be other products and services that may naturally align to help expand the adviser-client relationship. It is far more effective to retain an existing client than it is to attract a new one.

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Technology improves client engagement

Why the perfect financial plan is not enough

Today’s clients are keen to use technology and to integrate it into their day-to-day lives. If an adviser is ‘doing it right’, once a client has made initial contact and has entered the fact-finding stage, this entire process can be streamlined with the use of technology. It is no longer a fear that technology will diminish adviser-client rapport. In fact, the opposite is true. By implementing a technology-driven solution, the financial planning process moves seamlessly to an online-based solution that incorporates up-to-date data, giving an accurate picture of a client's current financial situation. Gone are the days of spending three or four hours on paper forms and obtaining printed statements. Technology has created real time-saving solutions that, in turn, increase the client-facing capacity of advisers. Subsequently, an advice practice’s business model naturally creates an enhanced client experience.

Creating the ideal financial plan that helps clients achieve all their financial goals is a waste of time if the client cannot be brought along on the journey and encouraged to commit to a plan. Excellent communication skills are vital for an adviser to develop trust with a client. Not only do advisers need to fully understand clients’ financial, emotional and physical situations, they may also need to discuss complex strategies and concepts in terms that are easily understood and valued by clients. Even the best technical advice and financially sound solutions will not fly if the client is uncomfortable and does not feel engaged in the process. If a client feels that an adviser does not understand them and their situation, they simply will not accept advice. Many advisers find themselves working with clients they have inherited from other advisers. In some cases, it is more difficult to establish a relationship and connect with a client who is used to seeing someone else than it is to build a rapport with a new client. Another adviser’s clients will be expecting the new adviser to already have a full understanding of their situation and to step in where the previous adviser left off. The ability to do this well depends on many things, including the quality of the file notes and documentation kept by the previous adviser. Regardless of what written information is on hand, an adviser still needs to establish a personal relationship with a client who will likely be comparing them to their predecessor. In these instances, the adviser will need to provide the client with more than just a sound financial plan.

Tip Keep in touch regularly with your clients between appointments. Go further and utilise technology to place them in a marketing funnel where the content you are sending them is relevant to their life stage or product mix. If rules and regulations are changing, are you sharing this with your clients and making them aware you are a thought leader in the industry?

Financial advisers need to do what algorithms cannot With significant advances in algorithmic management of client portfolios, the role of a financial adviser is rapidly changing. Previously, they would have had to draw on data and make calculations across all asset classes. However, in this modern world of fintech, the basic proposition of a financial adviser as an ‘investment manager’ using historic research to put forward recommendations, is less appealing. The construction and constant monitoring of a client’s portfolio can now all be done online, with little need for any human intervention. Competing against such powerful data analytics is simply not practical anymore. Advisers need to do what the algorithms cannot, which is having deep and powerful conversations with their clients. After all, all the data in the world will not reveal that a client’s goal is to retire at 70 and live in Paris for a year to write a novel. It is human conversations that tell us these things. Tip Do not forget to check in regularly. Maybe something has happened in your client’s life and they just had not thought about reassessing where they are and how they’re tracking. A great financial adviser understands that life-changing events can be a strong motivator to re-evaluate financial situations. By regularly checking in with clients and keeping their records up to date, you are giving yourself every opportunity to be there at a time in their lives when they need advice.

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Improved client engagement helps retention

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. According to the author, technology can help advisers to: a) Avoid questions asked of clients on a regular basis b) Let go of existing clients who are problematic c) Send relevant collateral automatically to clients d) Strengthen their standing as investment managers 2. How does the author recommend an adviser handles their first meeting with a client? a) Display their expertise to assure the client that they have made the right choice b) Seek to better understand the client and make the process user friendly c) Avoid technology, as it is often seen as diminishing adviserclient rapport d) Let the let the client know that securing their business is paramount 3. What does the author believe advisers may experience with inherited clients? a) Increased difficulty in establishing rapport b) Clients assuming the adviser will already be au fait with their situation c) Comparisons with predecessor advisers d) All of the above 4. Research cited in the article found that adviser-client engagement levels fell greatly after: a) Seven years b) Three years c) 10 years d) One year 5. The author found that technology is surprisingly adept at capturing clients’ deeper goals. a) True b) False 6. As highlighted by the author, technology has increased client comparisons of advice providers. a) True

When the focus of a client meeting moves away from administration work to focus on the client’s goals, the outcome is that the adviser, and the company, appear more professional and engaged. Technology is here to stay and will play a vital part in any transaction in financial services. It not only allows the adviser and the client to be better prepared for a meeting, it means there is more time to focus on the client themselves. This is positive news for client retention and engagement. Macquarie research cited in its ‘7 ways to engage with your clients’ article showed there are danger periods in the client relationship. When engagement levels fall, clients are most likely to leave. Further, its 2014 survey of 1283 advice clients found that engagement levels fell sharply after year three of the relationship, before rising again towards the 10-year mark. Tip Yet again, regular contact is the key to retaining clients through the in-between years. If you manage this, you will likely have won their loyalty for life.

Great client engagement is good for business Process matters, of course it does, but engagement and the human connections made with clients is a key element to improve the financial planning process. The engagement uplift that can be achieved, along with the clever use of the technology now available to financial professionals, is not to be underestimated. Skillful use of technology in an advice business can deliver compliance, increase engagement and create plenty of productivity efficiencies. In fact, the Netwealth 2019 AdviceTech report estimated that there was a 44.9% increase in improved client engagement and communication by using technology to facilitate the financial advice process. This was coupled with a 43.8% increase in client satisfaction. There is no doubt that an advice business will start to reap the rewards of: • higher conversions rates with prospective clients • greater retention of your existing client base • higher profitability and margins. Moreover, technology has the potential to make day-to-day work life easier by providing the tools to focus less on paperwork and more on building real client connections, increase the efficiency of processes and, in turn, help an advice business realise a significant engagement uplift. fs

b) False

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Retirement:

Common FAQs for low means residents

By Minh Ly, Challenger

Retirement

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Low means aged care residents may face complex additional rules for government support. This paper shares common queries around the assessment criteria, and examines how clients can maximise, not forgo, benefits.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Common FAQs for low means residents

A Minh Ly

ged care residents assessed as ‘low means’ are eligible to receive federal government (government) support for their accommodation costs in addition to their ongoing care costs. This means there are additional rules for these residents, and they can be complex. A common ‘low means’ situation occurs for couples particularly where one member of the couple enters residential aged care before the other. This paper shares some common queries around the technicalities for low means residents.The FAQs in this paper relate to those who enter residential aged care from 1 July 2014. Any rates and thresholds used are as at 1 May 2020 and includes the new deeming rates of 0.25% and 2.25%, effective 1 May 2020.

• the value of any lump sum accommodation payments in assessable assets • the person’s social security payment in assessable income (e.g. their Age Pension or service pension), but excluding the Energy Supplement and minimum pension supplement • the value of the former home up to $171,535.20 (each for couples) in assessable assets if there is no protected person. occupying the home. The entire value of the home will be excluded from aged care means testing if a protected person1 occupies the home. MTA

= (income-tested amount + asset-tested amount) / 364

Where,

Who can qualify as a low means resident?

Income-tested amount

= (annual assessable income – income-free area*) x 50%

A resident will be classified as ‘low means’ if their means tested amount (MTA) is less than the maximum accommodation supplement (MAS) at the time of entry.

Asset-tested amount

= 17.5% of assets between $50,500 and $171,535.20

The MAS is currently $58.19 per day

The resident’s MTA is based on their assessable assets and assessable income for aged care purposes. Assessable assets and income for aged care purposes are broadly the same as assessable assets and income for social security pension purposes, but also include:

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% of assets between $171,535.20 and 1 $413,605.60 2% of assets above $413,605.60 *As at 1 May 2020, this is $27,736.80 for singles and $27,216.80 for couples (each).

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Where a resident’s MTA is equal to or greater than the MAS, they will not be assessed as a low means resident. This would occur if: • their assessable assets for aged care are equal to or greater than $171,535.20 (each for members of a couple) • their assessable income for aged care is equal to or greater than $70,099.12 p.a. for singles or $69,579.12 p.a. for each member of a couple, or • a combination of both assessable income and assets that produce an MTA equal to or greater than the MAS. Example 1. Beryl and Barry Beryl and Barry, both 85, own their home and have been providing each other with support for several years. However, Barry’s health had deteriorated recently and Beryl is not able to provide him with the care that he needs. They chose an aged care facility

Can a low means resident’s status change after entry?

per fortnight each, based on illness separated rates).

When a person enters residential aged care, their assets and income are assessed at the time of entry. If assessed as a low means resident, they will remain a low means resident while they continue to receive services from the same aged care facility. This is the case even if their assessable assets and income increases and their means tested amount subsequently exceeds the maximum accommodation supplement.

Barry’s MTA is $40.63 calculated as:

What if they change facilities?

nearby and Barry has now moved in. Outside their family home, they only have $260,000 in the bank and $10,000 in personal assets at the time Barry entered residential aged care. They are currently receiving the maximum rate of Age Pension ($933.40

Income-tested amount

= $14,787.50

Residents who move to a new aged care facility will generally have their assets and income reassessed and a new MTA determined. Their new MTA will be based on assessable assets and income at the time of entry to the new facility, and if this amount exceeds the MAS at that time, they will no longer be assessed as a low means resident. Residents who leave an aged care facility for more than 28 days (for instance, to return to their former home) but then re-enter residential aged care will also need to have their means reassessed to determine whether they will be a low means resident. This is the case even if they reenter the same facility.

= (income-tested amount + asset-tested amount) / 364

What fees can a low means resident be asked to pay?

= ($0 + $14,787.50) / 364

Residential aged care costs are broadly broken up into accommodation and ongoing care costs.

= (assessable income less income-free area) x 50% = ($25,275.80* less $27,216.80) x 50% = $0

Asset-tested amount

MTA

= 17.5% of assets between $50,500 and $171,535.20 = 17.5% x ($135,000** – $50,500)

= $40.63 * Deemed income of $4,126.00 / 2 = $2,063 (for each member of a couple) plus Barry’s assessable Age Pension of $23,212.80 (this excludes the energy supplement of $14.10/fortnight and minimum pension supplement of $37.40/fortnight). **$270,000 / 2 = $135,000 (for each member of a couple). Excludes the value of the former home as a protected person (spouse) is occupying the home.

As Barry’s MTA is below $58.19 at the time of entry, he is assessed as a low means resident.

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Accommodation costs

Unlike other residents, a low means resident cannot be asked to pay the published price for a particular room. Instead, low means residents can be asked to contribute an amount towards their accommodation costs. This amount, known as the daily accommodation contribution (DAC), is equal to their MTA and capped at the accommodation supplement received by the aged care facility.

Minh Ly, Challenger Minh Ly, BCom, AdvDipFinServ, CFP, is a technical services manager at Challenger. He has extensive financial services industry experience, specialising in social security, retirement and aged care.

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Retirement

Prospective residents can check with aged care facilities as to which supplement applies to them. AC = MTA (capped at the facility’s accommodation D supplement)

Example 2. Beryl and Barry In Beryl and Barry’s example, Barry’s MTA was calculated to be $40.63. His DAC will therefore be the lower of:

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Table 1. Accommodation supplement amounts for aged care facilities Eligibility

Amount of supplement

If a service is significantly refurbished or newly built More than 40% low means, supported, concessional and assisted residents

$58.19

40% or fewer low means, supported, concessional and assisted residents

$43.64

If on the day the service, meets building requirements in Schedule 1 of the Aged Care (Transitional Provisions) Principles 2014 More than 40% low means, supported, concessional and assisted residents

$37.93

• the aged care facility’s accommodation supplement.

40% or fewer low means, supported, concessional and assisted residents

$28.45

If his facility’s accommodation supplement is $37.93, his DAC would

If on the day of service, does not meet those requirements

• $40.63 per day, or

be capped at this amount.

What accommodation supplement can the aged care facility receive?

A low means resident’s DAC is capped at the accommodation supplement amount which the aged care facility receives from the government. Currently, the maximum accommodation supplement is $58.19 per day (MAS). However, depending on whether the aged care facility meets certain building requirements or if the facility currently accommodates more than 40% of their residents as ‘low means’, the amount they receive can be lower. Different accommodation supplement amounts that an aged care facility can receive are summarised in Table 1.

More than 40% low means, supported, concessional and assisted residents

$31.86

40% or fewer low means, supported, concessional and assisted residents

$23.90

Source: Department of Health, aged care subsidies and supplements payment rates from 20 March 2020

Can a low means resident’s DAC change?

A low means resident’s DAC is based on their assessable assets and income on a particular day and can change over time as their means change. Residents are required to report changes to their circumstances to Centrelink/Department of Veterans’ Affairs (DVA) within 14 days, however, their DACs generally change on a quarterly basis in line with Centrelink/DVA’s quarterly reviews (effective 1 January, 20 March, 1 July and 20 September). If the resident’s DAC reduces through the quarter, a refund is due and generally applied in the next quarter. Table 2. DAC thresholds for singles and couples Single

Assessable assets*

Couple DAC (subject to the facility’s accommodation supplement)

Assessable assets*

DAC (subject to the facility’s accommodation supplement)

$50,500

$101,000

$100,000

$23.80

$200,000

$23.80

$150,000

$47.84

$300,000

$47.84

$171,535

$58.19

$343,250

$58.19

*Assumed to be all financial assets.

A low means resident’s DAC can also change if the aged care facility’s applicable accommodation supplement changes (for instance, they may have increased the percentage of low means residents to more than 40%) or when the government indexes or increases the accommodation supplement paid to the facility. Ongoing care costs

Like other residents, low means residents will need to pay a basic daily care fee that covers the cost of daily living such as meals, laundry and power. The basic daily fee is currently $52.25 per day

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Can a low means resident be asked to pay a means-tested care fee?

Low means residents can also be asked to pay a means-tested care fee (MTCF) towards the cost of their ongoing care, subject to an annual and lifetime cap. The MTCF is calculated as the amount of the resident’s MTA that is above the MAS (regardless of the accommodation supplement received by the aged care facility). MTCF = MTA minus MAS

Residents who are classified as ‘low means’ are not required to pay this fee as long as their calculated MTA remains below the MAS. However, if their means increase after entry and their MTA increases above the MAS, they will be required to pay an MTCF. This generally occurs when the second member of a couple enters residential aged care, and the former home becomes assessable for aged care purposes. For completeness, some facilities may provide extra services. Although not generally a consideration for a low means resident, when these are taken up, ongoing extra services or additional fees are also payable.

Can a low means resident pay a lump sum for their accommodation instead of a daily amount? A low means resident can only pay an accommodation amount that is based on their means. When this is paid as a daily amount, it is called a daily accommodation contribution (DAC). An alternative is to pay the aged care facility an equivalent lump sum amount known as a refundable accommodation contribution (RAC). The lump sum amount that would need to be paid so that the RAC is equivalent to the DAC is worked out as follows. RAC = (DAC x 365) / maximum permissible interest rate (MPIR) Note: For residents who entered care between 1 April 2020 and 30 June 2020 (inclusive), the MPIR is 4.89%

Example 3. Beryl and Barry In Beryl and Barry’s example, if Barry’s DAC was calculated to be $40.63, the equivalent RAC would be calculated as: RAC = ($40.63 x 365) / 4.89% = $303,271. This is greater than what Beryl and Barry have in their bank accounts ($260,000). They could choose to use part of the funds in the bank to pay a ‘part’ RAC to reduce the amount Barry will need to pay as a DAC. Amounts paid as a RAC will reduce the annualised DAC by 4.98% of the lump sum amount paid. RAC paid

Nil

$100,000

$150,000

$200,000

DAC to be paid

$40.63

$27.23

$20.53

$13.84

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Can low means residents have their DACs paid from their RAC?

Where the resident has paid a RAC for their accommodation and there is also a DAC payable, the resident can request (in writing) that the aged care facility deducts the DAC from the RAC balance. In these cases, the facility can increase the DAC to compensate for the reduction in the RAC balance.

Other considerations Having some or all of their accommodation costs subsidised by the government can be a financial benefit for low means residents. However, there are other considerations that are noteworthy for these residents: • Low means residents may not have a choice of which room they occupy in the aged care facility. While some facilities will try and facilitate the wishes of residents, they may reserve single rooms or nicer rooms with better features for residents who can pay more for their accommodation. Low means residents may be forced to share a room with one, two, three or more other residents. Some residents may be comfortable with this arrangement, however, some may not. • The chosen aged care facility may not have a room available for low means residents. This may result in the resident entering a facility based on the availability of ‘low means’ rooms instead of entering a facility with features that they want.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The means tested amount is: a) Capped at the resident’s daily accommodation contribution b) Is based on assessable income only c) Capped at the aged care facility’s accommodation supplement d) Is based on assessable income only 2. A low means resident’s daily accommodation contribution: a) Is essentially locked in, even if their means change b) Is based on their assessable assets and income on a given day c) Is assessed on an annual basis by Centrelink/DVA d) Is not subject to a refund if it reduces over six months

Can someone choose not to be assessed as a low means resident?

One way a prospective aged care resident will not be assessed as ‘low means’ is if they choose not to have their means assessed by Centrelink/DVA. However, this generally means they will not be eligible for government assistance with their accommodation and ongoing care costs, and will need to pay an agreed accommodation payment and the maximum means tested care fee based on their cost of care. Alternatively, they could increase their assessable assets and income so that their MTA is equal to or greater than the MAS at the time of entry. For instance, family members may want to gift some assets to the prospective resident before they enter the aged care facility or ensure that there is no ‘protected person’ occupying the former home at the time of entry. fs Notes 1. A protected person includes: a spouse or dependent child, a carer eligible for an income support payment who has been living in the home for the past two years, or a close relative eligible for an income support payment who has been living in the home for the past five years. The information in this update is current as at 1 May 2020 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670, the issuer of the Challenger annuities. The information in this update is general information only about our financial products. It is not intended to constitute financial product advice.

3. The means-tested care fee a) Is the amount of the resident’s means tested amount above the maximum accommodation supplement b) Is the amount of the resident’s means tested amount below the maximum accommodation supplement c) Hinges on the aged care facility’s accommodation supplement d) None of the above 4. Jed’s daily accommodation contribution is $44.12. The maximum permissible interest rate is 4.89%. His refundable accommodation contribution is: a) $360,000 b) 351,391 c) $303,271 d) $321,321 5. Flo’s means tested amount is $43.16 when she enters an aged care facility. Thus, she will not be assessed as a low means resident. a) True b) False 6. Residents who leave an aged care facility for more than 28 days will need to have their means reassessed. a) True

b) False

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Superannuation:

Winding up an SMSF

By Netwealth

Superannuation

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: An SMSF’s regulatory and administrative burden is not to be taken lightly. Exiting members may need advice on the necessary windup steps, suitable accounts for rolling over funds, and taxation considerations.

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Winding up an SMSF

A Netwealth

spate of changes over the past several years has impacted self-managed superannuation funds (SMSFs) with increasingly onerous responsibilities. As a result, investors seem to be taking a closer look at the possibility of transitioning from their existing SMSF to a retail public offer fund. However, to successfully transition from an SMSF to a public offer fund, there are several important considerations. This paper has been designed to help individuals who have chosen to make this change, map the journey and develop a plan to aid the process. SMSFs can be highly advantageous for many people. However, there are several reasons that have prompted people to consider leaving their SMSF behind. Some SMSF owners feel that managing a superannuation fund is a strain on their time, while others find the frequent regulatory changes overwhelming. On 1 July 2017, we saw the introduction of the biggest changes to superannuation rules in a decade, and all at once. These changes have had a big impact on retirement planning, reporting requirements and record keeping, particularly for SMSFs. Managing an SMSF has become significantly more complicated as there are numerous issues SMSFs have to deal with that previously did not exist. Further, the underlying tax and reporting issues which were created as at 1 July 2017 have particularly affected members in the accumulation and pension phase, which could create difficulties for the remaining spouse. While these are only some of the reasons, others may include a

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desire to move overseas or the concern that a remaining spouse may not be in the best position to continue managing the SMSF. If someone decides to wind up their SMSF, there are several things they will need to consider or map out, for which a financial adviser may be able to assist. These include: • key features and differences between public offer superannuation funds and SMSFs • choosing between public offer superannuation funds • selecting the right type of account for your life stage • how to wind up and transfer an SMSF • tax implications when closing an SMSF.

Key features and differences between public offer superannuation funds and SMSFs Not all superannuation funds are created equal. The following discussion looks at some of the main features of public offer superannuation funds and SMSFs. It also highlights some of the key things to consider when picking the right public offer fund. Compliance and regulation

When investing in a public offer superannuation fund, your superannuation account is one of many under the one tax entity and is professionally managed by trustees in compliance with superannuation and taxation law. In an SMSF, you are the trustee responsible for all aspects of how the fund works. It is up to you to ensure that proper records are kept, that your fund is compliant with the relevant regulations and that you have a suitable investment strategy. You must also be capable of dealing with all legal and tax issues.

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Time obligations

Online functionality

As public offer funds are responsible for looking after your funds, you do not have to prepare tax returns, audits, investment valuations, and you do not need to stay up to date with legislation. Instead you can focus on managing your investment portfolio, knowing the professional superannuation fund trustee is required to meet all paperwork and legal requirements. As an SMSF owner, these responsibilities fall under your care.

Being able to manage and analyse your portfolio is important, and each superannuation fund offers different levels of online control and versatility in management tools. Consider Before making a choice, it is worthwhile asking for a demonstration to make sure you are comfortable with managing your online

Protection

account. This will give you an insight into how you can perform

Members of public offer funds have important protections when something goes wrong, which are not available to SMSFs. This includes no compensation for SMSF members who sustain losses due to fraud or theft. If there are any complaints or disputes, SMSF members/trustees must resolve their own issues. This may incur high legal costs, with no access to the Australian Financial Complaints Authority.

transactions such as buying and selling investments, making

Choosing between public offer superannuation funds Investment control and flexibility

Each superannuation fund will offer a different level of investment choice, and it is up to you to make sure you are comfortable with the level of control available. Commonly, superannuation funds will provide a menu of investment options from which you are able to make and place a percentage of your portfolio. Some funds may provide a limited choice of standard portfolios with different risk-return profiles. Other funds, like Netwealth, provide an extensive choice of individual assets that enable you to construct your own portfolios to suit your needs. These may include choices of direct Australian Securities Exchange-listed shares, overseas shares, term deposits and many types of managed funds. If you want to invest in a certain exchange-traded fund, stock or managed fund, you will need to check its availability within the trusteesâ&#x20AC;&#x2122; range of investment options and any limit that the trustee sets for particular investments.

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withdrawals, updating your pension payments, and analysing transactions and performance reports. Fees and costs

Small differences in investment performance and fees and costs can have a substantial impact on long-term returns. Example. The compounding effect of fees and costs Total annual fees and costs of 2% of your account balance rather than 1% could reduce your final return by up to 20% over a 30-year period. That is, reduce it from $100,000 to $80,000.

Each superannuation fund is required to disclose all fees and costs in their product disclosure statement, and you should consider whether investment performance or the provision of better member services justify higher fees and costs.

Selecting the right account for your life stage In the process of closing your SMSF, you will need to open an account with your chosen public offer superannuation fund ready for your SMSF rollover. Depending on your life stage, there are several types of accounts you can open. Each member of your superannuation fund will have a separate account.

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Table 1. Account types and features Type of account

What is it designed for?

How tax on income and capital gains is treated

Accumulation

Accumulation accounts are used to build wealth for retirement.

Transition to retirement (TTR)

A TTR pension allows you to draw down some income from your superannuation if you have reached your preservation age and still working, to supplement your income from work.

Any investment income and capital gains generated on the sale of assets within the fund is taxed at the concessional rate of 15%. A onethird tax discount is received for capital gains generated from assets that have been held for longer than 12 months. This means that the effective tax rate is 10%.

Standard income stream

A retirement income stream, which you can commence once you have met a necessary condition of release. You can use the proceeds from your superannuation balance up to the transfer balance cap (currently $1.6 million) to generate an income. There is no tax payable on investment earnings or capital gains, and any franking credits earned are passed back to the member.

There are two main account types: accumulation and income stream (pensions). Pensions can be either TTR or a standard income stream. Depending on the account type you choose, there are different characteristics and taxation rules with restrictions on your ability to make additional contributions and receive an income stream (see Table 1 on preceding page).

How to wind up and transfer an SMSF Whether you have decided to wind up your SMSF because you lack time to properly manage your fund or you are no longer happy with the SMSF running costs, here are some steps you should consider for which a financial adviser can help. 1. Check the SMSF trust deed

Is it possible to make ongoing or additional contributions?

Can I receive a regular income stream?

Yes, subject to the contribution rules you can make ongoing contributions including eligible employer contributions and additional superannuation rollovers.

No, accumulation accounts are used to build wealth and you cannot take an income stream, but you can access lump sums if you have met the necessary condition of release.

No, a pension account cannot accept additional contributions or subsequent rollovers once established. A pension is usually commenced by transferring a lump sum up to the transfer balance cap from an accumulation account and, once established as a pension, cannot accept further contributions. A pension account can be transferred back to an accumulation account at any stage should you wish to start a new retirement account with additional funds. In saying this, you can have a TTR account or a standard income stream at the same time as an accumulation account.

Yes, a TTR account allows you to receive an income between 4% and 10% of your account balance each financial year. You can nominate your amount and payment frequency.

Source: Netwealth

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Yes, in an account-based pension you can receive a regular ongoing pension payment. There is an annual minimum amount you need to withdraw, based on your age and there are no maximum restrictions.

The trust deed may include windup instructions, so this should be your first step. 2. Written agreement

All trustees or directors will need to agree about the windup, and you need to document their decision. This is vital to avoid unnecessary complications. 3. Pay existing member benefits

You need to pay out or roll over the balance of membersâ&#x20AC;&#x2122; superannuation to another fund. This may involve selling assets or transferring them without selling the underlying investment (in-specie transfer). Each member must notify how and where they want their benefits paid. In the case of pension members, trustees must ensure that at least the minimum pension (pro rata) has been paid.

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4. Prepare draft financial statements

7. Tax and compliance

Draft financial statements are important, as they determine the value of each member’s benefits. This may take some time to finalise, and delay the fund windup. If it is crucial for the members funds to be in a retail fund as soon as possible, it is common to roll over the bulk of the balances immediately and only leave a sufficient amount to wind up the SMSF and pay the expenses. Any smaller amount remaining after finalising the windup can be rolled over to the retail fund.

You need to pay any outstanding tax and other debts (or arrange to) before closing your fund’s bank account.

5. Sale or transfer of assets

If you are a corporate trustee, the steps may be slightly different, and you may want to apply to The Australian Securities and Investments Commission for a voluntary deregistration of the company. To do this, you must first make sure all members agree to deregister, the company is not party to any legal proceedings and all fees and penalties payable under the Corporations Act 2001 have been paid.

Trustees must arrange the sale of assets or arrange for them to be transferred in-specie either to the member, if exiting superannuation altogether, or to the receiving fund directly if rolling over. Following are some considerations: • Some retail funds will require you to sell your SMSF investments and transfer the proceeds in cash. You should check with the fund whether it can accept the asset and any maximum holding limit. • A rollover needs to be initiated for each member, and each rollover needs to be accompanied by a rollover benefit statement. • A rollover benefit statement allows retail funds to correctly record your tax components and other member details. It is important to ensure your SMSF pays its minimum pension liabilities where applicable, outstanding tax bills and accounting fees (or has arranged to do so) before it is completely wound up. Some SMSF owners choose to roll over their fund in stages, especially when transferring assets. 6. Final accounts and audit

A final set of accounts and an audit must be completed before you lodge your last SMSF annual return, making sure to indicate your fund is being wound up.

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8. Notify the Australian Taxation Office (ATO)

Notify the ATO in writing within 28 days of the fund being wound up. You will need to provide the name and Australian Business Number of your SMSF, the date your fund was wound up and a person of contact. 9. For corporate trustees

Tax implications when closing an SMSF It is important to obtain specialist tax advice when winding up an SMSF so you do not accidentally trigger unnecessary tax liabilities. Many people close their SMSF while in pension phase because they believe there are no tax consequences in this phase, but that may not necessarily be the case. For anybody still in the accumulation phase, there is usually capital gains tax (CGT) on any accumulated capital gains when rolling out the assets to another fund as well as the usual tax liabilities and obligations at the time of windup. CGT will be at the superannuation tax rate of 15%. Where you have held the assets for over 12 months, the CGT will only apply to two-thirds of any gains, so the effective tax rate is 10% of the gain. The same applies if you are selling or transferring assets through an in-specie transfer.

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Superannuation

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In accumulation phase where assets have been held for over 12 months, the CGT: a) Is 10% b) Applies to one-third of any gains c) Is 15% d) Applies to one-half of any gains 2. Which of the following accounts would allow someone to make ongoing regular contributions upon rolling over their SMSF balance? a) An accumulation account b) A TTR account c) A standard income stream d) All of the above 3. Which of the following steps are part of the SMSF windup process? a) Written agreement from the trustees or directors must be obtained b) Draft financial statements must be prepared c) Members must notify how and where they want their benefits paid d) All of the above

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If you have property in your fund, you may need to sell it because public offer funds do not normally allow you to hold the property in the fund. The same CGT rules apply, and you may have other selling costs on the property when winding up the SMSF. Table 2 summarises ATO information on effective CGT rates (after CGT discounts where applicable). Table 2. ATO information on effective CGT rates Length of time asset was held prior to sale

Accumulation phase

Pension phase

<12 months

15%

>12 months

10%

Source: ATO

It is always best to close a fund well before the end of the financial year because if you enter a new financial year, you will be responsible for undertaking another tax return. This is a complex subject, so it is important to seek tax advice that reviews your specific circumstances and makes appropriate recommendations for your situation. fs Disclaimer: This information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

4. Which of the following statements in relation to sale or transfer of assets is correct? a) All SMSF investments must be sold if transferring to a retail fund b) The fund must be rolled over in one transaction when transferring assets c) A rollover benefit statement needs to accompany each member’s rollover d) An SMSF must pay at least half of its minimum pension liabilities pre-windup 5. The ATO must be notified within 14 days of an SMSF being wound up. a) True b) False 6. There are no tax consequences if an SMSF is closed in pension phase. a) True

b) False

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Investment:

Psychological investment traps in a market crisis: Seven common behaviours to avoid

By Sabil Chowdhury, Koda Capital

Fixed income at low yields: Why it still makes investment sense

By Louis Crous, BetaShares

Investment

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Events such as COVID-19 can magnify investors’ underlying behavioural irrationalities. Advisers can help clients recognise these biases, explain how they take hold, and suggest strategies to overcome psychological traps. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Psychological investment traps in a market crisis Seven common behavioural biases to avoid

Sabil Chowdhury

n finance textbooks, academics assume that investors act rationally when making investment decisions. However, in practice, investors are not fully rational. This is especially true during market crises such as the severe volatility and uncertainty brought on by the coronavirus (COVID-19) pandemic. At times of distress and uncertainty, investors are subject to psychological biases when making investment decisions. Regardless of how disciplined they are, people invest with innate behavioural biases that cause them to act on emotion rather than based on facts. This is the basis of behavioural finance, a field of study that combines psychological theory with conventional economics. This paper discusses several psychological traps that investors should avoid during a market crisis.

1. Overconfidence Studies show that overconfident investors trade more frequently and fail to appropriately diversify their portfolio. To counter an overconfident mindset, investors should consider trading less and investing more. By entering into trading activities, investors are trading

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against computers, institutional investors, fund managers and others around the world who can have far better data and more experience. By increasing their timeframe and holding a diversified portfolio with exposures to different asset classes that are uncorrelated, investors are more likely to consistently build wealth over time. They would be well advised to resist the urge to believe that their information and intuition is better than others in the market. Overconfidence leads to the unfounded belief that the investor possesses superior stock-picking abilities when they in fact do not. Example 1. ‘Unlikely’ occurrences Many stock-pickers have been caught out during COVID-19 by investing into companies they believed would recover but unfortunately did not, such as Virgin Airlines.

2. Confirmation bias Confirmation bias suggests that an investor would be more likely to look for information that supports their original idea about an investment rather than seek out information that contradicts it.

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As a result, this bias can often result in irrational decision-making because one-sided information tends to skew an investor's frame of reference, leaving them with an incomplete picture of the situation.

vestors should instead base their decisions on fundamental and/or sound technical analysis and reasoning before determining what will happen in light of a trend. Example 3. At odds with odds

Example 2. Reinforcement: a stuck record

If a coin is flipped and lands on heads one hundred

Confirmation bias develops when a person reads

times, what is the chance of the coin landing on tails

selected material about a topic that backs up their

the next go?

viewpoint and they subsequently keep on being

The answer is 50/50, given each flip is an independent

exposed to the same argument to confirm their initial

event. The same logic applies to directional movements

opinion without considering other contrary views.

in the stock market—the market returns of previous days do not dictate what will happen next.

Consider One solution to overcome confirmation bias is to stress

Consider

test one’s ideas by asking other people about their

In the context of COVID-19, some investors have

opinions and being open-minded to other viewpoints to

taken the view that the trend is prolonged and

develop a more balanced perspective.

are cautious, while others are buying at what they perceive to be the bottom of a bear market.

3. Hindsight bias Another common perception bias is hindsight bias. This bias tends to occur in situations where an investor believes that the onset of some past event was predictable and completely obvious, whereas in fact, the event could not have been reasonably predicted. Consider Many events seem obvious in hindsight. COVID-19 reinforces the folly of this bias, as it had far less predictability than events such as the global financial crisis, 1987 stock market crash, Asian financial crisis and tech crash of 2000.

Psychologists attribute hindsight bias to our innate need to find order in the world by creating explanations that allow us to believe that events are predictable. Hindsight bias is a cause for one of the most potentially dangerous mindsets that an investor can have. That is, overconfidence.

4. Gambler’s fallacy In the gambler’s fallacy, an individual incorrectly believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future. It is important to understand that in the case of independent events, the odds of any specific outcome happening on the next chance remain the same regardless of what preceded it. Buying a stock based on the belief that the prolonged trend is likely to reverse at any moment is irrational. In-

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The fact is nobody knows how things will eventuate, and investors should avoid speculating. If a portfolio is constructed with appropriate levels of diversification, often it is better to ‘do nothing’.

5. Herd behaviour Herd behaviour is the tendency for investors to mimic the actions of a larger group. Individually, however, most people would not necessarily make the same choice. Herd behaviour, or ‘herding’, can happen due to the pressure to conform and the assumption that it is unlikely that such a large group could be wrong. Even if an investor is convinced that a particular idea or course of action is irrational or incorrect, they still may follow the herd, believing they know something that other investors do not. When it comes to herd behaviour, it is worth remembering a simple rule of thumb from Warren Buffet: “Be fearful when others are greedy and greedy when others are fearful.” Consider Herd behaviour is especially relevant today, given the easy access to information with the internet and seemingly endless social media platforms.

6. Anchoring Anchoring is a cognitive bias where an investor depends too heavily on an initial piece of information (the ‘anchor’) when making decisions, and may subsequently over-rely on this piece of information.

Sabil Chowdhury, Koda Capital Sabil Chowdhury is an adviser and partner at Koda Capital. His specialisations include developing customised investment mandates, strategic/tactical asset allocation, alternative investments, structuring and tax strategies, managing liquidity events and equity extraction.

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Example 4. Exclusion of alternative viewpoints

CPD Questions

If an investor believes a certain company is successful based on a particular metric, they may over-rely on this information and buy into the shares, dismissing other factors completely. To avoid this

Earn CPD hours by completing this quiz via FS Aspire CPD 1. Liv gets on board with a popular managed investment scheme, even though she knows this is irrational. This is an example of: a) Anxiety b) Herd behaviour c) An unlikely occur-rence d) Anchoring 2. Al reads an article saying a certain investment is a ‘winner’. This opinion is echoed on TV. Al then seeks material that reinforces this belief. This is an example of: a) Anchoring b) Herd behaviour c) Confirmation bias d) Insecurity 3. Hindsight bias is: a) The onset of a past event being predictable and obvious b) Is surprisingly effective at countering overconfidence c) The onset of a past event being unpredictable and uncertain d) Is surprisingly accurate for market behaviour, but not other areas

trap, one needs to remain flexible in one’s thinking and be open to new sources of information.

7. Loss aversion Loss aversion refers to the tendency to prefer avoiding losses relative to realising equivalent gains. Multiple studies have found that the negative emotion of losing one dollar is around twice as strong as the positive emotion of earning the equivalent amount. Investors often go to great lengths to avoid losses because of the potential psychological discomfort they may cause. Loss aversion can help investors avoid key threats to their portfolio. However, if someone is too loss averse, they may end up holding onto a losing position with the hope it recovers, despite logic indicating otherwise. Example 5. How loss aversion can snowball An investor’s stock falls 10%, and they are afraid to take the loss. Thus, they hold the stock for no other reason than to avoid the loss. However, the stock falls another 10%, by which time they think it is too late to take the loss. This mindset is driven by emotion, not

4. Loss aversion: a) May result in a delayed benefit in some circumstances b) Is where the negative emotion of loss outweighs the positive emotion of gain c) Can be subject to compounding detrimental effects d) All of the above

rational analysis.

Investment decisions such as choosing to hold or sell a stock should be based on structured reasoning. Example 6. When holding a falling stock may still be

5. Research shows that overconfident investors: a) Invest more and trade less b) Trade more frequently and have overdiversified portfolios c) Trade more frequently and fail to diversify their portfolios d) Fare well compared with the ‘experts’ 6. Gambler’s fallacy is based on: a) The probability that past events do not change the probability of certain events occurring in the future b) A certain random event being less likely to happen following an event or series of events c) A certain random event being more likely to happen following an event or series of events d) None of the above Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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worthwhile Someone may think a falling stock still has a good earnings profile and balance sheet. In such circumstances, holding a falling stock (and even adding to a position) can sometimes make sense.

Conclusion During times of severe uncertainty and volatility such as the unprecedented events during COVID-19, investors can experience high levels of stress and anxiety. Behavioural biases and emotional reactions may also cloud their judgments when making decisions. The first step to overcome these psychological traps is to have self-awareness and a good understanding of the different biases. Start by identifying biases when they are encountered and think of some coping tools in order to manage them. With practice and time, one can develop strategies to overcome these psychological traps. Investors can also avoid these behavioural biases by speaking with an independent financial adviser to receive professional advice and counselling to help them to steer clear emotionally of these behavioural biases and traps. fs

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: While interest rate levels will always attract attention, investors should not lose sight of the overall benefits of fixed-income allocations. That is, diversification, capital stability, and reliable income streams.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Fixed income at low yields Why it still makes investment sense

M Louis Crous

ost investors appreciate the role of fixed income in a diversified portfolio. That is, steady income streams, lower volatility, and protection against falls in equity values during periods of market stress. However, by the end of January 2020, the Australian 10-year government bond yield had fallen to 0.95% (after reaching an all-time low of 0.88% at the end of August 2019). In the last year alone, the Reserve Bank of Australia lowered the cash rate three times from 1.50% to 0.75%, and many economists are now predicting further cash interest rate cuts to as low as 0.25% over this easing cycle. Very few investors would have predicted such low yields only a few years ago. Recently, the potential action of quantitative easing in Australia also became a topic of discussion. The question often asked is whether an allocation to fixed income at these yield levels is still worthwhile? To add to the conundrum, yields offered on international bonds are similarly at or near historic lows (see Figure 1). This paper looks at a number of factors to consider when assessing whether allocating to fixed income in low-yielding environments still makes investment sense. In particular, it revisits the concept of yield to maturity (YTM) and examines the performance of fixed income over shorter timeframes, the role of diversification, and the risk of capital loss should yields rise.

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YTM and the impact of changing economic expectations on investment returns Investors tend to focus on YTM as the single most accurate gauge of the future total return from their bond portfolio. However, YTM is only an accurate measure of total return if a bond is actually held until maturity. It is important to note that managed bond portfolios, whether active or passive, engage in a program of rolling bonds prior to maturity. The extent to which this occurs will affect the accuracy of the YTM as a measure of the expected total return for the portfolio. More important is that for duration exposures (duration is a measure of the approximate sensitivity of a non-callable bond’s price to changes in interest rates—the higher the duration, the more sensitive the bond price to interest rate changes), changes in expected economic conditions and investor sentiment have a far greater impact on bond returns over short to medium timeframes than the yield itself. It is the rate of change to expected inflation, economic growth, interest rates or central bank actions that drives bond capital values over shorter holding periods and often at a magnitude far in excess of the implied yields. Figure 2 shows the YTM on the Bloomberg Ausbond Composite 0+ Year Index, along with the corresponding five-year and oneyear forward total returns. Since this particular index has a profile of holding bonds until close to maturity, the YTM at any point in time still has some relevance as a predictor of future total returns

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Diversification benefit still matters

Example 1: Benefiting from a flight to safety Take for instance the last meaningful equity market drawdown in Q4 2018. In the US, the S&P 500 Index fell 13.52%, while the Bloomberg Barclays US Corporate High Yield Bond Index fell 4.53%. The flight to safety resulted in investors directing their flows to higher-quality assets, and consequently, the Bloomberg Barclays US Aggregate Total Return Index (comprising a broader set of investment-grade bonds) returned +1.64% for the quarter.

over periods of a similar duration. However, over shorter timeframes this is hardly the case at all. This has important implications for portfolio outcomes. In addition, it also allows for investors to benefit from tactical allocations during certain market conditions.

While the current low-yield environment may make it tempting to allocate to higher-yielding bonds (of lower credit quality and most often sub-investment grade), these assets are unlikely to offer meaningful diversification benefits in the event of market stress. In fact, given that credit risk premia and equity beta are positively correlated, high-yield bonds are likely to suffer from negative returns at the same time as equities during such periods. This was despite the YTM on the high-yield index being 6.24% at the start of the quarter— significantly higher than the 3.46% on the Aggregate Index. US Treasuries, considered the safest of all the bonds, benefited even more from the flight to safety, with the Bloomberg

Figure 1. Australia and US 10-year government bond yields Australia

% Yield

10 9 8 7 6 5 4 3 2

Louis Crous, BetaShares Louis Crous is BetaShares’ chief investment officer, responsible for the company’s portfolio management function. He joined BetaShares in 2009 and has been involved in the launch of all of the firm’s ETFs. Previously, , Louis held positions at nabInvest, Rand Merchant Bank, and KPMG. Louis is a qualified chartered accountant (CA (SA)) and a CFA Charterholder.

1 0 Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Dec-13

Dec-15

Dec-17

Dec-19

Source: Bloomberg, BetaShares

Figure 2. Bloomberg Ausbond Composite yields and forward returns YTM

18%

5YR Forward Return

1YR Forward Return

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4%

96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11 -12 -13 -14 -15 -16 -17 -18 -19 c c c c c c c c c c c c c c c c c c c c c c c De De De De De De De De De De De De De De De De De De De De De De De

Source: Bloomberg, BetaShares

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Barclays US Intermediate Treasury Index increasing 2.24% over the period. By way of comparison, it only offered a YTM of 2.90%. Note: the Bloomberg Barclays US Intermediate Treasury Index was selected due to it having a similar modified duration to the Bloomberg Barclays US Corporate High Yield Bond Index for comparative purposes. Table 1. Returns over Q4 2018: S&P 500 vs bond indices (USD) Index

Change in index,Q4 2018

YTM, start of Q4 2018

S&P 500

–13.52%

Bloomberg Barclays US Corporate High Yield Bond Index

–4.53%

6.24%

Bloomberg Barclays US Aggregate Total Return Index

+1.64%

3.46%

Bloomberg Barclays US Intermediate Treasury Index

+2.24%

2.90%

Source: Bloomberg. Past performance is not an indicator of future returns. You cannot invest directly in an index.

This reinforces the fact that over shorter timeframes, bond returns are driven largely by changes to expected economic conditions and investor sentiment. It is this attribute that can provide additional sources of return to investors and/or diversify away the beta risk of equities. The performance of different fixed income portfolios will mostly depend on the duration and quality of the underlying bonds. The longer the duration and the higher the credit quality of the bonds, the greater the potential diversification benefit (the higher the negative correlation to equities) and vice versa. Cash, while providing capital stability, simply will not provide the same level of portfolio insurance or diversification over such periods.

able to reliably predict interest rate levels, what makes the average investor think they can? While it is true that rising interest rates will have a negative impact on capital values of fixed income bonds, the overall effect may be less than investors expect for two reasons: 1. Yield expectations are reflected in the yield curve. To the extent that interest rates are expected to increase, the chances are that this is already priced into bonds based on the term structure of interest rates. Under this scenario, the yield curve is likely to be upsloping and only to the extent that interest rates rise by more than what is reflected in the yield curve, will bonds experience further capital losses. 2. Bond reinvestment into higher yields. As mentioned previously, bond portfolios engage in a program of rolling bonds prior to maturity. If interest rates rise, new bonds will be purchased at these higher yield levels and so dampen the initial capital impact of the interest rate increase. Rate rises also do not affect all bonds the same way—issuer type (government versus corporate), issuer quality (investment grade versus sub-investment grade), sector and duration profiles will all make a difference to the degree of the capital loss. However, all bonds will eventually benefit from reinvesting at higher yields.

Example 2: Negative returns, protection and diversification To use a more extreme illustration, by the end of December 2019, Germany’s 10-year yield was –0.185%. Why would anyone invest for a negative return over a 10-year period? If we ignore any potential argument for disinflation, the answer is relatively straightforward—protection and diversification if economic conditions worsen. These bonds have returned 2.07% year to date (performance of the Bloomberg Barclays Germany Government 7–10 year Index up to 31 January 2020).

Investment risk from rising yields Until recently, many investors have been calling the end of the multidecade bull market in bonds. The eventual increase in interest rates in the US over 2017 and 2018 served as confirmation to many investors that the interest rate cycle had indeed bottomed and that fixed income should be approached with care. What followed was a sudden dovish shift by the Federal Reserve in response to a weakening growth outlook. Investors again found themselves adding fixed income bonds as protection against potential further interest rate cuts. This experience highlights once again that future yield levels are incredibly hard to predict. If central banks, whose role revolves around modelling economic conditions and monetary policy, are not

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In terms of yields: a) Future yield levels are readily predicted b) Future yield levels are difficult to predict c) Low yields do not imply lower income streams d) Not all bonds benefit from reinvesting at higher yields 2. In terms of duration, the: a) Lower the duration, the less sensitive the bond price to interest rate changes b) Higher the duration, the more sensitive the bond price to interest rate changes c) Higher the duration, the less sensitive the bond price to interest rate changes d) Lower the duration, the more sensitive the bond price to interest rate changes 3. In terms of bond performance: a) Cash will provide the same level of portfolio insurance or diversification over long periods b) Bonds with shorter duration and high credit quality provide greater potential diversification benefits c) Bonds with longer duration and high credit quality provide greater potential diversification benefits d) None of the above 4. Which of the following factors would lessen the effect of rising interest rates on fixed income bond values? a) Selling prior to maturity b) Reinvesting into higher yields c) Yield expectations not necessarily being shown in the yield curve d) None of the above

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Table 2 shows the cumulative returns in Australia over previous periods of cash interest rate hikes since 1990. While negative returns can be experienced over short timeframes (especially when significant hikes have not been anticipated such as 1994), investors with a longer-term focus should still benefit from positive returns. Table 2. Australian cumulative returns over interest rate hike periods 30/8/1993 to 31/12/1994

31/12/1998 to 31/8/2000

29/12/2005 to 31/3/2008

30/6/2009 to 31/12/2010

Change in cash rate

268bps

156bps

175bps

Composite

–2.52%

4.87%

9.14%

9.02%

Composite 5–10yr

–5.85%

3.09%

6.06%

11.04%

Period

Government

–3.63%

4.40%

9.89%

7.18%

Government 5–10yr

–6.37%

2.92%

8.23%

8.94%

Credit

2.22%

6.61%

8.25%

11.85%

S&P/ASX 200 Index

–4.99%

21.35%

23.20%

27.59%

Source: Bloomberg, BetaShares. Past performance is not an indicator of future returns. Composite represented by Bloomberg Ausbond Composite 0+ Index, Composite 5–10yr by Bloomberg Ausbond Composite 5–10yr Index. Government represented by Bloomberg Ausbond Treasury 0+ Index, Government 5–10yr by Bloomberg Ausbond Treasury 5–10yr Index, Credit represented by Bloomberg Ausbond Credit 0+ Index.

Summary While there will always be a focus on whether interest rates will move higher or lower, it is more important that investors focus on the overall benefits of allocating to fixed income. That is, diversification benefits, capital stability, and reliable income streams. A low-yielding environment does imply a lower income stream, but there can be no assurance that interest rates will not fall further in the future. The added portfolio diversification remains a key benefit for investors. While there will be investors who shy away from fixed income due to their view of the risk of rising interest rates, we view the overall long-term risk to portfolio outcomes of not allocating to fixed income to be even greater. fs

5. Rate rises essentially have the same effect on all types of bonds. a) True b) False 6. YTM is an accurate gauge of total return, even if a bond is not held to maturity. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Insurance:

TPD claims within superannuation: Taxation pitfalls of consolidation

By Andrew Reynolds, Fitzpatricks Private Wealth

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Consolidating superannuation accounts is often seen as ‘wise’. However, there are potential taxation traps regarding TPD claims, eligible service dates and rollovers. This paper examines tax-effective strategies to counter such

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

TPD claims within superannuation Taxation pitfalls of consolidation

A Andrew Reynolds

n unintended consequence of the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP Act) that came into effect on 1 July 2019 means that many total and permanent disability (TPD) insurance claimants may have significantly higher tax rates when they access their TPD benefits, potentially costing them tens of thousands of dollars in additional tax. On 21 April 2020, the Australian Prudential Regulation Authority released data showing there were 17,500 group TPD insurance claims approved via members’ superannuation accounts in 2019. Many of these claimants may be surprised and disappointed to learn that when they come to access these TPD proceeds from their superannuation account, they will have to pay a significant amount of tax when accessing their TPD benefit.

The first tranche of rollovers happened on 31 October 2019 and will continue to occur every six months. An unintended consequence of this legislation is that some TPD claimants will have a significantly higher tax rate when they access these funds. Tip One thing members should never do when they are pursuing a TPD claim is to consolidate superannuation accounts because this can increase the tax they pay when they then withdrawal these funds from superannuation—which has to do with how tax is calculated on “disability superannuation payments” prior to retirement age. Through this legislation, many TPD claimants will fall into this trap through no fault of their own.

The PYSP Act and inactive superannuation accounts

Tax treatment of disability superannuation withdrawals

One element of the legislation requires “inactive low-balance accounts” (that is, superannuation accounts with balances under $6,000 that have had no contributions for at least 16 months) to be rolled over to the Australian Taxation Office (ATO) every six months (on 31 October and 30 April each year). The ATO will then direct these proceeds into an “active” superannuation account that the member holds.

When a TPD claim held through superannuation is approved, the proceeds are then paid into the member’s superannuation account and combined with their existing balance. When meeting the TPD definition, the member also meets the superannuation “permanent incapacity” condition of release (these two definitions are aligned), meaning their superannuation becomes unrestricted, non-pre-

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served and they have full access to their superannuation/TPD money. If the member then makes a withdrawal from their superannuation account before preservation age (between 55 and 60, depending on when a person was born), they will pay tax at a rate of 22% on the taxable component. When accessing funds under permanent incapacity, there is a ‘tax-free uplift’ calculation applied, which means a portion of the superannuation withdrawal amount will be tax free (see Figure 1). Figure 1. Tax-free uplift calculation timeline

Source: Created by author

New tax-free component = existing tax-free component + withdrawal amount x FSP/TSP The tax-free uplift calculation means every TPD claimant will have a different effective tax rate. Further, those members with multiple superannuation accounts and TPD claims will have a different effective tax rate when they access funds from each superannuation account.

commenced in 1995.

Eligible service date

and that the balance will be rolled over to the ATO and

Every superannuation account has an eligible service date (ESD), which is either the earlier of the following dates: • The date the superannuation account was set up. • If the superannuation account was set up by an employer, it is the date of commencing employment with that employer. • If superannuation accounts are consolidated, the earlier ESD is always retained. It is this third point that can unknowingly cost TPD claimants a substantial amount of additional tax—with the PYSP Act, many claimants will be impacted.

Scott also had a Fund B account which he This account has a balance of $3,000. Given this Fund B account is inactive, Fund B has written to Scott to let him know about this situation consolidated with an active superannuation account. If Scott’s Fund B account gets rolled into his Fund A account and he then withdraws his TPD balance, the tax he will pay is $55,000 (11%). This is a $45,000 increase in tax (see Figure 2). Figure 2. How consolidation lengthens the total service period

Example 1. Consolidation: how an earlier ESD can increase tax Scott, 45, commenced his Fund A account in January 2016, and ceased employment in March 2018. He has a TPD claim of $500,000 approved through his Fund A superannuation account. If Scott withdraws his $500,000 TPD balance, he will pay tax of $10,000 (2%).

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Source:Created by author

Andrew Reynolds, Fitzpatricks Private Wealth Andrew Reynolds is principal adviser at Fitzpatricks Private Wealth. With over 20 years’ financial services industry experience, he specialises in supporting individuals and families with disabilities, and personal injury law firms.

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What can TPD claimants do about this? Consider If someone is thinking about submitting, or has submitted, a TPD claim and they have more than one superannuation account,

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Strategies and further considerations for TPD claimants Before TPD claimants access their insurance benefit, they should understand that they have options, and there are specific strategies that can reduce their tax. These are examined in the following discussion.

they should not consolidate superannuation accounts without understanding the tax and other financial consequences.

Often, submitting a TPD claim triggers the claimant to take a more active role regarding their superannuation accounts. Many people think they are doing the right thing through consolidation (this does not bring any additional insurance benefits), which is sensible for many fund members. However, for TPD claimants this could be very costly. If the potential TPD claimant has an inactive low-balance superannuation account, there is an ATO form that they can completed and lodged with their superannuation fund to ensure it does not roll over their account to the ATO. Unfortunately, this needs to be undertaken every six months, before each cut-off date (1 October and 31 March).

Rolling over superannuation to lock in tax-free component

The previously outlined tax-free uplift calculation is only applied when the superannuation member makes a withdrawal or rolls over their superannuation benefit. This means that if the member leaves their TPD benefit within the fund and decides to make a withdrawal at a later date, the superannuation fund may ask for updated medical certificates in future to ensure the member still meets the “permanent incapacity” condition of release. If they are unable to provide the medical certificates, or if they have returned to work, the member can still withdraw their funds (as they have been classed as non-preserved), but they will pay the full 22% tax rate and not receive the tax-free uplift amount. A simple strategy to avoid this situation is for the member to roll over their superannuation benefit to another superannuation account. This rollover is classed as a “disability payment” and, therefore, the existing superannuation fund will provide details to the new superannuation fund of the tax-free component. This means the member gets to lock in their tax-free component. It also means that in future, the member can make withdrawals from their superannuation account any time and have the lower tax rate locked in, even if they return to work. Non-concessional contribution before rollover ‘washes out’ the taxable component

If the TPD member has access to other funds and can make a nonconcessional contribution into their superannuation account where the TPD claim has been approved and then rolls this account over to another superannuation account, it will increase the power of the taxfree uplift. This means the member can have a significantly reduced tax rate on future withdrawals. In some cases, they can ‘wash out’ the taxable component completely, meaning the member’s superannuation account is 100% tax free. Segregating superannuation accounts and TPD claims

Quite often, Australians have more than one superannuation account and, therefore, have multiple TPD claims. As outlined earlier, each of these accounts will have a different tax rate on withdrawal. This means that claimants may want to choose which account they access funds from, based on this tax rate. It also means that if the claimant is rolling over their superannuation accounts to lock in taxable components, they may want to keep accounts separate so they can access funds initially from the lower-tax-rate account; and then higher-tax-rate account is earmarked for withdrawal in future, possibly over age 60, when superannuation withdrawals are tax free. Account-based pensions

As TPD claimants have met the permanent incapacity condition of release, they also have the ability to commence an income stream (account-based pension (ABP)) with their superannuation benefit(s).

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If the member is under retirement age, this has completely different tax treatment. ABP income is taxable at marginal tax rates, with a 15% disability tax offset. So, depending on the claimant’s situation (that is, any other taxable income/benefits they may be receiving), they may be able to draw a significant income through an ABP with minimal or no tax. A potential strategy to further reduce tax is to roll over the superannuation benefit, lock in the tax-free portion, then supply two new medical certificates to the new superannuation account and receive the 15% tax offset. This means the member can withdraw quite a high annual income (often in excess of $100,000 per financial year, if they have no other taxable income). Implementation and tax reduction versus tax avoidance

First, all the aforementioned strategies should not be implemented for tax reduction purposes alone, but as part of an overall strategy. Second, all superannuation funds are not the same, and having an experienced financial adviser implement these strategies is crucial. Example 2. Disability payments and rollovers Going through the normal channels to process a rollover (that is, using SuperStream) often results in the tax-free uplift not being applied on rollover. It is much safer to provide a rollover form directly to the superannuation fund with a covering letter requesting the tax-free uplift to be applied and that the rollover be

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The tax-free uplift: a) I s not applicable for claimants with multiple superannuation accounts b) Means every TPD claimant will have a uniform effective tax rate c) Is only applicable for claimants with multiple superannuation accounts d) Means every TPD claimant will have a different effective tax rate 2. Which of the following statements regarding the eligible service date (ESD) is correct? a) T he earlier ESD is always retained when superannuation accounts are consolidated b) The later ESD is always retained when superannuation accounts are consolidated c) Some superannuation accounts do not have an ESD d) None of the above

classed as 100% unrestricted, non-preserved.

Conclusion TPD claims through superannuation have unique tax treatment, and claimants face numerous potentially costly pitfalls if they do not understand their options. However, they also have unique opportunities to maximise their benefit and financial position if they choose the right strategy by using an adviser with the requisite skills. fs

3. An account-based pension: a) I s ineffective tax-wise for claimants under retirement age b) Enables claimants to access a 22% disability tax offset c) Enables claimants to access a 15% disability tax offset d) Allows claimants to draw a small income at most 4. The tax-free uplift is only applied: a) I f medical certificates are requested by the fund b) When the member makes a withdrawal or rolls over their benefit c) When the claimant returns to work d) All of the above 5. To prevent an inactive low-balance account being rolled over to the ATO, a superannuation fund needs to be notified: a) Every six months b) Every year c) Every two years d) Every five years 6. The TPD definition and superannuation permanent incapacity condition of release are aligned. a) True

b) False

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