FS Advice vol 17 no 01 by financial.standard

Volume 17 Issue 01

Whitepaper

Specialist insights on aged care advice Challenger

Opinion

What are clients’ biggest worries in 2022?

A PROMISING YEAR

Sam Perera, Perera Crowther Financial Services Published by

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Contents

www.fsadvice.com.au Volume 17 Issue 01 I 2022

COVER STORY

A PROMISING YEAR Sam Perera, managing director and founder, Perera Crowther Financial Services

16 NEWS HIGHLIGHTS

FEATURES

SKILL SHORTAGES HITTING ADVICE PRACTICES

The shortage of skills is forcing firms to change how they operate. UPTICK IN DEMAND FOR RETIREE CLIENT BOOK

The demand for client books with a Baby Boomer demographic is increasing

Welcome note Heading for breakthroughs By Christopher Page

among those looking to acquire a financial advice business. INQUIRY CRITICISES GAPS IN CSLR

The proposed Compensation Scheme of Last Resort regime has several flaws that will overlook the protection of advisers and certain investors. MOST PARAPLANNERS WILL NOT BECOME ADVISERS

An overwhelming number of paraplanners do not intend to pursue a career as a financial adviser, a new report reveals. INSIGNIA REPORTS SELF-EMPLOYED ADVISER WALKOUT

Insignia reported an exodus of self-employed advisers amid a fee overhaul.

FS Advice

Opinion Clients’ biggest concerns By Stevie-Jade Turner

Featurette Shoddy exam feedback

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Contents

www.fsadvice.com.au Volume 17 Issue 01 I 2022

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 Karren Vergara karren.vergara@financialstandard.com.au Design & Production Jessica Beaver

News

AUSSIE CFP NUMBERS INCH TOWARD 5000 RETIREMENT PLANNING BOOM SEEKS ADVISERS

07 08

News

VIRTUAL MEETINGS TO DOMINATE IN 2022 AMP REPORTS $252M LOSS News

I NDUSTRY PAYS RESPECT TO CHRIS REGENASS ASIC BANS TWO SYDNEY-BASED ADVISERS

jessica.beaver@financialstandard.com.au Technical Services Roger Marshman roger.marshman@rainmaker.com.au Ian Newbert

News

INHERITANCES BALLOON TO $1.5TN E&P PULLS THE PLUG ON SUBSIDIARY DASS

ian.newbert@rainmaker.com.au Fiona Brillantes fiona.brillantes@rainmaker.com.au Advertising Stephanie Antonis

stephanie.antonis@financialstandard.com.au Director of Media and Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Managing Director

News

RI ADVICE COPS $6M PENALTY I NDUSTRY LOSES 800 ADVISERS DURING HOLIDAYS News

HYBRID ADVICE PLATFORM LAUNCHES DIGITAL ADVICE SET TO SOAR IN 2022

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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Contents

WHITEPAPERS

www.fsadvice.com.au Volume 17 Issue 01 I 2022

Insurance

BANKRUPTCY, LIFE INSURANCE AND SUPERANNUATION

By Alex Koodrin, BT

Knowing the ins and outs of bankruptcy rules may help advisers set up an ownership structure for life insurance clients at high risk of becoming bankrupt due to their profession or business.

Insurance

NAVIGATING THE NEW INCOME PROTECTION LANDSCAPE By Damian Revell, AIA

Affordability and a strategy aligned to clients’ needs are among key considerations for advisers in light of the new income protection product regime that came into effect last October.

Applied Financial Planning

LEVERAGING EXPERTISE TO EXPAND YOUR VALUE PROPOSITION By Ray Miles and Neil Younger, Fortnum Private Wealth

There must now be greater alignment between a practice’s value proposition and fees charged not only from a commercial point of view, but also from a regulatory perspective.

Applied Financial Planning

STRATEGIC PLANNING AND MIDDLE-MARKET BUSINESSES By Michael Dundas, Pitcher Partners

This paper examines how COVID triggered a wave of strategic and succession planning.

Retirement

SPECIALIST INSIGHTS ON AGED CARE ADVICE By Rahul Singh, Challenger Three financial advisers offer insights on how they became specialists in aged care advice and why it is valuable to their practice.

Investment

INFRASTRUCTURE IN A MULTI-ASSET STRATEGY By Matthew Merritt, Insight Investment

The evolution of listed infrastructure is creating assets that fit well within a multi-asset portfolio, particularly as it is more resilient to changes in the economic cycle.

Superannuation

STRATEGIES TO MANAGE TPD PAYMENTS THROUGH SUPERANNUATION By Mark Gleeson, IOOF

Many advisers don’t provide advice on managing TPD payments on a frequent basis. IOOF provides a refresher to ensure their knowledge is up to date.

58 54

Compliance

ENHANCED FEE DISCLOSURE STATEMENTS By Sean Graham, Assured Support

This whitepaper clarifies the confusion around FDSs and ongoing fee arrangements.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

FS Advice

Welcome note

www.fsadvice.com.au Volume 17 Issue 01 I 2022

Christopher Page managing director Financial Standard

Heading for breakthroughs he Lunar New Year of the Tiger is tipped to T bring about refreshing changes, ones that overcome the difficulties and challenges of the past. This is according to Deakin University academic Delia Lin, who says that 2022 is all about seeing the old and welcoming the new. In welcoming 2022, financial advisers are doing just that, rendering a confident optimism that has not been palpable for quite some time. Take research from CoreDate and Colonial First State as an example, which reveals that 70% of 200 advisers surveyed are optimistic that this year will bring positive breakthroughs. Advisers canvassed in the December 2021 quarter expressed positive sentiments of 57% on the index, as opposed to 51% in the prior corresponding quarter. As lockdowns lift and pandemic worries ease, advisers believe they will pocket more opportunities to service a growing demand for their services; turnaround their operations, and grow revenues by 10% or more. Our featured adviser, Perera Crowther Financial Services’ Sam Perera (pg.16), who is also the president of the Association of Financial Advisers, is spearheading efforts to make sure that in 2022 advisers’ hard work gets the recognition it deserves

and that their voices resound along the highest levels of policymakers. Like many of his colleagues, Perera is upbeat about the future of the profession and opportunities in life insurance, superannuation and the broader wealth management sector. He is leading by example and inspiring his peers with the belief that this is the year advisers will finally get on the front foot. The recent passage of the Retirement Income Covenant legislation (pg.6) reinforces Perera’s point, in that as the $3.5 trillion superannuation asset pool continues to balloon, there is a significant opportunity to provide specialist retirement advice. It’s not to say that 2022 won’t have its own unique set of challenges. Advisers are closely looking at major events on the political and regulatory calendar - such as the May federal election, Quality of Advice Review and Compensation of Last Scheme Resort - the outcomes of which can potentially ease compliance burdens and make financial advice more affordable and accessible. Advisers have been through so much in recent years to say the least. But with a renewed sense of enthusiasm and vigour, they have a lot to look forward to in 2022. fs

70%

The proportion of advisers who are optimistic about business improvement in 2022.

Christopher Page managing director, Financial Standard

FS Advice

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

News

www.fsadvice.com.au Volume 17 Issue 01 I 2022

Aussie CFPs move toward 5000

Skill shortages hitting advice firms

Australian Certified Financial Planners added 164 professionals to the fold last year, taking the total to nearly 5000. The Financial Planning Association of Australia, which is the certification body for the CFP designation in the country, recorded 4966 members at the end of December 2021. While CFP numbers in Australia in the past year have fallen by 4%, this is lower when compared to the 11% drop experienced broadly across the profession, FPA chief executive Sarah Abood said. Abood said it is pleasing to see that advisers continue to recognise the value of the CFP certification and dedicate themselves to education, despite the challenges they have been facing over the past few years. “CFP professionals have been growing proportionally and now make up 55% of our practitioner members,” she said. On a global scale, the total CFP population grew by 5.5% year on year to 203,312, hitting past the 200,000 milestone. This rate of growth also doubles the 2.5% recorded in 2020. The CFP Certification Program globally is managed by the Financial Planning Standard Board and operates in 27 countries. “Last year, the number of CFP professionals reached the highest ever, with growth from emerging, developing and mature markets demonstrating the broad appeal of financial planning and CFP certification worldwide,” FPSB chief executive Noel Maye said. “We’re pleased to report that, despite the COVID-19 pandemic, momentum in the global growth of CFP professionals remains strong, and is increasing.” fs

Elizabeth McArthur

The quote

My advice to any employer at the moment would be to ensure the first interview is not to test the water and enter the meeting like it was a final interview.

he financial advice sector is facing a shortage of skills, forcing firms to change how they do things to attract talent. Profusion Group divisional director Chris Gordon said he has observed a skilled staff shortage in advice, particularly for client service officers, associates and established advisers who can bring books to a new firm. “I have known a number of client service officers recently offered the job in or after the first interview, the days of interviewing a short list and taking them through a full interview process are few and far between, as it’s highly likely the candidate will have other roles and offers on the table,” Gordon said. “My advice to any employer at the moment would be to ensure the first interview is not to test the water and enter the meeting like it was a final interview. The candidates need to sell themselves, but you will also need to

make sure that you are selling the opportunity too.” He explained between 80% and 90% of job seekers he sees at Profusion are looking for some flexibility, with most wanting at least some days working from home each week. To attract talent, employers are going to have to be open to this, Gordon suggested. He added that client service officers and associates want to know there is a career path for them at a firm, choosing firms with the opportunity to grow as a priority. “The industry still seems to have a focus on general advice and wholesale advice, definitely the growth areas of the industry and that will likely be the case for the foreseeable,” Gordon said. “Retail will likely continue to have a focus on merger and acquisitions, the recruitment market has not been as active in this area as businesses merge and re-establish themselves.” fs

Retirement planning boom seeks advisers Karren Vergara

With the passing of the Retirement Income Covenant on February 10, there has never been a better time for advisers to position themselves as retirement advice specialists. Superannuation funds will have to provide a retirement income strategy for members to assist them in their later years under the new RIC legislation, embedded in the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021. Under the strategy, trustees must balance risks, maximise income, and offer flexibility to savings. This must be presented in writing and made public from 1 July 2022. The Financial Planning Association of Australia chief executive Sarah Abood said advisers now look forward to their clients having the ability to access a broader range of options. The “one size fits all” approach in the super system has limited the ability for retirees to mix income, lump sum, longevity, and market risks adequately, she said. “We also welcome the additional clarification and

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

certainty provided by parliament on time frames for time critical advice provision which ends a long debate over the definition of ‘days’.” SuperEd chair Jeremy Duffield predicts that retirement planning will be a major focus of the 2022 Quality of Advice Review. Advisers are said to be in the empathy business as much as in the finance business, he told a Vanguard event. “In the real world, though, retirement is a transformative time of life and also a great opportunity for financial advisers,” he said. With some 250,000 people retiring each year and Australia having 3.9 million people aged over 65 this is “a huge market of people either retired or thinking about retirement”. Advisers have a key role to play in helping Australians align their retirement with their financial situation and therefore their own financial reality. “That’s often very hard to do. It’s a major challenge to work out how long your money will last, and how much you can afford to spend,” he said. fs

FS Advice

News

www.fsadvice.com.au Volume 17 Issue 01 I 2022

Uptick in demand for retiree client book

Virtual meetings to dominate Financial advisers will continue to host virtual meetings with clients in 2022 but the majority are eager to meet them face to face, a new survey shows. The global survey of 400 US-based financial advisers found that video conferences are expected to increase in the next 12 months, but 88% of advisers will make more of an effort to increase in-person client meetings. The survey, conducted by US fintech Broadridge Financial Solutions and the Financial Services Institute, reveals that 51% of advisers still conduct formal client meetings either via phone or video conferencing. Should the technology improve, most advisers believe that the client acquisition process will also get better as they will be able to reach prospects outside of their geographic location. LinkedIn (77%) and Facebook (67%) are the most widely used social media platforms by advisers. Similar to Australia, the survey found that crypto and ethical investing, as well as the need for financial literacy are on the rise in the US. The low interest-rate environment is forcing investors to find better returns; 64% of advisers are seeing increased interest in cryptocurrency from clients. Further, 33% see an increased interest in ESG investments from clients. “With the rise of DIY investing and clients’ growing interest in branching out to new asset classes, financial literacy is of the utmost importance and advisers have a clear role to play,” FSI president and chief executive Dale Brown said. fs

FS Advice

Karren Vergara

The quote

In 13 years since the GFC, prices have moved up for the first time.

he demand for client books with a Baby Boomer demographic is increasing among those looking to acquire a financial advice practice. The December Radar Results reveal that near-retirees or retirees are highly sought after by financial advisers. Valuations for investment and superannuation clients aged 65-79 years old have increased to 1.7x to 2.3x (previously 1.7x to 2.2x). Those aged up to 64 are priced at 2.2x to 2.8x (previously 2.2x to 2.7x). For 80 year olds and over, multiples are at 0.80x to 1.0x. Demand for risk clients however, remained static and in line with March valuations. Risk clients under 55 sit at 2.2x to 2.7x, while those aged between 55 and 60 are valued at 2.0x to 2.3x. Those aged 61 and over have multiples of 1.0x to 1.5x. Since the March 2021 price guide, activity in selling and buying financial planning businesses has been frantic,

Radar Results founder John Birt said. “In 13 years since the GFC, prices have moved up for the first time.” Demand for licensee groups of 50 to 200 authorised representatives to be acquired by one bulk purchase continues to be evident. On the mortgage broking front, Radar Results found a steep rise in the price multiples buyers are willing to pay. The multiple for annual trails rose 13% from May 2020 to March 2021 and another 20% to December 2021, and now sits at three times the annual trails. “If the number of home loan books for sale from the major aggregators continue to be scarce, prices may rise further,” Birt said. “With house prices up 40% in two years and approved loans up a similar level, upfront commission on the new loans has also risen, which is why loan books are not coming onto the market. Trail commission on the new loans and the upfront commissions are keeping sale stock low.” fs

AMP reports $252m loss While AMP’s financial advice and wealth management units show signs of recovery, the group ultimately reported a massive $252 million statutory loss in its full-year financial performance. Underlying net profit after tax, however, was up 53% to $356 million, boosted by AMP Bank earnings and the release of provisions, together with performance fees earned by AMP Capital. AMP’s Australian wealth management business, which comprises platforms, master trusts, and SuperConcepts, reported a $48 million underlying profit, a 25% drop year on year. The division saw $5.2 billion in net cash outflows, an improvement from the $7.8 billion lost in FY20. The master trust business had $62.9 billion in AUM, which was $2 billion higher than FY20. All in all, total assets under management increased 8% to $134 billion, driven by improved investment markets and a reduction in net cash outflows. The North platform saw inflows from external financial advisers increase by 18% to $1.3 billion.

SuperConcepts, which services 41,754 SMSFs, recorded total assets under administration of $17.4 billion. AMP chief executive Alexis George said there are positive signs in the platform business with North AUM growing from stronger market performance and higher inflows from the external adviser channel. “[This] is a key focus of our strategy and is being supported by ongoing enhancements to investment choice and functionality, and competitive pricing,” she said. AMP also announced that AMP Capital has changed its name to Collimate Capital as it steps closer to finalising the demerger and listing on the ASX by the end of the year. “Collimate is a scientific term that means to make rays of light perfectly parallel. It is a metaphor for alignment, clarity and precision, which speaks to our vision and expertise in long-term value creation for our clients,” AMP Capital chief executive Shawn Johnson said. fs

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

News

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Inquiry criticises gaps in CSLR Karren Vergara

Vale Chris Regenass Jamie Williamson

The financial advice community is remembering Synchron state manager Chris Regenass, following his sad passing in January. In a video message to the Synchron adviser network, director Don Trapnell shared that Regeness passed away as a result of heart surgery complications on Thursday, January 13. “We are a family at Synchron … and Chris was a very integral part of that family,” Trapnell said. Regenass served as Synchron’s state manager for South Australia and the Northern Territory since November 2017, and more recently became responsible for Tasmania. “In that five-year period, in those states he took Synchron from a very small operation to being big enough to be a licensee in its own right,” Trapnell said. Prior to joining the licensee, he led AMP’s financial planning business for more than three years, overseeing AMP Financial Planning, Charter and Hillross. In total, he spent close to two decades with AMP and AXA in a range of development roles. Tributes to Regenass flowed on Synchron’s Facebook page, with many remembering him for his cheerful disposition and friendly smile. At over seven feet tall, he was affectionately known as a “big friendly giant” who was generous with both his time and knowledge. He is survived by his wife Robyn and their two children, Rebecca and Matthew. fs

The quote

Even with the exclusion of product providers from this scheme, it’s inevitable the spotlight will be on financial advisers for the allocation of fault.

he proposed Compensation Scheme of Last Resort regime has several flaws that will overlook the protection of advisers and certain investors. Such issues were discussed at the Standing Committee on Economics Financial Services Compensation Scheme of Last Resort Levy Bill 2021 in late January. SMSF Association deputy chief executive Peter Burgess pointed to deficiencies in the proposed bill that will fail to protect members. That managed investment schemes are excluded from the scheme is a major concern for the industry, particularly as retail investors suffered substantial financial losses from the likes of Trio Capital. “The Trio case exposed a significant gap in the compensation options available to many investors and highlights the need for an alternative mechanism to protect both advised and unadvised investors. This is particularly relevant to self-managed super fund investors

who, unlike members of APRAregulated funds, are not eligible for compensation under part 23 of the SIS Act,” Burgess said. Limiting the scope of the CSLR to the financial advice and specific sub-sectors has also been widely slammed as advisers would bear a disproportionate amount of the costs. “The escalation of compliance costs and ASIC levies in the financial advice sector and the difficulties faced by financial advisers in providing affordable financial advice have been well documented. Even with the exclusion of product providers from this scheme, it’s inevitable the spotlight will be on financial advisers for the allocation of fault,” Burgess said. The association is backing for professional indemnity insurance to play a bigger role in the framework. SMSFA chief executive John Maroney said PII “is a vital component” for the long-term financial sustainability of the CSLR as it is essentially a mechanism for reducing the crosssubsidisation of costs across all market participants. fs

ASIC bans two Sydney-based advisers Chole Walker

ASIC has banned the directors of Premier Wealth Management from providing financial advice, while also stripping the firm of its AFS licence. The corporate regulator banned Sydney-based financial advisers Gerald Cummings and Craig Allen for a period of five years, after the pair were found to have engaged in misleading or deceptive conduct. The bans prevent them from providing any financial services, performing any function involved in the carrying on of a financial services business, and controlling an entity that carries on a financial services business. ASIC said it found Cummings “failed to give Statements of Advice when there had been significant changes in clients’ circumstances and the basis for the advice”. “He engaged in misleading or deceptive conduct

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

in relation to review checklists on client files, claiming to confirm that certain tasks in the advice process had occurred when they had not.” Cummings also failed to implement a system to refund clients that had been overcharged fees. Allen was involved in Cummings’ non-compliance with the requirement to provide SoAs. He also audited his own files, engaged in misleading and deceptive conduct in relation to checklists on client files and failed to implement a system to refund any overpayments. ASIC said Allen failed to demonstrate that he has the skills, knowledge, and expertise to perform his duties as a responsible manager and financial adviser to the standard required. The pair demonstrated prolonged, wide ranging and ongoing incompetence and lacked compliance mentality. They have the right to appeal to the Administrative Appeals Tribunal. fs

FS Advice

Opinion

www.fsadvice.com.au Volume 17 Issue 01 I 2022

Stevie-Jade Turner senior adviser Tribeca Financial

What are clients’ biggest concerns? fter the last two years of A lockdowns and restrictions to travel, clients have been telling me they’ve found it so easy to save their money. The biggest concerns that I’ve been seeing working with new clients over the last 12 months, is that they now have significant sums of cash and don’t know what to do with it. They know leaving it in cash won’t give them much of a return, so naturally they want to explore what investments are out there. Many of my younger clients have only been exposed to investing through their Superannuation funds, so have no idea where to start and can feel really overwhelmed starting the investment process on their own. Of course, we are living in an age where information is everywhere, so more often than not, I find clients have already Googled and digested lots of information and formed opinions about what they would like to do, before they pick up the phone to book a meeting. Sometimes this is great because they have a clear purpose or goal for the funds, a fair idea of the investment timeframe they are comfortable with, and have made decisions about wanting to invest ethically, etc. They can also realise through their research that there is a lot to know and can be wise to seek the guidance and work with an adviser.

FS Advice

The quote

Over the years, people have said ‘yes’ more and more, and the unprompted requests to invest ethically have become more frequent.

However, sometimes the information overload can be dangerous if some of the information they’ve come across isn’t quite right or the context around when or why to invest has been applied incorrectly to their situation. They might love the idea of a highgrowth investment option because it’s performed well, but the purpose is a short- to medium-term goal, which is a high-risk strategy and may not be suitable to their situation. Unfortunately, this means I also come across people who have completed the research on their own, ‘had a go’ and then realised they made a mistake, or the investment hasn’t done what they expected. These people end up seeking advice to ‘course correct’ their investment strategy and tend to tell me they would prefer a more ‘tried and truer’ plan than the exciting options they were reading about. The other concern I’m seeing, which I think has again been an impact from the last 18 months recovery market after the initial drop that we saw at the start of COVID, is that people have loved the near 20% super and investment portfolio returns they’ve seen over the last 12 months. My existing clients are obviously aware through our ongoing relationship and education that this won’t continue indefinitely, and that volatility will return again. However, new clients that I’m coming across who haven’t worked with an adviser before, especially younger clients, they

can be surprised and obviously don’t like hearing that portfolio returns will drop to more typical returns behaviours linked to their underlying asset classes. Lastly, ethical investing is definitely a hot topic. Ten years ago, I had to ask people if they had a preference to invest ethically, and very rarely did someone respond with a yes, and even rarer that someone asked me about it first. Over the years, people have said ‘yes’ more and more, and the unprompted requests to invest ethically have become more frequent. As awareness and curiosity around investing continues to grow, and after a period of time where plenty of people still have ready cash to invest, I believe this will become a very important request of clients to choose ethical investing as part of their investment strategy. fs

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News

www.fsadvice.com.au Volume 17 Issue 01 I 2022

Most paraplanners will not become advisers Karren Vergara

D Inheritances hit $1.5tn Australians give away the vast majority of their wealth, as some $1.5 trillion has been passed on to the next generation since 2002, the Productivity Commission finds. In 2018 alone, nearly 90% of the $100 billion transferred was in the form of inheritances passed on following death. Children of the deceased were the major recipients, while the remainder went to a surviving spouse or to other family and friends, the Productivity Commission’s newly released Wealth transfers and their economic effects report suggests. Only 2% of this wealth went to charity. The average age of the recipient was 50 years old, inheriting about $125,000 (the median being lower at $45,000). “In contrast, the average recipient of a gift was about 20 years of age, at the beginning of their career, yet to start a family or purchase a house, and received about $8000 (again, the median was much lower, at about $1000),” the report read. The study also found Australians invested a substantial share of their inheritances - but did not do so wisely to overcome inflation. In real inflation-adjusted terms, each $1 of inheritance increased household wealth by $10 three years later, but only $0.90 some four to seven years later. The Productivity Commission predicts between 2020 and 2050, an even bigger inheritance will pass onto the next generation. fs

The numbers

69%

The proportion of paraplanners who are female.

espite popular belief, an overwhelming number of paraplanners do not intend to pursue a career as a financial adviser, a new report reveals. Fintech Tanngo, together with The Paraplanner Hub, found that almost three quarters of paraplanners (72%) see their role as a career in the industry and not as a stepping-stone to becoming an adviser and many say that they are content in their roles. In their inaugural Paraplanner Hub Survey, they suggest more needs to be done about supporting career progression of paraplanners by providing technical support, development, and education. Paraplanners that have the biggest desire to move to adviser roles are employed paraplanners, and the contracted and part-time paraplanners have mostly chosen a career-path in paraplanning, the report reads. “This suggests that employed paraplanners could be perfect candidates for the Professional Year Programme to

cultivate new advisers for our industry.” The majority (69%) of Australia’s paraplanning sector is female, aged between 30 to 40 years old. About 60% are employed either full time and part time, while 39% are contractors. On average, they have over four years’ experience in the industry. Only 21% of paraplanners are found on the ASIC Financial Adviser Register. Only a third (34%) are members of an industry body. Paraplanners believe they are not “glorified typists” and have influence over the strategy and product advice provided to a client, meaning that they are critical in developing appropriate and compliant advice. “If this is the case, then they should have recognisable qualifications so that all who produce advice are suitably qualified, and their qualifications are transparent and easily identifiable for those who employ their services,” the report said. It takes paraplanners four to six hours to complete a standard SoA that is priced between $451 and $550. fs

E&P pulls the plug on DASS The troubled superannuation subsidiary of E&P Financial Group is now in voluntary administration. PwC acts as voluntary administrator of Dixon Advisory and Superannuation Services, parent company E&P Financial Group said, adding that “mounting actual and potential liabilities mean it is likely to become insolvent at some future time”. Such liabilities include potential damages that will arise from the Piper Alderman and Shine Lawyers class actions, numerous claims made to AFCA, as well as civil penalties agreed between DASS and ASIC. Piper Alderman commenced the class action in the Federal Court last November, defending investors who received dodgy advice in the group’s beleaguered ASX-listed US Masters Residential Property Fund. Kosen-rufu, which is part of the class action,

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

attempted to freeze the payable $7.2 million civil penalty ASIC slapped on DASS that same month. Despite the trouble it has caused investors, ASIC dropped its case against DASS in July 2021, seeing that a $7.2 million penalty and $1 million to cover legal costs was fit. E&P managing director and chief executive Peter Anderson said the move to call in administrators was “necessary”. “It has also become apparent that settling individual claims as they arise will likely lead to inequities between client creditors. Voluntary administration provides an appropriate framework to ensure all client creditors are treated equitably. Importantly, no client assets are at risk as a result of this process, and we will strive to minimise any disruption to clients who will have ongoing access to their adviser(s),” he said. fs

FS Advice

News

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Insignia loses selfemployed advisers Karren Vergara

RI Advice cops $6m penalty RI Advice was slapped with a $6 million penalty for failing to keep tabs on a representative who invested clients’ money in risky and complex financial products. The Federal Court found that RI Advice failed to take the appropriate steps to ensure that former adviser John Doyle acted in clients’ best interest, and instead reaped upfront and ongoing commissions from the financial products that were unsuitable to their situation. Doyle admitted that he inappropriately advised clients to invest and stick with complex structured financial products ultimately for his own benefit. The court also forced Doyle to pay an additional $80,000 in penalties. Justice Moshinsky determined that RI Advice, a former ANZ subsidiary that is now owned by IOOF, did not have processes to identify when advisers were avoiding internal advice quality checks or were recommending non-approved financial products. Although RI Advice’s conduct was not deliberate and had compensated Doyle’s clients, Moshinsky said its breaches of the law were serious and sustained and the monitoring flaws should have been apparent. Doyle was affiliated with RI Advice between May 2013 and June 2016. Doyle and RI Advice were closely examined at the Hayne Royal Commission as a case study in “bad advice”. fs

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I The numbers

$227bn

Inisignia’s FUA at the end of 2021.

nsignia Financial reported an exodus of self-employed advisers in the December 2021 quarter amid an overhaul of its advice fee model. The company, which recently shed the name IOOF, lost 118 advisers during the period. Most advisers (94) who left were from the self-employed channel. The group ended the year with 1765 financial advisers on its books; of which 480 were classified as self-employed. The attrition was due to the reset of management fees introduced on 1 October 2021 which many self-employed advisers decided not to pursue. “The revised fee model removes historic subsidisation of fees and supports our target for ANZ-aligned licensees to break-even on a run-rate basis by 30 June 2022. The reduction in advisers for the quarter is consistent with Insignia Financial’s commitment to deliver to this break-even target as planned,” Insignia chief executive Renato Mota said. “This contraction in adviser numbers reflects the necessary changes to ensure the financial advice profession

can prosper after a period of change, while supporting continued investment in technology and process improvements, for the benefit of advisers and their clients.” For advisers who either retired or exited the industry altogether during 2021, Insignia facilitated over 50 intra-group acquisitions and mergers; it expects its adviser numbers to stabilise from 1 July 2022. Some 97% of Insignia advisers have completed their exams. During the quarter, funds under administration increased by $4.2 billion to $227 billion because of market performance ($5bn). This was offset by pension payments ($730m) and outflows ($69m). Fund under management reached $98.8 billion, comprising market gains ($507m) and inflows ($49m). Retail inflows ($599m) were offset by outflows ($550m) from MLC’s institutional channel. Ninety-eight percent of Insignia shareholders voted in favour of changing the company name and logo at the annual general meeting held in November 2021. fs

Industry loses 800 advisers during holidays The exit of 807 advisers during the Christmas and New Year break leaves the total population close to dipping below the 18,000 mark. There are currently 18,015 practising financial advisers left, according to Rainmaker’s modelling of the ASIC Financial Adviser Register as at January 20. Rainmaker reported on 16 December 2021 that there were 18,822 financial advisers. Early that year, the total population stood at 21,103. Currently, AMP Financial Planning is home to the largest number of advisers, with 595, followed by the SMSF Advisers Network with 544 and Morgans Financial with 446 representatives on its books. Synchronised Business Services (382), Charter Financial Planning (376), Consultum Financial Advisers (327), Interprac Financial Planning (263), Capstone Financial Planning (260), Alliance Wealth

(260), Count Financial (251) make up the top 10 practices based on adviser numbers. While many continue to leave the profession, one interesting trend Rainmaker found is the rapid rate in which advisers moved between licensees. In 2021, nearly 13% switched to a new AFSL. Another finding was the shift towards the nonaligned sector, which is growing at an unprecedented rate, Rainmaker said. The non-aligned sector is led by the SMSF Advisers Network, followed by Synchronised Business Services and Capstone. The number of aligned advisers fell 1629 in the year to December 2021 to 7012. The non-aligned segment lost 653 advisers and ended the year with 11,767. The SMSF Advisers Network is the largest nonaligned AFSL (647) and owns 5.8% of the market. fs

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Shoddy exam feedback fuels adviser stress With ASIC now in charge of administering the exams, advisers running out of chances to pass are hoping it does not make the same mistakes FASEA did. Karren Vergara writes. inancial advisers who failed the mandatory examination multiple F times are slamming the feedback process, claiming it is inconsistent and fails to help them stay in the industry. As the failure rate continues to balloon, advisers who made genuine attempts to study and pass the exam told Financial Standard they were let down by the now-defunct Financial Adviser Standards and Ethics Authority. The pass rate, which was as high as 88%, has deteriorated to 69% and 60%. Fifty-eight percent of the 2129 advisers who sat the November 2021 exam failed - the highest fail rate in the short history of the exams. Advisers who spoke to Financial Standard based on the condition of anonymity said that they have not received the feedback FASEA had promised. At the start, FASEA provided no feedback to advisers who failed the exam whatsoever. It then provided generic feedback in terms of areas where candidates struggled. It was only in 2021 that FASEA gave more personalised feedback - but not at the level of detail advisers were anticipating.

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Feedback webinars were also introduced, with some 5000 participants in attendance. “The webinars are general only, they discuss every topic in the exams and do not identify specific areas,” one adviser said. Another adviser described the webinars as “not constructive”. The advisers we talked to tried to contact FASEA, only to have the door slammed in their face. Only some candidates who failed were successful in doing so. This was not the case for one adviser, who has relentlessly attempted to talk to a FASEA representative. “They refer us to the areas we need to improve in. After four attempts all the feedback is the same for me even after studying, so someone is lying to you about this,” the adviser said. The Financial Planning Association of Australia said there have been occasions where it had to ask FASEA to speak to a member after the exam to discuss issues or questions. “[And] both members and FASEA have confirmed these conversations have occurred,” the FPA said in a statement. The Association of Financial Advisers commented: “It remains

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a fact that those who have continued to fail the exam, would like to get better feedback.” FASEA provided either a pass or fail with no numerical marks based on a credit level, as per its legislative instrument. A credit grade typically ranges from 65% to 74%. An adviser alleges FASEA has moved the pass mark within this band, saying that a floating pass mark “is totally unfair”. Another issue is that exam questions continue to change for each sitting, leaving many overwhelmed with what to study for. One adviser, who has been in the industry for over 30 years and sat the exam four times, believes for one question, FASEA moved the goal post and changed the answer. This adviser, who queried FASEA about this particular question, is making genuine attempts to pass the exam and keep his job - but said the failure of FASEA is stealthily pushing financial advisers over 55 years old out of the industry.

Ghosted FASEA’s radio silence was a thematic. While it had several email contact addresses, it had no direct hotline. One adviser who managed to get hold of a senior FASEA staff member was asked: “How did you get this number?” Could the lack of response be attributed to a lean team?

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The authority had 10 employees, whose work spanned developing and maintaining standards, assessing and accrediting higher education degrees and courses, and overseeing the exam, according to the annual report. FASEA did not divulge how many employees were dedicated to fielding exams and feedback queries. Financial Standard contacted FASEA for this article which declined to provide a response. Requests to talk to the elusive chief executive Stephen Glenfield also fell on deaf ears. This was no surprise given the publication had contacted the authority in the past on other adviser issues only to be ignored. Even months out from its December 31 closure date, FASEA began warding off queries and directed us to ASIC, which took over its remit on 1 January 2022. To a great extent, this is understandable as Glenfield had been facing a deteriorating health condition and was solely focused on taking the professionalisation of advisers to a level it has not reached before. Glenfield bowed out with a total remuneration package of $588,082, of which $163,915 was a redundancy payment. Kathryn Kerr, the chief operating officer, was paid $465,886 for FY21; $127,386 of this was her severance package. In the grand scheme of things, nine out of 10 advisers have passed the exam regardless of number of sittings. Yet, a minority of advisers continue to fail the exam and are so close to losing their livelihoods before October 2022. With thousands of advisers ditching the industry, isn’t it logical to throw a lifeline to the ones who desperately want to stay by simply providing them specific feedback on their weaknesses? Senator Jane Hume now wants to recognise 10 years’ work experience with zero infringements - a relief experienced advisers have been clambering for - was conveniently introduced after Labor proposed the exact same measurements days before. At its height in 2019, there were nearly 28,000 active advisers.By the end of 2021, a whopping 10,000 or 36% abandoned the profession. Many industry stakeholders blamed the stringent educational standards for the mass exodus. The Stockbrokers and Financial Advisers Association of Australia slammed FASEA’s legacy, describing it as a “bureaucracy that was averse to stakeholder engagement” and narrowed the scope of recognised qualifications. Going forward the SAFAAA wants to see qualification pathways that are flexible, transparent, and easy to understand - unlike the previous standard that was made up of complex and lengthy lists of specific degrees. But for veteran advisers who have yet to pass the exam or had already unwillingly left the industry, Hume’s salvo in the lead up to the 2022 federal election could be too little too late. fs

The numbers

36%

The drop in adviser numbers from a peak of 28,000 in 2019.

Senator Jane Hume was contacted for this article.

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CFS awards platform technology mandate Karren Vergara

C Hybrid advice platform launches Jamie Williamson

Fin365 is planning to launch a roboadvice platform, having acquired miPlan as part of its strategy. miPlan is a privately-owned, self-licensed robo-advice platform for individuals, retirees and small businesses. Fin365 hopes to make advice more affordable with the acquisition. Acquiring miPlan provides Fin365 with an AFSL and consumer-facing brand required to build out its hybrid advice model which will now also offer investment and insurance solutions. While the Fin365 solution has traditionally been used by financial services firms, it can equally be applied to deliver simple, scaled advice, the company said. “Consumers who engage directly with the miPlan platform will be able to select from variety of DIY service levels. At the point they identify a need for full-service advice, they will be seamlessly transitioned to a financial planning firm whose practice management system is directly connected to the platform,” Fin365 chief executive Stephen Handley said. “As far as the consumer is concerned, the full-service offering will feel like a natural continuation of the DIY service.” The miPlan version of the Fin365 platform will be rolled out over the course of the year and a white-label version will also be made available. fs

The quote

Financial planning software is critical to advisers, and we think there’s an opportunity for that to be enhanced further than how it operates on platforms today.

olonial First State awarded a major technology mandate in a bid to revamp its wrap platform. Specialist investment platform provider FNZ won the task of transforming FirstWrap, replacing its underlying technology as CFS attempts to cement its lead in the market. CFS chief distribution officer Bryce Quirk told Financial Standard that FirstWrap will continue as is but will migrate to the new infrastructure some time in 2023. “By the end of 2022, we will launch a new wrap platform on this new capability. While we are still working through how we will bring those items together in 2023, ultimately, we will launch a new wrap platform offering by the end of this year,” he said. FNZ works with global asset managers and insurers such as Vanguard, abrdn, Findex, and Singlife. CFS chose FNZ following a 12-month selection process based on its IT infrastructure, investment operations and

platform-as-a-service capabilities. It demonstrated the ability to meet the needs of clients and provide greater speed to market, Quirk said. “FNZ manages about $70 billion across a number of clients in Australia and over $2 trillion in assets globally,” he added. Late last year, Commonwealth Bank relinquished its 55% stake in CFS to KKR. The FirstWrap revamp is the first major project CFS is focusing on under its new majority owner KKR, which injected it with $430 million to transform operations. Financial advisers can expect improved investment selection processes and managed accounts offering. Advisers can also benefit from increased automation, greater speed and accuracy, and the integration of the platform with other software, he said. “Financial planning software is critical to advisers, and we think there’s an opportunity for that to be enhanced further than how it operates on platforms today,” Quirk said. fs

Digital advice to soar in 2022 Asset managers and super funds will ramp up their digital advice offerings in 2022 as the reality of financial advisers exiting sets in. Technology firm Finura predicts the wealth management and super sectors will invest heavily in digital advice, particularly as they lose unadvised investors to do-it-yourself trading platforms. Pinnacle Investment Management, for example, took a stake in OpenInvest in 2021. Meanwhile, Finura expects Six Park, Stockspot and MapMyPlan to either be acquired or embrace significant investors in 2022. However, Vanguard’s digital advice offering will not make the big splash the industry anticipated it would. “We still feel they will be a significant player and did not retreat from managing institutional money for the fun of it. We were delighted to see evidence of IFAs partnering with firms like Six Park and MapMyPlan in 2021,” Finura said.

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Another prediction is the intensification of the platform wars. Finura is confident Netwealth will successfully acquire Praemium by June 2022, despite the latter rejecting the initial offer. Last year, Finura said the merger and acquisition activity gave clear evidence that platform business models are evolving. Netwealth’s investment in Xeppo is a case in point, as is HUB24’s acquisition of Easton and Class. Interestingly, major cloud providers like Amazon, Google and Microsoft are predicted to make a significant move in wealth management. Amazon already has strong connections with Iress, as does Google with HUB24. But it’s Microsoft that is expected to make a major move. As 95% of advice firms use Office 365, Finura expects to see strong growth in Microsoft’s Independent Software Vendors launching productivity tools purpose-built for wealth. fs

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A PROMISING YEAR Sam Perera, managing director and founder, Perera Crowther Financial Services The advice industry is poised to turn the corner in 2022. Leading a major association and his own practice, Perera Crowther Financial Services founder Sam Perera is confident advisers will finally have their watershed moment. Karren Vergara writes.

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any financial advisers are called to be entrepreneurs, driven by the desire to succeed and control their own destinies, ultimately reaping the risks as well as the rewards. Early in his career when Sam Perera worked as an accountant, a somewhat eccentric life insurance adviser convinced him to

move to the risk sector. “I joined him for a few months and unfortunately that didn’t work out. But during my short time there, I saw the opportunity and how you could serve people and run your own business. So I approached my dealership head at that time and said, ‘I want to try this myself’,” he says. When Perera helped establish Perera Crowther Financial Services with Josh Crowther in 2005, he left behind what was familiar and put in the hard yards to make sure that the firm, which initially started in the southern Sydney suburb of Caringbah, would thrive as it does today. “Josh and I started our business with no clients but a deep hunger to be successful,” he says. Building a business from scratch filled those early years with many challenges, ranging from how to find people who needed their advice to how to attract clients and staff. “Those initial hardships forge your career and I believe you take all these lessons with you throughout your career and journey in private enterprise. We learnt very quickly without your clients, you’ve got no career, you’ve got no business.” When the pair eventually went their separate ways, Crowther moved on with the mortgage business and Perera took over the financial services offering. Today, after formalising a joint venture with Econ Financial Services and Economos Chartered Accountants, the firm services a range of professionals such as doctors, lawyers, and pharmacists, predominantly offering risk-based advice. The group’s philosophy is to provide a risk advice solution as part of a multi-disciplinary accounting and financial advice approach. It has

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several practices and completed a significant merger at the end of 2021. Perera considers himself a business owner first and a financial adviser second. “I continuously look at my business and the metrics and have considered succession planning throughout my 15 years... contemplating my eventual exit,” he says. “We must remember that we are financial advisers. We advise our clients about their finances; about making money and being financially successful. Therefore, it’s incumbent upon us to look at ourselves and our businesses in the same way. Practically, we need to make sure that we are evolving with the times with respect to business models and ensure that we are getting the financial returns that we ought to for risking our capital.”

When opportunity knocks Rainmaker Information’s examination of the ASIC Financial Adviser Register shows there were 18,015 practising financial advisers as at January 20. Four years ago, just before the fallout from the financial services Royal Commission sent tremors across the broader wealth management industry, this figure peaked at 28,000, and has dropped an alarming 36% - yet no other profession was pummelled like the advice industry. “I think the sector is generally worn out and tired as a result of the regulatory challenges and the COVID-related impacts. I am empathetic to the challenges of the sector which are numerous and have been unrelenting,” Perera says. Some of the toughest challenges advisers faced and continue to grapple with stemmed from the Royal Commission, forcing too many to answer serious life-changing and career-transforming questions. Practices may have needed to merge or acquire to get scale, while advisers had to decide if they should take the newly mandated education requirements. “Coming to terms with many of the adjustments that are needing to be made whilst looking inward at our own business mod-

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els might seem an insurmountable challenge for advisers, many who have run very successful practices over the years,” he says. “As a result of current compliance requirements and increased costs, many might have to come to terms with the fact that they won’t be able to service certain clients and markets and this is hard to reconcile as they have always served these clients successfully in the past.” He empathises with advisers trying to complete their studies while running a practice at the same time. “I did that several years ago and I know how difficult that can be,” he says. Looking into the horizon, the wealth management landscape is awash with opportunities for advisers. Thanks to strict border restrictions and lockdowns, Australians have never been more cashed-up. The underinsurance crisis prevails, while the $3.5 trillion superannuation sector continues to balloon. “Clients will need financial professionals that are educated and experienced. And guess what? The advice market is shrinking and the financial advisers that remain are in a perfect place to capitalise on these opportunities,” he says. “Those of us who are client-centric and are here for the long haul with economically viable business models will be stupendously successful.” Advisers also recognise that opportunities to fill the gap in Australians’ financial illiteracy are there for the taking. Not to mention the fact that for the average Australian, finance is an esoteric subject placed in the ‘too hard basket’. “There is still so much complexity in areas like insurance, superannuation, investments and tax law. This is in addition to the behavioural finance aspect, clients still need to be coached and educated,” he points out. Incidentally, Perera does not see robots making advisers redundant any time soon - only that the demand for their services will be crucial more than ever. Smart advisers who are good at what they do and put the clients front and centre recognise this. To be a truly good adviser in Perera’s eyes comes down to four things. “A great adviser is able to connect with clients, have empathy in getting to know their hopes and goals, and most importantly, in executing their craft taking very complex subject matters and explaining it in simple terms to clients. That to me, is mastery,” he says. He cites RICS founder Russell Collins, a risk specialist and retired financial adviser, who described advisers as being ‘cursed’ with an immense amount of market and product knowledge. “Excellent advisers are those who are able to get into the shoes of their clients, understand their needs and objectives, then transfer their knowledge to clients so that the complex is reduced into the simple,” he says. “Russell Collins says advising is 95% people knowledge and 5% technical knowledge - but you better know 100% of the 5%.”

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gression, steering the AFA as it navigates the peaks and troughs that await in 2022. The Quality of Advice Review, Life Insurance Framework Review, and Compensation of Last Scheme Resort are some of the initiatives on the regulatory agenda that will require his leadership and guidance. “One of the most important jobs that me, Phil Anderson, Marisa Broome and Sarah Abood from the Financial Planning Association of Australia can do is to lead the sector’s perspective and in spite of the challenges, focus on the opportunity. “We need to start to focus on the blue skies that lie ahead and take members and the sector along with us, because I do believe we’re starting to turn the corner,” he says. “We are getting a firm sense of this change as a result of our dealings with ASIC and the legislators and it’s important to the advice sector to understand this. For the first time in many years, the AFA together with the FPA will have an opportunity to get on the front foot with making proactive suggestions to the QAR. This means we will be proactive and not necessarily having to react to legislation.” Financial advisers are poised to have their voices heard and make a meaningful input so that the regulatory pendulum, which has swung far too deeply in the wrong direction, will not do further damage. “What are the things that we can unpick and what intiaitves can we implement to somewhat reset the regulatory framework so that the financial advice sector thrives?” Perera asks. “To me this work will be refreshing. Yes, the sector has its challenges; advisers are leaving; many need to take the exam and so on. I am not oblivious to the significant disruption and turmoil that many advisers have buffered as a result of the regulation burden.” By deeply engaging members and pushing for fairer reforms under Perera’s watch, this might just be the year that advisers finally get a seat at the table. fs

On the front foot Perera has been a member of the Association of Financial Advisers since he joined the sector and became more involved in its efforts when he became part of the policy committee. He took over as vice president in October 2020 shortly after wrapping up 12 months as treasurer. Also last October, Michael Nowak vacated the role of national president and bid farewell to the AFA after five years of service. For Perera, stepping into the role of president was a natural pro-

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The opportunity ahead of us in proactively contributing to what the sector ought to look like in the next decade energises me.

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Insurance:

Bankruptcy, life insurance and superannuation

Best interests duty: Navigating the new income protection landscape

By Alex Koodrin, BT

By Damian Revell, AIA

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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 examines how superannuation interests and life policies—both inside and outside super—are potentially impacted by bankruptcy, and the degrees of protection against creditors. Further, it discusses how legislation and case law decisions interpret ‘divisible property’. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Bankruptcy, life insurance and superannuation

Alex Koodrin

f your client base includes business owners, chances are you have turned your mind to what might happen to their superannuation and proceeds from life insurance policies should their circumstances drastically change, and they become bankrupt. Small firms (employing up to 19 people) account for around 98% of businesses in Australia. Unfortunately, a substantial number of these small enterprises fail. According to the Australian Small Business and Family Enterprise Ombudsman’s Small business counts: small business in the Australian economy report of December 2020, the survival rate of small businesses as measured over the period from June 2015 to June 2019 ranged from 60% (for those with no employees) to 78% (for those with five to 19 employees). Though no one is immune from bankruptcy, self-employed businesspeople, ‘at risk’ professionals (for example, doctors, dentists, lawyers, accountants, architects and engineers) and company directors are particularly vulnerable to lawsuits from disgruntled patients, dissatisfied clients, or vindictive former business partners. Successful litigation against these individuals may send them bankrupt, as can merely mounting a defence against a spurious claim. This paper examines how superannuation interests and life insurance policies are impacted by bankruptcy proceedings. Interestingly, Australia’s bankruptcy law provides certain exemptions, which

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means that proceeds from superannuation and life insurance policies may be protected from claims by creditors. Knowing the ins and outs of the rules around bankruptcy may help financial advisers set up an ownership structure for life insurance policies which can be more appropriate for clients who are among those at high risk of becoming bankrupt due to the nature of their profession or business.

Bankruptcy in Australia The good news is that according to Australian Financial Security Authority (AFSA) statistics for 2020/21, the number of total personal insolvencies in Australia decreased 49.6% in 2020/21 compared to 2019/20. By type of personal insolvency, in 2020/21 there were: • 6792 bankruptcies (a 46.7% decrease) • 3731 debt agreements (a 54.2% decrease) • 89 personal solvency agreements (again, a 46.7% decrease). These figures may seem surprising, given that they were produced in a financial year impacted by a global pandemic. No doubt, government assistance measures and the decision by the banks and Australian Taxation Office not to pursue debt temporarily, contributed to the lower insolvency numbers. It will be interesting to see what insolvency outcomes the end of the current financial year will bring. Individuals who are unable to pay their debts and cannot come to suitable repayment arrangements with their creditors may file a

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voluntary petition to become bankrupt (called a debtor’s petition) with the Official Receiver at AFSA. Creditors can also apply to the court, via a creditor’s petition, to make a person bankrupt if that the person owes them money above a minimum amount, currently $10,000. The court order declaring a debtor bankrupt is called a sequestration order. Once it is made, all property owned by the bankrupt (with some exceptions) comes under the control of the bankruptcy trustee, either the Official Trustee in Bankruptcy (at AFSA) or a registered (private) trustee. Bankruptcy generally lasts for three years and one day, but can be extended under certain circumstances. A personal insolvency agreement (formerly known as a Part X Arrangement) is an alternative to bankruptcy, whereby a person enters into an agreement with their creditors without being made bankrupt. Under section 116(1) of the Bankruptcy Act 1966 (Bankruptcy Act): (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge … is property divisible among the creditors of the bankrupt. The property or assets that the bankruptcy trustee may be able to claim and sell include real estate, vehicles, bank balances, tools and lottery winnings. A vehicle used mainly for transport and tools of trade can be kept, both up to a set amount. The trustee can also claim a portion of after-tax income earned by the bankrupt above a set threshold.

The exemption for superannuation The definition of ‘property’ would normally include superannuation interests and life insurance policies and their proceeds. However, the Bankruptcy Act goes on to provide certain exemptions. Section 116(2) of the Bankruptcy Act excludes the following property (as defined by the Superannuation Industry (Supervision) Act 1993 (SIS Act)): • The bankrupt’s interest in a regulated superannuation fund

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• An approved deposit fund • An exempt public sector superannuation scheme, or • A payment to the bankrupt from such a fund received on or after the date of bankruptcy provided the payment is not a pension within the meaning of the SIS Act. It also excludes the amount of money a bankrupt holds in a Retirement Savings Account (RSA) or a payment to a bankrupt from an RSA received on or after the date of the bankruptcy, provided the payment is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997. Superannuation benefits paid as a pension or annuity do not have the same protection as lump sums because these payments are classified as ‘income’ as opposed to property divisible among creditors. This income is protected from creditors up to a certain legislated limit (updated twice a year), depending on the number of dependants of the bankrupt. The current threshold for a bankrupt with no dependants is $60,515 and increases to $82,300.40 for bankrupts with more than four dependants (all amounts after tax). The bankruptcy trustee is generally entitled to claim 50% of amounts exceeding an individual bankrupt’s threshold. There is no limit as to how much a person can earn while bankrupt. For these reasons, it may be worthwhile for an undischarged bankrupt not to commence superannuation pensions, but to keep superannuation benefits in the accumulation phase and make only lump-sum withdrawals, assuming they meet an appropriate condition of release. Although the federal government has reduced minimum pension payment amounts by 50% for this and the previous two financial years, it would also be prudent for people who are in superannuation pension phase and who are facing bankruptcy to obtain financial planning and legal advice about rolling their pension back into accumulation phase if their minimum payment amounts are above the protected income threshold. Separate provisions of the Bankruptcy Act cover contributions to the trustee of a superannuation fund both by a future bankrupt (section 128B) or by a third party (section 128C) for the benefit of a future bankrupt.

Alex Koodrin, BT Alex Koodrin is senior product manager, advised, life insurance, BT. He has worked in the financial services industry for over 25 years. Previously, Koodrin held several positions with CommInsure and ClearView, including national technical manager, sales and dealership manager, business development manager, and financial adviser with Commonwealth Financial Planning. He has a Bachelor of Arts, a Diploma of Financial Planning and a Diploma of Financial Services.

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These provisions: • allow bankruptcy trustees to recover superannuation contributions made prior to bankruptcy on or after 28 July 2006 with the intention to defeat creditors • apply to any ‘out of character’ transfers which may be outside the normal contribution patterns of members. Based on the preceding discussion, provided there was no intention to defeat creditors, term life and total and permanent disability (TPD) insurance proceeds from policies held inside superannuation would also not be subject to a claim by a bankrupt’s creditors. As for protection against bankruptcy for income protection or salary continuance policies, the question would hinge on whether a temporary incapacity payment by a superannuation fund would constitute a pension under SIS or under common law. While it is highly unlikely that such a payment would be pension under SIS law, it is strongly arguable that any regular payment from a superannuation fund is a pension at common law, and therefore accessible by creditors, subject to income thresholds. However, see also the outcome of a 2016 court case discussed in the next section.

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Bankrupt beneficiaries While it is clear that the superannuation interest of an undischarged bankrupt is not divisible property among creditors, two recent legal cases considered whether lump-sum death benefit payments were accessible to creditors if received by a bankrupt beneficiary. In Morris v Morris [2016] FCA 846, a bankrupt widow received various death benefit payments from her late husband’s superannuation funds via the exercise of the fund trustee’s discretion to pay death benefits in her favour. The widow’s bankruptcy trustee argued that the payments were divisible among her creditors as they did not qualify for the exemptions in section 116(2) of the Bankruptcy Act because the interest in the superannuation funds was the late husband’s and not hers. The court decided that the widow’s interest in the superannuation funds was created the moment the trustees exercised their discretion in her favour, thereby satisfying section 116(2)(d)(iii)(A) and exempting the property from being divisible among creditors. Further, the court decided that section 116(2)(d)(iv) was also satisfied, as the widow received payments from the superannuation funds directly after the date of bankruptcy and it was not a pension. In Cunningham v Gapes [2017] FCA 787, the wife of a bankrupt received a distribution from the bankrupt’s deceased mother’s estate via the latter’s Will, because the bankrupt did not have a bank account in his name. The distribution came from death benefits initially paid from the deceased mother’s superannuation fund to her estate and directed to her bankrupt son via her Will. The bankruptcy trustee argued that unlike the situation in Morris v Morris, the bankrupt did not have an interest in his mother’s superannuation fund, and that the payment was not received from the fund but from the deceased mother’s estate. The court, in a summary judgment, agreed with the trustee in bankruptcy. It held that the bankrupt did not have an interest in the superannuation fund and only received the monies because he was a residuary beneficiary in his mother’s Will. These cases hinge on superannuation death benefit payments. A superannuation fund member may choose to make death benefit nominations or not. If they do, and subject to the superannuation fund trust deed and governing rules, superannuation death benefit nominations can be either non-binding or binding death benefit nominations (BDBN). Under non-binding nominations, the superannuation fund member provides guidance to the fund trustee about how they would like their death benefits distributed to beneficiaries, but ultimate discretion rests with the trustee, in consideration of the member’s relationships at time of death. A BDBN, however, is binding on the trustee, provided it nominates either SIS Act dependants at the time of death or the deceased’s legal personal representative (LPR), the superannuation fund trust deed allows BDBNs, and that certain documentary requirements are met. BDBNs may be lapsing or non-lapsing. Lapsing BDBNs generally cease after three years and need to be renewed, whereas non-lapsing BDBNs are effective unless changed or cancelled by the member or are invalid due to nominees no longer being SIS Act dependants or due to procedural deficiencies (for instance, signed or witnessed incorrectly). Based on the aforementioned legal cases, there are degrees of bankruptcy protection available when lump-sum superannuation

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death benefits are directed to intended dependent beneficiaries. Given that many of the trust deeds of retail, industry or corporate superannuation funds have default payments to a deceased’s LPR if a binding nomination has lapsed, or if the superannuation fund trustee decides to pay the death benefit to the deceased’s LPR where there is a non-binding nomination, it would be prudent to consider making a non-lapsing BDBN in favour of intended beneficiaries. Provided it is regularly reviewed to align with the member’s testamentary wishes and is directed to SIS Act dependants, a non-lapsing BDBN would likely ensure potentially bankrupt beneficiaries receive death benefits protected against creditors.

The exemption for ordinary (non-superannuation) life insurance policies Section 116(2) of the Bankruptcy Act also exempts from section 116(1) the following property: (i) policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt (ii) the proceeds of such policies received on or after the date of bankruptcy. It is important to note that the exemption of life insurance (or life assurance) policies is based on the common law definition of life insurance expressed by the High Court in National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1959) 102 CLR 29, and NM Superannuation Pty Ltd v Young (1993) FCR 182; not the definition in the Life Insurance Act 1995 (Life Insurance Act). There is a longstanding discrepancy between the Bankruptcy and Life Insurance Acts as to what constitutes a policy of life insurance or life assurance. The Bankruptcy Act refers to ‘life insurance’ once, in section 139L, in respect of the meaning of ‘income’ and refers to ‘life assurance’ four times, with regard to property divisible among creditors in sections 116 and 249. Therefore, life policies under the Life Insurance Act, such as TPD and trauma insurance, may not equate to a life insurance policy at common law and may not be exempt from being property divisible amongst a bankrupt’s creditors under section 116(2). A policy of life assurance includes a term life policy and, following various stamp duty legal cases, most likely, TPD or trauma policies that are riders (additional insurance cover attached to a term life policy), as defined in the various duties legislation in Australian states and territories. These riders are unlikely to be considered property divisible among the creditors of a bankrupt. If the proceeds of these policies are received on or after the date of bankruptcy, the proceeds are likely also not divisible amongst the creditors of the bankrupt. Until recently, standalone TPD and trauma cover and income protection cover have not been considered life insurance at common law, and therefore not excluded from being property divisible among creditors of a bankrupt. Any income protection policies owned by a bankrupt would have been subject to the prevailing legislated income threshold.

Berryman v Zurich Australia The decision by the Supreme Court of Western Australia in Berryman v Zurich Australia Ltd [2016] WASC 196 held that a bankrupt’s entitlement to claim a TPD benefit under a life insurance policy is not an entitlement that is divisible among the bankrupt’s creditors and therefore does not vest in the Official Trustee in Bankruptcy.

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Mr Berryman was a self-employed carpenter who took out insurance and suffered an accident at work on 7 July 2009, when a large granite rock crushed his foot. On 16 November 2009, he made a claim under his Protection Plus policy with Zurich, which commenced on 17 June 2009, for the payment of a TPD benefit of $2 million, which was subsequently declined. On 29 August 2014, Mr Berryman commenced an action for damages against Zurich for breach of contract in the sum of $2 million. He was declared bankrupt on 31 August 2015. The judge, Justice Tottle, held that the TPD claim fell within sections 60(4) and 116(2)(g) of the Bankruptcy Act. Section 60(4) preserves the right of a bankrupt to continue with an action in respect of the rights specified in section 116(2)(g). Section 60(4) states: Notwithstanding anything contained in this section, a bankrupt may continue in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of: (a) any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner or a member of his or her family; or (b) the death of his or her spouse or de facto partner or of a member of his or her family. Section 116(2)(g), on the other hand, excludes from property divisible amongst the creditors of a bankrupt: any right of the bankrupt to recover damages or compensation: (i) for personal injury or wrong done to the bankrupt, the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt, or ii) in respect of the death of the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt … His Honour examined case law where courts had separated rights relating to injuries to the bankrupt’s reputation or feelings, excluded from the bankruptcy trustee in section 116, and those connected with losses to their property and financial interests, which vested in the trustee. Justice Tottle considered that with regard to the law of bankruptcy, the TPD claim should be characterised as a claim for compensation for a personal injury or wrong which was not part of the legitimate entitlements of creditors. It will be interesting to see if this issue is elevated to an appellate court where section 116(2)(g) is considered. Though only a decision of a single judge, the decision appears clear authority for the proposition that TPD policies and benefits— and by extension—income protection or trauma policy benefits, are excluded from a bankrupt’s divisible property; something that had not previously been determined by the Australian courts.

Ownership by spouses or partners Notably, it may be worthwhile for individuals who are generally at greater risk of being sued by potential creditors to consider having their spouses or de facto partners own TPD and trauma policies on the lives of the persons at risk, thus ensuring that any policy proceeds would be protected, regardless of bankruptcy. However, this ownership structure has inherent risks, namely that in the event of relationship breakdown, there may be issues for insured persons in lodging a claim or accessing claim payments as they are not the policyowner.

Summary Depending on the circumstances, superannuation interests and benefits, as well as life insurance policies—both inside and outside super-

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annuation—and their proceeds may afford protection for bankrupts against claims by creditors. For superannuation interests, it is important for members to consider death benefit nominations to potentially bankrupt beneficiaries. For non-superannuation insurance policies, the timing of the claim may be crucial to ensure that policy proceeds are received on or after the date of bankruptcy of the insured policyowner. In the coming months, some businesses may thrive as COVID-19 restrictions are expected to continue to be lifted, while others might still suffer and shutter permanently. Similarly, some individuals might reap the benefits from a job market that favours workers, while

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others may find themselves out of work, especially if their employer becomes insolvent. People’s fortunes may be mixed, depending on how new virus variants impact economies and markets. It is important to keep in mind, on a more general note, that clients facing financial difficulty can access support from financial institutions, including relief from loan repayments and pausing payments for life insurance premiums. fs The above is general information only and should not be relied on in providing financial advice. Independent tax and legal advice should be sought.

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. The Berryman v Zurich judgment determined that a TPD claim: a) was outside the Bankruptcy Act’s scope in terms of directions b) fell within the legitimate entitlements of creditors c) fell outside the legitimate entitlements of creditors d) w as nullified by the Bankruptcy Act if the injured party became bankrupt post-claim 2. The rationale behind the Cunningham v Gapes judgment was that the bankrupt: a) had an interest in the superannuation fund, regardless of the payment being received from the deceased’s estate b) did not have an interest in the superannuation fund, as the payment was received from the deceased’s estate c) had an interest in the superannuation fund, as the payment was made directly into their bank account, not via the deceased’s Will d) d id not have an interest in the superannuation fund, as the payment was made directly into their bank account, not via the deceased’s Will 3. Superannuation benefits paid as a pension are classified as ‘income’, thus have lesser protection from creditors than lump sums. a) True b) False

4. What did the Morris v Morris judgment find regarding superannuation funds and lump-sum death benefits? a) Payments were divisible property because the interest in the funds was the late husband’s b) Payments were received directly from the superannuation funds after the bankruptcy date, thus were a pension. c) The widow’s interest was created when the trustees exercised discretion in her favour d) None of the above 5. W hich of the following statements regarding the definitions of, and approach to, ‘life insurance’ and ‘life assurance’ policies is correct? a) The Bankruptcy Act is silent on whether policies of endowment insurance are exempt b) The Life Insurance Act uses the common law definition of ‘life insurance’ c) The Bankruptcy and Life Insurance Acts concur on these definitions d) The Bankruptcy and Life Insurance Acts diverge on these definitions 6. T he author thinks it unlikely a non-lapsing BDBN will add protection to a bankrupt’s death benefits from creditors. a) True b) False

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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 new income protection (IP) product requirements of 1 October 2021 ramp up best interests duty pressure on advisers to ensure affordable cover in light of premium increases and changes in clients’ health over time. Legacy IP policies add a further challenge. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Best interests duty: Navigating the new income protection landscape

W Damian Revell

ith the new income protection (IP) product requirements that came into effect from 1 October 2021, there are key considerations that may affect the approach advisers choose to take. Balancing clients’ best interests obligations against a changed IP product landscape and regulatory environment, here are a few things advisers should consider:

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1. Addressing long-term affordability concerns. 2. Recommending a sustainable insurance strategy aligned to the client’s needs. 3. The implications for IP advice already entered in to either as agreed value (up to 31 March 2020) or comprehensive indemnity policies prior to 1 October 2021. How an adviser addresses these considerations may be dictated by the adviser’s insurance philosophy and the client’s circumstances at the time of the initial advice process or at a regular review of their insurance needs.

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Addressing long-term affordability concerns

Damian Revell, AIA

Damian Revell is a technical manager at AIA Australia. He has over 23 years’ experience in financial services, including over 10 years in technical services. Revell is passionate about helping financial advisers provide quality advice and has extensive experience in superannuation, taxation, insurance, and social security.

Under the ‘best interests duty’, an adviser must balance the obligation to ensure that the client can not only afford the premiums today, but in future years. Placing a client into an IP policy where they are price sensitive or have concerns about the initial premium, puts an adviser’s obligation and the long-term affordability of the IP policy for the client at risk. It is therefore extremely important that attention be given to cumulative premiums, even if only using five-year cumulative premiums as a base case scenario. Additionally, alternative funding means may need to be identified in the event of temporary illness and potential out-of-pocket medical expenses. These may include: • accrued leave entitlements • cash reserves • existing IP group cover or salary continuance inside superannuation • private health insurance that the client may already have. These alternative funding mechanisms and the insurance philosophy an adviser applies may have a bearing on the waiting period and term of the IP policy recommended under the advice.

Recommending a sustainable insurance strategy With advisers having a legal obligation to act in the best interests of clients in recommending affordable IP policies now and into the future, a recommendation for an IP contract that is liberated from the pricing pressure points of the past must be considered.

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When looking across the existing product spectrum, at the top end there are IP contracts that fundamentally look and feel like the old-world contracts of the past. At the low to middle end of the spectrum, IP contracts have more limited terms and conditions with robust controls to manage the risks associated with long-term claims. Advisers are asking, ‘Where is the middle ground that produces meaningful client outcomes while ensuring the product’s sustainability?’ An example of a neat middle-ground solution that advisers are seemingly receptive to, is via the use of two retail AIA IP contracts, colloquially referred to as ‘2+2 Split IP’. The first IP policy has a shorter 30-day waiting period coupled with a two-year benefit period. The second IP policy has a two-year waiting period coupled with a benefit period through to age 65. If structured this way, and the client suffers from a temporary disablement, they are effectively entitled to receive a monthly insured benefit that replaces up to 70% of their pre-disablement income based on an own occupation definition of disablement for the entire initial four years on claim. If the client remains on claim at the end of the fourth year, then the controls built into the contract have the effect of replacing up to 60% of their pre-disablement income on a ‘suited occupation’ definition of disablement for the remainder of the benefit period (for instance, through to age 65). When coupled with TPD/ Crisis, suddenly it is possible to create multiple lines of defence to control for those outlier clients that may remain on IP claim for an extended period. How this strategy is arrived at and maintained may be determined by a client’s age, occupation, current

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health status, and cash flow now and in the immediate future. A combination of IP and lump sum cover can help manage premiums costs and provide a meaningful injection of capital to supplement the monthly benefit from a next-generation IP policy. As a part of the advice process, it is critical that the insurance philosophy behind the strategy is clearly communicated to the client and that the strategy is subject to regular review to determine the appropriate sums insured and there are no changes to the client’s occupation and financials. Indeed, the Australian Securities and Investments Commission’s Report 413 Review of retail life insurance advice (REP 413) states the need to “carefully consider how long the client wants to hold insurance, along with careful consideration of the client’s current and any foreseeable future health challenges”, while the Financial Adviser Standards and Ethics Authority’s Code of Ethics Standard 2 states “the products and services you recommend—are appropriate to meet the client’s objectives … taking into account … likely future circumstances”. If there are concerns about the ongoing susceptibility of an IP product to future ad-hoc out-of-cycle rate rises, perhaps because the terms and conditions of that IP policy look and feel like the oldworld IP policies of the past, then arguably the requirements stemming from REP 413 and Standard 2 are at risk of not being met. If pricing pressures do subsequently emerge within these quasiold world IP policies, any subsequent attempt to provide replacement product advice may be unworkable or prohibitive due to a deterioration in the client’s underlying health condition.

The implications for ongoing advice for preOctober 2021 IP policies With existing grandfathered IP policies either as agreed value (taken out up to 31 March 2020) or indemnity (taken out prior

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to 1 October 2021), the obligations of the best interests duty still fall upon ongoing advice to ensure the client’s affordability and circumstances justify the retention of these policies in their best interest. This area of advice becomes complex as, foreseeably, these grandfathered legacy policies may well have less-restrictive terms and conditions. However, that may be traded off by persisting pricing pressures on top of the conventional stepped premium increases borne by the client. These legacy contracts could be retained, albeit with refinements to waiting and benefit periods, to alleviate any pricing pressures that may be materialising going forward. Under these circumstances, and at any time of ongoing review, advisers need to balance their best interests duty where clients have an affordability issue against the recommendation of sustainable IP policies and a stepping-stone strategy encompassing lump sum cover.

Final thoughts While the IP product landscape from 1 October 2021 has resulted in new products with modified features, the value of comprehensive risk advice remains critical and has impacted advisers’ recommendations and how they talk to their clients, whether they be existing legacy IP policyholders, or clients requiring advice around the acquisition of a next-generation IP contract. Arguably, it has never been so important for IP advice and resulting recommendations to be sustainable and liberated from the pricing volatility of the past. fs Copyright © 2022 AIA Australia Limited (ABN 79 004 837 861 AFSL 230043). This is general information only, without taking into account factors like the objectives, financial situation, needs or personal circumstances of any individual and is not intended to be financial, legal, tax, medical, nutritional, health, fitness or other advice. AIA Australia has prepared a Target Market Determination which describes the class of consumers that comprise the target market for this product. The Target Market Determination can be sourced at aia.com.au/tmds

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. What conclusion does the author draw regarding IP policies and related advice complying with the best interests duty? a) Advisers must balance the obligation to ensure products are affordable today and in future years b) Comprehensive risk advice has become less critical postOctober 2021 c) There has been a lack of new products with modified features post-1 October 2021 d) A dvisers’ insurance philosophies have often impeded their best interests obligations 2. What observation does the author make in terms of future IP viability? a) IP advice and recommendations need to be freed from past pricing volatility b) Combining IP policies of different terms and conditions can improve client outcomes and product sustainability c) Alternative funding such as accrued leave or private health cover may be required to tide clients over d) A ll of the above 3. The author believes advisers should pay heed to cumulative premiums when recommending IP policies. a) True b) False

4. In terms of replacement IP strategies, what factor(s) come into play for advisers to meet the regulatory standards? a) The term over which a client wishes to hold a policy b) Any foreseeable changes in a client’s health c) Policy susceptibility to future premium increases d) A ll of the above 5. What does the author highlight in relation to grandfathered legacy IP policies? a) They are outside the best interests duty in terms of advisers justifying policy retention b) A potential trade-off between ongoing pricing pressure and less-restrictive terms and conditions c) If retained, there is no scope to adjust waiting and benefit periods, to address any pricing pressures d) P re-31 March 2020 policies essentially escape pricing pressures and stepped premium increases 6. T he author suggests ‘next-generation’ IP policy costs can be managed by segregating IP and lump sum cover. a) True

b) False

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Applied Financial Planning:

Leveraging expertise to expand your value proposition

Strategic planning and middlemarket businesses: Advisers take a seat at the table

By Ray Miles and Neil Younger, Fortnum Private Wealth

By Michael Dundas, Pitcher 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: Today’s ‘no-free-ride’ market environment along with greater client and regulatory expectations mean advisers must make their wealth-protection offerings and fee justifications more compelling. Having the right capacity, capability, systems and processes can help achieve these outcomes. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Leveraging expertise to expand your value proposition

Ray Miles and Neil Younger

his paper comprises an excerpt from Fortnum Private Wealth’s The inevitable advice journey: Where professional advisory firms are set to land report. The report found that the majority of advice businesses are not yet achieving their full potential and are vulnerable, despite having a compelling value proposition and robust systems and processes, because they are not scalable and lack a clear strategy to get to scale. It also identified the critical ingredients needed to build an advice business of significant economic value, and outlined the path advisers need to take to bulk up, reduce their vulnerability to external shocks and significantly enhance their capital value.

Considerations for a better value proposition No matter how compelling and competitive a business’s value proposition, it will still need support to ensure the efficient, if not excellent, execution of that service. Here are some key observations. A compelling value proposition is the cornerstone of business success. When evolving your value proposition, there are two critical aspects to consider: 1. Share of wallet—the broader your value proposition, the greater relevance your service has to a client.

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2. Depth of value—value cannot be superficial. It must be supported by evidence of capability, continuous improvement and superior outcomes. Where both these elements exist, businesses perform strongly. Not only do advisers need to articulate and demonstrate the value they deliver to clients, they must also be prepared to prove the effectiveness of their philosophy, processes and systems if requested by the regulator. This is particularly important in relation to investment advice, given 84% of financial advisers spend the majority of their time providing strategic advice on superannuation and investments, according to the 2020 Investment Trends Planner Risk Report, based on based on a survey of 524 financial planners. As such, a critical component of any professional advice business is the capability and capacity to provide an effective, compliant investment advice solution. This is especially pertinent, given the federal government’s focus is likely to shift to strategic investment advice, once it has completed its Quality of Advice and Life Insurance Framework review. This is likely to coincide with the inevitable end of Australia’s near-three-decade record run of economic prosperity and the retirement of millions of Baby Boomers. Advisers should prepare for hard questions about their approach to managing other people’s money. They must be able to articulate and demonstrate the robustness of their investment philosophy,

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processes and performance including how they build and customise portfolios, how they manage risk and how they monitor and measure ongoing performance. For some advisers, luck has undoubtedly played a significant role in their success to date. Critically, this represents a major risk going forward. For the past 20 years, Australian equities, which make up roughly 21% of the average MySuper fund, have returned over 8% p.a. Over the past decade, global equities, which represent 29% of the average MySuper fund, have delivered 8.6% p.a. (see Figure 1). Performance attribution analysis of the average advised portfolio would probably reveal that market movement (not skill), generated the bulk of returns. A rising tide lifts all boats. This is not to discount the importance of diversification and asset allocation, which one study (Brinson, Singer & Beebower 1991, ‘Determinants of Portfolio Performance II: An Update’) suggests accounts for more than 91.5% of a portfolio’s return. However, it questions if strategic asset allocation or—for that matter—stock and manager selection and market timing are part of the strategic advice proposition. In most cases, these are inputs into the investment process.

A structured approach There is no standard approach to managing superannua-

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tion and investments in the financial planning industry. Every practice does things differently. Some rely heavily on research and recommendations from their licensee to construct portfolios. Some have developed their own rules and systems to manage money. Others adopt a laissez-faire approach. In some cases, there are no formal processes and written manuals, but rather information exists only in the head of a practice principal or employee. When it comes to managing other people’s money and being a profession, this approach is unacceptable. It does not pass any test. A key benefit of belonging to a licensee is the investment support available. This support takes four key forms, namely: 1) guidance on asset allocation 2) investment product research (for managed funds and shares etc.) 3) approved product lists (APLs) 4) model portfolios, which advisers can replicate, reject completely or cherry-pick what they like. As long as advisers operate within the prescribed asset allocation and APL boundaries, they are more or less left to provide strategic investment advice as they see fit. This statement does not imply judgment, but honest assessment. This traditional approach is under pressure for two main reasons outlined in the following discussion.

Ray Miles, Fortnum Private Wealth Ray Miles is founder and director of Fortnum Financial Group. He commenced his career with MLC and moved to Aetna Life & Casualty as general manager, sales. In 1989, he founded Associated Planners, now Genesys Wealth Advisers.

Figure 1. Share price accumulation indices

Neil Younger, Fortnum Private Wealth

Source: Bloomberg; Reserve Bank of Australia

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Neil Younger is the group chief executive and managing director of Fortnum Private Wealth. He has over 30 years’ financial services and wealth management experience, including senior roles at ANZ, CBA and BT.

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1. Global economic uncertainty and political unrest exacerbated by COVID-19 The quote

The strong historical performance of Australian equities and property has masked loose investment processes inside some advice practices.

The strong historical performance of Australian equities and property has masked loose investment processes inside some advice practices. It is against a future outlook of subdued economic growth, extreme market volatility and prolonged ultralow interest rates (see Figure 2) that advisers will need to demonstrate their worth and justify their fees. 2. Greater focus on the value of advice

The shift to fees paid directly by the client is placing greater emphasis on value for money. It is more important than ever for advisers to refine their value proposition and be clear about the servicesthey do and do not provide. For example, it might be tempting to take credit for asset allocation in the good times, but consistently picking the best-performing asset classes is very difficult. Advisers must accurately represent their services—after all, they are not fund managers or asset consultants. They do not set asset allocation targets, conduct indepth manager and stock research or actively trade. Advisers provide personal strategic advice. As part of their role, they leverage external insights and inputs to construct customised portfolios to meet a client’s unique needs, objectives and risk appetite. As such, the performance benchmarks that some advisers use are not conventional, but they still need to be relevant. This is necessary for demonstrating that strict governance and risk management controls are in place.

Figure 2. Australian cash rate target

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Too many advisers use outdated benchmarks that do not pass the ‘pub test’. For example, if CPI plus 2% is their benchmark and they delivered CPI plus 4%, they may believe they outperformed even if the rest of the market delivered CPI plus 7% for the same level of risk and fees. This is fraught with danger for all involved. If the biggest indictment on the industry to date has been fees-for-no-service, then the next big test for advisers will be demonstrating value for service in their investment proposition, especially if clients are being charged separately for that service.

Building an effective, robust and compliant advice investment service The focus of regulatory and consumer action to date has been on the quality and appropriateness of advice rather than value for service. In the face of imminent harsher market conditions, advisers will need to demonstrate value for money. With the comfortable retirement of millions of Australians at stake, this will not be a routine exercise. Advisers may be called on by the Australian Securities and Investments Commission to produce hard evidence of their ability to provide high quality investment services to retail clients. This will likely include appropriate qualifications and experience, documented processes, efficient systems, and formal risk management and governance controls. A practice may not have proof of such things readily available. The most effective way to satisfy these critical responsibilities is to formally engage the required expertise— be that an internal resource, external asset consultant or support from an experienced licensee.

Three critical features regulators expect to see If and when the appointed time comes, there are three must-haves for advice businesses. 1. Customised advice and solutions

Source: Reserve Bank of Australia

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The biggest problem with Storm Financial was that every client got the same solution. They all received the investment equivalent of Panadol, regardless of their needs, circumstances and objectives, not to mention point-intime asset valuations and market conditions. Similarly, the main criticism of the vertically integrated model is that it revolves around products rather than clients. Both these roads lead to an in-house product sales construct (whether by design or inadvertently). Despite it being more than a decade on, the memory of Storm Financial is still fresh in the regulator’s mind, so it will be compelled to look for evidence of thoughtful, bespoke advice in each and every client situation. It wants to see advisers acting as fiduciaries because that leaves no room for predetermined outcomes. There is also no appetite for arbitrary fees. In the past,

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it may have been okay for practices to have a medley of active and inactive clients with some, for instance, paying $6000 and others paying $1000 but everyone more or less receiving the same homogenous solution. Commercially, and also from a regulatory perspective, there must now be greater alignment between a practice’s value proposition and the fees charged. It is an adviser’s fundamental duty to understand a client’s unique needs, circumstances and goals. Then, based on that information, customise solutions to maximise the probability of them achieving their agreed goals. 2. An efficient execution model

While advisers should be guided by a consistent investment philosophy and steadfast principles, personal advice starts with the individual. Advisers need to be able to articulate their philosophy, systems and processes, evidence their veracity and demonstrate how it meets clients’ best interests. Advisers need a model that can accommodate a client’s personal preferences even if they conflict with their own. For example, investors may want to bring existing funds, assets and insurances with them. If they use a particular administration platform or do not want to use a platform at all, flexibility in solutions would be required to satisfy their needs. Advisers need a model that can facilitate efficient access to a broad range of direct and managed options; capture timely investment opportunities; adjust portfolios as required; dump and replace underperforming managers; and continuously track, measure and report performance. They need to be able to do this across multiple clients without any administrative delays as they progress through the advice process.

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3. Requisite scale or the potential to achieve requisite scale

Value and price are inextricably linked. Theoretically, the higher the fee, the greater the value add. Importantly, the underlying cost for advisers to service clients is rising, due largely to mounting compliance requirements and the end of passive income streams. Practice profitability is under growing pressure. Many advisers have been forced to increase fees. However, in a post-Hayne world, pulling that lever requires advisers to justify their fees and demonstrate a commensurate increase in value. A business with scale is in a stronger position to manage costs, meet their compliance obligations and keep fees steady than a small practice. As such, the regulator will want to see profitable, scalable businesses or at least businesses on the right trajectory. After all, quality bespoke advice and effective systems are irrelevant if businesses are not around to fulfil their obligations to clients, staff and other stakeholders. To secure these three critical elements, advisers need not ‘reinvent the wheel’. A licensee with the requisite capability and capacity can assist advisers to establish, articulate and execute investment advice services for the benefit of clients.

Wealth protection observations The pioneers of financial planning in Australia started out as passionate life agents. This industry is built on a legacy of life insurance sales yet, for the past decade, advisers have been distancing themselves from risk advice. Wealth protection is becoming a smaller and smaller part of their value proposition. In 2020, risk-related revenue represented less than a quarter of the average practice’s income compared with 32% in 2012, according to the 2020 Investment Trends Planner Risk Report.

Figure 3. Australian real gross domestic product

Source: Australian Bureau of Statistics

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Why do the authors recommend that advisers belong to a licensee? a) Greater access to research b) The use of APLs and associated boundaries c) The flexibility of model portfolios d) All of the above 2. As highlighted by the authors, what overarching challenge do today’s advisers face? a) Outsourcing fiduciary duties b) Demonstrating value for money c) Standardising advice solutions d) Adopting strategic asset allocations 3. The authors believe that the overall decline in advisers’ life-insurance-related revenue is a result of: a) the rising cost and complexity of delivering risk advice b) a growing focus on superannuation and investment platforms c) an increase in product-related and premium costs d) All of the above 4. What do the authors see as one of the key elements to help make life-insurance advice viable? a) Avoid clients with potentially problematic issues b) Widen its scope to include estate planning c) Concentrate solely on products d) Stick to simple advice solutions 5. The authors assert that some advisers have achieved most of their returns from market movements, not skill. a) True b) False 6. A SIC has relieved advisers from having to prove the effectiveness of their philosophy, processes and systems. 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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The report found that only 16% of advisers were considered risk specialists (those who derived 50% of more of their revenue from risk), 47% were risk generalists (those who generated 20-49% of their revenue from risk) and the rest were considered superannuation and investment specialists. This dilemma has come about for a number of reasons, namely: • the rising cost and complexity of delivering risk advice • a greater focus on superannuation and investment platforms • falling commission rates and the unwillingness of consumers to pay a fee for insurance advice • higher product-related costs and premium increases • poor underwriting and claims experiences. The culmination of these factors has put risk advice in the ‘toohard basket’, even though adequate life insurance is the foundation of prudent wealth management. The question then is how can advisers offer a compelling risk advice proposition and execute it efficiently. Based on Fortnum Private Wealth’s observations, the businesses that are doing this well offer advice on life insurance as part of a broader end-to-end wealth protection strategy that encompasses estate planning. Given households come in all different shapes and sizes, of which the traditional nuclear family is increasingly rare, specialist advice on estate planning and life insurance is critically important. Add to the mix Australia’s impending intergenerational wealth transfer, and the need for advisers who can connect the dots can add considerable value by foreshadowing the likely outcome of poor planning, addressing key concerns, developing and implementing a wealth protection strategy and saving their clients stress, pain and money. Since the inception of Australia’s life insurance industry, people’s lives have become more complicated. Second and third marriages are increasingly common, as is mental illness. When looking after a client’s estate planning needs, advisers must manage difficult, sometimes messy, situations such as children who are alcoholics, have a gambling addiction and live under the constant threat of divorce. Increasingly complex lives requires more sophisticated advice solutions. A dynamic proposition that changes as a person’s circumstances and needs change, and considers a person’s life insurance needs in the context of their broader wealth management and wealth protection needs, is necessary. Life insurance advice is still critical, but it has to go beyond simply facilitating access to the right products. While investment specialists are often perceived as more sophisticated advisers, life insurance is one of the most complicated aspects of financial planning. There are so many possible scenarios and preferences that need to be explored, and life insurance products are complex with many variables and moving parts. Addressing issues properly elongates the advice process and adds to the cost. Licensees can help their risk specialists and risk generalists deliver advice more cost effectively by creating efficiencies. That means investing in technology to automate manual, repetitive processes and speed up processing times. 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: COVID-19 was a catalyst for middle-market businesses expanding their strategic planning. Those that engaged professional advice reaped the benefits of new viewpoints, better decisions, a clearer future, and improved performance in uncertain times. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Strategic planning and middle-market businesses Advisers take a seat at the table

T Michael Dundas

his paper examines the relatively recent wave of business strategic planning triggered by the COVID-19 pandemic, and which could deliver favourable returns for many years, as businesses sought external advice and formalised planning—often for the first time. It draws on Pitcher Partners’ 2021 Business Radar Report: Understanding the businesses that drive Australia’s economy. The report found that COVID-19 drove middle-market businesses (that is, those with annual revenue of between $2 million and $500 million) to expand the scope of their strategic planning, with the results linked to improved performance and confidence. The report was based on a survey of more than 400 Australian middle-market businesses conducted with strategic growth consultancy Forethought. In terms of respondents and the role of strategic planning, the report found that: • 44% said the pandemic had led them to make more frequent updates to their strategic plans • 40% increased the frequency of short-term planning • 37% increased the frequency of long-term planning • 28.5% were more willing to engage expert professional advice.

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Macroeconomic shifts make their presence felt The global pandemic encouraged businesses to reconsider the impact of macroenvironmental shifts on their performance. Upon the closing of borders and the consequential slowing of trade, many businesses were forced to re-evaluate their reliance on one export market or a supply chain focused on one destination, with it being more apparent than ever that this was no longer a viable option if they wanted to thrive in the future. Prior to the pandemic, one in three businesses said they ignored macroenvironmental shifts in their planning processes although this has since fallen to one in five. Now, a third of businesses said that they focused strongly on the potential impact of wider issues and megatrends, with 30% engaging expert advice to better prepare for possible macroeconomic shifts and ways that they can take advantage of new markets, and opportunities that arise as a result.

The benefits of advice Unexpected positives in uncertain times

While the drive for improved strategy was enlivened during COVID-19 crisis, the long-term benefit of better planning is already clear. In what was a surprising finding, 40% of middle-market businesses reported that COVID-19 had a positive impact on their business, and 16% a very positive impact.

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Applied Financial Planning

Michael Dundas, Pitcher Partners

Michael Dundas is a partner at Pitcher Partners, Sydney. He provides structuring and strategic advice to private family groups, mediumto-large private businesses and large proprietary companies to help improve and strengthen operations through effective tax structuring, succession planning, and advisory support.

Those who experienced the most positive effects were significantly more likely to have a formal short-tomid-term strategic plan in place, resulting in the business being in a far stronger position to recalibrate to the challenges presented by COVID-19. They were also more likely to involve a professional adviser in strategic planning and to have boosted that engagement since COVID-19 began. Engaging expert advice helps ensure a level of objectivity in decision-making, with a financial expert bringing a broader understanding and expertise around businesses, industries, and macroeconomic factors. Those who sought professional financial advice reaped the benefit of non-bias in their decision-making process which many business leaders have found difficult to achieve. This is a prominent issue within family business structures, with two in five family business owners recognising that the influence of family distorted their decision-making, resulting in poor judgments.

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With the support of financial experts, leaders found new confidence in their business. Further, they were able to successfully navigate unforeseen challenges while simultaneously continuing to plan and execute strategic decisions in favour of the business, rather than failing to form or action plans due to family conflict or bias.

A main area of contention was the distinct difference between the way the old- and the new-generation leaders believed the business should be run, with the new leaders having a more advanced and open-minded view towards taking advantage of business opportunities compared with the previous generation that was more hesitant towards change. Fortunately, by the time the pandemic hit, the business had already established an advisory board and structured recurring meetings where participants had become accustomed to sharing their views and exploring the value propositions of various ideas openly. While the advisory structure did not appear to be delivering tangible value in the first 18 months, when the pandemic hit, there was sufficient progress in taking different opinions into account that the business was much better prepared to identify any crisis at hand. From this, it was able to commit to a plan of action quickly and change its direction if need be—something that would have previously been too daunting and too difficult to complete. As a result, the business was able to redesign its service model—a task that without the advisory board would have been near impossible. The redesign had a positive impact on the business, contributing to a large increase in sales and profit margins, despite it occurring in the middle of a pandemic.

New leaders, new structures, new viewpoints

The many dimensions of advice

A recent example of this involved a middle-market family business that was experiencing difficulties during the transition of leadership from first-generation owners to its second-generation leaders.

Sharing the burden

Navigating the unknown

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Many business leaders suffer from professional loneliness as they hold the burden of either not feeling as though they have peers to turn to for advice on critical

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decisions, or from fear of judgment, shame or lack of understanding from their confidants. However, those who formed strong professional relationships with their advisers benefited from having a trusted person from whom they could seek advice and act as a sounding board to share their ideas and seek solutions regarding their concerns. By having an adviser with whom to consult, business leaders are better placed to make sound decisions based off facts, rather than emotions. Challenging the familiar

An example of this was with a heavy industries client who had established an advisory board and sat in on its quarterly advisory meetings. Despite the advisers of the board having limited technical understanding of the business, this did not hinder the ability of the advisory board to support the business leader in making confident business decisions. The majority owner of the business said that it was not important for the board to completely understand every element of the business straight away. “I didn’t need them for that because that is where I am strong. The value they brought was giving me a forum to talk about what is on my mind, with a group of people with the professional skills to challenge, engage and help me process the questions that I didn’t have an answer to. This has been invaluable,” the majority owner said. This statement echoes the importance of having advisers, with their knowledge and experience, as an invaluable resource to support, guide and challenge business owners in ways previously unexplored.

Applied Financial Planning

Strength through strategy The message that can be drawn from the report is that despite all the challenges caused by the pandemic over the past two years, businesses that utilised trusted advisers and had the discipline to consider their medium-term strategic plans on a recurring basis, tended to emerge stronger. Businesses that became more strategic throughout the pandemic reported improvements on a range of measures. They were less likely to report a fall in revenue and were better equipped to take advantage of opportunities. Although all strategic planning delivered benefits, businesses with mid-to-long-term plans were more likely to identify opportunities arising from of the pandemic including: • increased flexibility (30.9% were mid-to-long-term planners compared with 14.1% of other businesses) • improvements in work-life balance (28.9% versus 10.6%) • cost reductions (28.7% versus 15.3%) • improvements in technology (24.6% versus 13.9%). As previously noted, the converse was true for businesses without a strategic plan in place. Ad hoc decision making was linked with decreased revenue, difficulties in maintaining customer engagement, and greater technological challenges. Businesses that did not have planning in place consistently reported higher levels of staff dissatisfaction and incurring higher costs than businesses with a clear strategic direction.

Succession planning

The report highlighted that 62% of the middle-market businesses intended to increase their focus on succession planning, with 67% deciding to engage professional advice to do so. A succession plan provides business owners with the confidence that their estate and legacy will be preserved for the future, with financial advisers taking an active role in the end-to-end process, from the succession plan establishment to aspects of its execution upon the owners passing. Succession plans are pronounced in the construction and property development industry where 39.5% of respondents stated that they have engaged an expert professional, and 47.3% had implemented a succession plan. Consultation, confidence and decision-making

Planning has brought about a surge in business confidence with 52% of the most confident businesses claiming to have a formal mid-tolong-term strategic plan in place and a further 32% having a short-tomedium-term plan. The increase in agile strategic planning has seen growth in businesses’ ability to adjust their focus to consider likely and unlikely events that without proper planning would sway their business off course. These plans also include effective guidance on how to react rapidly and/or be proactive when it comes to unforeseen circumstances. Only 16% of highly confident businesses said they made strategic decisions on an ad hoc basis.

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Agility and opportunity

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Research findings cited found that in terms of COVID19’s impact on middle-market businesses’ strategic planning: a) 28.5% saw no pressing need to engage expert advice b) 44% updated their strategic plans more frequently c) three-fifths increased the frequency of short-term planning d) two-fifths decreased the frequency of long-term planning 2. Engaging an adviser in strategic planning was found to be an effective way for businesses to counter: a) hurdles arising from COVID-19 b) the influence of family members c) biases in decision-making d) All of the above

The report indicated that a lack of agile planning also put organisations at a higher risk of stunted growth. A lack of planning hinders a business’s ability to be proactive in taking advantage of new market trends while it emphasises leader’s inability to tackle unexpected challenges with ease—putting them substantially behind their competitors. The takeaway for middle-market businesses is the value of incorporating good financial advice and regular strategic planning into their processes. Strategic planning is not Google Maps for business, where you define a fixed path and stick to it. By engaging financial advisers for support and assistance, fresh perspectives can be gained, and prudent decisions can be made. As a result, businesses will be in a better position to continue a journey of growth and development, unscathed by external or internal challenges. The benefit of strategic planning is the habitual discussions, testing of ideas, setting goals and seeking expertise and advice which enhance a business’s ability to be proactive and align themselves with opportunities or be prepared for uncertainty. fs

3. Examples cited found that an advisory board in the context of middle-market businesses provided a forum to: a) hear from a ‘brains trust’ with similar technical knowledge and experience b) confirm current conventions and thinking c) challenge current conventions and thinking d) legitimise the phasing-out of first-generation owners 4. COVID-19 has been a catalyst for businesses to increase their: a) acceptance of ad hoc planning and its realties b) focus on microeconomic events c) focus on macroeconomic events d) reliance on single export markets and supply chains 5. Over 60% of middle-market businesses intended to use an adviser as part of their plans for increased focus on succession planning. a) True b) False 6. B usinesses with mid-to-long-term plans were found to be more likely to identify opportunities arising from COVID-19. 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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Investment:

Infrastructure in a multi-asset strategy By Matthew Merritt, Insight 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: Listed infrastructure is increasing rapidly, shown by a societal shift in infrastructure demand. Benefits include increased asset resilience, and ESG friendliness. In a multi-asset strategy, it enables stable long-term returns and diversification in a variety of market conditions. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Infrastructure in a multi-asset strategy

T Matthew Merritt

he listed infrastructure market is growing rapidly in size, with new companies helping to finance a societal shift in infrastructure demand. This evolution is creating assets that fit well within a multi-asset strategy, particularly as they are more resilient to changes in the economic cycle. Insight Investment been shifting the composition of its holdings to take advantage of this opportunity. Given a focus on social and environmentally supportive infrastructure, many of these assets are of natural interest to investors seeking to invest responsibly, however, engagement is key to ensure that their environmental, social, and governance (ESG) goals are being carried through. Infrastructure has been a core element of Insight’s multi-asset strategy for many years. Its focus has been on less economically sensitive parts of the infrastructure universe—concentrating on assets that produce stable long-term cash flows, often linked to inflation, that can have a low beta to global equities.

A larger, deeper market providing a broader opportunity set With investors increasingly looking for real assets and stable cash flows, the listed infrastructure sector has grown rapidly. While providing global exposure, the regulatory framework and investor demand

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has led the UK market to be an attractive hub and focal point for listing of closed-ended investment companies. By the end of 2021 there were over 30 listed infrastructure companies (see Figures 1 and 2 on the next page) with a total market capitalisation of over A$50 billion.

Societal shifts are creating new opportunities Many newer companies are seeking to finance projects which are being driven by a societal shift in infrastructure demand. For example, renewable energy has grown to become a significant part of the sector—initially financing projects such as windfarms and solar power, but evolving to encompass projects such as anaerobic digestion, which use bacteria to turn biomass into energy, battery storage, or that seek to monetise energy efficiency gains. A more recent innovation is accessing digital infrastructure, financing subsea fibre cables and wireless networks to improve access to communication services. Further, the market has expanded from being primarily UK focused, to include projects across Europe and more recently the US.

Assessing the economic sensitivity of infrastructure investments Historically, infrastructure investments have been broadly categorised as either social or economic in nature. The types of characteristics one would expect to see within these categories are outlined in the following lists:

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Figure 1. The number of listed closed-end infrastructure companies has trended higher

Social Infrastructure

Economic Infrastructure

Renewable Energy Infrastructure

Infrastructure Debt

Digital Infrastructure

Asset Backed/Leasing

2021

2020

2019

2018

2017

2015

2014

0 2013

0 2011

5 2010

1 2009

2007

Total Number of Companies

Listed Infrastructure Sector Growth by Year - All Sectors

2006

Company Launches / Year

Total (RHS) Source: Insight Investment and Bloomberg. Data as at 28 January 2022.

Figure 2. As more companies launch, so the market opportunity set has diversified

• Key risks around ensuring availability of assets, management of costs, and retrospective changes to regulation.

Matthew Merritt, Insight Investment

Economic infrastructure

Source: Insight Investment and Bloomberg. Data as at 28 January 2022. Encompasses all fully UK listed closed-end investment companies in the infrastructure sector.

• Supports economic development and enables movement of people, goods and information (e.g. regulated utilities, communication infrastructure, renewable energy, transportation and transmission assets). • Funded through long-term concessions, private sector investment and end-user payments. • Higher potential for capital appreciation. • Key risks include pricing, demand/volume, and regulatory changes. Political, social, economic and environmental risks additionally bear on renewable energy infrastructure. Economic sensitives within the traditional infrastructure universe (shown in Figure 3 on the next page) tend to be greater for economic infrastructure than for social infrastructure.

Making infrastructure a core part of a strategy Social infrastructure

• Provides essential services for society (e.g. education, healthcare, transport, social housing and other assets required for public services). • Procured and funded through long-term concessions programs (e.g. private finance initiatives, public-private partnerships and other government programs). • Concessions provide availability-based revenue streams with some inflation linkage. • Yield likely to be the main component of total returns.

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Infrastructure has been a core element of Insight’s multi-asset strategy for many years. The company’s focus has been on less economically sensitive parts of the infrastructure universe—concentrating on assets that produce stable long-term cash flows, often linked to inflation, that can have a low beta to global equities. As can be shown in Figure 4 on the next page, to deliver its return objectives in a smooth manner, Insight operates a dynamic approach to asset allocation. It has significantly changed its exposures over time as it adapts its cyclical

Matthew Merrit joined Insight in September 2004 and is head of its Multi-Asset Strategy Group. He started his career at the Bank of England in 1989 and previously held various investment strategist roles at CitiGroup, ING Barings and NatWest Securities. He holds an MSocSc in Money, Banking and Finance (University of Birmingham) and a BA (Hon) in Economics from Nottingham University.

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Figure 3: Economic sensitivities of infrastructure investments*

* For illustrative purposes only.

Figure 4: A history of dynamic asset allocation over recent cycles

Source: Insight Investment. Data as at 31 December 2021.

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positioning to the market outlook, however, it has maintained its exposure to infrastructure within a tight range. This stems from Insight’s belief that its carefully selected holdings should provide both stable long-term returns and diversification benefits through a variety of market conditions.

• Economic infrastructure that is resilient to the economic cycle (e.g. regulated water utilities, electricity distribution networks and digital infrastructure assets) and which over time will benefit from more stable revenue streams. • Infrastructure debt, linked to investments in social, renewable and economic infrastructure investments. As more of these opportunities have become available, Insight has shifted the composition of its infrastructure holdings over time (see Strategy In Figure 5), seeking stable returns and lower susceptibility to economic cycles across a diversified basket 100% of companies.

This evolution is creating assets that fit well within a multi-asset strategy

40%

Figure 5: Infrastructure exposure over time

40%

Strategy Infrastructure Composntion

60%

20% 20%

Strategy Infrastructure Exposure & Composition 20%

100%

20%

80%

2011

Strategy Infrastructure Infrastructure Composition Composntion Strategy

Strategy Infrastructure Composntion

80%

A key benefit stemming from the way the market has evolved is that growth has primarily been in sectors that are more resilient to changes Strategy Infrastructure Exposure & in the economic cycle. This differs to more economically sensitive infrastructure assets such as airports, where revenues can be more vari- 100% EngagementStrategy is important to ensure ESG& Composition Infrastructure Exposure able depending on economic activity. This is outlined in listed items goals are being met 100% appearing in the earlier ‘Assessing the economic sensitivity of infra-Strategy InsightInfrastructure ensures that all ofExposure its infrastructure holdings, or their under& Composition structure investments’ section 100% of this paper. lying investment manager, are80% signatories to the UN Principles for When Insight searches for infrastructure holdings that areInfrastructure suitable Responsible Investment (PRI). All of these holdings have sustainStrategy Exposure & Composition as part of a100% broader multi-asset strategy, it believes that the following able 80% investment strategies and many have key performance indicators Infrastructure Composition sectors best fit the requirementsStrategy of multi-asset investors: Exposure &that are explicitly linked to sustainability goals. 80% • Renewable energy, which is a rapidly growing sector that is at the However, Insight believes that active engagement also plays an immore resilient end of the economic sensitivity spectrum. Within portant role to ensure that companies remain on track and progress. 60% 80% this, renewable energy assets are regarded with a high degree of con- As part of Insight’s approach to stewardship, it requires that a propritractual subsidy as having a lower sensitivity to the economic cycle. etary 60% ESG questionnaire is completed, providing detailed answers 80% Bloomberg estimates that an additional investment of US$13.3 tril- on issues not covered within standard publications. issues are identi60% lion will be needed by 2050 to expand existing energy capacity, with fied, or events justify it, this helps focus research and engagement 77% of this investment expected to go into renewables, which should when meeting with the appropriate representatives of the company 40% present continued investment60% opportunities over time. to discuss. • Social infrastructure, including investments that promote social Over time, this engagement can often encourage greater trans40% 60% development and quality of life and seek to have a positive impact parency within official reporting, as companies gain a better underon communities. standing of the information their investors are seeking. 40% Strategy Infrastructure Composntion

100%

60%

40%

2012

2011

2012

2011

2013

Renewable Energy Infrastructure 2013 2014

2012

Renewable Energy Infrastructure 2013 2014

Social Infrastructure 2015 2016

Social Infrastructure

2012

Renewable Energy Infrastructure Social Infrastructure 2013 2014 2015 2016

2012

Renewable Energy Infrastructure 2013 2014

Renewable Energy Infrastructure

2011

2013

Renewable Energy Infrastructure 2014 2015 Social Infrastructure 2015 2016

Economic Infrastructure 2017 2018

Digital Infrastructure

Infrastructure Debt

Infrastructure Debt 2020

2014

Social Infrastruc 2016

Economic Infrastructure D 2017 2018

Economic Infrastructure Digital Infrastructure 2017 2018 2019

Economic Infrastructure

2012

Digital Infrastructure 2019

Infrastructure Debt Asset 2020 2021 Asset Backed/Leasing 2021

Asset Backed/Leasing

20%

2011

2012

2013

Renewable Energy Infrastructure

2014 Social Infrastructure

2015

2016

Economic Infrastructure

2017

2018

Digital Infrastructure

2019

Infrastructure Debt

2020

2021

Asset Backed/Leasing

Source: Insight Investment and Bloomberg. Data as at 30 September 2021.

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Recent examples of engagement

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In terms of making infrastructure part of a multi-asset strategy, Insight looks for assets that: a) produce stable long-term cash flows b) are often linked to inflation c) have a low beta to global equities d) All of the above 2. Which of the following qualities does the author assign to social infrastructure? a) It is primarily funded through short-term concessions b) Key risks are primarily around oversupply of assets c) Yield will most likely form the bulk of total returns d) It has the highest potential for capital appreciation 3. Based on Insight’s experience, best-fit multi-asset investment sectors include: a) infrastructure debt of positive social value b) renewable energy c) regulated water utilities d) All of the above

• Review of health and safety practices across Insight’s renewable energy holdings after an incident. • Engaging with the board of one holding regarding their low dividend coverage. • Engagement with investment managers regarding personnel changes, net zero targets and enhanced ESG reporting. • Engaging with the Foreign, Commonwealth and Development Office on MOBILIST program to address the sustainable development financing gap. Note: MOBLIST (https://www.ukmobilist.com/) is a program focused on mobilising public markets to catalyse new scalable and replicable financial products that support the UN Sustainable Development Goals (SDGs) and net-zero transition. Targeting infrastructure investments that contribute to SDGs

Infrastructure holdings play an important role in helping economies achieve the SDGs. Investments within social infrastructure typically support sustainable development of communities, while renewable energy infrastructure facilitates provision of affordable and clean energy. Examples of companies in which Insight invests and the UN SDGs they assist with are depicted in Table 1. fs Table 1. Company adherence to the SDGs

4. What point does the author make in relation to the infrastructure market’s evolution? a) Traditionally, social infrastructure is more sensitive to economic changes than economic infrastructure b) Growth has mainly been in sectors that are more resilient to changes in the economic cycle c) Traditionally, social and economic infrastructure are equally robust in contending with economic changes d) G rowth has mainly been in sectors that are more susceptible to changes in the economic cycle Source: Insight Investment.

5. I n relation to vetting holdings, the author believes detachment is necessary to determine if ESG goals are being fulfilled. a) True b) False 6. I n terms of changing its infrastructure exposures over time, Insight recommends maintaining exposure within a broad range across a select basket of companies. 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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Superannuation:

Strategies to manage TPD payments through superannuation By Mark Gleeson, IOOF

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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 compares taxation outcomes of disability benefit payments as a lump sum versus income stream in a superannuation environment and the effects on social security payments. It also highlights considerations around channelling disability benefit payment into superannuation. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Strategies to manage TPD payments through superannuation

A Mark Gleeson

s many advisers do not provide advice on managing total and permanent disablement (TPD) payments on a frequent basis, this paper provides a refresher to help them ensure their knowledge is up to date. Further, it explores lump sum payments, income streams and other options to maximise social security payments.

Accessing a TPD benefit through superannuation To access a TPD insurance benefit from a superannuation fund, a client must initially satisfy the insurance policy definition. If a client’s policy was in place before 1 July 2014, the TPD definition could vary from the current definitions. For example, the policy may have an ‘own occupation’ definition, ‘homemaker’ definition or a modified TPD definition. If the policy definition is satisfied, the proceeds are paid from the insurer and added to the client’s superannuation balance but will not be treated as a superannuation contribution. At this point, the insurance proceeds increase the taxable component. To access money as a lump sum or income stream, the perma-

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nent incapacity condition of release or other condition of release must be satisfied. Permanent incapacity occurs when a client has physical or mental ill-health, and the trustee is reasonably satisfied that they are unlikely to engage in gainful employment for which they are reasonably qualified by education, training or experience. The fund trustee generally requests medical certification from two legally qualified medical practitioners when making an assessment.

The form of a TPD benefit When the permanent incapacity definition is satisfied, the amount in the superannuation fund becomes an unrestricted non-preserved component. This simply means that the funds can be accessed as a lump sum, income stream, or a combination of both. A client can leave the funds in the accumulation phase of superannuation indefinitely. Many clients only consider taking the lump sum, but it is important to assess other strategies that are more tax-effective or which may increase social security payments.

Tax on a disability benefit Disability superannuation benefits can be paid to a member as a

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lump sum or income stream, and the relevant tax implications are summarised in Table 1. Table 1. Taxation of lump sum and income stream payments Age

Component

Tax on lump sum

Tax on income stream payments

Age 60 or over

Total benefit

Nil

Tax-free

Nil

Taxable—taxed

20%*

Marginal tax rate less 15% tax offset

Under preservation age

Between preservation age and age 60

Tax-free

Nil

Taxable—taxed

First $225,000 Nil (2021/22 FY) Excess at 15%*

Marginal tax rate less 15% tax offset

*Plus 2% Medicare levy where applicable

Tip Watch out for the addition of the taxable component of a superannuation lump sum or income stream to assessable income if a client is under age 60, as the outcome could impact their entitlements or obligations related to income (for example, the family tax benefits, co-contribution, child support obligations and Division 293 tax).

The lump sum option There is an additional tax concession provided to a lump sum or rollover, known as a ‘disability super benefit’. The tax-free component is increased if the benefit is paid because of ill-health, and two legally qualified medical practitioners certify the client is unlikely to be gainfully employed in a position for which they are reasonably qualified due to education, experience or training.

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The fund trustee must obtain two certificates from qualified medical practitioners to increase the tax-free component. The fund trustee would normally have already requested these details for the permanent incapacity assessment. The tax-free component of the benefit is increased to broadly reflect the period the client would have expected to be gainfully employed. The existing tax-free amount in the superannuation fund is increased by an amount which is calculated as follows: Amount of benefit

Mark Gleeson, IOOF

Days to retirement (service days + days to retirement)

Days to retirement: The number of days from the day on which the person ceased being capable of being gainfully employed to their last retirement date. Last retirement date: If a person’s employment or office would have terminated when they reached a particular age or completed a particular period of service—the day they would reach the age or complete the period of service (as the case may be); or in any other case the day on which they would turn 65. Service days: The number of days in the service period for the lump sum. Any days that are included in both ‘service days’ and ‘days to retirement’ are to be counted only once. The Australia Taxation Office’s ‘Calculating components of a super benefit’ webpage provides more information on this topic. Example: Lump sum and increased tax-free component

Archana, 48 (date of birth 23 January 1974), has $100,000 in superannuation (all taxable component) with any occupation TPD cover of $900,000. Archana sustains an injury, and the insurer accepts her TPD insurance claim, paying the benefit into her superannuation fund.

Mark Gleeson is a senior technical services manager at IOOF. He has almost 20 years’ financial planning industry experience, with particular experience in superannuation, insurance through super, retirement income streams and strategy development. Previously, he held technical services roles at Perpetual and Asteron. His qualifications include a Bachelor of Economics and Certified Financial Planner designation.

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Superannuation

An amount of $1,000,000 now sits within the account, all as a taxable component. Archana requests that the trustee releases the benefits under permanent incapacity, and provides two medical certificates. She wants to receive the full amount as a lump sum and to understand the tax consequences if the date of disability is 1 July 2021. The start date of Archana’s fund is 11 April 2009. The trustee generally assumes a person would retire at age 65, that is, 23 January 2039 for Archana. After applying the formula shown previously, the trustee calculates the increase in the tax-free component as follows: $1,000,000

6,416 (days to retirement) 4,464 (service days) + 6,416 (days to retirement)

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provider and request the trustee (of the original fund) to increase the tax-free component. In hindsight, if Archana required a net lump sum benefit of $1,000,000, the sum insured should have been grossed up to allow for the tax payable.

Tip When including TPD insurance within superannuation, an adviser and their client may want to look at selecting a fund with a later eligible service date to decrease the total service and increase the tax-free component.

= $589,705 Days to retirement = 6,416 (1 July 2021 to 23 January 2039) Service days = 4,464 (11 April 2009 to 1 July 2021)

The remaining amount of the lump sum is $410,295 and is an all taxable component (element taxed). As Archana is under preservation age, the taxable component of $410,295 is added to assessable income and taxed at a maximum rate of 22%. This results in $90,265 tax payable and a net benefit of $909,735. To reduce Archana’s tax payable, she could consider retaining part of the benefit in the accumulation phase or commencing an income stream. Further, she could roll over the benefit to another

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The income stream option An account-based pension (ABP) option paid from the superannuation fund is particularly tax-effective in cases of permanent incapacity, due to the tax-free earnings within the fund and tax concessions on pension payments. A client receiving a disability superannuation income stream before reaching their preservation age receives a 15% tax offset on the taxable component of each pension payment. The tax-free component is tax free. From preservation age, the ABP is taxed normally. Example: Income stream option

Continuing the previous example of Archana, instead of receiving

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the full $1,000,000 benefit as a lump sum, Archana decides to take $400,000 to clear debts and commence an income stream with the remaining amount of $600,000 (all taxable component). The income stream commenced from Archana’s fund is simply an ABP. The pension has a minimum payment of 2% for the 2021/22 financial year (as Archana is under age 65), and the earnings within the ABP are tax-free. The taxable component of the payments is subject to a 15% tax offset. Lump sums can be accessed at any time, with any tax payable being based on the components. The transfer balance cap (TBC) is not a problem for Archana, as the commencement value is below $1.7 million. In short, the tax treatment of the ABP compares favourably to alternative investments available to Archana. An adviser and their client will need to consider the TBC (currently $1.7 million*) if part or all of the benefit is received as a disability superannuation income stream. *This assumes the client had no TBC account prior to 1 July 2021, otherwise

their TBC is between $1,600,000 and $1,700,000.

This cap applies on the total amount that is transferred from accumulation to pension phase. When a disability superannuation income stream is commenced, a credit applies to the transfer balance account.

Tip If an ABP is commenced from the superannuation fund that received the TPD insurance, the trustee would not increase the tax-free component using the disability superannuation benefit formula. However, if the superannuation fund is rolled over to another provider, the trustee increases the tax-free component. Clients should identify their preferred income stream provider before commencing an ABP. Caution: Contrived arrangements may be considered tax avoidance, and multiple rollovers or other unnecessary transactions should be avoided.

Comparing the options Table 2 summarises what advisers need to consider for the strategies detailed in this paper. In practice, a combination of two or more options may satisfy the client’s objectives. Table 2. Applicable strategies and considerations Strategy

Considerations • Clear debts and meet upfront expenses (e.g. paying for modifications to the home).

Retain funds in superannuation option Another option upon receiving a TPD insurance benefit is to simply leave the funds in accumulation phase where a maximum 15% tax applies on fund earnings. Lump sums can be withdrawn from the unrestricted non-preserved component as needed, being mindful of the tax consequences outlined previously. Any earnings growth within the fund forms part of the preserved amount.

• Significant tax may apply under preservation age (up to 22% tax on taxable component). Between preservation age and under age 60, the taxable component above the low-rate cap is taxed at up to 17%.

Lump sum

• The tax-free component should be increased by the fund. • Satisfy ongoing expenditure requirements. • Tax-free earnings within the ABP. • Tax-effective income if under age 60:

Centrelink considerations From a Centrelink perspective, any amount held in the accumulation phase of superannuation is not assessed under the assets test or income test when an applicant is under Age Pension age. In contrast, the amount in the accumulation phase of superannuation is assessed as an asset and deemed under the income test from Age Pension age. The favourable assessment below Age Pension age may allow a client to retain some of their money in the accumulation phase of superannuation and apply for the Disability Support Pension, if eligible. Amounts held in ABPs are fully assessed under the assets test. Any new ABP commenced from 1 January 2015 is deemed under the income test.

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– 15% tax offset on the taxable component – No tax on the tax-free component.

Income stream

• Tax-free income from age 60. • TBC between $1.6 million and $1.7 million (depending on whether a client commenced a retirement phase income stream prior to 1 July 2021) applies. • Tax-effective environment, maximum tax of 15% on fund earnings.

Retain funds in superannuation

• Superannuation is not assessed under Centrelink means tests if applicant is under Age Pension age. • Applicant may claim Disability Support Pension (if eligible). • A partner may apply for Carer Payment and/or Carer Allowance if they provide care.

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Conclusion

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Jo’s superannuation balance of $580,000 consists of a $250,000 taxable component and a $330,000 TPD benefit. She is under preservation age with 8210 days to retirement and 3455 active service days. If Jo elects to access her full balance as a lump sum, the tax payable (including Medicare levy) is: a) $11,665 b) $7044 c) $37,793 d) $25,768

There are significant advice opportunities for clients who receive a TPD insurance benefit into their superannuation fund. Clients may be keen to take a lump sum from superannuation, although the tax payable may be substantial. A lump sum sufficient to satisfy immediate needs can be a good option combined with an ABP to provide ongoing income. The TBC should be considered before commencing an income stream. Retaining some funds in the accumulation phase may assist a client maximise their Disability Support Pension. fs

2. A disability benefit used to commence an ABP from within a superannuation fund is subject to: a) 20% tax on the taxable component before preservation age b) tax-free earnings within the fund c) immunity from counting towards the transfer balance cap d) a 15% tax offset on the taxable component from preservation age 3. According to the author, which of the following are relevant considerations for a member who is thinking of commencing an ABP from their superannuation balance that includes a TPD insurance benefit? a) The trustee of a superannuation fund receiving a rolled-over benefit may increase the tax-free component b) Contrived rollover arrangements may be seen as tax avoidance c) The benefit recipient should ‘do their homework’ in selecting an income stream d) A ll of the above 4. If a disability payment is kept in the accumulation phase of a superannuation fund: a) the benefit will be considered as a tax-free component of the account balance b) the member may still claim a Disability Support Pension, pending eligibility c) the fund balance is assessed under the Centrelink means tests, regardless of member’s age d) a partner automatically forgoes any Carer Allowance if they provide care 5. A permanent disability benefit paid into superannuation can be accessed either as a lump sum or income stream, not both. a) True b) False 6. A mounts held in ABPs are assessed in full under Centrelink’s assets test. a) True b) False

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Compliance:

Enhanced fee disclosure statements: Your questions answered By Sean Graham, Assured Support

Compliance

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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 new fee disclosure statement (FDS) regime targets previous FDS deficiencies. This paper identifies inclusions for an enhanced FDS, and clarifies timeframes for providing enhanced fee disclosure-documents and renewing service arrangements under the new regime. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Enhanced fee disclosure statements Your questions answered

A Sean Graham

dvisers and licensees have had a lot of regulatory reform to manage in 2021, so it is no surprise that there is still a measure of confusion and uncertainty around these new arrangements. Queries about fee disclosure statements (FDSs) and ongoing fee arrangements (OFAs) top the list, so this paper aims to address the five most common issues.

What is the purpose of the ‘enhanced’ fee disclosure statement? In the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne noted: The fee disclosure statement is plainly a backward-looking document, looking back at what services the client was entitled to receive, and what services were provided. Neither the definition of ongoing fee arrangement in section 962A(2) nor any other provision of the Corporations Act 2001 appears to require an adviser to identify prospectively with any degree of specificity what services the client will be entitled to receive, and what services will be provided.

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According to the Replacement Explanatory Memorandum of the Corporations Amendment (Future of Financial Advice) Bill, 2011, the original intent of the FDS was to capture ongoing fee arrangements and impose a disclosure obligation—supported by a requirement for active renewal—that would “protect disengaged clients from paying ongoing financial advice fees where they are receiving little or no service”. One of the key deficiencies of the FDS regime, beyond the limitations of disclosure, is that neither the OFAs, industry practices nor the Corporations Act 2001 (Corporations Act) provide, as Commissioner Hayne put it, “any degree of specificity [about the] services the client will be entitled to receive, and what services will be provided”. In fact, the Australian Securities and Investment Commission’s (ASIC) Report 636 Compliance with the fee disclosure statement and renewal notice obligations (REP 363) confirmed this suspicion and concluded, based on their review of thirty Australian financial services licensees (AFSLs), that there was widespread non-compliance with these requirements. In Commissioner’s Hayne’s view “a financial adviser who enters into an ongoing fee arrangement with a retail client should be required to provide to the client—every time the ongoing fee arrangement is made or renewed—a statement of the services that the client

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will be entitled to receive under the arrangement during the coming year.” Unsurprisingly, the Commissioner’s recommendations in respect of ongoing service arrangements were broadly supported, and the legislative changes that followed ushered in a raft of reforms with respect to FDSs, OFAs and annual consents. It is important to recognise that these changes do not apply to short-term arrangements. The law and regulatory policy are clear that unless the contractual arrangements provide for the adviser to receive fees over a period greater than 12 months, it is not an ongoing fee arrangement. An ongoing fee arrangement exists when an AFSL or its representative gives personal advice to a retail client and the client enters into an arrangement with the licensee or representative, the terms of which provide for the payment of a fee during a period of more than 12 months.

What needs to be included in an ‘enhanced’ FDS?

How does transition work?

The ongoing service arrangement between the adviser and the client prospectively outlines the key elements of the contracted services. The FDS is both a forward and backward-looking document that provides the information a retail client needs to decide whether to re-engage the adviser to provide ongoing service. The amendments to section 962H of the Corporations Act require that an FDS, issued after 1 July 2021, must contain: • information about fees charged for the previous 12 months as well as fees to be charged for the upcoming 12 months. The information relating to the upcoming year must include: – t he amount of each ongoing fee payable by the client to the fee recipient – the services that the client is entitled to receive – the amounts of any ongoing fees payable after the end of the upcoming year for a service provided in that year • any other information that may be prescribed by the regulations • if the amount of any ongoing fee cannot be determined, the fee recipient must provide a reasonable estimate of the fee and a statement about how it is calculated • a statement informing the client that they may renew the ongoing fee arrangement by notifying the fee recipient in writing • a statement informing the client that the arrangement will terminate if the client does not elect to renew • advice that the client is deemed to have elected not to renew if an election to renew has not been received within the renewal period • a statement that the renewal period is 120 days beginning on the anniversary day.

This is a really interesting question and a licensee’s approach to transition may be indicative of its culture and capability. If a licensee had an obligation to provide FDSs on or after 1 July 2021, as long as the FDS is provided before 1 July 2022, they will satisfy their legal obligation. Let us think about this for a moment and consider a practical example. A client was engaged in October 2020 and an ongoing service arrangement was established. In the normal course of events, the licensee would have been expected to provide the client with an FDS around October 2021 (give or take 60 days). Under the transition provisions, as long as the client is provided with an enhanced FDS, agreement and consent before 1 July 2022, the licensee will have complied with the law. Of course, the anniversary date will be re-set, and the FDS provided will be required to cover the entire period from October 2020. However, this transition period enables licensees and advisers to manage their ongoing obligations by staggering production dates and scheduling renewals over a period to make them more manageable. This can be considered an extremely generous allowance, given that many practices had already implemented measures, processes and procedures to facilitate and manage FDS production. While it demonstrates regulatory flexibility; one may question whether it improves the client experience or reinforces the intent of the Financial Adviser Standards and Ethics Authority Standards (its remit which now falls under ASIC)? In the example given earlier, the client will not have received confirmation of the fees they are paying or the services they expected to receive for a period of almost 20 months. The law allows an adviser to manage the transition to the new requirements in this way, however, advisers may want to consider whether deferring disclosure and

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Sean Graham, Assured Support Sean Graham is Assured Support’s managing director. He specialises in financial services law, compliance and risk management. In addition to consulting and policy roles with Suncorp, BT, ASFA and Mills Oakley Lawyers, he has held senior executive roles with Millennium3 Financial Services Group, CBA and CFS.

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re-engagement supports, or undermines, their obligation to obtain their clients’ informed consent or confirm their clients’ understanding and engagement. Licensees might care to consider whether, and to what extent, such a delay reflects on their culture and capability.

When do key documents need to be provided? Earn CPD hours by completing this quiz via FS Aspire CPD 1. What did Commissioner Hayne identify as being a key deficiency of the previous FDS regime? a) Lack of clarity around conflicted remuneration b) Lack of retrospective information about fees charged c) Lack of prospective information about services to be provided d) Lack of retrospective information about services provided 2. Which of the following must be included in an enhanced FDS? a) A statement of services the client is entitled to receive in the coming 12 months b) Information about fees to be charged in the coming 12 months c) A statement confirming the renewal period d) All of the above

In addition to the flexibility provided by the transition period and the replacement of the ‘disclosure day’ with the ‘anniversary day’, there have been some key changes to the fee disclosure timeframe. Once the new regime commenced, the anniversary day became the foundation for all obligations: • The enhanced FDS and ongoing service agreement need to be provided within 60 days of the anniversary day. • The ongoing service agreement (and consent) need to be confirmed or renewed within 120 days of the anniversary day. • The consent to deduct/receive fees expires 150 days after the anniversary date. For example, as shown in Figure 1, if a client signed the ongoing service agreement on 1 August 2021, then 1 August becomes the anniversary date, and this date cannot subsequently be changed. The client will need to be provided with an FDS and a renewal and consent by 30 September 2022. The original Service Agreement will expire on 29 November 2022 and the consent will expire on 29 December 2022. Figure 1. Enhanced fee disclosure timeframes—example Detail

Date

3. Bob first enters into an ongoing service agreement on 1 November 2021. What is the latest date on which his adviser can provide him with an enhanced FDS? a) 1 November 2022 b) 31 December 2022 c) 31 December 2023 d) 1 March 2023

Ongoing service agreement starts:

1 August 2021

First-anniversary date:

1 August 2022

Enhanced FDS and ongoing service agreement to be provided by:

30 September 2022

(anniversary date + 60 days)

Ongoing service agreement and consent to be confirmed/ renewed by:

29 November 2022

(anniversary date + 120 days)

4. Bob first enters into an ongoing service agreement on 1 November 2021. What is the latest date on which Bob can provide his consent to renew the ongoing service agreement? a) 1 March 2023 b) 31 December 2021 c) 31 December 2022 d) 1 March 2022

Consent to deduct fees expires:

29 December 2022

(anniversary date + 150 days)

5. All fee agreements with a duration of 12 months or more are subject to the enhanced fee disclosure obligations. a) True b) False 6. L icensees are allowed flexibility to defer disclosure dates and re-engage clients until the end of the transition period. a) True b) False

What are the consequences of non-compliance? Failure to comply with the content requirements for an FDS results in the termination of the ongoing fee arrangement. In addition, a civil penalty may be sought if ongoing fees are charged after the arrangement has terminated. For an individual, the maximum penalty is $1,110,000 (5,000 penalty units) and $11,100,000 for a corporate entity. Of course, these obligations are not applicable if the ongoing fee arrangement relates to instalment payments of the original advice fee or if it does not relate to “a period of more than 12 months”. fs

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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Retirement:

Specialist insights on aged care advice By Rahul Singh, Challenger

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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 presents insights from three experienced aged care advice professionals on service offerings, pricing structures and client conversations. It offers tips for fledgling practitioners and reinforces the adviser’s role of protecting clients’ best interests. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Specialist insights on aged care advice

W Rahul Singh

hen looking at aged care advice from an adviser’s perspective, we find that there are some common themes of interest. This paper offers insights from three experienced aged care advice professionals from different areas in the country who provide their thoughts on aged care advice.

Featured interviewees Andrew Biviano is head of lifestyle and care at Alteris. His team is focused on ensuring clients and their families receive the support they need to make confident decisions about their aged care and retirement living options. He has been in the financial services industry since 1999. Cassandra Troy is senior financial adviser, director and cofounder of Robins Financial Planning. She has worked extensively throughout the financial services industry since 1991 and as a licenced adviser since 2006. Shaun Ganguly is a financial adviser and founder at Aged Care Financial Planning. He has worked extensively within the financial services industry from private practice to banks, specialising in retirement planning and aged care advice in particular.

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How did you get into aged care advice?

Andrew Initially, we were focused on finding a way to help existing clients of the firm with specific advice as they had elderly relatives moving to residential aged care. As we started engaging with facilities to help our clients with the move, we began receiving enquiries from other people who were being referred to us by these facilities. It soon became apparent there was a broader community need for aged care advice, so we invested in building a specialist division that exclusively helped people moving into residential aged care and retirement villages. For eight years, we have had a dedicated team of specialist aged care advisers and client service managers who help clients with their advice needs and support them through the implementation stages which provides peace of mind by helping them achieve their desired outcomes. Cassandra Our practice is based in Redland City around Brisbane where I was born and bred. We have an ageing population and I have experienced an increase in the number of people seeking advice associated with aged care. We enjoy working with vulnerable people, particularly the elderly, to ensure they receive advice which is appropriate and in their best interest.

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Shaun When my grandparents had to go into aged care and I realised how little I knew despite my financial training, that is when I decided to learn all about aged care and realised how few people could actually advise on it. I did not want any other family to go through what we went through and have designed my whole process with the ‘uninformed accidental consumer’ in mind.

How do you start the aged care conversation with clients well before they have aged care needs?

Andrew We regularly talk to our clients about their personal situation, the various changes that have affected them and their family, and their future goals and considerations, including what these could look like when they need some additional support. This helps us to have open conversations early about the various aged care considerations and how we are there to support them. We also hold webinars and send regular informative articles to clients around residential aged care. However, many of our clients call after a parent or elderly relative suffers a medical incident and, as such, they require urgent advice and assistance. Cassandra We provide extensive advice in the pre-retirement and retirement space, and always consider our clients longer-term needs, such as when they may need additional support or enter residential aged care. Future needs, such as how to fund the cost of care, is considered and discussed. These discussions have raised client awareness of our ability to assist and offer advice in the complex area of aged care and has subsequently led to an increase in referrals. Shaun I start with an education piece about all the different services available to clients, from the Commonwealth Home Support Program to the Home Care Packages Program all the way to residential aged care. Some pre-planning around getting aged care assessments can be very helpful to clients and prevents the dreaded panic later down the track.

What services do you offer for clients seeking aged care advice?

Andrew We provide an end-to-end service that helps clients understand the fees associated with aged care and the options available for their unique circumstances so that they can make decisions with confidence. Our aim is to provide peace of mind by ensuring that their outcomes align with what they want at each stage. We are with our clients and their families every step of the way at one of the most emotional times in their lives. Not only do we prepare options and strategies tailored

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to each client, but our support and care for our clients continues after moving into an aged care facility. As our clients’ nominee, we will regularly liaise with relevant government departments to confirm receipt of any information requested, follow up processing to ensure the accuracy of their assessments, and we will appeal outcomes that do not meet our clients’ expectations. We also provide aged care financial advice education and training for aged care facilities’ staff and other professionals, sharing our knowledge and actively participating in industry-body events. These relationships, together with our team of research, training, and compliance specialists, help us to achieve the best outcomes for our clients.

Cassandra Initially, we offer a consultation where we can discuss and understand a client’s situation and provide a general explanation of how aged care fees are assessed and possible interaction with Centrelink and Department of Veterans’ Affairs (DVA) entitlements. Where appropriate, we offer a full financial planning service to develop and implement strategies to optimise a client’s overall position and meet their needs and objectives. Our service includes completion and lodgement of forms and liaising with Centrelink and/or DVA as an authorised contact. This service is highly valued by our clients as it removes this burden which often comes at a time of high emotions and distress. We also provide an annual review service where we update Centrelink and/or DVA as required. This allows clients, often their Enduring Powers of Attorney (EPOAs) to concentrate on caring for their parent(s). Shaun Looking after every aged care need clients have, from guiding them through the initial placement process, as-

Rahul Singh, Challenger Rahul Singh is a technical services manager at Challenger. He has been in the industry since 2004, commencing his career with Clearview and working in technical services teams in AMP, ANZ and MLC prior to joining Challenger in 2019. He is passionate about supporting advisers to deliver technical solutions to retail clients.

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sisting with Centrelink forms to comprehensive financial advice such as relating to estate planning, tax planning, investments and structures. I also offer a full Centrelink/DVA service where we can lodge all the forms and follow up all the requirements and assist with the aged care home documentation. When appropriate, we can remain as the client’s Centrelink nominees. This is often in conjunction with ongoing financial advice. In addition to the asset management, we also make sure that their Centrelink/aged care fee strategy is optimised.

Why is aged care advice valuable to you and your practice?

Andrew Our specialist age care division helps families understand the financial costs of moving to aged care while ensuring the whole process runs smoothly. As we provide this service at a particularly emotional time, we are often introduced to other family members for the first time. This can be a valuable opportunity as we often identify scenarios where we could help these family members further. Cassandra Aged care advice is a very important service to our community. Unfortunately, if good advice is not obtained it may be detrimental to financial outcomes, which can be difficult to rectify. I get a lot of personal satisfaction from providing aged care advice. I enjoy this aspect of my role when acting as a trusted adviser in helping people during difficult times, which is often the case with aged care advice. Shaun Every case is different, and I can see the relief on the clients’ faces when we help them. Unlike ‘standard’ financial planning, we can tangibly demonstrate benefits—sometimes in the tens of thousands of dollars—immediately and deliver, rather than working towards more intangible future goals.

Where do you source aged care advice clients from?

Andrew After specialising in this area for many years, our centres of influence include existing clients, aged care facilities and other professionals in the industry. One key area we have seen growth in is the referrals from other financial planners who see benefit in working with us to further support their clients and their parents, relatives or friends. In these instances, by partnering with a specialist firm that has deep sector relationships, they can help their client with their aged care advice needs, which in turn helps them to: • reinforce their relationship as the central adviser for the client • gain a new opportunity to meaningfully connect with other family members, and • avoid situations where a client’s personal financial plan may be negatively impacted because they did not seek specialist financial advice. Cassandra This area of advice has grown significantly for our practice. We have a number of permanent aged care residences in the Redlands area and

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have been able to develop a trusted relationship where they refer potential residents or their EPOAs for advice. Other sources include word of mouth, referrals from existing clients, real estate agents selling homes as an older person is moving into care, and aged care placement specialists.

Shaun I provide advice nationally using technology. As such, my clients are not limited to a particular geographical area, so I receive a lot of enquiries from internet searches and word-of-mouth referrals. I also work with aged care facilities, so regularly receive referrals directly from them. It means their residents enter care with a far lower level of stress and a greater understanding of what is ahead. I also receive referrals from other financial advisers who do not focus on aged care advice, as well as the usual centres of influence such as lawyers and accountants working with clients with aged care needs.

Do you have any insights around charging for aged care advice?

Andrew Having a pricing strategy that aligns with client outcomes is an important part of our offering. This is important especially in cases where a client may pass away during the process, as an executor may require further information about services being provided and the amounts charged. We charge on a fee-for-service basis which is determined prior to work being completed based on the expected level of time and complexity involved. Cassandra It was initially difficult to implement an appropriate fee structure. Often the work is very labour intensive and can take quite some time to fully implement, particularly if we are waiting for the sale of a home. There are often several updates required for Centrelink/DVA which can also be time consuming. We now charge a consultation fee for the initial appointment, as it may be the only appointment required. If a more comprehensive service is required, I can generally identify this at the first appointment and charge appropriately. Shaun In a highly specialised field, I often charge for my time and expertise in the same way a lawyer or doctor does with an hourly rate. If clients are shown the value, they are happy to pay directly and with full transparency. My initial meeting also has a cost, and I would encourage advisers to value their knowledge and experience in the field. The potential ‘cost’ of not receiving advice is usually greater than any advice costs with aged care planning.

What advice would you give to advisers who might be offering aged care advice for the first time?

Andrew Aged care advice often requires a client’s enquiry to be attended to as a matter of urgency. We commonly find the initial aged care advice phase is completed within a few weeks, with some clients requiring advice in a much shorter timeframe. Having in-house experts and trusted partners that can be called on to help respond to these queries is of critical importance.

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Most clients generally do not have any prior knowledge of the aged care sector and are often confused about where to start. We have found that right from the first point of contact, clients are generally looking for some advice on the next steps to help them manage the emotion and apprehension that putting a loved one into care brings. Assisting clients for a period of time after they move into care is important to help them achieve their desired outcomes. In many cases, we have found that there are several questions that arise once the client enters care. As this period can range for up to nine months, it is important to consider how you can attend to these types of queries as part of your offer.

Cassandra It is such an important role and so much trust is placed in you, often at a very difficult time. Be sure to work in the best interest of the older person, even if you are interacting with an EPOA. In the end, it is the older person who you are providing advice for—not the EPOA. It is important to be aware that older people may be vulnerable. Be patient and remember they may be older or have diminished capacity, but they deserve the utmost respect, patience and understanding. Understand that you may come across an EPOA who is not acting in the older person’s best interest, whether intentionally or unintentionally. You may need to decline to act or call this behaviour out and seek advice on how to deal with this. Shaun Make sure you are thinking five steps ahead. Every potential strategy has about four to five subsequent moving parts. Either use specialised aged care financial tools or run potential strategies by an experienced aged care adviser or a technical team as ‘out of the box’ solutions are often needed. fs Disclaimer: The information contained in this update is current as at 13 August 2021 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger annuities (Annuity(ies)). It is intended solely for licensed financial advisers and this update must not be passed on to retail clients. The examples shown are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. This information is not intended to be financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs.

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which adviser service is valued because it removes burdensome administrative tasks from clients at a highly stressful time? a) Providing education about the annual review service b) Providing ongoing advice after the resident has moved into a facility c) Liaising with Centrelink and/or DVA as a nominee d) Acting as a go-between for the referral process 2. Which of the following is noted as a source of referrals? a) Real estate agents b) Aged care facilities c) Lawyers d) All of the above 3. What circumstance may lead to an adviser declining to act for a client? a) When an EPOA is not acting in the client’s best interests b) When there is no EPOA to advocate for the client c) When the client’s assets are not sufficient to fund a full residential bond d) W hen family members have conflicting views about aged care services 4. It is often necessary to provide aged care advice within a short timeframe because: a) residential aged care places are only held for a short time b) it is required following a sudden medical incident c) clients are often in denial and need a reality check d) family members are often overly pushy for a resolution 5. The pricing structure for aged care advice can be standardised because client needs tend to be comparable across different aged care scenarios a) True b) False 6. Aged care advice is a particularly valuable service because often tangible benefits can be demonstrated immediately, rather than over the long term. a) True

b) False

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FS Advice vol 17 no 01

Articles inside

UPTICK IN DEMAND FOR RETIREE CLIENT BOOK

SKILL SHORTAGES HITTING ADVICE PRACTICES

MOST PARAPLANNERS WILL NOT BECOME ADVISERS