Money Management | Vol. 33 No 4 | March 28, 2019

www.moneymanagement.com.au

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

Vol. 33 No 4 | March 28, 2019 PRINT POST APPROVED PP100008686

See the invisible, perform the incredible PIONEERS IN FACTOR INVESTING

_FP ad Test.indd 1 1353'03'19_Coverwrap_FI_Xray__MoneyMangement_Australia_DD_18March_240x330mm_SINGLE_PAGE.indd 3

18/03/2019 10:22:33 AM 15-3-2019 10:05:19

THURSDAY, 16TH MAY 2019 SOFITEL SYDNEY WENTWORTH

Celebrating Excellence

Are you a Finalist?

Finalists announced www.fundmanagerawards.com.au Money Management and its research partner, Lonsec have named the finalists for 19 categories for the 2019 Fund Manager of the Year Awards! Now in its 32nd year, the Fund Manager of the Year Awards ceremony will bring together the best and the brightest in the industry at the most prestigious awards ceremony for the fund management industry in Australia.

Early Bird tickets are selling fast, book your tickets now!

PLATINUM SPONSOR

5228_FMOTY house print.indd 2

14/03/2019 3:25:10 PM

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 33 No 4 | March 28, 2019

EDITORIAL

RESPONSIBLE INVESTMENTS

Leaking billions, the banks depart wealth management

Is it better to divest or to keep your seat at the table?

02

FIXED INCOME

18

Is a compensation scheme of last resort just a bandaid solution?

ASIC confirms scrutiny of industry funds advice

BY MIKE TAYLOR

PRINT POST APPROVED PP100008686

Fixed income managers see recessionary risks emerge FIXED income assets often provide investors with protection against downside risks, particularly when equity markets are struggling, but global trade tensions have rocked the boat lately, causing industry experts to batten down the hatches and prepare for a possible recession.

JP Morgan Asset Management raised its probability of recession from zero to 10 per cent in its global fixed income outlook for the first quarter of 2019, but other fund managers believe the market is purely indicating a slowdown.

Unexpectedly though, bonds still returned solid results in 2018 relative to the negative returns posted by equity assets, proving the stocks/bonds relationship is still as effective as it always was.

So, while perhaps last year the red flags were emerging, outlooks for 2019 have become slightly more positive, with global growth expected to stabilise in the second quarter of the year and pick up soon after.

According to David Choi, head of Australian macro at Aberdeen Standard Investments, China has been actively easing policies and the Federal Reserve has paused in response to a global slowdown, with Australia following suit.

“The risk of a policy mistake has fallen materially,” he said.

“Even the RBA has recognised the extent of global slowdown and has dropped its hawkish bias.”

Going forward, the experts recommend investors carefully monitor the sector, particularly the non-financial corporate sector in the US given its increased debt levels over the last decade.

Investors should similarly keep a watchful eye on China as they predict the country’s slowdown to continue in response to tightening domestic monetary and fiscal policies, and monitor its interactions with the US as trade negotiations continue.

04MM2803_01-13.indd 1

Full feature on page 14

12

INFOCUS

CONFLICTS of interest impacting the quality of financial advice are not restricted to retail superannuation funds, according to the Australian Securities and Investments Commission (ASIC).

In a recently-delivered address, ASIC Commissioner Sean Hughes confirmed that the regulator was currently looking at advice delivered by superannuation funds to their members.

He said ASIC had commenced the project with a survey of 25 funds and would move on to looking at some examples of personal advice with a view to completing the exercise in about a year’s time.

“As part of the project, we are particularly interested in whether conflicts affected the quality of advice,” Hughes said. “Conflicts are not restricted to retail super funds and can arise in different ways

across the industry.”

The ASIC commissioner noted that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had recommended a prohibition on the deduction of advice fees from MySuper accounts and a limit on the deduction of fees from choice accounts.

As well, he noted that the Royal Commission recommended to repeal the grandfathering provisions for conflicted remuneration by 1 January, 2021.

“We think there is scope for trustees to improve their oversight practices in this area, including having regard to the sole purpose and best interest requirements in the law,” Hughes said.

Elsewhere in his address, the ASIC commission flagged that the regulator intended to “heighten the intensity of our regulatory scrutiny in superannuation”.

AFCA gives consumer groups key input CONSUMER groups have been delivered direct input into the Australian Financial Complaints Authority (AFCA) via a newlyformed Consumer Advisory Panel.

The panel consists of 10 consumer representatives and is being chaired by a former executive officer of the Financial and Consumer Rights Council and former Consumer Action Law Centre board member, Peter Gartlan.

Confirming establishment of the panel, AFCA chief executive and chief ombudsman, David Locke said it would provide important insights on issues and ensure consumer needs were being met.

“AFCA exists to deliver fair solutions to financial disputes, to provide access to justice for consumers and small business owners, and to work with industry to improve its practices and Continued on page 3

21/03/2019 2:53:01 PM

2 | Money Management March 28, 2019

Editorial

mike.taylor@moneymanagement.com.au

LEAKING BILLIONS, THE BANKS DEPART WEALTH MANAGEMENT

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

Just short of 20 years after beginning their adventure in wealth management, the major banks have all headed for the exit, leaking billions of dollars.

AND THEN THERE were none.

The great banking adventure in wealth management all but ended on Tuesday, 19 March, 2019 having cost the Commonwealth Bank, ANZ, National Australia Bank (NAB) and Westpac billions of dollars to get in and, ultimately, billions more to exit.

Westpac completed the full set of Australia’s four big banks exiting wealth when it announced that it was exiting personal advice by salaried and aligned planners and aimed to complete the transaction with relative unknown, Viridian Financial Group, by September, this year.

I say the banks have all but ended their wealth management adventure because, of course, the Commonwealth Bank has had to slow-down its exit from Colonial First State, Count Financial and its mortgage broking business to finish its fee for no service remediation, while former Perpetual chief executive, Geoff Lloyd, still has a significant job in front of him in completing NAB’s exit via the divestment of MLC. The big banks’ wealth management adventure lasted just short of two decades and reflected the value they saw in investment management outfits such as

Colonial and MLC in 2000 – a time when Australians were increasingly embracing share ownership via, ironically, the Federal Government’s decision to privatise the Commonwealth Bank and transactions such as the demutualisation and listing of the NRMA. It was a time when residential property began its long rise and when, aside from minor hiccups such as the “tech wreck”, share markets maintained an upward trajectory despite the misgivings of some analysts and commentators.

Perhaps surprisingly, the banks’ wealth management adventure lasted almost a decade beyond the global financial crisis as some exhibited their willingness to continue the party when the Commonwealth Bank opted to spend $373 million on acquiring Count Financial in 2011.

But, two years’ later the Future of Financial Advice (FoFA) regime became law, commission-based remuneration and volume-based rebates were banned and while the adrenalin which had fuelled the adventure was still flowing, it should have been clear that commercial exhaustion was setting in.

In athletics, exhaustion can lead to poor judgement and the same

seems to have applied to the banks and wealth management, giving rise to the succession of bad decisions which were revealed during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, not least fee for no service.

But if anyone wanted to truly understand the commercial rationale behind the big banks’ exits from wealth management they need only have followed the testimony delivered to the Royal Commission and the evidence given by Commonwealth Bank chief executive, Matt Comyn, to the House of Representatives Standing Committee on Economics.

Comyn neatly encapsulated the hard financial reality which had confronted the board of the Commonwealth Bank when he said that of the $1.4 billion the company had had to pay in remediating clients, $1.2 billion was with respect to wealth management.

So now that the great wealth management adventure is over and Westpac has found a buyer for its business, who will be willing to ante up for the MLC and CFS businesses?

Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@moneymanagement.com.au Journalist: Anastasia Santoreneos Tel: 0438 836 560 anastasia.santoreneos@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi

Subscription enquiries: www.moneymanagement.com.au/subscriptions customerservice@moneymanagement.com.au

Money Management is printed by Bluestar Print, Silverwater NSW. Published fortnightly.

Subscription rates: 1 year A$244 plus GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written

Mike Taylor Managing Editor

permission from the editor. © 2019. Supplied images © 2019 iStock by Getty Images. Opinions expressed in Money Management are not necessarily those of Money Management or FE Money Management Pty Ltd.

WHAT’S ON Creating a customer centric culture and improving customer outcomes

How to reinvent and liberate your career

Adelaide, SA 3 April Finsia.com/events

Sydney, NSW 3 April Finsia.com/events

04MM2803_01-13.indd 2

Vic Fund Taxation Discussion Group

ASFA Budget Briefing

Melbourne, VIC 4 April Superannuation. asn.au

Adelaide, SA 9 April Superannuation.asn.au

ACN 618 558 295 www.financialexpress.net © Copyright FE Money Management Pty Ltd, 2019

20/03/2019 4:28:10 PM

March 28, 2019 Money Management | 3

News

Super funds bounce back in February

BY HANNAH WOOTTON

SUPERANNUATION funds have come out of the December quarter market downturn in good shape, with February’s median balanced option’s return of 2.6 per cent being the highest monthly return since July 2016.

This represented a full recovery for median options from last year’s slump, which saw super funds hit with four consecutive months of negative returns.

For the ten years to February’s end, the data, sourced from SuperRatings, showed that the top-performing option belonged to TelstraSuper with 9.7 per cent, followed by QSuper, UniSuper and CareSuper, all returning 9.5 per cent or above.

The median growth option returned 3.3 per cent over the month, with the median Australian shares and international shares options delivering performances of 5.4 and 4.2 per cent respectively.

SuperRatings executive director, Kirby Rappell, said this showed the sector’s resil-

AFCA gives consumer groups key input Continued from page 1

ience even in challenging market conditions.

“Markets have generally reacted favourably to the recent round of earnings in Australia and the US, while trade tensions have eased and central banks have backed away from further tightening,” he said. “But most participants expect volatility to return in the near future, meaning funds must remain focused on long-term performance.”

minimise disputes arising in the first place,” Locke said.

“Consumer organisations see thousands of people every year and have unique perspectives that can help inform AFCA’s work,” he said. “AFCA is a new organisation and open feedback is important as we continue to improve our processes and services.

“We have ensured that we have selected Panel members who represent the community we serve, including older Australians, Indigenous and Torres Strait Islanders, vulnerable communities and those with financial difficulties.”

Locke said the panel would meet quarterly in different locations across Australia.

Can small, self-licensed firms afford adequate PI insurance?

BY MIKE TAYLOR

PROFESSIONAL indemnity (PI) insurance premiums are going up again and tough questions are being asked about whether small, selflicensed financial planning practices have the capital adequacy necessary to deal with the claim excesses climbing towards $100,000.

What used to cost around $25,000 a year has climbed towards close to $100,000 for some practices, and senior dealer group heads are questioning how this can be afforded by many smaller, selflicensed businesses.

The concerns about the capital adequacy of smaller, self-licensed firms and their ability to meet significantly higher PI premiums has come at the same time as the latest data has revealed that the number of single adviser licensees in Australia has risen from just 489 in 2015 to around 891 in December, 2018.

At the same time, the number of firms with two to five advisers has grown from 619 to 846 over the

04MM2803_01-13.indd 3

same period.

CountPlus chief executive, Matthew Rowe has confirmed to Money Management that he is currently in the market for PI and looking at the options available to the company in circumstances where there have been increases in premium costs and increases the excesses being applied to claims.

He said the scale of the increases were such that they raised questions about the ability of Australian Financial Services License (AFSL) holders to maintain the levels of capital necessary to protect clients.

Rowe’s concerns reflect those of Infocus Wealth Management chief executive, Darren Steinhardt who has openly questioned the rationale behind the establishment of a compensation scheme of last resort.

While making clear he has no objection to self-licensing, Steinhardt has used a discussion paper to argue that much of the impetus for an industry-funded compensation scheme of last resort had been generated by “44 separate,

small and under-resourced AFSLs who have been proven unable to comply with 177 Financial Ombudsman Service (FOS) determinations which affect 246 customers”.

Discussing the situation in the context of PI insurance, Steinhardt confirmed to Money Management that there had been a reduction in the number of PI insurers operating in the market not only generated by the fall-out from the Royal Commission but also by other events such as the construction faults with Sydney’s Opal Tower building.

Like Rowe, Steinhardt suggested that the cost of gaining and retaining PI cover was increasingly becoming something that could only be managed by larger firms with substantial capital backing – something which was beyond most smaller, self-licensed operators.

He said things had changed dramatically since the $20,000 bond which planners had been required to pay under the old Securities Dealer License.

Former dealer group chief executive and current board member, Paul Harding-Davis said it was clear PI insurers were concerned about the higher thresholds allowed under the new Australian Financial Complaints Authority (AFCA) regime and its ability to deal with matters dating bvack to 2008.

He said it was something that the Government and ASIC needed to take into account with respect to policy development in the industry.

21/03/2019 2:53:10 PM

4 | Money Management March 28, 2019

News

AFA hits Hayne on intra-fund advice failing

BY MIKE TAYLOR

THE Association of Financial Advisers (AFA) has continued to rail against the findings of the Royal Commission pointing out that it had failed to understand the degree to which intra-fund advice is conflicted.

The AFA’s general manger, policy and professionalism, Phil Anderson wrote a paper in which he laments the degree to which the Commissioner, Kenneth Hayne, failed to recognise the value of advice while failing to understand the workings of intra-fund advice.

Anderson suggested that all advisers should be concerned about the way financial advice had been described and treated in the Royal Commission final report, even those who thought the Royal Commission represented a great opportunity to deliver fundamental change and help make financial advice a genuine profession.

“There can be no doubt that what the Royal Commission has said about financial advice, both

fair and unfair will have a longterm impact,” Anderson wrote.

“Industry Super Australia (ISA) asked for much in this process, including the removal of grandfathered commissions, life insurance commissions, non-monetary benefits, and ongoing fees from superannuation accounts (or otherwise move to annual renewal),” Anderson wrote.

“One thing that they called for to be retained was intra-fund advice, and that is exactly what they got (again),” he claimed.

“We are not arguing for the banning of intra-fund advice, however we do appreciate that it has the ultimate conflict of interest in that it can only involve a recommendation with respect to the fund that the adviser works for,” Anderson wrote Further he pointed out that the Australian Securities and Investments Commission (ASIC) had acknowledged that it had not yet looked at industry fund advice adding, “so it is not surprising that there were no

issues highlighted at this stage”.

“It is interesting to hear that following the finalisation of the Royal Commission, the industry fund movement is now pushing for a broader definition of intra-fund advice,” Anderson said.

“One further point to note on this statement, is that the Commissioner is wrong again, and intra-fund advice does include personal advice,” he wrote.

Are super fund frequent flyers tantamount to early release?

A panel of superannuation fund executives and experts has openly questioned whether superannuation funds which encourage people to join via offers of frequent flyer points are not only breaching the sole purpose test but also allowing members early use of their funds.

A roundtable conducted by Money Management’s sister publication Super Review during the Conference of Major Superannuation Funds (CMSF) expressed concern that the offer of frequent flyer points by big industry fund, AustralianSuper, was entering worrying and unchartered territory.

Discussion of the AustralianSuper frequent flyer points offer came just a day after a panel discussed the sole purpose test contained within the Superannuation Industry (Supervision) Act and the fact that the Australian Prudential Regulation Authority (APRA) had never publicly acted on breaches of the legislation.

NGS Super chief risk and governance officer, Ben Facer said the offer of frequent flyer points to attract new members had raised a number of questions, particularly in terms of the way in which new members then used the frequent flyer points.

Mercer sales leader, Investments and Financial Services, Brian Zanker said that it appeared that by using frequent flyers, funds were “converting an asset of the fund which is meant to provide for their retire-

04MM2803_01-13.indd 4

ment into an immediate benefit”.

“To me that is not sole purpose,” he said.

“This is a really grey one, because existing members are funding a benefit to attract new members. How does that differ from normal advertising or marketing? It is costing existing members.”

Australian Institute of Superannuation Trustees, Eva Scheerlinck acknowledged the dilemma, noting that a member could spend her points now, but that superannuation was intended for retirement.

However, she noted that other funds had similar, if somewhat different offers, including providing healthrelated benefits such as boost juice vouchers and subsidised gym memberships.

Scheerlinck said it could therefore be argued that the benefits were helping drive down the fund’s group insurance premiums.

Zanker said that the question had to be asked about “at what point does it cross the line, and if it is deemed to cross the line where does it actually stop”.

“By this one starting now, others will think of creative ways.” he said.

Facer said that if the practice was allowed to continue, then the industry might be seen as effectively sanctioning it, albeit that it could be argued that such an offer created membership growth and therefore helped drive down overall costs.

FASEA reaches key milestone on degrees/ bridging courses IN what represents one of its most important announcements to date, the Financial Adviser Standard and Ethics Authority (FASEA) has published what amounts to an outline of its requirements and education pathways clearing the way for education providers to seek accreditation of their offerings.

FASEA announced it had released its final FPS002 Program & Provider Accreditation Policy which provides guidance to Higher Education Providers (HEPs) and Professional Associations on the approval requirements for a range of education pathways.

The policy, the result of stakeholder consultation and two pilot accreditations conducted at HEPs can be found here: https://www.legislation.gov.au/Details/ F2018L01833.

The policy provides guidance on approval of: • Bachelor Degrees; • Graduate Diplomas; • Masters Degrees; • Bridging Courses; and Credit for recognition of prior learning (RPL) in respect of education undertaken to obtain a relevant professional designation.

FASEA said that it would now be accepting applications for accreditation from HEPs with priority of assessment given to applications for Graduate Diplomas and Bridging Courses.

The announcement said FASEA would assess an initial tranche of Graduate Diplomas and/or Bridging Courses pursuant to the requirements in FPS002 Accreditation Policy for HEPs who submit an application by 12 April 2019.

“FASEA will undertake an initial review of applications and advise if further information is required.

Compliant applications will be assessed within approximately eight weeks of receipt and notification of outcomes will be advised to all HEPs at the same time and entered on the FASEA website,” it said.

FASEA would periodically register amended Degrees, Qualifications and Courses Legislative Instruments, updated to include the accreditation of additional approved degrees, courses and education approved for RPL as well as amendments to existing approved programs and courses.

21/03/2019 12:24:37 PM

GET UP TO 30% MORE TIME ON YOUR SIDE Our new underwriting engine helps you to complete OneCare applications up to 30% faster.

LEARN MORE AT ONEPATH.COM.AU/PATHWAYS OneCare is issued by OnePath Life. OnePath Life is a wholly owned but not guaranteed entity of Australia and New Zealand Banking Group Limited (ANZ). View the PDS available at onepath.com.au and consider if it’s right for you.

_FP ad Test.indd 5 WTM-ANW0336_330x240_FP_MM_v2.indd 1

14/03/2019 3:28:16 PM 4/2/19 2:39 pm

6 | Money Management March 28, 2019

News

APRA serves notice on financial services remuneration

BY MIKE TAYLOR

THE big banks have been placed on notice that their executive remuneration regimes will have to become more transparent and that variable remuneration will have to be variable in practice.

The Australian Prudential Regulation Authority (APRA) executive general manager, Policy and Advice, Pat Brennan flagged to a Sydney forum that before the middle of the year the regulator will be releasing a consultation paper ahead of an updated prudential standard on remuneration.

He said that the consultation paper represented a follow-on from APRA’s 2018 Information Paper on Remuneration practices at large financial institutions “where we found that practices were not as robust as they should be”.

“We have also learnt a great deal from the CBA Prudential Inquiry and of course the

Royal Commission,” Brennan said.

“The new standard will be stronger and be primarily focused on outcomes. This will include that performance assessment must reflect consideration of all relevant contributions to performance, including risk management,” he said. “Banks will need to be transparent with APRA on how remuneration decisions are made; and variable remuneration must be truly variable in practice.”

Brennan also flagged that APRA would be refreshing its governance and fit and proper standards as part of an improved accountability regime for financial institutions, particularly the new regime to be run by the Australian Securities and Investments Commission (ASIC) in parallel with APRA’ s Bank Executive Accountability Regime (BEAR).

“Again, this will be in light of what we have learned through our supervisory activity, through the CBA Prudential Inquiry and the findings of the Royal Commission,” he said.

Westpac to exit personal advice by September WESTPAC has confirmed it is exiting personal advice by salaried and aligned planners by September, this year.

In a document released to the Australian Securities Exchange (ASX), the big banking group said it was resetting its wealth strategy and the exit by September was part of its priorities.

The document stated that the BT brand would be retained but that BT Financial Group would no longer be a standalone division with insurance to be integrated into an expanded consumer division and private wealth, platforms and super to be integrated into the expanded business division.

It said that this would result in a reorganisation of executive responsibilities.

The Westpac document said that as part of its move it would be extending its advice referral model over time, including to Viridian Advisory.

04MM2803_01-13.indd 6

So, who is Viridian?

THE financial planning group which has acquired a significant element of Westpac’s BT Financial Advice business, Viridian Financial Group Ltd, owes at least a part of its origins to Westpac with one of its co-founders, Raamy Shahien starting his career with the banking group in 2005.

Viridian confirmed its transaction with Westpac soon after the big banking group announced its decision to exit private advice via salaried and aligned planners to the Australian Securities Exchange, surprising many because of its relatively modest scale.

The company described itself as a selflicensed, national advice business offering wealth and retirement planning, investment management and other solutions.

Explaining the transaction, Viridian said it would also entail the company offering BT Group Licensees practices, currently operating under the Securitor and Magnitude brands, the opportunity to join a Viridianowned licensee advice model operating under an Australian Financial Services Licence (AFSL) being established.

“Viridian also intends to acquire the Securitor and Magnitude brands under its new model, subject to finalising terms with Westpac,” it said.

The company’s formal statement said the purchase agreement would result in the

transfer to Viridian of part of the BT Financial Advice business and some of BT Financial Group’s financial advisers and support staff.

“The transaction enables Viridian to expand its existing national strategy,” it said.

“Viridian will have national adviser presence through both an employee adviser channel and a licensing model for separately run advisory firms. “ “The BT Financial Advice advisers, support staff and clients who agree to the transition are expected to transfer to Viridian on the anticipated completion date 30 June 2019. BTGL practices that accept the Viridian licensing model will also be able to commence transferring to the newly established AFSL at a later date.”

Commenting on the transaction, Viridian chief executive and co-founder, Glenn Calder described it as an exciting acquisition by the public unlisted company wholly owned by staff and clients.

“This acquisition gives us the opportunity to be a dynamic part of the industry, continuing to invest heavily in IT infrastructure in the long term.”

Under the agreement, after the anticipated completion date of 30 June 2019, Viridian will be a referral partner for new Westpac clients seeking financial advice services.

21/03/2019 2:50:20 PM

March 28, 2019 Money Management | 7

News

Investors again voice fears over dividend reform

BY HANNAH WOOTTON

IN an unsurprising survey result, one of Australia’s largest listed investment companies has found that many Australian investors are deeply concerned by Labor’s proposed dividend imputation reforms.

Eighty-five per cent of nearly 15,000 shareholders to respond to a survey by the Australian Foundation Investment Company (AFIC) said that they relied on franking credits, with many noting that they’d face “significant” income losses should the policy go through.

AFIC managing director, Mark Freeman, said that shareholders were “distressed” by the changes as they’d planned to depend on them in their retirement “in good faith based on the current system”.

“We have received many stories from elderly retirees who are proud of working hard throughout their lives as well as living on modest means in order to save and be self-sufficient in retirement. They did this with an understanding of the current rules, knowing it takes a number of years to build up a retirement fund,” Freeman said.

Attempting to counter Labor’s position that the reforms would only impact wealthy retirees, Freeman claimed that many respondents had planned to use the credits to fund a “modest quality of life in retirement”, earmarking them for groceries and medical expenses.

Freeman also suggested that the reforms could impact investment in Australian businesses, as franking credits were a “key reason” retail investors supported domestic companies’ capital raisings after the Global Financial Crisis.

Brexit hits UK fin services sector hard REGARDLESS of what outcome the United Kingdom and European Union reach on Brexit, the decision to leave has inflicted unprecedented damage on the former’s financial services industry, according to the founder of one of the world’s largest financial advisory organisations. deVere Group founder and chief executive, Nigel Green, warned that the actual process of leaving the EU was “increasingly irrelevant” and that firms across the sector had already had to take precautionary action to safeguard their business.

Such steps could involve relocating parts of their business or key staff to countries within the EU or setting up legal entities in the EU. Green warned that the extent this had occurred was unknown, as many of the moves hadn’t been disclosed.

Green slammed “years of uncertainty and a lack of firm leadership from all parties” following the decision to leave as a cause, warning that low confidence in financial services would hit jobs and the Government’s tax base.

“With no meaningful access to the EU’s single market, the UK’s financial services sector is bracing itself for what is likely to be a long and steady decline, ultimately losing its coveted ranking as the world’s top financial centre,” the deVere Group CEO said.

“The steady drain of investment, talent and activity away from UK financial services might be able to be stopped, the situation might be recoverable, but confidence needs rebuilding fast.”

The financial services sector currently contributed around 6.5 per cent of the UK’s GDP.

04MM2803_01-13.indd 7

FSC dragged ‘kicking and screaming’ on codes

BY MIKE TAYLOR

THE insurance industry and the Financial Services Council (FSC) have had to be dragged kicking and screaming towards enforceable codes of conduct, according to plaintiff law firm, Maurice Blackburn.

Welcoming the Federal Government’s release of a consultation paper canvassing enforceable provisions for industry codes of conducts, Maurice Blackburn Superannuation and Insurance principal, Kim Shaw said the Government’s move was necessary because of the industry’s stubborn refusal to act on the commonsense measure that would ensure improved standards for consumers.

Shaw said enforceable codes of conduct had long been called for by stakeholders and were recommended by both the Hayne Royal Commission and the Productivity Commission, “but the industry had repeatedly failed to act and the Federal Government’s intervention to enforce this vital reform was welcome”.

“The industry has had to be dragged kicking and screaming to this reform, despite consulting and developing revised codes of conduct over a number of years,” she said.

“We have repeatedly criticised both the code governing insurance in super and the Financial Services Council’s (FSC) life insurance code for being completely

inadequate, in our view both have not and will not provide adequate consumer protections without proper ASIC oversight and enforceability.”

Shaw said both groups had failed to act on what was obvious and necessary reform to deliver Australian Securities and Investments Commission (ASIC) approval and enforceability of their codes, despite numerous opportunities to do so.

“Groups like the FSC and other peak bodies should be taking a long, hard look at themselves today as to why it has had to get to this point – where a Productivity Commission (PC) report and the Hayne Royal Commission have called for such oversight but still they have failed to act, and the Federal Government is now stepping in to legislate to force their hand,” she said.

“We are relieved the Federal Government is now stepping up to legislate to ensure proper and long overdue oversight and enforceability of these industry codes, given the industry has made clear it cannot be relied on to do the right thing itself.”

Shaw said the law firm also welcomed the proposal to ensure that any contraventions of ASIC-approved codes would amount to a breach of the law, as well as to ensure that if the industry failed to put forward its proposed enforceable code provisions in a timely way that mandatory codes would be imposed by the Government.

20/03/2019 3:00:21 PM

8 | Money Management March 28, 2019

News

Consumers simply won’t pay for life/risk advice

BY MIKE TAYLOR

PEOPLE seeking life insurance are unwilling to pay out of pocket fees and such a move after the Life Insurance Framework review in 2021 is likely to put expert life insurance help out of their reach, according to new research released by Zurich.

At the same time as a Money Management project revealed substantial support for the continuing role of Australia’s life/risk advisers from within the most senior executive ranks of the life insurers, the Zurich research sounded a warning on the consequences of abandoning a commissions-based approach after 2021.

Further, Zurich called on all stakeholders – regulators, policymakers, financial advisers, insurers and consumers - to collaborate on the framework for the 2021 review saying it is essential to ensure the review is as robust and comprehensive as possible.

The Zurich research, undertaken by actuarial research house, Rice Warner revealed a significant disconnect between the cost of providing life insurance advice and the willingness of consumers to pay for that advice with only eight per cent of those surveyed indicating they would be willing to pay more than $1,000 out of their own pocket.

It found that, by contrast, 93 per cent of advisers said they would need to charge in excess

of $1,000.

The research also found that almost 30 per cent of consumers said they were not willing to pay a fee at all, a finding which illustrated the size of the challenge ahead.

Commenting on the research, Zurich Life and Investments chief executive, Tim Bailey said the research confirmed the experience observed in other countries that consumer willingness to pay out of pocket fees for life insurance advice is very limited.

“To the extent that demand for life insurance generally coincides with major life events, for example taking on major debt such as a mortgage, or the birth of a child, we often see the paradox that the time when cover is most

needed is also the time when household finances are most challenged,” he said. “Mandating an out-of-pocket fee to people in such circumstances, from 2021, is likely to put expert life insurance help out of reach at the worst possible time for them and would likely see people with inadequate or inappropriate cover, or worse still, no cover at all.”

Bailey said that, in these circumstances, a major priority for insurers and the advice profession, in partnership with ASIC and government, should be to help create a consistent and robust evidence base to be used by the many stakeholders who will shape the sector over the coming years.

FPA and Kaplan join forces

BY HANNAH WOOTTON

THE Financial Planning Association (FPA) has signalled that at least one education provider it plans to be in bed with for the rollout of the Financial Adviser Standards and Ethics Authority (FASEA) reforms is the privately-run Kaplan Professional, announcing the two groups would run a series of events together.

Kaplan had already said it would run low-cost, largely online offerings to help advisers meet the education

04MM2803_01-13.indd 8

Early release of super a key concern for advisers ACCESSING superannuation and understanding the conditions for release was forefront of many advisers’ mind last month, as it proved the number one superannuation issue they faced.

AMP’s technical superannuation advice team reported a spike in interest particularly in early access to super, receiving over 2,000 calls from advisers on the topic over February.

“This month we saw a focus on understanding the conditions that need to be met before people can access their super,” AMP technical strategy manager, John Perri, said. “Many Australians don’t realise they can access super early if they change jobs between the ages of 60 and 65, even if they continue working in a new job.”

From an adviser perspective, he said that it could suit some people to access super benefits as a tax-free lump sum during that period or use it to commence a retirement income stream, both of which could prove more flexible and tax-efficient that using a Transition to Retirement pension.

Other hot topics raised by financial advisers on superannuation in February included: • How much can be contributed to super through non-concessional contributions; • How transition to retirement pensions work; • How superannuation death benefits work; and • How total and permanent disability insurance works within superannuation.

requirements imposed by FASEA, with a recent Money Management survey finding that these factors had made them the provider of choice for advisers needing further qualifications under the professionalisation regime.

The ‘FPA Careers in Financial Planning Event Series’ would ran networking events in Perth, Adelaide, Melbourne, Brisbane and Sydney in coming weeks, providing tertiary students with the opportunity to meet local and national employers, education providers, and young professionals.

20/03/2019 3:02:10 PM

March 28, 2019 Money Management | 9

News

ASIC hits AMP and banks over laggard approach to fee for no service

BY MIKE TAYLOR

AMP and the major banks have taken too long to conduct followup reviews into fee for no service, according to the Australian Securities and Investments Commission (ASIC).

The regulator released an update on what were supposed to be further reviews undertaken by AMP, ANZ, the Commonwealth Bank, National Australia Bank (NAB) and Westpac claiming that most of the institutions are yet to complete the exercise beyond what was carried out in 2013.

Commenting on the finding, ASIC Commissioner, Danielle Press said the institutions had taken too long to conduct the reviews and welcomed the Government’s commitment to give ASIC new directions powers

that could speed up remediation programs in the future.

“These reviews have been unreasonably delayed,” she said.

“ASIC acknowledges that they are large scale reviews – they relate to systemic failures over long periods with reviews going back six to 10 years and cover 36 licensees from the six institutions that currently authorise more than 7,000 advisers. However, we believe the institutions have failed to sufficiently prioritise and resource their reviews, particularly as ASIC advised them to commence the reviews in mid-2015 or early 2016.”

“We are pleased the Government has agreed to adopt recommendations from the 2017 ASIC Enforcement Review Taskforce Report, which includes a directions power. This would allow ASIC to direct AFS

licensees to establish suitable customer review and compensation programs,” she said.

Press said the main reasons given by the institutions for the delays were poor record keeping, a failure to propose reasonable customer-centric methodologies and an overly legalistic approach.

YBR reports loss, reassesses wealth management PUBLICLY-LISTED mortgage broking and wealth management business, Yellow Brick Road (YBR) has announced a strategic review of its wealth management business after confirming a substantial loss to the Australian Securities Exchange (ASX).

The company released its delayed half-year result describing it as an unqualified audit-review half year report which showed a net loss after tax of $34.15 million which included a non-cash asset write-down of $33.95 million on the carrying value of the wealth management and lending business and various other intangible asset across the Group.

It said the balance sheet reset had resulted in no goodwill being carried out and only one remaining strategic intangible asset with underlying EBITDA being a $2.6 million loss versus a $2.10 profit in the previous corresponding period.

The announcement said the write-down had resulted from detailed consideration of the goodwill and other intangible assets in the context of the cumulative effect of challenging consumer and market trading conditions, the response from the banks to increased macro-prudential oversight, sentiment resulting from the Royal Commission and uncertainty regarding proposed changes to the

04MM2803_01-13.indd 9

future regulatory environment.

Commenting on the situation, YBR executive chairman, Mark Bouris said the first half of the financial year had been challenging for the sector and the company had taken decisive action.

“It has been an unusually tough six months,” he said. “Sentiment surrounding the Royal Commission, changes in credit approval processes, ore intense regulatory oversight and greater compliance requirements and costs have created significant uncertainty.”

“It is now particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan,” Bouris said. “In all the years of being involved in the home loan b usiness, I have never seen such difficult borrowing conditions.”

The YBR statement said that having simplified the company’s balance sheet, the board and management were currently undertaking a broad strategic and operational review to simplify the business, “including assessing the wealth management business and business structures, to ensure YBR remains competitive”.

The statement said the board would provide an update by the end of April.

ASIC claims document victory against AMP and Clayton Utz THE Australian Securities and Investments Commission (ASIC) is claiming a victory following a decision by law firm Clayton Utz and AMP Limited to provide its internal file notes on the firm’s interviews with current and former employees and officers of AMP interviewed in connection with its report to AMP on fee for no service.

ASIC had commenced Federal Court proceedings against AMP and the law firm in December seeking an order compelling Clayton Utz to produce the interview notes which had been withheld from ASIC on the basis of claimed legal professional privilege.

The interview notes were responsive to a compulsory notice to produce issued by ASIC under section 33 of the ASIC Act in October, last year, relating to ASIC’s ongoing investigation into AMP Group for fees for no service conduct and related false or misleading statements to ASIC. ASIC said Clayton Utz had produced the documents so by ASIC with no claim of legal professional privilege by AMP and that AMP had agreed to pay the regulators costs.

Commenting on the outcome, ASIC deputy chairman, Daniel Crennan QC said the regulator was determined to take enforcement action against the major banks and financial service providers and to use all legal powers necessary to investigate the significant issue of fees for no service.

“Entities should take seriously their obligations under statutory notices issued by ASIC, including producing documents in accordance with the specified timeframe and not preventing the disclosure of documents to ASIC by making inappropriate LPP claims. These interruptions delay and frustrate ASIC’s proper investigation,” he said.

20/03/2019 3:57:14 PM

10 | Money Management March 28, 2019

News

CBA acting on RC advice recommendations: Comyn

BY HANNAH WOOTTON

THE Commonwealth Bank (CBA) has expressed its total support for Banking Royal Commissioner Kenneth Hayne’s recommendations and signalled how it is already acting on many of them as it seeks to rebuild trust in its business. Its chief executive, Matt Comyn, told the Standing Committee on Economics that the bank was focusing on addressing past failings, strengthening internal governance, culture and accountability, and focusing the business on delivering for customers to improve trust.

While CBA had already signalled its intention to remove grandfathered commissions, arguably the most significant of Hayne’s financial advice recommendations, Comyn said that the bank would move to implement all the advice suggestions.

The bank was moving to a new model with its salaried advice channel, Commonwealth Financial Planning, where customers would only pay once service was delivered. CBA would also develop new models in its other advice businesses once legislative requirements meeting the advice recommendations were finalised.

Regarding concerns about conflicts of interest, Comyn said that, consistent with a recommendation from Hayne, CBA would “soon be” updating its customer communications to explain simply and concisely why their

advisers weren’t independent, impartial and unbiased.

Comyn said the bank had already acted prior to the Royal Commission on stopping conflicted remuneration practices for advisers, as well as already taking a strong stance on misconduct by financial advisers. He said the bank also already reported serious compliance concerns regarding advisers to ASIC, but that it would make changes to this process once the regulator released new guidance.

Regarding superannuation, Comyn expressed support for all Hayne’s recommendations and said that the bank would

implement them once legislation was finalised on each issue. He said that CBA already didn’t engage in hawking or treating of employers, the banning of which was advocated by Hayne.

The CEO took a similar stance on insurance, saying that the bank supported all recommendations and would implement them once legislated. The exception was Hayne’s suggestions on life insurance, which Comyn acknowledged but said didn’t apply to the bank now that it had agreed to sell its life business to AIA. Comyn said the bank was improving its culture generally, supporting the extension of the Banking Executive Accountability Regime (BEAR) to improve governance practices. He also said that “work is well underway” to improve culture and governance through its Prudential Inquiry Remedial Action Plan, and that CBA supported Hayne’s recommendation that the Australian Prudential Regulation Authority (APRA) supervise practices in these areas.

On regulation, Comyn said that CBA supported recommendations to improve its interactions with regulators, but noted that the bank had already taken steps to self-report contraventions and have open, constructive and cooperate dealings with the watchdogs prior to the Final Report.

Comyn also announced that his deputy, David Cohen, would chair a Royal Commission Implementation Taskforce at the bank.

Advisers and clients the best judges of SMSF appropriateness

BY MIKE TAYLOR

THE appropriateness and desirability of self-managed superannuation funds (SMSFs) are matters for clients and their advisers to work out, and ought not be determined by Government reports or industry bodies utilising generalised figures, according to the chief executive, of automated investment management company, Six Park, Pat Garrett.

Writing in a column, Garrett argued that notwithstanding its good intentions the recent Productivity Commission (PC) report into superannuation had unfairly singled out SMSFs and had therefore risked tarnishing what could actually be the best option for many Australians looking to

04MM2803_01-13.indd 10

maximise their superannuation.

Discussing the PC, he wrote that there had been much discussion about whether or not a minimum balance for SMSFs would be recommended, with many predicting the Commission would set the benchmark at $1 million.

“Thankfully, the final report didn’t end up recommending a minimum fund size but there were references to SMSFs under $500,000 with question marks placed over their performance. This is both frustrating and an overly simplistic conclusion,” he wrote.

“Each client is different and should be treated as such. A SMSF may not be the best choice for someone with $1 million but it could be the perfect solution for

someone with under $200,000 – or vice versa! Or for two people who look almost identical on paper, a SMSF might be right for one and not the other depending on their future needs, timeframes and risk preferences,” Garrett wrote.

“That’s for advisors to help their clients figure out – not for reports, industry bodies or governments to infer by utilising generalised figures that do not present applesfor-apples analysis.”

He said the PC report’s recommendations were based in part on costings that didn’t consider newer, more cost-effective and professional services that exist in the industry.

“Whether via an advisor or using online administration and/

or investment management, there are options out there now that significantly reduce the costs of running a SMSF – and these options seem to have been entirely overlooked in the Commission’s figures and assumptions,” Garrett claimed.

“High fees and poor diversification have been the primary causes of poorer performance in smaller-balance SMSFs in the past, but technology is now allowing people to create SMSFs that are internationally diversified and expertly managed at a lower cost point,” he wrote. “By not factoring in these developments, the report is not accurately representing what’s possible with a SMSF set-up today. “

20/03/2019 3:02:53 PM

March 28, 2019 Money Management | 11

News

Choppy markets don’t deter Aussie investors

BY ANASTASIA SANTORENEOS

LAST year’s fourth quarter was rocky to say the least, but Investment Trends’ 2018 2H Online Broking Report showed Australian investors continued to trade despite the volatile conditions, and dormant investors were prompted to recommence their trading activity.

The report, which surveyed over 8,000 Australian online investors in Q4 last year, said the population of online investors in the six months to December 2018 increased from 720,000 to 750,000.

Investment Trends’ research director, Recep Peker, said many online investors took the broad sell-off in equities at the end of 2018 as a buying opportunity, and 76,000 investors resumed their investing activity in the last six months.

Peker said this presented an opportunity for online brokers and product providers to target investors.

“There is widespread appetite for stock recommendations, trading ideas, in-depth research and analyst reports as investors seek tools that give them the edge to make informed decisions in these uncertain times,” he said.

As well, digital engagement channels continued to grow in importance, with online investors increasingly relying on digital engagement channels as part of their investing.

Twenty-four per cent of online investors currently used social media platforms for investing or finance-related purposes, and a further 11 per cent intended to do so in the future.

“Along with the rising prominence of digital engagement platforms such as social media, blogs and online forums, a new wave of brokers such as SelfWealth and Stake are leveraging these platforms to gain traction with online investors, especially the younger crowd,” said Peker.

“These new challengers make effective use of online media channels to raise their brand profile and engage with their audience by focusing on a seamless user experience or building a vibrant online community.”

Consistent mid-size super funds come out on top

BY HANNAH WOOTTON

CONSISTENCY has seen mid-sized funds come out on top in the first round of the newly launched Superannuation Fund Crown Ratings, a quantitative rating system launched by data company, FE, and Money Management's sister publication, Super Review.

The list of funds to proportionately have the most top-rated options is dominated with mid-size funds. With the exceptions of AustralianSuper and REST Super at the larger end and BUSSQ Building Super and AustSafe Super at the smaller, it’s largely the superannuation providers whose number of offerings and funds under management (FUM) hover in the middle of the road that have done well.

In order from highest to lowest, the top 10 funds to have the largest portion of options receive five Crowns were NGS Super, AustSafe

04MM2803_01-13.indd 11

Super, QSuper, Statewide Super, Sunsuper, First State Super, AustralianSuper, BUSSQ Building Super, Energy Super, and VicSuper.

Considering the emphasis of the Australian Prudential Regulation Authority (APRA) and of some larger providers on scale, this is worth noting.

While some of the larger providers had high numbers of four and five crown options, this was offset by equal amounts of one and two crown ones. This doesn’t really show strength then, as they struggled as much as they succeeded. Another interesting perspective on scale, then.

There was also little to separate many of the options offered by these top 10 funds.

The difference in returns between the best-performing, AustralianSuper’s Balanced Option, and the lowest, BUSSQ Building Super’s Balanced Growth Option, was less than five percentage points.

Considering that most of these products have longer investment horizons, this is a negligible difference. Again, consistency is a recurring theme.

Beyond the Crowns themselves, FE has also created peer group mixed asset indices. Reflecting that the superannuation industry isn’t managed the same way as traditional investment funds are, the indices seek to provide a benchmark for superannuation fund performance.

Speaking on the benefit of the indices in light of the Crowns’ overarching goal of better informing the public and industry on superannuation fund performance, FE’s head of data for Australia, Stuart Alsop, said: “Being able to asses a fund/product option based on a benchmark of their peers aids with comparability and assists the member in making a more informed decision.”

All of the MySuper options of these top 10 funds, for example, also fit into one of these indices. This means that for members going into a fund’s default option, they can better assess the performance of that option against its peers.

The ratings are based on alpha, volatility, and consistency and strength of performance, measured across the three years prior to each rebalancing, which will occur biannually.

20/03/2019 3:55:56 PM

12 | Money Management March 28, 2019

InFocus

TREATING THE SYMPTOMS AND NOT THE DISEASE Does the Royal Commission’s call for a compensation scheme of last resort represent treating the symptoms rather than the disease? That is a question posed by Infocus Wealth Management managing director, Darren Steinhardt in a discussion paper he titled - The Day Socialism Came to Town (cleverly disguised at the Compensation Scheme of Last Resort).

THE FINAL REPORT out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry made a total of 76 recommendations; most of them sound and responsible, some of them philosophical in nature, a few of them questionable (or may I dare say commercially naïve) … but there’s one recommendation in particular that in my view does nothing to fix the problem it is seeking to address and in fact introduces an element of socialism into the financial advice industry.

I’m talking about the Compensation Scheme of Last Resort.

BACKGROUND In order to provide financial advice, a financial adviser needs to have an Australian Financial Services License (AFSL) or be an Authorised Representative of an AFSL. In order to obtain and maintain an AFSL, the financial adviser must be able to demonstrate capability to adhere to certain conditions of the AFSL, such as: 1) Responsible Manager/s that meet educational and operational requirements; 2) Organisational capability; 3) Financial resources; 4) Training of authorised representatives; 5) Monitoring and supervision of authorised representatives; 6) Adequate internal and external dispute resolution arrangements; and 7) Adequate client compensation arrangements (incl. appropriate professional indemnity insurance coverage). * for full details of licence

04MM2803_01-13.indd 12

conditions see ASIC Pro Forma 209 (now in bold font).

The failure to demonstrate capability of any licence condition will mean an application for an AFSL will be rejected; further, the failure to maintain adherence to any licence condition will mean a breach of the conditions of the AFSL and the possibility of the cancellation of the AFSL.

WHAT PROBLEM ARE WE TRYING TO FIX? FOS Circular Issue 34 from August 2018 provides details on ‘unpaid determinations’. An unpaid determination will occur when a consumer is awarded compensation via the FOS dispute resolution process and the consumer receives no payment (or less than the full payment); this is typically as a result of the failure of the business of the AFSL, with the proceeds of insolvency proceedings

representing nil or a minimal return on the dollar.

FOS advise that from the start of its Terms of Reference (01/01/2010) to 30/06/2018 the total of unpaid determinations is $16,040,397.76. It’s important to note the $16m figure does not include any interest on the base award which once applied will see this figure grow substantially.

It’s entirely appropriate that a consumer should be confident that compensation will be paid, as such the problem that we’re trying to fix is the AFSL who is the subject of the determination having adequate client compensation arrangements (i.e. ensuring the AFSL is maintaining the obligations of its AFSL).

HOW THE PROBLEM OCCURS The culprits who have caused this problem are not the banks, financial institutions or the larger and well-resourced AFSLs/dealer groups. They are 44 separate,

small, and under-resourced AFSLs who have been proven unable to comply with 177 FOS determinations which affects 246 consumers; these 44 AFSLs are no longer in business.

Each of these culprits was a small/self-licensed/boutique AFSL who, when a client complaint/compensation was awarded against them, found that their PI Insurance policy didn’t respond (i.e. inadequate client compensation arrangements, 1st breech of licence conditions) so the funding of the determination was subject to the strength of their balance sheet. A lack of financial resources (i.e. inadequate financial resources, 2nd breech of licence conditions) then meant that the AFSL could not pay its debts/ bligations as and when due (insolvency test) which included the client compensation, receivers were then appointed and it’s all over.

20/03/2019 3:05:00 PM

March 28, 2019 Money Management | 13

InFocus Let’s look at precisely how this happens.

PROFESSIONAL INDEMNITY INSURANCE Just having a PI Insurance policy doesn’t automatically mean that the licence condition of adequate client compensation is satisfied; you need to make sure that when you need to call on the policy it’s ready to respond. A PI Insurance contract, like all insurance contracts, has conditions and definitions that need to be met to ensure coverage is available; I call this operating ‘inside the swim lanes’.

For some, one of the attractions of having your own AFSL is that there’s no ‘big brother’ professional standards officer looking over your shoulder checking your work; conversely one of the downsides of having your own AFSL is that there’s no ‘big brother’ professional standards officer looking over your shoulder (you only realise this when a material complaint arises). The benefit of that professional standards officer is that someone is ensuring you stay in the swim lanes, not just so that you meet all of your compliance obligations, but also to ensure you’re operating within the conditions and definitions of the PI Insurance policy. Without that professional standards officer in the first year, you may wander off course and get close to the lane rope but you’re still in the swim lane; in the second year you may wander a bit more off course and be swimming across the lane rope; in the third year … well you know what happens.

I don’t say this because I’m against self-licensing (I absolutely support self-licensing, in fact Infocus evolved from a selflicensed financial advice practice), I make these comments because this is exactly what I regularly see occurring in the industry. Over the years we’ve had a number of advice businesses exit our AFSL to become self-licensed; the common exiting comment was ‘your compliance regime is too tough’. We also rarely partner

04MM2803_01-13.indd 13

with firms that were formerly self-licensed as the challenge of getting them back inside the swim lanes can be too much.

The flaws of this recommendation are numerous, and this article is already long enough.

FINANCIAL RESOURCES

THE SOLUTION THAT WILL ACTUALLY FIX THE PROBLEM

The current licence condition for financial resources is, in my opinion, too low; it’s better than the $20k bond required under the old Securities Dealers licence, but it’s still too low.

I find it almost laughable that in today’s regulatory and litigation fuelled environment that one can actually become self-licensed with the investment of minimal financial resources, and meet their licence conditions, and then go out and take on the responsibility of advice on many millions of dollars.

THE ROYAL COMMISSION SOLUTION The solution recommended by the Royal Commission, based on recommendations from the Ramsay Review, was all about addressing the symptoms of the problem (the unpaid determinations) and not the root cause of the problem itself (the cause of the unpaid determinations). This is extremely disappointing as you cannot fix a problem unless you address the cause.

The solution recommended by the Royal Commission is that the structure which led to the unpaid determinations be allowed to continue completely unchanged, with the bill for the unpaid determinations left to the ~20,000 ethical and capable financial advisers (the rest of us) to pay.

This is penalising the majority for the crimes of the few, the distribution of the costs to the financial advice community as a whole.

This sounds a lot like socialism and with the current level of unpaid determinations we can all expect to pay at least another $1,000 per annum in industry funding. Inevitably, these additional costs trickle down to advisers, and in turn clients, increasing the cost of accessing quality financial advice.

There are many individual changes occurring within our industry that are leading us down the path towards professionalism, including those changes led by FASEA, LIF, and all of the other acronyms.

However, these individual changes don’t address the root causes of the problems that lead to unpaid determinations, which is the failure of AFSLs to adhere to licence conditions.

In my view the following would address the problem: 1) ASIC – the regulator should bear the responsibility for unpaid determinations. This figure would come off their annual profit prior to distribution to their government shareholder (the revenue ASIC now rake in is more than 3.5 times their cost of operation, I believe it was ~$1.2b last year).

This will ensure that they perform their job as corporate policeman effectively including: a) Being more robust at the time of the initial issuance of an AFSL, including the testing of ability of meeting licence conditions and adhering to the reference checking regime recommended by the Royal Commission; and b) ASIC ensuring that licence conditions are continually being met. This could be as simple as testing/ evidencing the adherence to all licence conditions as a part of the annual audit.

The outcome of ASIC bearing responsibility for these unpaid determinations would be that they now have funds at risk. This will either encourage ASIC to become a more effective regulator (ASIC was savaged by the Royal Commission for failing to perform its key role of protecting the public) or have them suffer a

financial consequence for their shortcomings.

2) AFSL – the introduction of a minimum level of capital adequacy, somewhere around $1m. The outcome of a minimum level of capital adequacy would immediately address issues caused by under-resourced AFSLs and I would imagine having more capital at risk would have an immediate change in the attitude of the boards and management of these firms.

Improved management would see advisers stay inside the swim lanes as the consequences for failing to do so would now be significant and, if they did stray outside the swim lanes, there would now be appropriate resourcing to help fund compensation arising from client complaints.

CONCLUSION This is an article that not only seeks to address the flaws in the Royal Commission recommendation of Compensation Scheme of Last Resort, but also challenges the subject of selflicensing as a panacea for the ills of the industry.

We all have opinions, none of which are wrong, but glossing over a subject or failing to identify/challenge its problems because it might not suit the philosophical argument you’re endeavouring to put forward is wrong. The failure by the Royal Commission to point out the root cause of such an important subject as unpaid determinations is a cause for concern.

I’m all for meeting my personal and corporate responsibilities, I’m far from perfect, but I’m a responsible individual and our AFSL is a responsible corporate citizen.

I do not feel like lying down nor should my peers or our collective good advisers - and accepting being forced to take on fiscal responsibility for those who do not take their responsibilities for both the provision of advice and the meeting of their licence conditions seriously.

20/03/2019 3:05:33 PM

14 | Money Management March 28, 2019

Fixed income

04MM2803_14-31.indd 14

20/03/2019 4:29:24 PM

March 28, 2019 Money Management | 15

Fixed income

FIXED INCOME MARKETS GEAR UP FOR AN UNPREDICTABLE YEAR Oksana Patron writes that while fixed income assets serve as a good portfolio stabiliser, geopolitics and the US/China trade war have rocked the market, with some experts even fearing a possible recession.

THE FIXED INCOME market is not as hotly debated as equities or property in Australia, and investors often remain underallocated towards this asset class.

The last few months, however, have proved once again that this component of a portfolio still has a big role to play by offering some insurance and counterbalance to riskier allocations, particularly when equity markets struggle.

So, what does the fixed income market look like, and can investors find opportunities there?

IT’S JUST A SLOWDOWN While some economists and experts have recently become more alert to the probability of global markets entering a recession, with JP Morgan Asset Management raising that probability of recession from zero to 10 per cent in its global fixed income outlook for the first quarter of 2019, most fund managers don’t expect an imminent crisis.

The main concerns for the market are geopolitical risks, including the possible escalation of the US/China trade war; problems in Europe and how countries would handle Brexit; and major central banks’ policies.

Anthony Kirkham, head of Western Assets Australia, an affiliate fixed income manager of Legg Mason, said that despite somewhat lower gross domestic product (GDP) numbers across main economies and a general slowdown in global growth, it was definitely too early to talk about

04MM2803_14-31.indd 15

the recession.

“It’s more just a slowdown,” he said. “We are not on the verge of the recession at this point in the cycle so we are not as negative as I guess some of the economists out there.”

According to him, the solid returns from bonds in 2018 relative to negative results in equities was a prime example that the relationship between equities and bonds was still working.

“Certainly, last year no one has expected the outcome that occurred, with such a strong outperformance by bonds,” he said.

Over the last few months, a fixed income portfolio component also continued to provide some insurance against more volatile assets like equities.

“Fixed income has served over the last 12 months a very good job for investors in terms of providing, I guess, the offset to riskier assets like equities which clearly had a tough year last year being very volatile,” Kirkham said.

However, David Choi, head of Australian Macro at Aberdeen Standard Investments, said while recessionary risks were high last year, he’s a little more optimistic now.

“Our thoughts are evolving,” he said. “Late last year we saw a higher risk of a policy mistake and likelihood of a recession. But now, our outlook has changed.

“We see global growth stabilising in Q2 and expect it to pick up in H2. China has been actively easing policies and the Fed has paused in response to a global

slowdown. The risk of a policy mistake has fallen materially.”

And the Fed is not the only bank to adopt a more dovish stance, Choi stressed.

“Even the RBA [the Reserve Bank of Australia] has recognized the extent of global slowdown and has dropped its hawkish bias,” he said.

On the other hand, according to Anujeet Sareen, portfolio manager for Brandywine Global’s global fixed income and related strategies, the possibility of a recession was a very important question given that the current stage of the cycle would, in June this year, mark the longest global economic expansion in post-war history.

However, he did not believe expansions would end simply because they get old and, in his view, a global recession would be catalysed by two factors that were not yet evident today.

“One is global recessions are precipitated by synchronised monetary tightening. Although the Federal Reserve has raised interest rates over the last few years, other central banks have not similarly tightened policy – for example we do not have the synchronized monetary tightening cycle we saw in 2008 and 2000,” he noted.

Sareen also warned that global recessions are precipitated by a major misallocation of capital.

“In the last cycle, excessive investment in housing markets around the world and excessive financial engineering in banking systems precipitated the severe crisis in 2008.

Continued on page 16

20/03/2019 4:29:32 PM

16 | Money Management March 28, 2019

Fixed income

Continued from page 15 “Although there are pockets of excess in certain parts of the world today, there is no major misallocation of capital that is likely to catalyse a significant contraction in economic activity,” he said.

SHOULD INVESTORS BE LOOKING TO JUMP IN THE MARKET? Bob Michele, chief investment officer and head of global fixed income, currency and commodities at JP Morgan Asset Management, has no doubts that the bond market is in a very good state right now, given economic growth has slowed and central banks have turned dovish in response.

“You look at corporate bonds, you look at emerging market debt, you look at high yields securities and in a stable yield environment – that’s a pretty good time to invest in those markets.

“For the first time in a number of years, it feels like the central banks are supporting the bond markets,” Michele said.

But going forward, he warned, a lot in this market would depend on how the global events unfolded.

“If you don’t get some compromise on the trade and it escalates into a trade war or you’ve had a hard Brexit or there’s more problems with central government shutdown – any combination of these things, then it will push you closer to a recession.

“And stable central bank policy isn’t going to offset that and they would probably be forced to reduce rates and maybe increase the size of the balance sheet – so right now it feels like they’ve taken their foot off the brakes.

“That’s what the markets and investors are trying to figure out, how much time are the central

04MM2803_14-31.indd 16

banks buying, and right now that feels pretty good, but you need to see some improvement on some of these other issues, otherwise the probability of recession goes up significantly.”

AUSSIE MARKET STILL HIT BY GEOPOLITICS According to fund managers, the Australian market has not emerged unscathed from the effects that major global events had on global bond markets.

In fact, Australian investors were faced with a number of domestic issues such as the concerns around the housing market on top of negative geopolitical activity.

However, active fund managers had a number of tools they could use to counterbalance these risks, and when the bond market is rallying, then duration always becomes one of the factors that draws investors’ attention, Kirkham said.

Credit similarly looked interesting, and with assets like equities being on a downward trajectory in 2018, Kirkham said how investors positioned themselves within credit became even more important.

Commenting further on the Australian fixed income market, Kirkham said that there was no problem with liquidity in this market in Australia.

“The Australian market has always been less liquid so the change is less dramatic but in terms of moving bonds we’ve have no issues at all with liquidity. It’s fine.”

Sareen reminded that last year was shaped to a large degree by factors such as the Fed’s policy and the strong performance of the US dollar, which highlighted the sheer strength of the US economy.

However, at the same time, dollar strength brought some negative implications for the emerging market countries, in particular those that relied on

access to that easy money, he said.

“Unfortunately, dollar strength was also a conduit for transmitting US renormalisation stresses to the developing world. Still early in the evolution of their business cycles, emerging markets bore the brunt, and the impact was particularly punishing for those countries that indulged in easy money.”

Choi was of a similar opinion and said that this situation had also translated into the Australian market where the funding costs increased sharply, despite the RBA doing nothing.

“Likewise, the outlook for emerging markets is more positive for this year compared to last year. Not only does the growth outlook supports emerging markets but USD liquidity is less of an issue this year. The Fed is likely to hike only once this year (relative to four hikes delivered last year) but is also actively considering a floor on the size of its balance sheet.”

20/03/2019 4:29:45 PM

March 28, 2019 Money Management | 17

Fixed income

EMs LOOK VALUABLE So does a run of a strong US dollar coupled with weakening Chinese demand and the potential trade disputes mean more challenges for the emerging world? Not necessarily.

“Emerging markets look attractive for a couple of reasons,” Michele said.

According to him, it is not so much about the external dollardenominated debt but the “the real play is in the local currency debt”.

On top of that, real yields are very high across emerging markets, close to on average five per cents, making those markets quite attractive. By comparison, the average yields in developed markets were about zero.

“The currencies [of emerging markets] are also oversold in our view,” he said.

“The trade negotiations between China and the US are going to be magnified in this market, they’re going to move the currency one way, and force the bond market to react another way.”

Also, a trade war isn’t helping either economy, with both economies slowing down and both administrations concerned, he stated.

“I think there’s a lot of value there but, as I said, it’s not quite as easy as owning US treasuries or 10-year Aussie Government bonds or European high-yield which should be relatively stable.

It’s going to be more volatile and you have to be willing to live with that volatility.”

Sanjeen reiterated that that the US and China—along with the rest of the emerging world—could be trading places, with the former slowing and the latter stabilizing

04MM2803_14-31.indd 17

Chart 1: Three-year returns of fixed income sectors to February’s end

Source: FE Analytics

and maybe even seeing a small uptick in growth by year end.

“Self-preservation on both sides of the trade war argues for some kind of a deal, which should bring further relief to global markets in the form of a softer dollar,” he said.

“The outlook for developing economies and their respective financial markets would receive a huge boost if there is a soft landing in the global economy, an end to normalization efforts in both the US and China, and stabilization in the dollar.”

At the same time, capital markets outside of the US have priced in a lot of bearish sentiment on the global economy, which has manifested in extreme discounts across a wide range of emerging market bonds and currencies, and commodities, he said.

THE OUTLOOK FOR 2019 Going forward, experts agreed that there would be a few areas requiring careful monitoring. One of them would be the non-financial corporate sector in the US and how it has increased debt levels over the last decade.

“Although interest costs remain low and the US economy remains in reasonable health, there is higher risk in corporate America from this increase in gearing,” Sanjeen said.

The second issue would be the expected slowdown in the Chinese economy over the past year, which reflected the tightening of domestic monetary and fiscal policies.

However, even though Chinese policymakers could decide to reverse many of these policies to help support future growth, the country’s debt levels and a lack of commitment to significantly ease monetary policy might mean its economy would slow somewhat further, according to Brandywine Global’s portfolio manager.

The third factor would be the final outcome of the US/China negotiations and how both parties would handle and resolve this issue.

“Recent trade negotiations between the US and China suggest a preliminary agreement is forthcoming, but this is unlikely to address the full range of issues between the two countries on economic and political fronts.”

20/03/2019 4:29:59 PM

18 | Money Management March 28, 2019

Responsible investments

TO DIVEST OR NOT TO DIVEST? THAT IS THE QUESTION Anastasia Santoreneos asks whether, as responsible investing proves to be more than just a fad, investors should be opting to divest from troublesome companies or remain invested and use shareholder power to change companies for the better?

RESPONSIBLE INVESTING HAS proven to be more than just a fad, with investors in growing numbers choosing to go green and quit the bad stuff cold turkey.

Coal and the armaments and tobacco industries have copped divestments in large numbers, with fund managers most notably pledging for Tobacco Free Finance at the United Nations earlier last year.

The Responsible Investment Association Australasia (RIAA) recorded that, as at 31 December 2017, responsible investments constituted $866 billion in assets under management, which was up a whopping 39 per cent on the previous year.

This means over 55 per cent of total assets professionally managed in Australia were responsibly invested, and the Association reported funds that implemented responsible investment strategies even managed to outperform traditional Australian and international share funds and multi-sector growth funds over most time horizons.

The RIAA quoted the top drivers of growth in the responsible investment sector as growing demand from institutional and retail investors; the importance of environmental, social and governance (ESG) factors to investors; and the alignment of investments with investors’ missions.

04MM2803_14-31.indd 18

The top detractors from growth in the sector were a lack of understanding and advice; a lack of awareness by members of the public; and performance concerns.

Responsible investing however, is a broad spectrum, and what constitutes responsible to one fund manager may not suffice for another, and vice versa.

So, how far under the hood do investors need to look for a truly responsible fund, and should they simply divest from “bad” companies, or should they be using their stake to change the inner workings of companies?

IT TAKES AN ACTIVE APPROACH Måns Carlsson-Sweeny, head of ESG at Aubsil, said a good ESG fund would actively demonstrate both a clear link between the investment philosophy and the ESG integration strategy, and have a genuinely engaged focus on active ownership.

He stressed that, at least for Ausbil, this meant better informed investment decisions, and a true active ownership, which includes attending meetings, visiting company boards and executives, reviewing supply chains and corporate culture and actively engaging and voting on any relevant ESG issues that arise.

In order for investors to be sure the fund they’re investing in is genuinely responsible, rather than simply a marketing tag to

20/03/2019 3:07:26 PM

March 28, 2019 Money Management | 19

Responsible investments Strap bump fees, Carlsson-Sweeney said they must be sure the fund is doing its own research with an element of independence to collaborate positively with companies to achieve better ESG and investment outcomes.

And, if you’re looking at companies with sustainable earnings and quality management, you’re looking at positive earnings and a hike in share prices.

“A business model that relies on under-priced pollution, misinformed customers, or underpaid workers, is unlikely to produce sustainable earnings over time.”

And, he said being ESG focused doesn’t necessarily mean you are looking at bumped fees, with Ausbil using an in-house research team as part of its overall investment team, as opposed to sourcing it externally.

But it’s no rumour that such high-fee ESG funds exist, with Australian Ethical’s Advocacy, Diversified Shares and International Shares funds all among the top five funds with the highest fees last year.

While the retail funds are expensive, Leah Willis, head of client relationships at Australian Ethical Investment, told Money Management the Diversified

Share and International Share funds’ wholesale equivalents had management expense ratios of 0.95 per cent and 0.85 per cent respectively, which was consistent with peers.

But while low-fee passive responsible funds like BetaShares’ Global Sustainability Leaders ETF, which charges a management fee of just 0.49 per cent, are also on the rise, Carlsson-Sweeney said it takes an active investment strategy to be an ESG manager.

“Yes, passive investors are offering alternative index-linked funds with ESG themes, but can they truly exercise their influence without the ability to actively allocate capital away from companies, and maintain an intense engagement meeting program with corporate leaders?” he asked.

“Because of ESG’s impact across both the tangible and intangible parts of a business’ value proposition, active engagement across both these parts can achieve better ESG and investor outcomes.”

PUTTING GOVERNANCE FRONT AND CENTRE Mercer’s global business leader of responsible investments, Helga Birgden, says while

Table 1: Top performing sustainable/ethical funds for the three years to last month’s end and their management fees.

Fund Name

Three-year cumulative performance to last month’s end (annualised) (%)

CFS Generation WS Global Share

18.49

1.82

UBS IQ MSCI Asia APEX 50 Ethical ETF

18.48

0.45

Nanuk New World

16.20

0.80

UBS IQ MSCI USA Ethical ETF

14.90

0.20

Pengana High Conviction Equities

14.87

1.80

Alphinity Sustainable Share

14.56

0.95

Franklin Templeton Australian Equity

13.39

0.49

UBS IQ MSCI Australia Ethical ETF

13.02

0.17

UBS IQ MSCI World ex Australia Ethical ETF

12.70

0.35

AXA IM Sustainable Equity

12.50

0.35

Source: FE Analytics

04MM2803_14-31.indd 19

Management fees (%)

“By engaging with companies, you can make better informed investment decisions, protect from capital destruction and also potentially expand your investible universe.”

- Måns Carlsson-Sweeny, head of ESG research at Ausbil Investment Management. environmental and social responsibilities are important, it’s governance that is absolutely core and foundational to responsible investing, and it’s transparent companies that are hitting the mark best.

Governance, she said, is about the stewardship of the assets in the board’s care, and now more than ever, governance requires boards to understand and assess a wider set of risks that may impact value or be material to their fiduciary duties.

“It’s about having a robust risk management process in place and being able to speak to the process of assessment of, for example, climate resilience at a governance level, or report in light of it as part of their fiduciary duty,” she said.

Active ownership, voting and engagement are key to Mercer and its clients’ involvement in examining governance processes, and executive remuneration is one example of an issue that has come under stakeholder scrutiny, according to Birgden.

“Increasingly, shareholders are looking at governance issues like the level and structure of executive remuneration, and they want to see that pay structures are aligned with the success of the business or the fund, and that they have an appropriate balance between base pay, short and longterm incentives,” she said.

Birgden picked out the National Australia Bank (NAB) annual general meeting (AGM) in December last year where executive remuneration was a topic of the bank’s report.

At that AGM, NAB was hit with an 88 per cent vote against its report, something that Birgden

said was due to the bank’s shortterm focus on executive remuneration, which was too generous in light of it’s financial performance.

Contrastingly, Whitehaven Coal received 40 per cent shareholder support for its climate change resolution to increase its disclosure on tackling climate change.

“That’s the way funds are expressing their views about governance, in that AGM and voting process,” she said.

Stewart Investors’ emerging markets (EMs) manager, Jack Nelson, believes investing in a company with responsible governance practices means investing in a company with a good sustainable growth outlook.

From the outset, companies with good corporate practices are generally not found in emerging countries, where low wages are rife and working conditions are sub-par. But, Nelson said this isn’t something that’s niche to just EMs. “Companies with attractive prospects for profitable growth, truly sustainable business models, and with owners who allow minority shareholders to participate in their success, are rare in emerging markets,” he said. “We would also argue that this is true of companies in developed markets.”

He said while EMs had some of the worst approaches the firm had seen with regards to corporate governance, treatment of employees and the environment, and attitudes towards responsibilities in general, they were also home to some of the most forward-thinking, Continued on page 20

20/03/2019 3:07:36 PM

20 | Money Management March 28, 2019

Responsible investments Continued from page19 well-stewarded and progressive corporates in the world.

One of these examples, he said, was India’s Dr Lal PathLabs, a small-cap medical diagnostics chain which had attractive economics and an owner with a track-record of treating investors fairly, alongside a naturally sustainable business model.

“Of the largest 100 companies in India, we would never invest in

04MM2803_14-31.indd 20

around 85 of them, at any price,” said Nelson. “In equities, your downside is 100 per cent regardless of what price you pay; and a majority of the largest Indian companies have issues with corruption, or have unscrupulous owners or low quality or unsustainable business models.”

“However, there are thousands of corporates to choose from, in India and other emerging markets,

such that building high-quality portfolios geared towards sustainability is eminently possible.”

Finding Dr Lal PathLabs was a case of bottom-up stock picking, and Nelson said all investors in EMs should approach the asset class in a truly active way, disregarding the benchmark entirely.

HOLD AND ENGAGE Lonsec Research’s general manager ESG/SRI research, Steve Sweeney talked about “engaging the enemy” in an article discussing the dilemma of divestment and engagement.

Sweeney questioned whether divestment, which was an option favoured by those seeking to align investment decisions with their moral views, was as powerful as engaging with company boards to positively impact company practices and culture.

“By divesting,” he said, “investors lose a seat at the table and may sell to a buyer who has little interest in sustainability outcomes.”

From an on-the-ground perspective, Carlsson-Sweeney said there was definitely a shift away from divestment to holdand-engage strategies, because divestment could lead to unintended consequences, while hold-and-engaging could increase the investable universe for ESG investors.

This came into play, he said, following the Rana Plaza building collapse in Bangladesh in April 2013, and the sentiment among Bangladeshi garment workers after the incident.

“I visited Bangladesh in 2014,” he said, “the workers I spoke with on this site visit did not want Western brand companies to leave Bangladesh. They wanted the brand companies to keep buying from Bangladesh for their industry, but in return, they just wanted decent working conditions.”

By simply divesting the shares in a company that has an ESG issue, Carlsson-Sweeney said those shares may end up in the hands of an investor that does no

corporate ESG engagement at all.

For the workers in Bangladesh though, the best option was to work to continually improve working conditions though active ESG engagement.

“Improved ESG performance can be a lead indicator of improved operational performance and can be a step in the journey towards premium valuation in the future,” he said.

In practice, while there are cases where ESG engagement leads to no measurable improvement, he’s seen many cases where companies adopt suggested changes and strengthen their ESG risk management.

“By engaging with companies, you can make better informed investment decisions, protect from capital destruction and also potentially expand your investible universe,” he said.

Birgden says it’s not so clear cut though, and divestment and engagement aren’t mutually exclusive.

“There’s no such thing as a perfect company, so engagement is really the more mainstream idea, rather than divestment or exclusion,” she said.

But, where divestment is most prominent, she said, is in the 60 per cent of APRA-regulated funds that have excluded tobacco or controversial weapons from their portfolios.

While stock pickers chose not to engage in this instance, Birgden said it was a less about the investment decision, and more about an understanding that companies and funds are part of society, and investors increasingly don’t want to capitalise or have the reputation risk of allocating to companies that are harming humans at the primary level.

“Divestment is a very fund-byfund related issue,” she said.

“There is a point at which investors will decide (in line with their investment beliefs and their policy and what they’re doing as a fund) that divestment is a useful tool, but that’s not to say it’s the only way you can deal with this issue.”

20/03/2019 3:07:48 PM

March 28, 2019 Money Management | 21

Women in Financial Services

THE PERKS OF BEING BACKED BY DEALER GROUPS As financial planners increasingly choose the self-licensed path, Anastasia Santoreneos discusses the perks of being licensed under a dealer group with Citadel Wealth’s financial planner and Money Management 2018 Women in Financial Services Financial Planner of the Year finalist, Maggie Tagg.

“IT’S NOT ME, it’s you”, are the words all now-self-licensed financial planners once said to their Australian Financial Services licence (AFSL) service providers, before running off into the distance to pursue their own businesses.

Investment Trends data released last year found 20 per cent of planners were selflicensed or under a boutique AFSL, a figure which was up from 17 per cent in 2017 and 15 per cent the year before that.

The move to self-licensing followed overall sentiment from planners that their service providers weren’t supporting them well enough, or the support they were receiving just hadn’t evolved with their needs.

“That’s why across a lot of the industries we look at, financial planners are rating their service

04MM2803_14-31.indd 21

providers lower,” said Investment Trends’ research director, Recep Peker.

Appetite for going solo even proved to be increasing, with another eight per cent of planners citing they intended to pick up their own AFSL in the future.

Peker said the movement could see the financial services industry start to look like that of the UK, which has seen two-thirds of financial planners move to become self-licensed since their version of the Future of Financial Advice was introduced.

“I don’t know if things are going to go there,” he told Money Management, “but it’s interesting to compare to that market.”

So while the trend in Australia is to take the self-licensing path, Money Management 2018 Women in Financial Services Financial Planner of the Year finalist,

“Having a dedicated team who provide ongoing and proactive support ensures we operate in a compliant and up to date manner, which is important for clients and the industry in general,” – Maggie Tagg, financial planner, Citadel Wealth.

Maggie Tagg, says that, on the contrary, dealer groups are, in fact, incredibly supportive.

Tagg works as a financial planner for Citadel Wealth, which is licensed under Alliance Wealth (a part of the Centrepoint Alliance Group), and she said her eight years as a licensee under the dealer group were extremely positive.

“They operate in a very consultative manner and are always looking at ways to further enhance the support and services they provide,” she said. “They provide us with dedicated practice development specialists that work with us to improve and grow the business.”

Tagg said Alliance Wealth has a large compliance and governance team, which provides ongoing guidance to ensure Citadel has the most up-to-date information and practices in place.

This means Tagg is constantly training to keep up with ongoing industry updates and uses fully research approved product lists and model portfolios.

“This enables me to consult with my clients with confidence,” she said.

Elsewhere in this magazine, Infocus Wealth Management’s Darren Steinhardt even suggests that dealer groups are better placed to foot the (extremely high) professional indemnity insurance bill, and it’s small, boutique, or self-licensed planners who cost consumers upwards of $16 million in unpaid determinations.

Something unique about the

MAGGIE TAGG

dealer group model is the community it tends to provide its advisers, and Tagg said being able to share ideas and issues amongst other advisers at Centrepoint’s conferences and development days is invaluable.

And regular peer group meetings could prove extremely useful for morale as advisers enter the next stage of their careers and undertake the Financial Adviser Standards and Ethics Authority regime.

“Having a dedicated team who provide ongoing and proactive support ensures we operate in a compliant and up-to-date manner, which is important for clients and the industry in general,” she said.

When asked whether working under a dealer group had hindered Citadel in any way, or whether the firm felt constrained by set APLs, Tagg simply said no.

“I haven’t had a case where I have been unable to provide the appropriate advice to a client due to the dealer or APL,” she said.

“Centrepoint are always available to discuss alternatives should the need arise.”

20/03/2019 3:54:15 PM

22 | Money Management March 28, 2019

Mental health

MANAGING MENTAL HEALTH IN TIMES OF AMBIGUITY: THE ROLE OF LEADERSHIP Margo Lydon says positive leadership is key to managing workplace mental health issues in the wake of the financial services Royal Commission.

WORKERS IN THE financial services industry are experiencing a period of heightened uncertainty.

The industry has been under sustained scrutiny and is now facing an unprecedented era of change following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

It is natural for people to feel a sense of uncertainty about where the industry is headed and worry about their job security and role within the organisation.

Many employees in the sector have been feeling the effect of this scrutiny on a very personal level, and this could potentially have an impact on their mental health.

From our research conducted shortly after the Royal

04MM2803_14-31.indd 22

Commission was announced, we can see that compared to the national average, workers in financial services experience higher levels of stress in their job, and lower levels of engagement with their work.

People who experience prolonged periods of high stress and poor mental health are not thriving, and therefore are not bringing their best selves to work.

This may result in unintended consequences of lower productivity and engagement in work, which in turn may negatively affect the one thing that this industry is trying to address – better customer outcomes by meeting customer expectations and increasing trust across the Australian community.

Therefore, it is critically important for financial services

organisations to take a close look at their mental health and wellbeing practices, particularly currently, and take proactive steps to support their employees.

MEETING THE CHALLENGE The financial services industry experiences one of the highest rates of mental ill-health in the workforce, with analysis by PwC and the Mentally Healthy Workplace Alliance finding that 33 per cent of its workers live with a mental health condition.

The current level of ambiguity facing the sector is unprecedented, in the wake not only of the Royal Commission, but also the Productivity Commission’s Competition in the Australian Financial System inquiry, and changes through

recent Federal Budgets.

Our research found that over a quarter of financial services workers are experiencing very high levels of stress in their job, and only 13 per cent report being highly engaged with their work, well below the 19 per cent national average.

Financial services workers also have much less confidence in their leaders creating a sense of cohesion in work teams (8.4 per cent feel confident versus the average of 16 per cent), and feel they’d be a lot more committed to their organisation if it was a mentally healthy workplace.

These statistics do not bode well for a sector that needs engaged leadership, strategic foresight and member-focused decision making.

The good news is that workplaces have been responding

20/03/2019 3:09:29 PM

March 28, 2019 Money Management | 23

Mental health proactively in recent years.

Mental health and wellbeing initiatives are evolving at a rapid pace, with far more resources focused on this sector, and there is an increased awareness of mental health issues.

The formerly independent sectors of financial services and mental health are beginning to converge more and more. This brings new opportunities for innovative mental health and wellbeing solutions, designed for the unique needs and challenges of superannuation and insurance organisations, their staff and their members.

This new era requires an increased effort to identify and address mental health issues in the workplace to ensure employees are supported to thrive, even through this time of flux. One of the most important factors to address this issue will be cultivating positive leadership within organisations.

PROFILE OF A POSITIVE LEADER The SuperFriend 2018 Indicators of a Thriving Workplace Survey identifies positive leadership as one of the key factors supporting mental health among employees.

Despite workers’ high expectations, Australian workplaces ranked Leadership the lowest among the five domains of Connectedness (68) Culture (65), Policy (64) and Capability (64) – which means they’re looking to their business leaders to create a culture of care that enables workers to be happy, healthy and productive.

Research strongly supports the return on investment in workplace mental health and wellbeing; businesses thrive when people thrive!

The report identifies eight characteristics of positive leaders.

1. Being accessible when you need them and willing to listen Leaders wanting to support the wellbeing of their workers could make sure people feel comfortable voicing concerns about their job by setting up safe, non-judgmental

04MM2803_14-31.indd 23

environments where they feel okay about sharing. Starting a safe dialogue about mental health in the workplace can also facilitate greater trust for people to speak up.

2. Modelling the values of the workplace It is important for leaders to consider how they can champion every aspect of their organisation’s wellbeing strategy and initiatives and engage other staff to do the same. Something as simple as being courteous and treating other people with respect will help promote a real sense of workplace connectedness.

3. Providing useful and constructive feedback Setting job-related goals, provided these are realistic, and then making a regular time to review progress and learnings using a coaching approach, strengthens performance and professional relationships. Providing strengthsbased feedback leads to greater engagement and outcomes.

4. Creating a sense of cohesion within work teams Leaders can promote unity within their team in a variety of ways including ensuring there are agreed goals and targets, valuing everyone’s contribution, helping to resolve conflict within the team, celebrating successes, and building trust, such as through team and cross-team activities.

5. Proactively encouraging and promoting good mental health policies and practices A leader might know, for example, that there are workplace mental health policies in place, but staff aren’t aware they exist. A proactive leader will engage people is discussing these policies, and more importantly, bring these to life through practice. One way is by encouraging work life balance through flexible work arrangements.

6. Providing opportunities to develop professionally Continually learning is known to be good for people’s mental health.

Leaders should seek to understand

“This new era requires an increased effort to identify and address mental health issues in the workplace to ensure employees are supported to thrive, even through this time of flux.”

- Margo Lydon, CEO, SuperFriend the aspirations and development goals of team members and take active steps to develop people skills and expertise.

7. Acting as champions for their work teams A positive leader supports his or her team members so they can get the job done. This means helping them overcome whatever challenges might be standing in the way of them achieving their goals. Team members can feel safe and secure because they know that when times get though, their leader has ‘got their backs’.

8. Reward and recognition are received for good work Providing relevant acknowledgement and appreciation of people’s efforts in a fair and timely manner can motivate workers, build their self-esteem and enhance team success.

CULTIVATING POSITIVE LEADERSHIP IN THE CURRENT ENVIRONMENT Helping to create a thriving workplace is no longer just the role of the HR department, but of every leader in the organisation, and every worker. There needs to be investments made in education, resources, time and tools to develop capable leaders.

Armed with more knowledge, skills and confidence, leaders will be better able to implement a positive workplace culture and identify early and address mental health issues as they arise.

Training of frontline managers in particular can benefit both staff and customers, who may also present with mental health issues.

The benefit of investing in front-line team leaders and

supervisors is that they are quite often the staff that will pick up the early warning signs that someone is not coping – and they can have an early intervention conversation, which may start simply with asking the person how they are going. The early conversations are often the most critical ones.

SuperFriend provides a range of solutions, including programs, resources, insights and events.

We also provide specialist mental health and wellbeing training for managers and other staff that is specifically tailored for superannuation and insurance organisations.

For those organisations not sure of where to start, we’d recommend using a diagnostic tool such as Wellbeing Works, which will highlight specific things you can do to improve your organisation’s performance in this vital area. Our Building Thriving Workplaces resource also offers a range of clear, straightforward actions and activities that any organisation can apply—including links to templates and further reading.

At SuperFriend, we are evolving our strategy in consultation with our partners to adapt to their evolving needs. In this new era for financial services, we maintain a laser focus on advocacy, insights and solutions for our industry partners and their members.

There is no doubt this is a challenging time for the industry, from senior executives and regulators through to frontline workers. However, we have the resources to address this important issue if we remain vigilant and work together.

Margo Lydon is the chief executive officer of SuperFriend.

20/03/2019 3:09:38 PM

24 | Money Management March 28, 2019

Portfolio construction

PORTFOLIO CONSTRUCTION IN THE REAL WORLD Technical and academic portfolio construction doesn’t always suit the real world. Rob Thompson outlines factors advisers can consider to firmly focus their clients’ investments in reality.

PORTFOLIO CONSTRUCTION HAS largely been built on the strong foundation of academic and technical research. There is a tension, however, between the theoretical world and the real world that financial advisers are often required to manage with their clients.

These tensions are often between long-term investment objectives and the short-term vagaries of the market, along with the balance between providing various levels of capital preservation and the delivery of sufficient returns to meet investor needs. Traditional portfolio construction can be enhanced to better address these issues.

The starting point of any outcome-oriented approach to investment is a definition of the end goal and this is typically expressed as an investment return above cash or inflation. In addition, it is important to determine the acceptable tradeoff between risk and return that will be appropriate in the pursuit of the investment objective.

The next stage is to track this target in an effective

04MM2803_14-31.indd 24

risk-controlled manner and by doing so, aiming to increase the probability of hitting the target and reduce vulnerability to market timing issues, keeping in mind that an investor’s experience is affected by their entry and exit points. We employ some core principles to try and achieve this, which have a common-sense appeal and have been used to some degree by investment managers for decades.

Our approach to each, however, is subtly different to standard industry practice and the way we blend them together is, in our view, the key to delivering a more attractive return profile.

Diversification is rightly seen as one of the few ‘free lunches’ in the investment world. On its own, it won’t stop negative returns – but it may assist in reducing their probability. From an asset allocation perspective, diversification is normally associated with investing across a range of asset classes. However, there can be so many more dimensions to diversification as it can involve combining different sources of returns – some passive, some active.

20/03/2019 3:10:07 PM

March 28, 2019 Money Management | 25

Portfolio construction Strap

Active management has traditionally been thought of as ‘stock picking’ in equity or bond portfolios. Again, it can be more – through smart implementation you can benefit if the investment manager’s views are correct, but it can also potentially add value should some unforeseen events unfold.

Importantly, this approach involves blending the active management of directional risk (market risk) across a range of assets, in conjunction with less directional strategies which aim to deliver returns that are not reliant on broad market movements. By combining these two sources of returns, a broader range of risk premia can be accessed, enabling a degree of diversification beyond what traditional strategies typically offer.

Of course diversification is not just about risk reduction. The broader opportunity set has the potential for return generation in a range of different market conditions.

Moreover, there is a fundamental rationale for utilising both directional and less directional sources of return. It is often the case that environments that are most challenging to managing directional risk (during bouts of market volatility) present the greatest opportunities to take advantage of less directional strategies.

Conventional approaches to asset allocation rely on a long-run assessment of return expectations, risk, and asset correlation to drive a strategic asset allocation (SAA) approach and, whilst a simple and logical solution, may be vulnerable to variability in these inputs. We

04MM2803_14-31.indd 25

advocate a more dynamic and flexible approach that places more emphasis on active asset allocation.

Adopting such an approach requires two things: firstly, utilising a sound knowledge of the factors driving asset class performance. Understanding the environments which are conducive for positive asset class performance or those associated with poor or negative asset class performance is a more achievable objective than forecasting the inputs with the degree of accuracy required by a SAA approach.

Secondly, a strategy that does not have the benchmark weightings that accompany a SAA approach needs an alternative approach to determining asset class weightings.

Our bias towards asset classes is driven by a fundamental understanding of how they are influenced by macroeconomic factors, valuations and proprietary indicators of market positioning to form a view on their likely performance.

But how much exposure you can afford to have is guided in part by risk considerations. This is where dynamic asset allocation and downside risk management dovetail together.

Within a multi-asset framework, risk management can take several forms. First, the overall portfolio needs to be diversified – not only in terms of investment holdings, but also in terms of contribution to risk.

Second, different types of investment require specific risk management approaches. For directional assets like equities

where large negative drawdowns are possible, we employ a dynamic risk management strategy specifically designed to seek to control drawdown. This provides a guide of how much exposure you can afford to hold which you cross-check against your fundamental views.

This, in our view, represents a more effective form of downside risk management than traditional approaches which tend to rely on hedging strategies or some form of ‘put’ protection. These traditional approaches can assist in managing downside risk but tend to be expensive; i.e. they act as a drag on returns.

For less directional investments, alternative approaches to risk management are more appropriate – where for example the expected distribution of return is less susceptible to large drawdowns or when a strategy involves non-linear pay-off profiles.

Risk management should not be an afterthought. Rather, it should be a central part of portfolio construction in anticipation of a strategy wellequipped to deliver a smoother return path or a better distribution of returns.

Diversification through a broader range of return sources, the dynamic management of their allocation in a portfolio, and downside risk management specific to each exposure, provide a portfolio better suited to the real world.

“How much exposure you can afford to have is guided in part by risk considerations.

This is where dynamic asset allocation and downside risk management dovetail together.”

- Rob Thompson, head of adviser distribution, Insight Investment

Rob Thompson is head of adviser distribution at Insight Investment.

20/03/2019 3:10:20 PM

26 | Money Management March 28, 2019

Fixed income

LOOKING AT AUSTRALIAN FIXED INCOME THROUGH A GLOBAL LENS The drivers of Australian fixed income market performance, including its corporate credit sector, are more international than many investors think. Andrew Canobi shares three surprising ways to think about the market.

NEWS HEADLINES ON Australia’s fixed income market tend to focus on how specific issues, such as how the health of the country’s economy and the Reserve Bank of Australia (RBA) policy, determine the direction of the country’s government bond yields.

In our view, these domestic issues are critical. We think the RBA will likely continue to take a more cautious approach to interest-rate hikes because the country’s households are struggling.

However, investors unfamiliar with the Australian fixed income market may be surprised to hear the drivers of performance are as much global as they are local. For example, the direction of US

04MM2803_14-31.indd 26

Treasury yields tends to drive Australian longer-term government bond yields to a large degree. In addition, global issuers make up a substantial proportion of the Australian corporate bond market.

Here, we highlight three things for investors to think about when it comes to viewing the Australian fixed income market through a global lens.

AUSTRALIAN CORPORATE CREDIT MARKET IS A BIT OF A MISNOMER The Australian corporate credit market generally moves closely in sync with global peers. The proportion of non-Australian borrowers in the Bloomberg AusBond Credit 0+Yr Index is

approximately 50 per cent, higher when compared with other developed market indices. Large global names, such as Verizon and Apple, have raised money in the Australian dollar corporate bond market.

The market is also attractive to many global investors due to its liquidity and financial architecture.

Increasingly, Asian-based investors, for example, are becoming a stable part of the Australian dollar investor base, which has led to the regionalisation of the market.

As a result of these factors, the links between global investment-grade markets and Australia are quite strong. For example, the softening of global demand for corporate bonds and

emerging market debt in the latter part of 2018 saw a commensurate widening in Australian credit spreads.

We see the Australian corporate credit market as a global market denominated in Australian dollars.

This concept can be difficult for many investors to wrap their heads around. For us, it means a global perspective is essential for success, even in the local market.

PAST GLOBAL STOCK-BOND RELATIONSHIP MIGHT NOT HOLD IN THE FUTURE There is a strong perception that stocks and bonds always move in opposite directions.

The inverse relationship between bonds and equities has

20/03/2019 4:31:09 PM

March 28, 2019 Money Management | 27

Fixed income

Chart 1: US credit spreads return to pre-GFC levels

broadly worked over the last 30+ years, since the 1980s. But we implore investors to be cautious about relationships extrapolating forward. Our correlation analysis of almost 150 years of US bonds versus US equities has shown that the relationship between the sectors is unstable and can be positive for extended periods.

In short, regimes are important.

Much of the last 30+ years can be characterised as a disinflationary regime. However, something changed just on 10 years ago with the global financial crisis (GFC). Central banks unleashed previously unimaginable policies.

First, monetary policy entered new territory with zero and, in some cases, negative interestrate policy. Second, central bank balance sheets swelled as quantitative easing (QE) programs provided a critical backstop function for financial markets.

Enter the QE regime. After several years of unconventional monetary policy and interest rates falling to record low levels, both global bonds and equities have delivered strong returns (i.e. a positive correlation) for much of the last 10 years. Now, as central banks begin to unwind balance sheets, we believe it is unlikely that the previously inverse relationship between bonds and stocks will be restored.

If central banks can extricate themselves from their quantitative program burdens over the next 10 years or so, then it will likely be in an environment of rising growth and heady inflation rates. Historically, inflationary regimes have been associated with positive correlations between bond and equity markets.

This is important for Australian investors as, to some degree, the market imports global monetary conditions. A sustained period of

04MM2803_14-31.indd 27

very low interest rates globally has drawn added interest to Australian bonds. Equally, a move higher in global rates could see a waning in demand and a fall in bond prices.

Consequently, we think we could see a change in the behaviour of bond yields and prices in future cycles. We encourage investors to consider what an investment environment such as this might mean for portfolio construction.

MARKET LIQUIDITY IS NOT WHAT IT USED TO BE In the past decade, central bank QE led to excessive liquidity and extended the credit cycle. As a result, many investors had shifted into riskier forms of fixed income for higher yields.

During that time, there have been some brief periods—typically six to nine weeks—when financial markets have come under pressure as nervous investors divested their riskier positions.

Even in these short episodes, the traditional market makers (financial intermediaries) had not been able to absorb the supply of risky assets that hit the market.

In our view, despite Australia’s relatively high-quality corporate credit market, professional investors will likely not be able to play a supporting role should market sentiment deteriorate more deeply.

We think this could especially be true if short spikes in volatility turn into a prolonged downturn.

INVESTMENT IMPLICATIONS We think the global corporate credit markets could face obstacles in the year ahead. The profit cycle is slowing and some sectors are facing particular pressures.

While we see pockets of value in Australian corporate bonds, we are

Source: Franklin Templeton, Bloomberg Barclays US High Yield Index, as at 31 December, 2018.

highly selective and expect to be more defensive in the period ahead.

While corporate credit securities can provide additional yield to portfolios, it is important not to fall into the trap of putting all your eggs in one basket.

Historically, credit cycles show portfolios are likely to be exposed to similar risks by having a high correlation to equities as corporate bonds during inevitable periods of cyclical downturns and market distress.

In addition to corporate credit’s high correlation with equities, credit spreads—or, the incremental yield paid for the additional risk of investing in credit—appear to be approaching relatively expensive valuations. As chart one below shows, corporate credit spread levels have returned to pre-GFC levels, begging the question, are investors being rewarded enough for the additional level of risk?

In this environment, we favour areas like utilities and infrastructure, where there is a lot of government support and fairly regular cash flows. We have also more recently begun to

favour Australian state government bonds and generally a move higher in quality.

Investors seem to be wary of the softening domestic environment as the Australian economy faces challenges around housing and a moderating Chinese economy. We see risks in sectors tied to the Australian housing industry and consumer discretionary spending which keep us very cautious on banks and mortgage-backed securities.

We are also finding some attractive opportunities across Asian corporate credit markets which experienced some challenges in 2018. Supply was very strong and, at the same time, rising rates and concerns over China and trade weighed on sentiment, allowing the accumulation of positions from some of the more developed parts of the Asian universe at what we consider to be attractive valuations.

Andrew Canobi is director of Australian fixed income at Franklin Templeton Australia.

20/03/2019 4:31:16 PM

28 | Money Management March 28, 2019

Life insurance

REPLACEMENT BUSINESS IS NO JOKING MATTER Replacing insurance cover can be complicated and fraught with risk. Col Fullagar outlines steps advisers can take to navigate conversations with clients around this and ensure that their advice on the topic is helpful.

SOME FRIENDS WERE sitting around a campfire with Mike who has joined them for the first time. One looks up, smirks and says quickly “62”. Everyone, except Mike, laughs. A few minutes later, another, with a mischievous smile pipes in “24”.

Again, all laugh except Mike.

Eventually, a puzzled Mike asks what is happening.

“Well, we have known each other for many years and have told jokes so many times that we now just ascribe numbers to them to speed up the process.” Makes sense, thinks Mike ……. “Do you mind if I try”, he asks. “Of course, go for it.”

Mike waits for what he believes is the right moment, takes a deep breath, looks around and says loudly “37”. Not a sound. He tries again, “42”. Still no reaction.

Perplexed, Mike asks what is wrong.

“Oh, the jokes are great, and your timing was perfect but it was the way you told them ….. !”

When telling jokes, the three things that must be present are: • Timing; • Content; and • Delivery, When advisers are considering the crucial issue of replacement business in the context of risk insurance advice, funnily enough, the same three things also need to be present: • Timing - when should the subject be raised with the client;

04MM2803_14-31.indd 28

•

Content - what factors might be relevant to a replacement decision; and • Delivery - if insurance is to be replaced, what is the most appropriate way to proceed?

1. WHEN SHOULD THE SUBJECT BE RAISED WITH THE CLIENT? The short answer is: “there is no one correct answer as the subject may come up at various times”. (i) Prior to advice process beginning In the judgement for Swansson v Harrison (VSC 118, 2014), the following was recorded: “On about 26 February 2012, AXA sent Mr Swansson a renewal notice requiring payment of the annual premium. The premium …. had increased by about $800 from the previous year. Shortly after receiving the notice, Mr Swansson telephoned Mr Harrison.” (Paragraph 9) The content of the call was essentially that Swansson was unwilling to pay the increased premium and he instructed his financial adviser to source alternate and less expensive cover.

Thus, even prior to the formal advice process beginning, replacement of existing business was being considered.

Of the choices open to an adviser in this situation, the two most obvious are: • clear instruction had been

20/03/2019 3:11:02 PM

O R

March 28, 2019 Money Management | 29

Life insurance Strap

given and it was not up to the adviser to question the client unnecessarily; the adviser should proceed in line with the client’s stated wishes and, as per compliance requirements, implement a No Advice Sale; or, notwithstanding clear instruction, • when considering the client’s best interests, the adviser may feel it appropriate to go beyond compliance requirements and ensure the client is acting on an informed basis.

Judgement extracts in a separate case, appear to support the latter alternative by citing the adviser as having a “duty to ensure the (client) was adequately informed of the consequences…”, and “there should have been a full explanation of the risk(s)…” (Commonwealth Financial Planning v Couper (NSWSC 444, 2013), paragraph 79).

Even if a client rejects the adviser’s suggestion that due diligence investigations be undertaken, there appears no downside in at least making the offer. (ii) During completion of the fact find If, when completing the fact find, existing insurance is identified, replacement might be a consideration, but it is only one of several and, as such, if the subject is raised, it should be done so in context. This could be done through the below.

“During the analysis and research process, I need to consider your existing insurances within the framework of five generic advice scenarios: • replacement of cover, i.e. retain the existing level of cover but place it with a different insurer; • retention of cover, i.e. make no change to the existing cover; • increasing of cover, i.e. increase the insured benefit amount under the existing policy; • alteration of cover, for example a longer waiting period or a change in the TPD definition; and • cancelation of cover, without replacement with a different insurer.”

04MM2803_14-31.indd 29

Going further, the adviser might point out that “cover” refers individually to each of the five generic risk insurance types: • term insurance; • trauma insurance; • total and permanent disability insurance; • income protection insurance; and • business expenses insurance.

In other words, what might initially appear to be a simple process to the client is, in effect, the undertaking of an analysis process involving up to 25 different outcomes; a clear indication that the risk insurance advice process is not something to be laughed at. (iii) When presenting the Statement of Advice The adviser’s presentation of the Statement of Advice (SOA) is the designated time for discussion of the outcomes of the above analysis.

This discussion would be undertaken bearing in mind the need to ensure the client is “adequately informed of the consequences” and provided, not only with a “full explanation of the risks” but also of the “advantages” of a particular action.

Thus, discussion might include not only the outcome of the adviser’s behind the scenes deliberations but the nature of the deliberations as well, i.e. what factors were considered in reaching a decision regarding existing cover – refer to section three below.

Additionally, any mention of replacement should consider that new cover is yet to be underwritten and, as such, a final decision needs be deferred. To do otherwise, might be to risk engaging in “deceptive and misleading conduct” as per the Couper judgement: “First, the advice that was given wrongly supposed that a comparison could be made between (the new) and (existing policy). That could not be done, because whether (the new insurer) would insure Mr S, and if so with what exclusions and at what premium, was not known.

The unequivocal advice that the

(new) policy was cheaper on a like for like, dollar for dollar basis was incomplete. That was merely the best case, and could not be assessed definitively at that stage.” (Paragraph 94)

of cover will next move to how this is to be actioned – again, refer to section three below.

(iv) Completion of the application If there is a recommendation to replace some or all existing cover, and the recommendation is accepted, that decision is reaffirmed when the application is being completed.

The application is likely to include a question concerning the presence or otherwise of existing cover and whether that cover is to be replaced. Closed ended questions such as these by definition only include two answer alternatives i.e. “Yes” or “No”.

Whilst “No”, of itself may be a satisfactory answer, strictly speaking “Yes” is not, with the reason being that which was identified in (iii) above, a final decision may well be contingent on the outcome of the underwriting process; what might have been a compelling argument for replacement may be less so if new insurance is the subject of a loaded premium or an exclusion clause.

Thus, even if the application form makes no provision for it, an adviser might see merit in making a handwritten amendment to the form so that there can be no uncertainty in the future about a robust process being followed. By way of example, the amendment might simply state “Replacement of cover is subject to underwriting”.

If nothing else, this places the insurer on notice that the underwriting pencil needs to be sharp.

Before deciding the fate of existing cover, there are several factors that potentially need to be taken into account. Some of these are listed below but in no set order; and, as mentioned earlier, these factors should be applied to each of the risk insurance types for which there is existing cover.

(v) Subsequent to underwriting of new cover Again, if the underwriting of the application results in something other than a standard acceptance, the subject of replace existing cover may need to be revisited.

If the underwriting of the application results in a standard acceptance and the new cover is issued, the subject of replacement

2. WHAT FACTORS MIGHT BE RELEVANT TO A REPLACEMENT DECISION?

(i) One, or more than one, insurer When considering the position for each risk insurance type, the merit or otherwise of having all insurance types with one insurer, as distinct from spreading the different insurance types across more than one insurer, comes into play.

Premium discounts may be activated by the placement of multiple covers with one insurer; however, insurers may have different product type niche areas which can best be accessed by spreading cover. (ii) Quantum of cover Even if insurance types are spread across more than one insurer, a decision still needs to be made about where to place cover for an insurance type.

If large benefit amounts are involved, what are the ramifications of having all cover with one insurer, and potentially one reinsurer, versus spreading cover across different insurers and reinsurers: • the impact of underwriting delays associated with exceeding non-medical limits; and • rumoured mandatory reinsurance treaty requirements and claims vigilance for larger insured benefits possibly leading to claims delays and disputes; versus • access to premium discounts for larger benefit amounts; and • ease of claim’s administration if all cover is with one insurer.

Continued on page 30

20/03/2019 3:11:12 PM

30 | Money Management March 28, 2019

Life insurance Continued from page 29 (iii) Insured’s health Changes in the health, occupation and pursuits of the insured, either potentially beneficial or detrimental to the underwriting outcome, should be identified.

The most obvious impacts of these will be in the policy premium, taken up further in (iv) below and also the presence or otherwise of cover exclusions.

By using insurer pre-assessment facilities, A pre-application should be of the likely outcome can be obtained. which in turn, whilst not necessarily being a determinant, would certainly be a material consideration in the replacement analysis.

The impact may, however, go beyond the above in that it could affect the overall policy terms by opening or closing the door to matters such as: • product eligibility, for example, premier (v) standard contract; • policy terms and conditions, for example, different income protection offset provisions; and • definitions, for example, Own (v) Any Occupation TPD. (iv) Premium One of the most consistent considerations is premium cost and what factors are relevant in this regard.

In the Couper case, the judge specifically referred to the need to consider not just Year One costs but costs beyond Year One: “(The adviser’s) comparison of premiums was confined to the first year. But he was attempting to sell a product designed to last a lifetime. It was misleading to confine his comparison to the first year’s premiums.” (Paragraph 98) In fact, premium comparisons might go even further and consider the likely duration of the client’s specific need and, following on from this, the adviser might undertake a premium comparison for the equivalent term.

Thus, if cover for a 45 years old client is needed to protect a 10-year mortgage, premium comparisons should consider this differently to a situation where cover is needed through to retirement.

04MM2803_14-31.indd 30

Other factors impacting premium might be access to multi-policy, health and other discounts, and favourable occupation categories.

Having a general guideline could assist here, for example, am overall premium reduction of less than 10 per cent might be ignore in the absence of other supporting evidence, whereas a difference in excess of this, might be considered as sufficiently significant to dictate an action, in the absence of anything else of relevance. (v) Legacy v Retail An added complication regarding premiums is the position of a legacy product versus a retail product. The former resides in a closed book of business with attrition of policy numbers more likely creating premium volatility than what should be the case within a retail product.

Again, the duration of the need for cover may be relevant; a policy with a need-duration of 10 years in a recently closed book of business may be treated differently to a policy with a longterm need duration in a longstanding legacy portfolio.

Additional to premium considerations with legacy policies is the matter of flexibility of cover: • will it be possible in the future to move the policy between superannuation and non-superannuation without having to undergo fresh underwriting and the issuing of a new policy; and • will changes to waiting/benefit periods and premium type changes be possible.

An adviser may even feel it necessary to enquire with the insurer of the existing cover to obtain an informed view as to the current performance of the legacy book and/ or to see if there is an appetite for some form of conversion option to that insurer’s retail product. (vi) Policy terms and conditions The Couper judgement noted: “ … there should have been a full explanation of the risk, rather

than just in a perfunctory manner in fine print in a disclosure statement that was swamped with information.” (Paragraph 79) The client needs to be enabled to make an informed decision; the downloading of a many-page policy comparison with the inclusion of this within the SOA, may well fall into the category of Client Swamping.

To facilitate an informed decision, it may be better to extract the important and relevant aspects of a comparison with the highlighting of these together with a general context statement; “The matters listed below are those most relevant to your circumstances and/or the product itself. Whilst other differences exist, they appear of lesser consequence”.

Having worked out the material differences, the issue then becomes how to make an assessment of the relative merit of one set of differences over another.

It is one thing to have ten areas of material difference that are all are in favour of one policy but it is quite another if six are in favour of one

policy and four, the other. (vii) Insurance Contracts Act Then there is the impact of section 29(3) of the Insurance Contracts Act. Referring back to the Swansson judgement: “One of the effects of entering into a new contract of life insurance was to re-expose (the insured) to the risk of his policy being avoided for innocent non-disclosure. By contrast, that risk had long since passed in relation to the (previous) policy.”

(Paragraph 14) Even if the existing insurance has been in force for less than three years, it will still have been in force for a period closer to three years than any new insurance.

Not only is this likely to be a material replacement consideration, to complicate matters further, the Insurance Contracts Act was amended in 2016/17 with the now-current Act arguably less favourable to the insured than was previously the case. Thus, the assessment of a policy starting post-2016/17 in replacement of one

20/03/2019 3:11:24 PM

March 28, 2019 Money Management | 31

Life insurance

issued pre-2016/17 may need to take this into account. (viii) Time-based exclusions A term policy in force for longer than 13 months would generally no longer be subject to a suicide exclusion. Similarly, a trauma insurance policy in force for longer than 90 days should no longer be subject to the exclusion regarding heart attack, cancer, etc.

Any new policy, however, may have cover subject to these and similar exclusions.

If time-based exclusions cannot be removed from replacement cover, their presence should be taken into account.

Again, it may be that judicious adviser enquiry with the potential new insurer could result in a satisfactory way forward being negotiated; i.e. the endorsement of the policy to effectively remove the offending exclusion clause. (ix) Policy facilities A lesser consideration, but potentially one nonetheless, is the relevance of policy facilities.

By way of example, an insured under an existing policy may have used the full entitlement under the Guaranteed Insurability Option whereas a move to a new policy may provide fresh access to this facility.

These matters, whilst not universally relevant, still need to be considered even if only to be eliminated. (x) Client preference The last client-focused factor but my no means the least important one, is the client’s own preference which may be influenced by: • previous personal experiences; • experiences of trusted third parties such as the financial adviser and/or friends and/or relatives; and • media reports.

The strength and reasons for any preference should be assessed and balanced against other relevant factors. (xi) ASIC reporting There is one final factor which, whilst not directly client-focused,

04MM2803_14-31.indd 31

has become an indirect adviser consideration for some and that is the need for licensees to report so-called adverse adviser lapse rates to ASIC.

3. HOW SHOULD REPLACEMENT DECISION BE IMPLEMENTED? Simplistically, but by no means always, once new cover is in place existing insurance can be replaced. There are several ways in which this might be done. (i) Undated cancelation letter A popular way to implement the replacement of existing cover is to obtain an undated, but signed, cancelation letter from the client when, for example, the fact finder is being completed. This is held on file until new cover is in place, at which time it is sent to the insurer of the existing cover.

Whilst this may be a seamless way to proceed, there are potential problems associated with it, such as: • will the client perceive this as ‘best practice’; i.e. the effective signing of a blank cheque regarding the continuation of existing cover; • the process is prone to error in that, occasions have arisen where the cancelation letter was lodged notwithstanding new cover either did not commence or was subject to cancelation subsequent to the lodgment of the letter; and • there is always the risk that, obtaining a cancelation letter prior to the appropriate analysis of the facts, will be perceived as pre-empting an outcome. (ii) Dated cancelation letter A safer course to that detailed in (i) might be to wait until the new policy has been accepted and issued, and then contact the client to advise that: • the new policy has been issued and, as such, the existing insurance can now be cancelled; • to enable the existing insurance to be cancelled, a letter to this effect is to be

emailed to the client for signing, returning and then lodging with the existing insurer; but • prior to signing the letter, the client should carefully consider whether or not there have been any changes to their circumstance between when the application was completed and the start date of the new policy, that might be relevant to the now concluded duty of disclosure.

If there has been a change, the cancelation of existing cover should be put on hold to enable appropriate discussions to be had and actions agreed upon. (iii) Existing insurance allowed to lapse The third, and arguably a favoured alternative in many instances, is to hold the discussion detailed in (ii) above, but rather than obtain and lodge a cancelation letter, the client should instead be asked to cancel any premium paying authority on the existing insurance such that the policy can be allowed to lapse.

This is so that the client will have the benefit of the duration of the lapse cycle of the existing insurance in case anything should go awry with the new cover. Examples are a problem with premium payments to the new insurer or a question being raised about compliance with the duty of disclosure should an early claim arise under the new policy.

If there are concerns about what the new insurer’s position might be if the above action is taken, bearing in mind the ‘warning’ provided that replacement cover will not honour a claim if existing cover has not been cancelled, the new insurer can be advised of what is being done and why, such that sign-off or otherwise can be obtained.

IN CONCLUSION When all the above, and arguably more, is considered, two things become clear: • the advice process surrounding the replacement or retention of existing cover involves much analysis and thought and, as such, is a significant value-add provided by the adviser; and • it will be difficult to impossible

to provide definitive advice to the effect that existing insurance should or should not be replaced and, herein lies the irony, this provides a safety net of sorts to the adviser.

If, notwithstanding the difficulty/ impossibility, definitive advice was provided to the effect that “it is appropriate for existing insurance to be replaced and then cancelled”, there is always the chance that future events might render this to be erroneous; the advice and adviser are exposed to criticism.

If, however, there is acknowledgement of the reality that exists, a more cautious yet appropriate course might be followed: “In considering the position of your existing insurances, I have taken into account the following matters …”

A bullet point list of the factors considered could follow, together with an explanation of outcomes for and against replacement/retention, and the highlighting of the factors crucial to a decision. The advice would then continue: “Because it is unknown what is going to occur in the future, it is not possible to say with complete certainty whether it is better to replace or retain your existing cover; however, on balance, the most appropriate course would appear to be (replace/retain) for the reasons highlighted above.”

As per the heading of this article, the matter of replacement business is no joking matter and from the adviser’s perspective, considerable rumour and innuendo has been directed towards them about the subject.

It is certainly not the intention or place of this article to dictate a process but more to float some ideas to possibly expand the current horizon of thought and generate discussion on the subject.

When all is considered however, this component of the risk insurance advice process is yet another demonstration of the merit of advice when it comes to risk insurance.

Col Fullagar is the principal of Integrity Resolutions.

20/03/2019 3:11:34 PM

32 | Money Management March 28, 2019

Toolbox

WHY INTERNATIONAL EQUITIES ARE WORTHY OF ATTENTION Christian Obrist makes the case for international equities and outlines how investors can get them into their portfolios.

WHAT IS THE real impact of globalisation on Australians’ approach to investing in equities?

As digital technologies continue to reshape the investment landscape, we are seeing a change in how Australians invest and what they invest in.

04MM2803_32-36.indd 32

Australian investors have continued to increase their exposure to international shares. An example of this is seen in Australian investor ownership of shares listed on international exchanges, increasing from five per cent in 2014 to eight per cent in 2017.

WHY IT MAKES SENSE FOR AUSTRALIANS TO INVEST OFFSHORE The Australian share market represents approximately 1.7 per cent of the total global market capitalisation. To put this into perspective, the overall market

capitalisation of exchanges was $76.6 trillion USD as at the end of 2018.

This is not to diminish the opportunities available domestically on the Australian Stock Exchange (ASX), but holding investments in international

21/03/2019 3:07:26 PM

March 28, 2019 Money Management | 33

Toolbox companies may provide exposures that are not available locally.

Having multiple exposures in your investment portfolio has increased in importance due to its diversification benefits, wherein the spreading of unsystematic risk across the portfolio can enhance potential returns.

Chart 1: Comparative sector exposure for Australian and international equity ETFs (S&P ASX200 v MSCI World)

INVESTING IN INTERNATIONAL EQUITIES To invest in international equities, there are typically three methods: 1) Directly buying a single stock; 2) Through a managed fund; and 3) Through an exchange-traded fund (ETF).

Directly buying a single stock can be completed through a broker, which allows investors to buy and sell shares on major international exchanges, including the New York Stock Exchange and the London Stock Exchange. In contrast, a managed fund involves the pooling of funds with other investors, which is in turn managed by an investment manager.

ETFs are a unique investment vehicle that encompass traits of both a single share and a managed fund; they can be bought and sold on a stock exchange like shares and typically contain a diversified portfolio of securities like a managed fund.

For many, ETFs are considered one of the most accessible investment vehicles to invest internationally due to their relatively low cost, limiting the loss of investment earnings to fees over time. Yet, the other major benefit of ETFs, diversification, is still often overlooked. Bottom-line, ETFs have democratized investing, being used by all types of investors by providing them with an accessible exposure to a variety of asset classes, sectors or countries.

Source: ASX 2017 Investor Study

& Johnson and Google. Some ETF products specifically track the investment results of multinational, blue-chip companies of major importance, allowing investors to own a part of those companies that manufacture popular household brands.

For some investors, holding blue-chip companies creates a sense of comfort, primarily due to their association to quality – characterised by stable cash flows and long-term profitability. With low fees, ETFs provide a costeffective way of accessing this broad group of securities through a single vehicle without having to purchase the underlying constituents individually.

Sector Diversification Within equities alone, diversification benefits are abundant through varied exposures across countries and sectors. A consequence of Australian investors’ traditional home bias means many Australians are exposed to under two per cent of the world’s total share market.

In addition, Australia’s high level of concentration risk in the financials and materials sectors makes the Australian equity portion of investor portfolios much more vulnerable to a sectorspecific downturn.

As depicted in chart one, it is evident that an Australian equity profile is great if you’re building a portfolio that’s heavily weighted

Chart 2: US and international stocks have gone through cycles of relative outperformance

WHY SHOULD WE PAY ATTENTION TO INTERNATIONAL EQUITIES? Access to globally leading companies Investing in international equities presents the benefit of accessing global industry leaders such as Microsoft, Apple, Amazon, Johnson

04MM2803_32-36.indd 33

Source: Thomson Reuters, as of 31 December, 2018

to the financials and materials sectors. However, for exposure to the technology and healthcare industries, it barely scratches the surface.

Having a healthy dose of international equities in a portfolio can reduce concentration risk not only across countries, but also sectors, as the impact of idiosyncratic risks on the overall returns of the portfolio are reduced.

GLOBAL GROWTH OPPORTUNITIES There is no certainty for one economy to outperform another for any given period.

The volatility during Q4 2018 brought fear amongst investors globally, alluding to rising concerns of another US recession. Risks such as escalating US-China trade tensions and a more hawkish stance by the US Federal Reserve also dampened investor sentiment, whilst local events, such as the current house price correction, look to potentially impede Australian economic growth in 2019.

Countries are therefore primarily exposed to their own country-specific risk but are implicitly exposed to the idiosyncratic risk of other economies as well. Indeed, over the long run Australian stocks have historically seen positive levels of returns, however this has certainly been the case for any given period.

Continued on page 34

21/03/2019 3:08:04 PM

34 | Money Management March 28, 2019

Toolbox

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

1. How can investors access international equities? a) Directly on an international exchange b) Managed Fund c) ETFs d) All the above Continued from page 33

2. What is the size of Australia’s market capitalization relative to the rest of the world?

It is imperative to look past the home bias as other international markets can outperform for any given period, as indicated in chart two.

This has been seen most recently in emerging countries, wherein infrastructure developments and a growing middle class have brought accelerated rates of growt. A well-diversified portfolio across multiple countries and sectors can expose your investments to different rates of growth, with some ETF products also providing exposure to the emerging market.

ADDTIONAL RISKS CONCERNING INTERNATIONAL EQUITIES

a) 5.4% b) 12.2% c) 4.3% d) 1.7% 3. What is “home bias”? a) A tendency to hold investments only in property assets. b) A tendency to primarily invest in domestic assets. c) Primarily investing in asset classes you are comfortable with.

An additional consideration that comes with investing in international equities is the impact of changes in currency values relative to the AUD. Seen through the ever-shifting lens of foreign exchange, earnings from global companies can conversely appear much less rewarding or reliable for Australian investors, adversely impacting the overall returns of an investor’s portfolio.

For example, an investment in an ETF focused on US securities (e.g.

ASX: IVV) will give the investor exposure to the currency these securities are denominated in, that being the US Dollar. Currencies will constantly fluctuate, and in this case, if the AUD depreciated relative to the USD, the value of the ETF will rise, and the converse would occur if the AUD were to appreciate relative to the USD. A hedged version of an investment with international exposure can be a way to mitigate the impact of fluctuations in currencies on investment returns. If the AUD were to appreciate relative to the USD as above, the value of US securities would see diminished returns. However, a hedged ETF will minimize this currency impact by isolating exposure to equity markets and eliminating currency volatility.

d) Investors executing a trade from their home.

CONCLUSION

c) 45%

While it is common to have a home bias and be overweight in domestic investments, it is important to consider the abundance of dynamic investment opportunities globally which are currently untapped by Australian investors, yet accessible on the ASX. The ability to access market leading companies, different sectors and multiple countries of varying rates of growth have proved to be beneficial for diversification purposes, given the high level of concentration risk for Australian investments. ETFs present a highly accessible investment vehicle that are low cost and can be used to access these international equities.

Christian Obrist is the head of iShares, BlackRock Australasia.

04MM2803_32-36.indd 34

4. How can you mitigate the risk associated with currency exposures? a) Hedged ETFs b) Investing locally so global currency movements won’t affect the portfolio. c) Diversifying through international equities with different denominated currencies. d) A and C 5. What is the approximate sector exposure for the Financials and Materials Sector in the ASX200? a) 27% b) 32% d) 50%

TO SUBMIT YOUR ANSWERS VISIT www.moneymanagement.com.au/features/ tools-guides/ why-international-equities-are-worthy-attention For more information about the CPD Quiz, please email education@moneymanagement.com.au

21/03/2019 3:55:01 PM

March 28, 2019 Money Management | 35

Send your appointments to anastasia.santoreneos@moneymanagement.com.au

Appointments

Move of the WEEK Brad Watson Head of equity origination, property Australian Unity

Australian Unity’s Wealth and Capital Markets business appointed Brad Watson to the new role of head of equity origination, property, where he would report to the executive general manager, property, Mark Pratt.

Watson would be responsible for the development and execution of product and sales

Colonial First State Global Asset Management (CFSGAM) appointed John Ma, Diloshini Seneviratne, Leigh Cruess and Terry Mah to its North American infrastructure team in response to growing institutional investor appetite for infrastructure investments.

Ma would join CFSGAM as a director, with 20 years’ experience in infrastructure under his belt. In his new role, he would oversee the origination and assessment of new investment opportunities in North America.

Seneviratne would join the board of the management companies that oversee some of the firm’s funds. Prior to this, she was responsible for developing, building and launching the CALSTRS infrastructure portfolio, and managed real asset investments for CalPERS. Cruess and Mah would join as a senior advisers after extensive

04MM2803_32-36.indd 35

strategies across all equity channels for Australian Unity’s property business, including expanding the firm’s investor network in the private institutional markets and new product development.

Prior to joining the firm, Watson was head of distribution for Centuria Capital Group’s

experience across the energy and water sectors respectively.

Heather Brilliant, managing director, Americas and acting chief operating officer, said infrastructure continued to be an attractive investment for institutional investors due to its higher yields and stability.

“Our four new appointments help us further our growth ambitions and enhance our capacity to serve institutional clients across the Americas, and I am pleased to welcome each of these experienced individuals to the team,” she said.

Vision Super announced the appointment of Nikki Schimmel as its new chief risk officer, where she would oversee the risk and compliance functions of the fund.

Schimmel joined Vision from LUCRF Super, where she was chief risk and compliance officer

unlisted property funds division for four years. He has 16 years’ real estate experience in total, including roles with Macquarie Group, Citigroup and AXA. Pratt said the new hire would drive the firm’s growth, particularly in the mortgages area as well as the healthcare and social infrastructure sectors.

for over seven years. She also previously worked for KPMG for more than a decade before joining LUCRF, and prior to that, at the Australian Taxation Office.

Vision Super’s chief executive, Stephen Rowe, said adding an extra senior executive to oversee risk and compliance was an important step in the process of putting members’ best interest at the centre of the fund.

“Nikki spent seven and a half years guiding a similar sized fund through a complex, changing regulatory landscape, and considerably enhancing their governance arrangements, and we look forward to having her at the helm as that landscape continues to shift,” he said.

Blue Sky Alternative Investments announced the appointment of Joel Cann as the company’s new chief executive officer, effective 15 April.

Cann had over 30 years’ experience in Australia, Europe and North America across public and private equity investment, financial services and family office management sectors.

Prior to this, he held roles in global funds management at several institutions across multiple asset classes including real estate, retirement, tourism and hospitality, student accommodation, infrastructure, agriculture, mining and resources and technology.

Most recently, Cann served as CEO of Aspen Group, where he was in charge of rebuilding the group and its portfolio.

The firm’s executive chair, Andrew Day, would revert to the role of non-executive chairman, which would bring the board’s composition to majority independent, non-executive directors, the firm said.

20/03/2019 3:12:42 PM

OUTSIDER

ManagementMarch April 2,28, 2015 36 | Money Management 2019

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

The Westpac/Viridian transaction – poultice or peppercorn?

Will Cooper find a new panorama?

THE scuttlebutt had been in the industry for weeks, but Outsider still noted the element of surprise when Westpac announced that it was largely getting out of personal advice by salaried and aligned planners and flogging off its operations to Viridian Advisory.

There had, of course, been talk of Westpac being in discussions with Viridian but there were two questions which a lot of Outsider’s contacts kept asking him: “Who the hell are Viridian?” and “how much did they pay?”.

Of course, elsewhere in this edition, Money Management explains a bit more about Viridian but at the time of writing Outsider still doesn’t know how much the Melbourne-based mob lobbed up to get a hold of the Westpac and BT businesses.

Indeed, Outsider undertook a quick check of the most recent Money Management Top 100 financial planning groups data and came up empty, so he figures that with only about 30 planners in 2018 spread across offices in Melbourne, Warragul, Leongatha, Sydney, Subiaco and Burnie they failed to make the cut.

OUTSIDER wonders where his old mate Brad Cooper will turn up when he finally exits Westpac after well over a decade with the big banking group.

And, of course, one of Cooper’s legacies will be the bank’s multi-million dollar platform – BT Panorama – something which Outsider believes will continue to make its mark on the bank’s balance sheet for many years to come.

It seems that Cooper will be staying on long enough to ensure a smooth transition of his division into the Business and Consumer divisions and to wave goodbye to the 175 or so BT Financial Advice salaries advisers and other management and support staff who will be moving into new digs with Viridian Advisory.

Doubtless Cooper will also play a role in seeing off those working under the Securitor and Magnitude licenses.

According to Westpac chief executive, Brian Hartzer, Cooper has “indicated that he will leave to seek a new leadership role outside the Group”.

Outsider wishes Cooper all the best in his new challenge. Perhaps it involves a whole new panorama.

It is a pretty fair bet that with all the Westpac and BT planners onboarded, Viridian will comfortably make the Top 100 this year.

Which still leaves Outsider and his curious mates wondering the value of the Westpac/Viridian transaction which, given the alacrity with which the big four banks are moving to exit wealth, is either a poultice or a peppercorn.

Uncomfortable stablemates AS the May Federal Election looms ever closer, Outsider notes that the polls are suggesting that it remains pretty much a two-horse race, with one particular horse carrying Winx-like odds.

Thus, he very much enjoyed participating on a panel at the recent Financial Services Council (FSC) Life Insurance Conference with former Prime Minister, Tony Abbott’s near neighbour, insurance industry operative and Young Liberal stalwart, Jason Falinski.

Falinski is, of course, the member for the Sydney northern beaches electorate of Mackellar, which adjoins that of Tony Abbott’s Warringah, and was for many years the electoral fortress of former House of Representatives speaker and Liberal Party valkerie Bronwyn Bishop.

Of course, if Outsider’s failing memory serves him

OUT OF CONTEXT www.moneymanagement.com.au

04MM2803_32-36.indd 36

correctly, Tony Abbott once described himself as the political love child of Bishop and former Prime Minister, John Howard which begs the question: how one should then describe Falinski’s relationship with Abbott? – Adopted half-brother, perhaps.

Knowing that Abbott is facing an unprecedented amount of competition for his seat at this year’s election, Outsider sought to press Falinski for his views on the matter only to be told that Tony had been and would continue to be a fine representative for the people of Warringah.

All of which tends to confirm that not much has changed since the moderate Falinski won pre-selection for MacKellar ahead of Abbott’s preferred candidate who happened not to be Bronwyn Bishop.

"In energy you see this beautiful shape, where they start off with this steep pipeline, and then it's basically filling out like stuffing a sausage."

- Zoe Whitton, ESG research leader at Citi Australia, likens female representation in the energy sector to stuffing a sausage.

"If you lie down with dogs, you can expect to get up with fleas," - Mills Oakley financial services partner, Mark Bland, says superannuation fund trustees must have a good understanding of counter-party risk, and undertake due diligence.

Find us here:

21/03/2019 4:11:46 PM

1ST AUGUST 2019 FOUR SEASONS, SYDNEY

WOMEN IN

FINANCIAL SERVICES

AWARDS 2019 Recognise those who inspire

NOMINATIONS NOW OPEN! The future of the financial services sector relies upon the next great leaders to forge the way. As research continues to show the value of a diverse leadership team, it is increasingly important to encourage and reward women in the industry for leading, innovating and mentoring the next generation.

Money Management and Super Review will recognise the determination, commitment and amazing achievements of women in financial services with its seventh annual Women in Financial Services Awards.

Help us recognise these amazing women by nominating: www.wifsawards.com.au

CATEGORIES Achievement Awards • Female BDM of the Year • Financial Planner of the Year • Innovator of the Year • Investment Professional of the Year • Marketing and communication of the Year

• Funds Management

Executive of the Year • Life Insurance Executive of the Year • Superannuation Executive of the Year

Advocacy Awards • Pro-Bono of the Year • Mentor of the Year • Employer of the year • Advocate of the year Overall awards • Rising star • Woman of the year *

GOLD SPONSOR

*WINNER WILL BE PICKED BY MONEY MANAGEMENT AND SUPER REVIEW AND ANNOUNCED AT THE WOMEN IN FINANCIAL SERVICES AWARDS NIGHT 2019 ON 1ST AUGUST 2019.

5177_WIFS_PrintAd_2019.indd 3

14/03/2019 1:44:55 PM

For wholesale investors only

See the invisible, perform the incredible It’s now widely recognised that factors influence investment performance. But they remain invisible to the untrained eye. As pioneers in factor investing, we combine unrivalled experience with the latest research to reveal which factors are at work in portfolios, and how strategies can be optimised to capture them. We offer single- and multi-factor solutions, for both equities and fixed income.

And in all these strategies we integrate sustainability research and insights from Robeco affiliate, and sustainability expert, RobecoSAM.

It’s time to reveal which factors can improve your investments at www.robeco.com.au/factor-investing

Find out more >

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

_FP ad Test.indd 4 1353'03'19_Coverwrap_FI_Xray__MoneyMangement_Australia_DD_18March_240x330mm_SINGLE_PAGE.indd 2

18/03/2019 10:20:46 AM 15-3-2019 10:06:25