www.moneymanagement.com.au
MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY
Vol. 36 No 5 | April 7, 2022
18
MULTI-ASSET
Mitigating rising inflation
PROFESSIONAL YEAR
24
The value of graduates
TECHNOLOGY
Re-contribution strategies
Govt should educate consumers on finfluencer risks BY LAURA DEW
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Cutting-edge tech for financial advice firms COMING off two years of a pandemic, the world has changed when it comes to use of technology. Not only are advisers using it to communicate in a remote environment, clients are also expecting and demanding more use of technology. This will likely continue as advisers start working with younger clients who are digital natives and used to having 24/7 access to their finances at their fingertips. Money Management spoke to financial advisers to share their tips on which services they use and how they have helped make their businesses more efficient as well as what to consider when making a selection. This includes cashflow planners, fact-finding tools, online diaries and practice management tools. Nigel Baker, managing director of Arch Capital, said: “Technology is moving fast and many clients will soon demand a digital experience similar to the one they’re used to receiving from other tech-based companies. “Technology can improve client relationships and give advisers the ability to impact the lives of thousands rather than just a lucky few. Spend some time researching the options and understanding how they work and can fit into your processes.”
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Full feature on page 14
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TOOLBOX
WHILE guidance for advisers is welcome, the onus is also on the Government to educate consumers on how much weight they should give finfluencers. Earlier this month, the Australian Securities and Investments Commission (ASIC) issued guidance for advisers and finfluencers on what was classed as financial product advice as well as what advisers needed to consider when working with finfluencers. It also provided case studies which gave examples of what would class as misleading or financial product advice. Licensees were reminded they could be guilty of misconduct and the regulator warned they should do their due diligence, put risk management systems in place and have sufficient compliance
resources to monitor the finfluencer. Speaking to Money Management, chief executive of Financial Simplicity, Stuart Holdsworth, said the guidance was welcome but that the consumer should also be educated on how much weight they should give these platforms. If consumers wanted to follow the advice of finfluencers, this should be a considered decision by them of the risks involved, he said. “What is the onus on the Government or the industry to provide more education to consumers and to help them grade social media influencers versus licenced financial professionals and treat them with the appropriate level of weighting?” Continued on page 3
FSC announces Blake Briggs as CEO BY LIAM CORMICAN
FOLLOWING the completion of its executive search process, the Financial Services Council (FSC) board has appointed Blake Briggs as chief executive. Briggs had been acting CEO for the past three months and had worked at the FSC for eight years in total as its deputy CEO and as senior policy manager for superannuation. He was also previously head of government and industry affairs for wealth at Westpac. FSC chairman, David Bryant, president, Pacific region and CEO of Mercer Australia, congratulated Briggs on his appointment. “The FSC board welcomes Blake to his new position. Blake has proven he is a strong leader for the FSC who has a commitment to the organisation’s mission of delivering a financially secure future for all Australians. Continued on page 3
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Disclaimer: This information has been prepared and issued by Perennial Investment Management Limited (ABN 13 108 747 637, AFSL No. 275101) as Responsible Entity and is for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs and you should not construe the contents of this material as legal, tax, investment or other advice. Past performance is not a reliable indicator of future performance. A copy of the PDS, Additional Information Booklet and the TMD is available at www.perennial.net.au. No distribution of this material will be made in any jurisdiction where such distribution is not authorised or is unlawful.
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April 7, 2022 Money Management | 3
News
Budget 2022: The bottom line for advisers BY LIAM CORMICAN
THERE are no major changes for financial planners or their clients following this year’s Federal Budget, a reasonably positive development for financial planners, according to the Financial Planning Association of Australia (FPA). The FPA said this meant planners could continue to focus on helping their clients and growing their business. FPA chief executive, Sarah Abood, said: “It is an opportunity for financial planners to catch their breath after years of change”. The FPA welcomed several initiatives proposed in the Budget, including tax offsets for small businesses and added support for digital transformation and staff upskilling, initiatives that would be “very useful for financial planning practices”. The $1 billion Technology Investment Boost would be aimed at encouraging small businesses to go digital. Small businesses with an annual turnover of less than $50 million would be able to deduct a bonus 20% of the cost of expenses and depreciating assets that support digital uptake, including portable payment devices, cyber security systems or subscriptions to cloud-based services. A $1 spend would equate to a $1.20 deduction.
CPA Australia general manager for external affairs, Jane Rennie, said: “The technology investment boost and skills and training boost are welcome. These two programs go hand in hand and will help establish Australia as a top 10 digital economy.
“What’s missing are measures to make it easier for small businesses to access professional advice. “The Government has missed an important opportunity to help businesses build resilience to manage future shocks and improve their profitability.” In superannuation, the Government indicated that the temporary reduction in the minimum income drawdown requirement for super pensions, which applied during the 2019-20 to 2021-22 income years, would be further extended until 30 June, 2023. AMP’s head of technical strategy, John Perri, provided further clarity. “This measure will apply to account-based, transition to retirement, and term allocated superannuation pensions. “Further, this measure is not compulsory. Individuals should carefully consider communications received from their pension providers to better understand how this might impact them and what action may be required.” Abood said further initiatives should have been added to address housing affordability and women’s economic security and that the ALRC Review and Quality of Advice Review would be of key concern to the association this year. “We also look forward to the Budget Reply from the Opposition later,” said Abood.
Govt should educate consumers on finfluencer risks Continued from page 1 Chris Brycki, chief executive of Stockspot, said it was often difficult for consumers to distinguish between what was a sponsored affiliate advertisement versus an unpaid review. “At present, licensed financial advisers who are also finfluencers and promote an investment platform, they can receive a revenue share fee for each lead they generate without disclosing their commercial relationship with that platform. This needs to be banned as it doesn’t comply with the best interest duty and code of ethics that came out after the banking Royal Commission. “We believe a blanket ban on all paid testimonials is urgently needed. There should be no paid testimonials or financial product reviews where the finfluencer receives a commercial benefit from the financial product or service being reviewed. They should only disclose the information if it is from personal experience and they are not paid for the testimony.”
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Holdsworth also said many consumers were “daunted” by seeking out professional financial advice and providing so much personal information to an adviser which was a factor helping the growth of advice via social media instead. “The traditional advice process is very timeconsuming and very scary for many people, even in the beginning, websites ask very, very personal questions before you even see them. That is a daunting experience and are people prepared to open themselves up to that to get a fully professional service? “In some cases, people may have read about the cost of advice and be tempted to take less effective or less personalised content because they feel they have no other option or they are prepared to take that risk. “If consumers feel like they have no other option then that is a sense of failure in our industry that can’t service consumers adequately because it is too expensive.”
FSC announces Blake Briggs as CEO Continued from page 1 “Under Blake’s policy leadership, the FSC has been an advocate for reforms that will deliver a more competitive, efficient, and growing financial services sector that delivers highquality products to Australian consumers.” FSC co-chair, Jen Driscoll, CEO of AllianceBernstein Australia, added: “The FSC is a leading voice for the funds management, life insurance, financial advice, and superannuation sectors and under Blake’s stewardship we look forward to the FSC continuing to be a strong advocate for the industry.”
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4 | Money Management April 7, 2022
Editorial
laura.dew@moneymanagement.com.au
NO NEWS IS GOOD NEWS IN BUDGET 2022
FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000
Editor: Laura Dew
What could have been perceived as a Budget containing little new information has been viewed positively by the industry.
Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214
AT the time of writing, the Budget 2022 has just taken place and, what could have been considered a rather dull and lacklustre Budget in a Federal election year, has been viewed positively by the industry. For them, it appears that ‘no news is good news’ with many commentators pleased that they will not have to contend with a whole raft of changes in the upcoming financial year. Much of what was included in Treasurer Josh Frydenberg’s speech had been previously announced, particularly in the superannuation space where measures included the $450 per month income threshold and removal of the work test for non-concessional and salary sacrificed contributions to superannuation for individuals aged 67-75. In the financial planning space, there were few major announcements but several one-off changes were announced to help Australia deal with the increased cost of living such as a $450 payment for low and middle income taxpayers. However, there was
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disappointment that less had been outlined for women despite the Government publishing an entire Women’s Budget statement. This included a lack of superannuation payments on Paid Parental Leave or measures around financial abuse, both of which had been canvassed for in the run-up to the Budget. In its accompanying documents, the Treasury acknowledged the gender pay gap and superannuation gender pay but appeared to indicate this would narrow naturally as more
women entered the workforce. While it inevitably will, this is likely to take decades without assistance and there were steps that the Government could have taken to ensure it happened faster. Advisers have also been warned not to rest on their laurels just yet as there could be still further measures announced between now and the Federal election in mid-May given there are several reviews ongoing on intergenerational wealth and retirement income.
Laura Dew Editor
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April 7, 2022 Money Management | 5
News
Less than a third of advisers pass Feb exam BY LAURA DEW
THE percentage of advisers who passed February’s exam, the first one run by the Australian Securities and Investments Commission (ASIC), has fallen to 32.4%. Some 333 advisers sat the exam and 32.4% passed (108 candidates). Almost three-quarters of candidates were re-sitting the exam for at least the second time. This compared to 52% of candidates passing in the November exam, which was the lowest pass rate of all exams run by the Financial Adviser Standards and Ethics Authority (FASEA). Since the exam was introduced, almost 20,000 advisers had sat the exam and 91%
of them had passed. Over 15,600 were recorded as current financial advisers on ASIC’s Financial Adviser Register (FAR), representing 90% of current advisers on the FAR. Over 2,260 were ceased advisers on the Financial Adviser Register (FAR) and may be re-authorised in the future while over 480 were new to the industry. ASIC said candidates would receive feedback from Australian Council for Educational Research (ACER) if they had been unsuccessful. The next exam sitting would be held on 12-16 May and enrolments would open on 4 April.
ASIC provides financial adviser enforcement update BY LIAM CORMICAN
THE Australian Securities and Investments Commission (ASIC) has confirmed 10 financial advice misconduct criminal cases are before the courts with six civil cases also yet to be decided. In an enforcement update, the corporate regulator reported four civil financial advice misconduct cases and two administrative cases were concluded in the six months between 1 July and 31 December, 2021. Meanwhile, one civil case relating to insurance misconduct had been concluded in the time period as well as six civil superannuation cases, two criminal superannuation cases and one administrative superannuation case. Overall, a total of 32 financial services enforcement matters had concluded in the same period with 28 financial services criminal cases and 48 civil cases before the courts.
“During this period, ASIC continued to act against misconduct to maintain trust and integrity in Australia’s financial system and promote a fair, strong and efficient financial system for all Australians,” ASIC said in a statement. A total of $84.3 million in penalties were imposed in the six-month period, which included penalties against National Australia Bank, superannuation trustees, asset management companies and managed investment schemes. ASIC confirmed 99 people or companies were prosecuted for strict liability offences, 21 people or entities were removed or restricted from providing financial services or credit and 31 people were disqualified or removed as directors of companies. A further six people were given custodial sentences and 10 people or companies were given non-custodial sentences.
AMP teams depart to HSBC AM and Maple-Brown Abbott SEVERAL AMP managers have moved with HSBC Asset Management hiring its listed infrastructure equity team and Maple-Brown Abbott hiring two small-cap managers. The listed infrastructure team, led by Guiseppe Corona, head of listed infrastructure equity, had worked together for over five years and been managing just under US$2 billion ($2.6 billion) in assets under management. They would report to Joanna Munro, chief executive of HSBC Alternatives, and be split across London and Sydney. The first fund under HSBC, Global Infrastructure Equity, would invest in a diversified portfolio of listed infrastructure assets across developed and emerging equity markets and would embed environmental, social and governance. Corona said: “We are excited to join HSBC AM’s growing alternatives investment platform. HSBC AM is strongly aligned with our commitment to delivering excellent investment returns to clients, while promoting sustainable investing. “Listed infrastructure has seen significant growth over the last decade. We expect this trend to continue, supported by secular tailwinds such as the ongoing digitalisation of the economy and the vital need to transition to a lower carbon environment.” Meanwhile, Phillip Hudak and Matt Griffin would join Maple-Brown Abbott as co-portfolio managers, Australian Small Companies, at the end of April. They were previously portfolio managers of the AMP Capital Australian Emerging Companies fund for the past four years. At Maple-Brown Abbott, they would report to chief investment officer, Garth Rossler and a small-cap fund was expected to be launched soon. Chief executive, Sophia Rahmani, said: “The opportunity to add this sought-after capability through the appointment of two highly experienced investment professionals is ideal for us. “Our people and our platform allow us to efficiently add and support new investment teams, and we expect to launch an Australian small companies fund soon after Phillip and Matt start.” AMP said the moves followed the sale of its global equities and fixed income (GEFI) division to Macquarie Asset Management which was completed in March and would allow the firm to focus on its infrastructure and real assets divisions.
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6 | Money Management April 7, 2022
News
SIAA name change to highlight breadth of profession
Adviser numbers fall to 17,193
BY LAURA DEW
BY OKSANA PATRON
THE name change decision by the Stockbrokers and Financial Advisers Association (SAFAA) was about highlighting the role of investment advisers rather than a decision to distance itself from the advisory community. The organisation announced it would rebrand as the Stockbrokers and Investment Advisers Association (SIAA). This came as the organisation had made numerous comments in the past that it should not be classed in the same category as financial advisers giving personal advice. In September, it said the Financial Adviser Standards and Ethics Authority (FASEA) regime had led to a one-size-fits-all approach to financial advice which disenfranchised retail investors and was deterring graduates from entering the stockbroking and investment advice profession. It also felt that Standard 6 of the Code of Ethics was “highly problematic” for its members as it had a financial planning lens on everything and considered the long-term circumstances of the client. Speaking to Money Management, chief executive, Judith Fox, said the move was not one to “distance” itself from financial adviser but rather a way to highlight the role of investment advisers. “It’s not so much to distance ourselves, we’ve got a role to play in helping educate everyone about the financial advice ecosystem
THE drops in adviser numbers in the week to 25 March were driven by AMP Group which saw one of its practices moving to Fitzpatricks, with the overall number of advisers having dropped to 17,193, according to Wealth Data. Also, the balance of the losses at AMP Group had not been appointed elsewhere at this stage. Additionally, Citi Investments (Citigroup) was down by eight advisers and was now down to zero advisers, effectively taking it out of providing retail financial advice. The net change stood at (-15), with 27 licensee owners having gained 40 advisers and 29 having seen a departure of 57 advisers. At the same time, four new licensees commenced their operations while another four were closed down. As far as year-to-date losses were concerned, Insignia led the way down albeit after improvement this week and was down by 48 advisers. Craigs was down by (-36) advisers, while AMP Group and WT Financial Group so far saw a departure of 28 and 24 advisers, respectively. On the other hand, Count pushed further ahead and was now up 30 for the year. The other groups that also manged to increase their adviser numbers included Castleguard (Lifespan), PSK Financial Services, Diverger, Centrepoint, Morgans and Steinhardt (Infocus).
and that there are different professions within that. Stockbroking and investment advice is different to financial planning. “There are times when obligations are relevant to some and not to others, we’ve seen what happens with the one-size-fits-all approach under FASEA and it just did not work. It’s not just us, there’s risk advisers and accountants who are also providing advice and we all have different roles.”
Warning for advisers selling up before exam deadline FINANCIAL planning firms with clients with fees above $3,000 are the most attractive buying target currently but advisers need to be prepared if they expect to exit before the exam deadline. In a report from Centurion Market Makers, it said 2021 had continued to be dominated by COVID-19 and the changes arising from the Hayne Royal Commission. It was also the first year without grandfathered commissions which dropped off at the end of 2020. Buyers of practices were becoming “more discerning” and “stratifying client bases”, it said. “Buyers are acting in a very sophisticated manner and stratifying client bases when developing offers such that they will only pay high multiples for high value clients. This means the average for the book can drop, but high-quality clients are still demanding around a 3x recurring
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revenue multiple. “The effect of averaging is the key driver of reduced valuation. What this means is that the relative amount of ‘low margin’ revenue i.e. clients with fees less than $3,000 are less attractive to buyers as the level of work required significantly reduces profitability.” Prices for clients with a fee structure above $3,000 had held steady and were the most attractive client style, particularly if they had the appropriate fee disclosure statements (FDS), opt-in and comprehensive compliance regime. “These fees, with appropriate and/or Opt-in are the most attractive client style, and we could sell dozens of these books a year. We expect this style of client book to hold value over time.” The firm also cautioned single-owner advisers who were seeking to leave the industry before the exam deadline, warning they could end
up receiving a lower sum due to the rush. Advisers had until 1 October, 2022 to pass the Financial Adviser Standards and Ethics Authority (FASEA) exam. “Education standards and the FASEA exam deadline during the year will see an increase in advisers exiting and we expect some will be single-owner businesses that will seek to sell. “We expect enquiries in this respect to pick back up closer to the cut-off date for non-university qualified advisers. “We caution advisers in this position that a rush of books onto the market at a time where there will be far fewer buyers will attract lower prices and leave some advisers without a solution. “A planned process to exit the industry is always preferable, and leaves advisers with more options than a rushed exit.”
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April 7, 2022 Money Management | 7
News
Rate rises cause end to ‘blue pill thinking’ BY LAURA DEW
THE idea that interest rates will remain low forever is ‘blue pill thinking’ by the market, according to Spheria, and lacked focus on the fundamentals. Likening it to movie The Matrix, where the lead character can take a blue pill to remain in blissful ignorance or a red pill to understand the reality, Spheria co-founder and portfolio manager Marcus Burns, said this was the situation regarding interest rates. Rates had remained so low, around 0.5% or lower, for so many years that it was expected this would be forever the case. In the UK, for example, there was no interest rate change for seven years between 2009 and 2016 and they still remained below 1% despite modest rises since 2016. However, rising inflation was forcing central banks to finally consider seriously raising rates. The Federal Reserve raised rates by 25 basis points to 0.5% earlier this month and the Reserve Bank of Australia was expected to make multiple rate rises later this year.
Burns said: “There was this belief, what I call iZirp, or infinite zero rate policy, that everyone thought that central banks would remain all powerful, they’d keep buying bonds forever, and that would keep interest rates incredibly low. “That provided abundant liquidity for investors in the stockmarket broadly, and really there’s a lot of what I call blue pill thinking. The market was very plugged into hot stories, hot ideas, momentum, and very little was focused on fundamentals.” Expanding on what blue pill thinking looked like among investors, he said people were getting carried away by liquidity and focusing on disruptive stocks. “The market goes through these incredible mood swings where you become very exhilarated
by certain ideas and certain stories, disruptive stocks, FinTech and biotech were all very exciting, especially in smalls and micros. And people tend to get onto stories that sounded very compelling. There wasn’t much red pill thinking going on. It was all very much what’s the narrative of management teams, how big could this market be in five years’ time? Very little application around what the business was today, what cashflow was today.” A better solution regarding the ‘red pill’ would be central banks exiting buying bonds, a slowdown in the IPO market and excessive use of exchange traded funds (ETFs) and a more rational thinking about capital allocation by management teams. “With rates rising, and a longer term lens being applied to the stock market, we think investors will question this idea that growth at all costs is where you should put your money. “We think you’ll see rotation out of sales growth companies with correctional business models, and back into things that look a little more fundamental.”
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8 | Money Management April 7, 2022
News Financial services legislation has become extraordinarily complex: ALRC BY LIAM CORMICAN
THE ‘shifting sands’ of regulatory approaches has resulted in financial services legislation that is unwieldy and extraordinarily complex, according to the Australian Law Reform Commission (ALRC). According to the new background paper, Risk and Reform in Australian Financial Services Law (FSL5), the existing legislative model had proven inadequate, and a new architecture could better accommodate change going forward. The ALRC said two broad changes emerged over time including a shift to greater risk for individual citizens and the ‘financialisation’ of the Australian economy, involving increased exposure to financial assets and markets and continued growth of the financial sector relative to the real economy. For example, a move away from interest rate controls, and the lack of long-term fixedrate residential mortgages, meant households would bear the risk of changes in interest rates, according to the ALRC. And, the overall size of the financial sector had grown enormously, in both relative and absolute terms. For example, household exposure to financial markets increased from roughly 30% of total household assets in 1980, to in excess of 40% in 2021 (with the total wealth of financial assets owned by Australian households now in excess of $6.2 trillion). “Collectively, these trends have meant that financial risks pose a greater threat to both the wellbeing of individual citizens and the Australian economy,” the background paper said. “The daunting volume of law was cause for concern enough, but even more concerning was
its ‘Byzantine complexity’ (as described by former High Court Chief Justice, Sir Anthony Mason).” The ALRC argued the divergent and varied approaches to risk that had accumulated in the law over the past 20 years contributed to the law’s complexity. “In particular, this is because new law has simply been added to the old. The accretion of law has reflected varied approaches to risk, but there has been little desire to revisit or dismantle what came before.” The ALRC considered that a survey of existing law and its history highlighted two particular needs: • First, the need for comprehensive and ongoing review of the law, to ensure it remains coherent, comprehensible, and accessible. This is part of the work now being undertaken in the ALRC’s Financial Services Legislation Inquiry. However, there might also be a role for a body akin to the former Corporations and Markets Advisory Committee (abolished in
2018), to continually review and make suggestions for improving the law; • Second, the need to ensure that the legislative framework for regulation provided an architecture that was sufficiently flexible to accommodate inevitable future changes. In the ALRC’s view, the Corporations Act's structure – and particularly, the use of legislative instruments to modify or amend it — were unsuitable. The ALRC’s research suggested the legislation administered by the Australian Prudential Regulation Authority (APRA) was better adapted to changing approaches to financial risk. The recommendation of a more suitable legislative architecture would be a core component of the ALRC’s Interim Report B, due in September 2022, as part of its Financial Services Legislation Inquiry. Stakeholders were encouraged to engage with the ALRC and the Financial Services Legislation Inquiry.
ASIC scrutinises marketing of managed funds THE Australian Securities and Investments Commission (ASIC) has commenced surveillance into the marketing of managed funds, to identify the use of misleading performance and risk representations in promotional material. The corporate regulator had recently taken enforcement action against fund managers for misleading or false advertising, including the Mayfair 101 Group, La Trobe Financial Asset Management and the Skyring Fixed Income Fund. ASIC deputy chair, Karen Chester, said: “ASIC has broadened our managed fund surveillance, as
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retail and unsophisticated investors continue to grapple with historically low yields alongside the outlook of even greater global risks and uncertainties”. ASIC would scrutinise traditional and digital media marketing of funds, including search engine advertising, targeting retail investors and potentially unsophisticated wholesale investors, such as some retirees. ASIC said it was concerned that, in the current highly volatile and low-yield environment, consumers seeking reliable or high returns were being misled about the
performance and risks of the funds they were investing in. This surveillance followed on from ASIC’s ‘True to Label’ initiative, which examined whether representations in fund labels might have misled consumers about the funds’ characteristics and underlying assets. Chester said: “ASIC remains concerned that managed fund promoters continue to target consumers, particularly retirees or those planning for retirement, with ambiguous or misleading performance and risk representations.
“Where we identify fund marketing of concern, we will also review the corresponding product disclosure statements, websites and target market determinations to assess if the marketing claims are misleading. “ASIC is committed to protecting consumers where misleading marketing practices run counter to their interests. If we identify misleading conduct, we will take prompt action to disrupt behaviours by deploying across our regulatory tools – from administrative intervention through to enforcement action if warranted.”
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10 | Money Management April 7, 2022
News
ASX outperforms developed market peers BY LAURA DEW
AUSTRALIA is proving to be a bright spot amid global markets with the ASX 200 outperforming its developed markets peers so far this year. The market had seen positive returns of 1.75% since the start of the year to 29 March. This compared to losses by other major markets; the FTSE 100 had lost 3%, the S&P 500 had lost 5.6%, the Topix in Japan had lost 9% and the Hang Seng in Hong Kong had lost 9.2%, according to data from FE Analytics. Morgan Stanley had previously said it expected Australia would be “well placed” for outperformance this year. A big contributor to this was the commodities and energy sector which had seen prices
significantly increased by the war between Ukraine and Russia. Since the start of the year, the ASX 200 Oil & Gas index had risen by 31.9% while the ASX 200 Energy index had risen by 30.9%. In an update, Andrew Mitchell and Stephen Ng at Ophir Asset Management, said: “We are again in one of those periods where ‘big picture’ factors are driving markets and have been for a few months now, rather than ‘bottomup’ factors, or underlying company fundamentals.
“Financials (and more specifically the big banks) are benefiting from funding costs remaining low, while banks are benefitting from a lot of businesses looking to borrow to expand amid strong economic activity. “While some of the main commodity players are facing cost issues, particularly around labour, they have not had any trouble passing this on given the rude health of most commodity prices.”
Managed accounts growth accelerates BY LIAM CORMICAN
MANAGED accounts advisers say they save 15.7 hours on average on a typical work week, up from 13 hours two years ago as proficiency in advice practices levels rise, according to research. The latest SPDR ETFs/ Investment Trends Managed Accounts Report, which surveyed 660 Australian-based financial advisers between December 2021 and January 2022, also showed more than half of financial advisers (53%) were using managed accounts, up from just 16% a decade ago. State Street Global Advisors head of SPDR ETFs Australia and model portfolios for Europe, the Middle East, Africa and Asia-Pacific, Kathleen Gallagher, told Money Management outsourcing was key to free up time and helped advice firms meet their mounting compliance burden. “If you look at it over a year, that’s 100 days they get extra to engage with their client base and strengthen their overall strategy. At the same time, it’s not just about client retention, it’s also about growing their business,” Gallagher said. “Advisers are telling us they like to use managed accounts because they provide access to institutionalgrade investment management, efficiencies of scale, and more scope to focus on educating their clients and meeting client goals.” The report showed advisers who already used managed accounts were recommending them for 60% of their clients, up from 44% in 2021. Prior to COVID-19,
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advisers were recommending managed accounts to just one third of their clients. “As advisers are getting more comfortable with the structures [of managed accounts] they’re seeing the benefits,” Gallagher said. Investment Trends chief executive, Sarah Brennan, said the breakdown of the type of client using managed accounts had changed over the last few years as advisers had become more familiar with the technology. “In the past it tended to be traditionally around that affluent client group ($100,000 to $250,000) and that’s still significant, but what we have seen for slightly lower balance clients, [is] the usage of managed accounts has increased, as well as the usage of managed accounts for self-managed super funds,” Brennan said. “In this year’s study, we saw advisers using managed accounts for those clients less than $100,000, move from nearly 20% to 40% - so it nearly doubled.” While the majority of managed account advisers still believed affluent clients were the most relevant target client group for whole-of-portfolio managed account solutions, a growing proportion appreciated their suitability for smaller portfolios. For example, about 35% of advisers believed it was appropriate for their millennial clients to hold the majority of their portfolio in a managed accounts structure, up from 30% in 2021. Meanwhile, 45% believed it was appropriate for pre-retirees aged over 50 to hold most of their portfolio in a managed accounts structure compared to 40% in 2021.
How to market to wealthy older Australians THERE are over half a million wealthy older Australians considering advice and research from Netwealth has detailed the best way to target them. Receiving over 1,600 responses, Netwealth’s Advisable Australian 2022 Report – The Established Affluent surveyed Australians aged 18 and over from 28 October to 3 November, 2021. To help advisers understand the industry they operated in, the report segmented the sample into four groups based on age and wealth, with this year’s report focusing on wealthy older Australians which Netwealth referred to as the ‘Established Affluent’. The Established Affluent were defined as those over-45 with parameters including, but not limited to, personal income greater than $100,000 or household income greater than $150,000. Representing 2.8 million people holding $4.1 trillion in household wealth, almost a quarter of wealthy older Australians had household incomes of $200,000 or more, while one in 10 had incomes of $250,000 or more. Over half of million people in this demographic were considering financial advice, the report said, while 1.1 million were already using an adviser. The report recommended understanding buyer intent and to focus on both channel/referral networks and key messaging. With 43% of Established Affluent saying they had found their adviser or intended to find their adviser through a friend, family member or accountant compared only 10% through online review sites, professional referrals and word of mouth were a significant source of new business. Only one in three of those considering advice said they could justify its value or see its benefits, 76% said the credentials of a firm were most important and one in three said technology experience would sway their experience.
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April 7, 2022 Money Management | 11
News
Douglass resigns from Magellan board BY LAURA DEW
HAMISH Douglass has resigned from the board of Magellan in light of his continued absence from the firm. Douglass, who took a medical leave of absence at the start of February, was previously chair of the asset manager as well as chief investment officer and portfolio manager. A statement to the Australian Securities Exchange (ASX) from the firm said his departure was effective from 19 March, 2022 and was due solely to his medical leave of absence. Douglass’ chair role was currently being taken over by former deputy chairman, Hamish McLennan, who was appointed as non-executive chairman. The firm said it would seek to recruit an additional independent director. In the firm’s results earlier this month, it did not confirm the date when Douglass would be returning to Magellan.
CA ANZ calls for streamlined financial advice regulations BY LIAM CORMICAN
CHARTERED Accountants Australia and New Zealand (CA ANZ) has been left disappointed by the exclusion of streamlined regulations for financial advisers and accountants in the 2022 Federal Budget.
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CA ANZ said it wanted a review of the regulatory environment affecting accountants and financial advisers in order to promote economic growth as small and medium-sized enterprises (SMEs) were relying on them more than ever since the pandemic. In a statement to Money
Management, CA ANZ said: “While the Federal Budget did not address the much-needed reform to the regulatory framework for accountants in financial advice, CA ANZ is actively engaging in the Quality of Advice Review as well as the Australian Law Reform Commission review in pursuit of streamlining financial advice regulations.” Bronny Speed, CA ANZ financial advice leader, said: “Our members have never been busier, but there’s quite a lot of regulation associated with being an accountant. Members in the financial advice area, in particular, are feeling the impact”. Speed said the cost of complying with regulations and the additional Continuing Professional Development (CPD) and Code of Ethics requirements was driving many members out of the financial advice side of their business.
Earnings forecasts prompt T. Rowe Price to stay neutral on Australia T. Rowe Price has held off changing exposure to Australian assets in its global multi-asset funds as it believes earnings forecasts remain elevated. The firm closed its overweight in September after a year as it expected economic growth and earnings would be lower going forward. Six months later, the firm remained neutral on the asset class as well as neutral on global equities. In an asset allocation monthly update, the multi-asset team said: “Economic momentum proved to be more resilient and stronger than previously estimated. Housing rebound seems to have peaked and might become a headwind. Earnings forecasts might prove to be too elevated. We remain neutral given these competing forces”. Positives for Australia were that a tight labor market supported the recovery in consumer spending, the value rotation supporting financials and materials and Australian assets had been more resilient to geopolitical risks than the rest of the world. On the flip side, however, business conditions were deteriorating on the back of supply and labor shortages, rising yields were a concern in a hot property market and the dovish stance from the central bank looked unsustainable. Elsewhere in their allocation, the global multi-asset team was underweight the US and Europe and overweight Japan and emerging markets. While emerging markets had been affected by the war between Russia and Ukraine, the team said valuations remained attractive. “Valuations are very attractive; however risk-off sentiment could remain a headwind. Improving outlook in China and fading COVID waves are supportive although recent conflict in Ukraine could weigh on global trade and pressure inflation higher.”
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12 | Money Management April 7, 2022
News
BT appoints head of product management from Insignia BY LAURA DEW
BT has appointed Kathryn Cosentino as its head of product management for its platform business. Cosentino joined from her role as head of wrap platforms at Insignia Financial and had 20 years’ experience in the industry. In the new role, which was a newly-created position and would begin on 4 May, Cosentino would work alongside the platform and
investment leadership team. This included a head of strategy and product development, an appointment for which would be announced soon. Kathy Vincent, BT’s managing director for platforms and investments, said: “I am delighted to welcome Kathryn to BT. She has an impressive track record in putting advisers and their clients first and I look forward to her passion and commitment in helping BT Panorama to become the undisputed platform of choice in Australia”.
North expands platform range BY LAURA DEW
NORTH has added 18 investment options to its platform, covering equities, property, bonds and technology. The firm said the new additions reflected the diverse choice of products and that 140 had been added during 2021, including a range of managed portfolios and ethically-based funds. It had also launched two partnered managed portfolios (PMPs) with Milestone Financial and Coastline Advice which were a decision to work with advisers and investment managers. Ian Hayes, director of Milestone Financial, said it had decided to partner with AMP as it would allow the firm to offer clients an expanded range of investment options while investment decisions could be implemented quickly via the North platform. The two firms brought the total number of PMPs to 16 advice practices. AMP director of platforms, Edwina Maloney, said: “Providing advisers and their clients with access to a diverse and growing range of highquality and contemporary investments is a fundamental aspect of our strategy for North. “We’ll also continue to draw on our knowledge of financial advice to work with more advice practices and investment managers to develop tailored managed portfolios, recognising the value they provide their clients.”
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Midwinter and AIA team up BY OKSANA PATRON
MIDWINTER Financial Services has announced that its advice software has been selected by AIA Australia for their new advice business Financial Wellbeing. Financial Wellbeing would offer solutions for life and health insurance, superannuation and wealth advice. AIA said it had selected Midwinter’s software due to the fact it required minimal customisation to meet their requirements given that AIA Financial Wellbeing were operational on the software following an implementation of just over four months. Chief commercial officer of Midwinter, Steve Davison, said “We’re proud to have been selected as the financial advice software partner for AIA Financial Wellbeing. This is a testament to the completeness of our advice software and vision, and our team’s ability to implement the software quickly and effectively.” “Midwinter has been easy to work with and their comprehensive and configurable software has helped us quickly stand-up our new advice business. We’re excited about the partnership and Midwinter’s ability to support our goal of enhancing the financial wellbeing of Australians,” added chief executive of AIA Financial Wellbeing, Pina Sciarrone.
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April 7, 2022 Money Management | 13
InFocus
CRACKING DOWN ON FINFLUENCERS The guidance from the regulator on social media influencers has been welcomed but help is also needed to ensure consumers understand the risks of their content, writes Laura Dew. IN A MUCH-NEEDED information sheet this month, the Australian Securities and Investments Commission finally issued guidance for ‘finfluencers’ and for licensees who worked with them. The industry had previously called for more guidance and information on what finfluencers needed to consider and the regulator listened, warning they could end up in jail or fined if they gave financial product advice without a license. It also provided clear examples and case studies over what would and would not be classed as financial product advice which was helpful in understanding what was within the law. Providing an opinion on products or on a potential return from a product was classed as an example of content that was misleading and financial product advice. On the other hand, descriptions of product or money saving/budgeting tips were unlikely to be so. Failing to explain or highlight a product’s risks or claiming a product was ‘risk-free’ was also said to be misleading and deceptive. It was not just finfluencers who came under the regulator’s watch, financial advisers and other licensees were also warned they needed to be wary when considering working with finfluencers and could find themselves guilty of misconduct. Licensees should do their due
THE ESTABLISHED AFFLUENT
diligence, put in place appropriate risk management systems, have sufficient compliance resources and consider target market obligations with the Design and Distribution Obligations (DDO), ASIC said. Stuart Holdsworth, chief executive of Financial Simplicity, said he believed more advice and guidance was needed for consumers, not just advisers, as they didn’t necessarily understand the risk levels of what was being promoted. “What is the onus on the
Government or the industry to provide more education to consumers and to help them grade social media influencers versus licenced financial professionals and treat them with the appropriate level of weighting? “ASIC is trying to populate its MoneySmart website with this information but is that sufficient in today’s world?” This was echoed by Judith Fox, chief executive of the Stockbrokers and Investment Advisers Association, who said
consumers may be unaware finfluencers lacked any education or professional obligations. “Because finfluencers are not licensed financial advisers, there is a lack of consumer protection so if something goes wrong then that was a great concern to us. We were also concerned that consumers didn’t understand these people didn’t have educational qualifications and weren’t obliged to meet any professional standards.” Fox added her members had noted an uptick in shares information being spread on social media. “If people are saying ‘this is a great buy’ then that’s straying into market manipulation territory so there’s a big difference between talking to someone about a share generally and how it’s performed and saying ‘buy, sell’. “We were concerned for both the good ones who might be inadvertently straying into financial advice and also for the ones out there who are doing pump and dump shares which is illegal.” She also highlighted cryptocurrency, which was topic de jour for many fininfluencers, was not yet a regulated financial product which made it hard for the regulator to protect. “The hardest thing still yet to be addressed is that crypto is not a financial product and is still outside the loop. That’s an area that needs to be looked at and they need to think how to deal with it.”
60
$192,722
523,000
Average age
Average household wealth
Considering advice
Source: Netwealth's Advisable Australian report 2022
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14 | Money Management April 7, 2022
Technology
CUTTING-EDGE TECH FOR FINANCIAL ADVICE FIRMS Digitalisation is only growing in importance for clients, writes Alexandra Cain, so it is vital that advisers work out how they can implement it in their practices. FINANCIAL ADVICE PRACTICES are implementing an array of different technologies to run their businesses more efficiently. The message is, if you haven’t already started digitising your firm, there’s no time to lose. One way to think about tech for financial advice firms is to break it into two different buckets. There’s tech to deliver advice more effectively and then there’s tech to improve the way the practice is managed. First, let’s
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take a look at innovative ways to deliver advice. Paul Moran is a specialist SMSF adviser with Melbourne’s Moran Partners Financial Planning. He has developed an interactive, cloud-based fact finding tool called iFactFind. This is a more accurate method of storing client information compared to paper-based methods and the information can be easily updated. The software includes a goalsetting function and a risk
tolerance questionnaire and it will take clients about 40 minutes to input their details the first time they use it. Once their info is in the system, clients are prompted to update their details before meeting Moran and his team. The tool also helps advice firms meet their regulatory obligations to keep complete and accurate records of their current and former clients. “iFactFind helps advisers know their client and deliver advice that’s appropriate for
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April 7, 2022 Money Management | 15
Technology
people’s circumstances,” Moran explained. Financial advisers are increasingly making use of roboadvice tech, which allows them to offer a more cost-effective option for some clients. Nigel Baker, managing director of boutique private wealth firm Arch Capital, is one. He has recently built and implemented Scientiam, a low-cost digital advice tool designed to help advisers serve clients who can’t afford comprehensive, personal advice or who just are not ready for fullservice advice yet but still want to be more engaged with their money. That includes millennials and people with low account balances, as well as clients who no longer fit the firm’s parameters for an ideal client. “A lot of clients don’t need full personal or complex advice. But they still want a relationship with a financial adviser. We couldn’t find a cost-effective solution that caters to this need. So we built Scientiam to solve this problem, originally for family and friends and clients with lower balances and also intergenerational clients,” said Baker. Clients get access to the technology for $9 a month, investment costs are on top of this and depend on the customer’s needs. The cost to serve 50 clients using Scientiam is around a few thousand dollars a year versus $100,000 a year to serve the same number of clients using the traditional approach. “Scientiam helps us to maintain regular contact with clients and offer a great service but not at a cost or distraction to the team. The technology releases the advice team to focus on where
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they add the most value: taking care of more complex client situations. The advice industry needs to stay relevant and meet the needs of the next generation. If the industry doesn’t create a solution for intergenerational clients, we risk losing them in coming years,” he warned. Since developing Scientiam, more of Arch Capital’s clients now refer their children to the practice. “We have also engaged some family groups in a deeper, more connected way. Many of our staff and their families have also opened accounts, as they can now use our services without the need for a complex statement of advice,” Baker said. It’s also an option for older clients who are no longer economically viable for the firm to service. “After many years of loyalty, some clients don’t really need our services anymore. In the past, we would have reduced the fee for them, but this doesn’t make sense for us because the cost to serve them is too high. Scientiam allows us to offer a lite service so clients still have contact with us but at a lower fee and service level. Clients are happy and we feel good. While our fee is lower, so is our cost to service so economically it works.” Online investment adviser and fund manager Stockspot has updated its goal tracker investors can use to set investment goals such as buying a house, retiring comfortably or paying for their kids’ education. “Giving clients clear, easy-tounderstand guidance every day helps them course correct when needed, which gives them more confidence they will achieve their goals,” said founder Chris Brycki.
“There’s no one-size-fits-all solution for businesses, so it pays to do homework before wasting time and money on tech that doesn’t suit the practice’s needs.” – Amanda Cassar “The goal tracker also enables our clients to have deeper conversations with their advisers or accountants about their broader financial goals. Our hands off, automated experience is designed to give clients a safe and consistent investing journey and save advisers the time and hassle of managing portfolios for their clients,” he added. Helping clients, especially retired ones, manage their cash is an essential part of many advisers’ work. Joshua Fileti, a senior financial adviser with Synergy Private Wealth, uses CashDeck to help clients manage their cashflow. “I can see how much money they need to live on and work out a plan for funding their retirement.”
BETTER PRACTICE MANAGEMENT Client service aside, financial advice practices across the nation are exploring a swathe of digital tools to help them be more efficient and effective. Many have switched to online diaries to manage their time. Moran uses Calendly to manage initial meetings, review meetings and follow-up meetings. “We were concerned some of our older clients would struggle with Calendly. But they have really taken to it, along with digital signatures we collect through HelloSign. It only takes five minutes to
Continued on page 16
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Technology
Continued from page 15 introduce the systems to the clients in a short coaching session. Now, more than 85% of clients self-select their appointments. We have linked this with Zoom so clients can choose how they want to interact with us,” he said. Moran uses a range of practice management tools to simply workflow, including WorkSorted for CRM, which also links to Calendly meetings. Rather than Calendly, Fileti uses Chili Piper, a free service, to manage his time, which suited him when he formed his practice. “You don’t want to spend too much money on subscriptions when you start a business. Now my business has critical mass, I could use something else and pay a subscription. But Chili Piper is simple and it works. I just send the link to a client and they punch their details into my diary. That’s it. I don’t like to over complicate the process.” Fileti uses Mailchimp to send marketing material to clients. He says with this software, more of his emails end up at their intended address rather than in the junk folder, which was a problem with a competitor software to Mailchimp he used to use. “People are reading our emails, which I can tell through the open rates and other stats.” Wealth Planning Partners’ director, Amanda Cassar, relies on Microsoft Azure products such as Team and Planner for practice management. “We have two team members in the Philippines and these tools are great for collaboration. Our local team works from home one day a week and using Planner means we’re always up-to-date.
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“We are also rebuilding our Network Attached Storage for additional internal file storage and security. The rest of our tech stack includes DocuSign, LastPass, Lightyear Docs, Malware Bytes Privacy and XPLAN,” she said.
ADVISER INSIGHTS It’s worth taking into account the lessons learned by advisers’ who have implemented tech into their businesses Overall, Baker said now’s the time to fully embrace the digital opportunity as clients were likely going to be demanding it from their adviser. “Technology is moving fast and many clients will soon demand a digital experience similar to the one they’re used to receiving from other tech-based companies. Technology can improve client relationships and give advisers the ability to impact the lives of thousands rather than just a lucky few. Spend some time researching the options and understanding how they work and can fit into your processes.” Similarly, Moran said the best idea for advisers who don’t know which tech to explore next is just to start the journey. “It’s easy to spend days, weeks or months procrastinating about
software because of the desire for one piece of software to do it all. This just isn’t reality. It’s more valuable to identify manual processes and to look for solutions to these problem. It’s a bonus if the software you choose can solve more than one problem.” While simply getting started is good advice, Cassar said it’s important to do proper due diligence before choosing the right tech for the firm’s needs. “I’ve heard many stories about advisers jumping on the latest nd greatest innovation and finding it didn’t suit their needs, so they had to go back to their original software. Check out group chats for advisers and ask for their experiences. There’s no one-sizefits-all solution for businesses, so it pays to do homework before wasting time and money on tech that doesn’t suit your needs.” Finally, Brycki recommended seeing technology as an enabler, rather than a threat. “Otherwise, your business will become Blockbuster rather than Netflix. We’ve found technology provides an enormous opportunity to deliver a better client experience, improve objectivity and reduce mistakes. Most importantly technology can empower clients to achieve their financial dreams more confidently.”
30/03/2022 10:22:32 AM
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18 | Money Management April 7, 2022
Multi-asset
DIVERSIFYING AWAY GEOPOLITICAL TENSION In a time of geopolitical tensions and rising inflation, the multi-strategy approach offers investors a better way to mitigate market volatility, writes Oksana Patron. WITH THE MORE complex global economic outlook on the short and long-term horizon, it is now a good time to put multi-asset strategies in place, fund managers are saying. One of the advantages of these strategies in uncertain times, according to managers, is they can help investors diversify and mitigate market volatility. However, investors will need to be more careful when selecting a suitable multi-asset strategy given that traditional defensive asset classes, such as bonds, are becoming less effective at shielding portfolios in light of inflationary pressures and given the prospect of rising interest rates. “We recommend an approach that invests across assets with a variety of return sources. In other words, one that is not reliant on any single driver of return,” Irene Goh, head of multi-asset solutions, Asia Pacific, at abrdn, said. “We explore an investment universe beyond equities and bonds, and include alternative asset classes such as listed alternatives, infrastructure, real estate, student housing and healthcare royalties. What drives their revenues is different to what drives more traditional assets.” Goh said she believed in investing actively to capture shortterm market inefficiencies and dislocations and rotating through regional, sector, style and thematic allocation. “To the extent possible, we pick stocks and bonds with strong fundamentals and supportive valuations depending on where we are in the business
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cycle – be it expansion, slowdown, recession or recovery – to avoid biases tied to marketcap-weighted passive indices.” For Thomas Poullaouec, head of multi-asset solutions APAC at T. Rowe Price, the benefits of these strategies during an uncertain market environment were twofold. He stressed that multi-asset strategies were not one single category but they also varied in terms of risk/return profile depending on the investment approach and the objectives. “Each investor can choose a multi-asset strategy that is in line with her/his own risk tolerance, in between growth and defensive risk profiles,” he said. “Multi-asset strategies can be dynamic in the asset allocation process. This means that investors are delegating the asset allocation decisions on when to buy or sell an asset class to a professional investor.” Clifton Hill, portfolio manager multi-asset/macro at Acadian Asset Management, said that one of the reasons to have a multi-asset strategy in place at the moment was the current situation with central banks and hiking interest rates. “We have a situation where the central bank can’t react to a downturn, or shock, or recession, as the inflation is elevated.” This would mean, he said, that as a result, the equities and bonds in this environment, were proving to be to be difficult. “What multi-asset [strategy] is able to do is to take advantage of all the parts of this difficult challenging and complex situation,” he said. Mike Ponikiewicz, Acadian’s
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April 7, 2022 Money Management | 19
Multi-asset Strap
portfolio manager, commodities, stressed the importance of diversification, which was not limited to only asset classes and the different regions. “In this case, some asset classes like commodities, they can hedge the other asset classes very well because of the supply-side shock issue.” He said that when there was a lot of uncertainty and geopolitical risks, diversification was one way to help investors not to be positioned in just one asset class and that was currently a huge advantage.
MARKET RISKS However, Goh admitted there was a number of major risks that currently did exist and they applied to the multi-asset strategies. According to her, these included central bank policy withdrawal at a time of heightened macro uncertainty, persistently high inflationary pressures and a further downside to global growth. Separately, she also mentioned a potential sharp market rebound in the event of geopolitical resolution or a decisive breakthrough in the fight against COVID-19 that would allow major economies such as China to reopen. “Actively-managed strategies comprising assets that benefit from multiple sources of return will be best positioned to capture investment opportunities while offering some protection against these key market risks,” she said. “As mentioned, investors can also use options strategies to profit from rising volatility, while certain alternative assets offer more resilient cashflows and so a degree of protection against recession. “In the event of a sharp rebound, active managers who have experience of re-risking dynamically will be best placed to handle this, in our view,” she stressed.
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RISING INFLATION Goh said that a major disruption to supply chains and cost inflation would remain persistent headwinds to the smooth functioning of the global economy. Asked about the impact of rising inflation on strategies, she said: “For companies, what has become critically important is pricing power, or the ability to raise prices to compensate for rising costs without damaging their customer base. As things stand, most companies are forecasting being able to pass on some of the cost pressures. “Certainly, there are reasons to feel optimistic as the world adapts to the Omicron variant and strives to return to ‘normal’. Then again, the Russia-Ukraine conflict has amplified existing challenges facing the global economy, specifically elevated rates of inflation along with the risks that the Federal Reserve ‘kills the cycle’ as it attempts to manage supply-demand imbalances and guide inflation back to target. “All managers making investment and portfolio construction decisions will need to grapple with how to manage these risks in the year ahead,” Goh added. “In our multi-asset strategies, given the uncertainty on when the Russia-Ukraine conflict will peak and when it will end, and on when the supply chain constraints will ease up, the threat of inflation on the impact of portfolio returns should not be ignored. In a diversified multi-asset approach, we recommend allocations to inflation linkers and exposures to commodity producers.” Poullaouec was of a similar opinion and said that a list of market risks “was unfortunately a long one” and ranged from the geopolitical risks in Ukraine, China’s slowing growth, fading stimulus and central bank tightening. “At the crossroad of all these
risks, the inflation risk was paramount. I believe that this is the major risks to watch for any investors, especially for retirees given how inflation can detract purchasing power over time,” he warned. “Multi-asset strategies should invest in inflation sensitive assets which can protect against inflation over the long term. T. Rowe Price multi-asset research has found that a mix of commodities (mining, energy, and utilities) and real estate companies, blended together as ‘Real Assets Equities’, exhibit similar—and in most cases, superior—inflation sensitivities to traditional inflation-linked bonds. “This research has found that Real Assets Equities respond more favorably to periods of high or rising inflation than the broad equity market where returns are relatively weak, at the cost of less favorable returns during periods of low or falling inflation where broad equity returns are relatively strong.” Poullaouec also stressed that the inflation risk also diminished the diversification benefits of traditional fixed income strategies in a multi-asset portfolio. Therefore, multi-asset strategies should look at including alternative strategies, like unconstrained fixed income strategies or hedge funds, or at alternative techniques, like tail risk, dynamic allocation strategies to protect the portfolio from the dominant equity risk. “This can substitute a portion of the traditional bonds which may generate poor returns in a rising yield environment. In short, multiasset strategies have a rich toolkit to pick from in order to better navigate the current environment.”
CHINA Next to the inflation balance and geopolitical risks, where the war in Ukraine took the main stage, the markets were closing watching China as well.
“The second most important thing is China as it continues its regulatory crackdown and that will make it very difficult in terms of the emerging markets,” Hill said. He said that contrary to the previous years when the markets saw a massive stimulus from China, this time around China was taking a very different direction. “They are trying the more targeted stimulus and to shift their economy more around consumption driven and less export driven. That in itself will create problems for the equities market in China and, in broader Asia, it will create problems for emerging markets that benefitted from Chinese consumption and that will have a bigger effect on the global growth.”
ASSET CLASSES Asked about what asset classes his portfolio was currently underweight, Poullaouec said that he remained underweight equities given moderating growth and earnings outlook amid an active Fed and inflation concerns, but within fixed income, he remained overweight cash as longer rates remain biased higher. “Within equities, we trimmed our overweight to US and global ex-US value stocks and shifted into core equities, and took profits following a period of strong outperformance by value stocks. “Within our fixed income allocation, we continue to favour shorter duration and higher yielding sectors through overweights to short-term TIPS [Treasury InflationProtected Securities], floating rate loans, and high yield bonds supported by our still constructive outlook on fundamentals, while keeping a cautious eye on liquidity amid higher volatility.” Goh said she was also underweight government bonds and investment grade credit due to low yields and the prospect of rising rates.
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20 | Money Management April 7, 2022
Investment
THE GREAT ROTATION
After more than a decade of growth outperformance, investment markets seem to be rotating back towards value but this is more than just a cyclical shift, writes Warryn Robertson. THERE HAS BEEN a sharp change in market dynamics in 2022. The growth trade which has prevailed for more than a decade – and especially since the onset of the COVID-19 pandemic – has shown signs that it is beginning to reverse. Previously unloved value stocks have come back in favour. But while commentators are characterising this change an ‘equity market rotation’, we believe what is happening goes beyond a temporary cyclical preference – this is only the beginning. To analyse the reasons we think this, it is important to put in context the long build-up and frantic final months of the growth boom.
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HOW DID WE GET HERE? The great ‘bull market in everything’ had its origins in the Global Financial Crisis (GFC) of 2008-09. In response to this crisis, central banks around the world delivered conducive monetary policy, including historically low interest rates and quantitative easing on a large scale. Under these monetary policy settings between 2010 and 2020, growth companies led the equity markets, steadily and persistently outperforming value companies over the decade. The arrival of the pandemic in 2020, only served to turbo-charge this dynamic, as Chart 1 shows. In our view, there were three factors at play over 2020 and early 2021.
The first was simply a thematic preference for technology stocks, as we all stayed at home connected to our smartphones, computer software, online shopping, and streaming services. The second was the general misconception that unlike a normal recession, the pandemic with its lockdown-induced downturns were not necessarily deflationary. In a normal recession, demand for goods and services generally falls, however, supply of such goods and services remains largely unchanged. This is, by definition, deflationary for prices. But unlike a more traditional or normal recession, Government’s responses to the pandemic were to lockdown whole economies. This resulted in a reduction in the
aggregate supply curve of the economy, which in combination with the reduction in demand creates an outcome which is uncertain for general prices. The result could be deflationary, as in ‘normal recessions’, but conversely could also be inflationary (Chart 2). And finally (and what we consider the most significant factor) Governments released the lockdown handbrake from the economy through an expansive fiscal and monetary response– most notably, the bigger emphasis on fiscal stimulus. The previously tightly controlled modern monetary experiment was expanded to the general economy, adding capital (and stimulus cheques) simultaneously to ‘Main Street’ and ‘Wall Street’.
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Investment Chart 2: Inflation risk
Chart 1: Growth Versus Value
Source: Minack Advisers, as at 31 January 2022.
We think markets reached ‘peak hysteria’ in the first quarter of 2021. The history books will show new record price multiples on technology stocks, a boom in loss-making initial public offerings (IPOs), extraordinary price rises in crypto currencies such as Dogecoin, and the GameStop phenomenon. At the time, as a valuation investor, it felt like the final throes of the long-running momentum growth boom. And, this is what in fact happened.
ENTER INFLATION The return of inflation has sparked a change in market preferences. Or more specifically, the likelihood of Central Banks rising interest rates in response to higher inflation. When rates are rising (or expected to rise), investors need to discount cashflows at a higher rate. That is generally negative for growth companies which are expecting to make the bulk of their profits in the future and relatively better for value companies where more of the earnings are expected in the nearer term. It is particularly bad for speculative companies with cash flows deferred a long way into the future, or companies trading on very high or in some instances infinite multiples. In the second half of 2021 and early into 2022, inflation has continued to surprise markets on the high side. The US Federal Reserve (the Fed) has had to revise its rate outlook upward. The results in equity markets, have played out as we would expect. The most speculative assets have sold off the most and traditional value stocks have outperformed. Interestingly, the mega-cap growth names have so far proven resilient.
Key questions for investors are: How persistent will inflation be? How much will rates rise? And how quickly?
OUR LONG-TERM INFLATION VIEW We expect that in the foreseeable future, inflation in the developed world will be structurally higher than that experienced in the past decade. While some forces driving the inflation spike, including supply chain disruptions, a surge in demand for goods, and higher energy prices may be transitory, we believe that the long cycle of disinflation/low inflation is over. Several structural factors are influencing the shift to higher inflation, including: • Higher demand partially induced by fiscal and monetary stimulus; • Aging demographics that will contribute to pressures in the labor market; and • Rising costs of doing business, including the cost associated with climate change. We acknowledge that technology and its remarkable contribution to productivity gains is an offsetting factor, as it has been for the past three decades. However, overall we believe, these new and considerable structural factors point to sustained higher inflation than we have experienced in the recent past.
PORTFOLIO IMPLICATIONS Higher inflation clearly has implications for global equity portfolio allocations. Even modestly higher inflation that leads to higher assumed interest rates can have a major impact on asset prices when many
Source: Lazard Asset Management
valuation models appear to have permanently lowered discount rates. As mentioned, this is acute for high-multiple speculative stocks which have a long duration earnings profile, and we have already seen the narrowing of market leadership in the growth space down to a small number of mega-cap IT stocks. Given the dramatic performance dispersion between these mega-cap IT stocks and the rest of the market, we think investors need to be mindful of concentration issues should this trade unwind. While the fall in speculative assets may be more dramatic, any fall in the megacap names at the top of the S&P 500 index may end up being of far more consequence. The top five names currently in the S&P 500 index make up more than 20% of the index total (Table 1). These names also populate many active and ‘smart beta’ strategies. Many investors will likely be holding these same stocks across a number of portfolios in a ‘diversified’ blend of funds. In short, many portfolios and even including the most diversified of equity market portfolios, the index, has become very narrow and a play on one mega-cap IT bet. We believe the market is yet to fully price in higher discount rates into the mega-cap IT stocks. Even a Table 1: Concentration at the Top
S&P 500
Weight (%)
Apple Inc
6.86
Microsoft Corp
6.26
Alphabet Inc
4.16
Amazon Inc
3.60
Tesla Inc
2.13
Total
23.0
stock like Microsoft (which we have previously owned) could potentially suffer a material fall in its share price if the discount rate applied to its cashflows is revised in line with a shift upwards in the risk-free rate assumption from 1% to as little as 3%. Under the most conservative of assumptions needed to justify its current share price, which as of the end of March 2022, traded on around 30x cashflow, when increasing the risk-free rate assumption from 1% to 3% would result in a value change of at least 30%. While arguably, we have yet to see a large or sustained enough shift in inflation and interest rate expectations to hit these stocks, investors need to be attuned to the risk due to the large role they play in portfolios.
LOOKING AHEAD While relative returns have been strong for valuation-focused investors over the past six months, market pricing has become distorted over a very long period. We believe the adjustment has only just begun. As ever, we are hunting for companies that have predictable earnings streams, are financially productive and generate a solid return on assets, but we do it with a value focus. Given the dearth of value opportunities, we believe this is a time when investors need to be concentrated and selective and need to be with managers who are prepared to make active investment decisions. Warryn Robertson is a portfolio manager and analyst at Lazard.
Source: S&P. As of 31 December, 2021.
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22 | Money Management April 7, 2022
Infrastructure
SPOILT FOR CHOICE IN INFRASTRUCTURE There are numerous risks around, writes Sarah Shaw, but the pandemic has highlighted the growing need for quality infrastructure assets. AS THE COVID-19 pandemic enters its third year, many challenges continue to face investors. Omicron is the most recent variant but unless vaccines can be distributed fairly globally, it is unlikely to be the last. Amidst this we have growing global inflationary pressures, which are expected to prompt interest rate hikes in the US imminently. More recently, we have conflict in Russia-Ukraine which is creating a great deal of uncertainty. Despite these not-insignificant challenges, which are playing out in equity markets around the world, we believe there are still unique buying opportunities for infrastructure investors. Huge Government stimulus programs are fast-tracking infrastructure investment, and governments are expected to increasingly rely on private sector capital to build much-needed infrastructure assets as government debt rises.
ECONOMIC OUTLOOK The key issues facing the global economy currently are COVID-19 (still), inflationary pressures and ongoing conflict. The Omicron variant, and Delta before that, slowed the emerging global economic recovery. We expect that further variants will emerge and the battle to fight it will be ongoing but, ultimately, we all need to learn to live with COVID-19. Once COVID-19 moves from pandemic to endemic stage, infrastructure, in all its forms, will be essential to a sustained economic recovery. There is no global growth recovery without roads, railways, pipelines, power transmission networks, communication infrastructure, ports and airports.
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Since last year, global inflation has also been emerging as a key economic risk. In the US in December 2021, consumer prices accelerated at the fastest pace since 1982, hitting 7% annualised. Price increases are being driven by supply chain disruptions along with the vast amounts of monetary stimulus global governments have pumped into economies during COVID-19 economic disruptions. The Federal Reserve is expected to raise rates in March with other countries, such as the UK and Brazil, already moving on monetary policy. The Russian invasion of the Ukraine dominated headlines and markets in February, continuing into March. The world has united in opposing Russia’s actions, introducing a large and diverse suite of sanctions designed to punish Russia economically and isolate them internationally. However, it is worth noting that these types of invasions, involving a motivated, dug-in, homeland defender, can run for years. In the face of this, the global economic recovery continues, although the most recent events have pushed out the timing of the full recovery. Investors may need to be cautious as events unfold, but they should also be aware of some of the strong opportunities on offer.
INFRASTRUCTURE AS AN ASSET CLASS Infrastructure is known as a defensive asset class. It has monopolistic market positions or positions with high barriers to entry. It has earnings that are underpinned by contracts or regulation. It’s a very long dated asset which has high upfront capital costs but reasonably low maintenance costs, which also
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Infrastructure
provide inflation hedges within the business model. All of these characteristics can provide longterm visible and resilient cash flows. There are also two very distinct and economically diverse sub-sectors within infrastructure – User Pays and regulated assets (or essential services). Regulated assets include things such as regulated utilities in the power and water space – for example AusNet in Australia or NextEra in the US, while ‘User Pays’ assets include toll roads, airports and ports, where the user pays to use the asset. Regulated infrastructure assets are largely immune to economic shifts, as they function as a basic need and are usually regulated by government with returns calculated independent of volumes. However, prices for these goods can be slower to respond in an inflationary cycle, due to their regulated nature and the time it takes for government to respond. On the other hand, ‘User Pays’ assets can offer a real inflationary hedge during times of inflation and tightening monetary policy. User Pays infrastructure investments may actually be about to enjoy a ‘perfect storm’ in the short and medium term, with interest rates supportive of growth, explicit inflation hedges through their tariff mechanisms, and improving economic activity flowing through to volumes.
LONG-TERM DRIVERS Infrastructure investments can provide an inflationary hedge when needed but are also a responsible addition to any portfolio due to some major underlying economic themes that will drive this sector for years to come. Two themes we have liked in the infrastructure space for a long time are growing global wealth and an emerging middle class, especially in Asia. Growing global wealth Global wealth tripled in the last two decades – from US$156 trillion to US$514 trillion – with China experiencing the biggest increase, ahead of the US and Europe. The 10 countries in Chart 1 represent more than 60% of world income: Bloomberg forecasts that the world will average annual growth of around 3.2% in the decade ahead, which is slightly down on the average of 3.5% for the 20102019 decade. However, the composition of that growth is expected to change, with emerging economies outperforming more advanced economies that are burdened by ageing populations. This is a clear positive for the infrastructure asset class as growth will drive necessary investment in the sector. A growing economy needs more roads, power, ports, airports and other essential services.
Chart 1: Expanding global wealth
SARAH SHAW
Although this economic growth is being accompanied by increasing global debt, that should be a positive for privately funded infrastructure, as governments increasingly rely on the private sector to fund much needed infrastructure assets. Emerging middle class More than 1 billion Asians are set to join the global middle class by 2030, with India and China adding about three quarters of that growth. A larger middle class drives consumption patterns that will require more infrastructure. More affluent consumers, for example, will be seeking out more opportunities for international and domestic travel. As just one example, passport ownership in China is still below 10%, meaning there is huge opportunity set for global travel in coming years. Aerospace company Boeing’s forecasts include an additional 8,700 new aircraft for Chinese airlines over the next 18 years. All those airplanes need to land somewhere, which means an increase in the number and size of existing airports. COVID-19 may have delayed these trends in the short term but they will persist in the longer term. A growing middle class is also expected to push for cleaner energy, and combined with global government decarbonisation efforts, this represents a significant opportunity for infrastructure investors that understand the real threats of climate change.
POTENTIAL RISKS There are risks to any outlook, and while we are generally optimistic, the past few tumultuous years have taught us to be very mindful of factors that
“User Pays infrastructure investments may actually be about to enjoy a ‘perfect storm’ in the short and medium term, with interest rates supportive of growth.” could adversely affect our views. For instance, if we cannot achieve fair, timely distribution of COVID-19 vaccines around the globe, the pandemic will continue to adversely impact economic growth. The conflict between Russia and the Ukraine is a clear concern. Global growth will likely be weaker as a consequence while inflation higher driven principally by a higher oil price. Global tensions between China and the US, are also a concern, along with the timing of expected interest rates. Central banks need to act prudently and cautiously in easing monetary policy in order not to derail emerging economic growth. Notwithstanding the above risks, there are many opportunities for the infrastructure investor in this environment, and we feel we are spoilt for choice. The ongoing pandemic has only highlighted the need for more of these essential infrastructure assets and the potential for private sector investors to step in where governments are unable to meet demand. Our portfolio remains diversified, with a strong bias to attractively valued investments with solid balance sheets and superior management teams. In the current inflationary environment we are overweight User Pays infrastructure and real rate utilities and will continue to position the portfolio for the significant long-term themes. Sarah Shaw is chief investment officer at 4D Infrastructure.
Source: McKinsey Global Institute
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24 | Money Management April 7, 2022
Education
GRADUATES ADDING VALUE IN PROFESSIONAL YEAR Mentoring a university graduate through their Professional Year may seem a daunting task for an adviser, writes Hans Egger, but there are some very good reasons to do it. THE WELL-DOCUMENTED EXODUS of financial planners from the advice industry has created a significant problem for advice practices trying to grow their business or secure a succession plan. In the past the banks’ salaried advice channels acted like a ‘nursery’ for new financial planners as they had a ready pool of referrals from employees who wanted to transition into advice and the deep pockets to set up a program for them. AMP Horizons Academy was also a pathway for new advisers and from 2015 they were offering
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six intakes per annum into their program. The number of vacancies AMP offered for the 2022 Graduate Program was between 20-29. With the banks exiting advice and dealer groups like AMP drastically reducing their graduate programs, the pipeline for newly-qualified advisers has dried up. Further exacerbating the problem is the natural attrition of financial planners retiring or otherwise leaving the industry which will reduce the pool of qualified talent even more over the next few years. One possible solution is to
attract planners back into the industry. Colin Williams of Wealth Data estimates that there are currently over 2,000 qualified advisers who have passed their Financial Adviser Standards and Ethics Authority (FASEA) exam but have left the industry for various reasons. Some of these advisers may be tempted back but the cost of hiring would be expected to be quite high given that they had a reason for leaving and therefore may require a premium to be enticed back. Many small to medium financial planning businesses will find it difficult to justify the cost of
hiring an experienced financial planner and may struggle to provide enough new clients to keep them busy. Typically, this results in the incumbent advisers working progressively longer hours and weekends potentially resulting in various mental health problems and stress on the family. The Australian Financial Advisers Wellbeing Report 2021 found 73% of advisers participants were experiencing burnout from work, 67% were feeling some level of depression and 33% were seeking medical care to manage their health symptoms caused by work stress.
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Education
Not employing someone to assist is clearly not a sustainable solution for these smaller businesses. While the rising cost of hiring a qualified planner is often not an option, the lower cost of hiring a university graduate may be an alternative. A graduate is a far more affordable option for these businesses and more versatile as they are able to assist with all facets of the planning process. They can be deployed as and where needed in the business, whether it’s in admin, paraplanning or assisting the adviser in a client meeting until they are ready to take on the role of unsupervised client facing adviser. However, it may not be easy to find them. According to Williams, only 346 new advisers have commenced across Australia since the Professional Year was introduced on 1 January, 2019. Given the bad publicity around financial planning, it is easy to understand why a university business student may choose accounting or economics before financial planning. Nevertheless, this may change as the industry moves towards a profession and higher salaries can be commanded due to a limited supply of graduates in the next few years. The problem is that there is a requirement for the financial adviser to mentor and supervise the graduate over the 1,600 hours of work they complete in the first year. This includes keeping a record of their observations of the graduate’s work completed under supervision and ensuring that the graduate’s logbook is complete and accurate. This level of documentation holds both the supervisor and graduate accountable to their respective roles. The Professional Year program is designed to progress the graduate through the following steps: • Quarter 1 – Client observations and support to supervisor (experienced adviser); • Quarter 2 – Supervised client
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engagement and advice preparation; and • Quarter 3 and 4 – Indirect supervision of client engagement and advice preparation. The concern for many advisers is how their business can gain value through this process for all the work required by the supervising adviser and how successfully can the graduate transition from supervised to unsupervised client engagement after the first six months. Many advisers will be concerned that graduates won’t have the confidence or the skills to manage a client meeting.
CASE STUDY Tony Cafarella of AFM Wealth Strategy in Adelaide found that his workload was becoming too much, but to justify the cost of an experienced adviser would require purchasing another book of business with all the associated issues and hassles. Tony decided the simpler option was to hire a graduate. He liked the idea of training a graduate in the way he wanted so he would not have to deal with any bad habits typically picked up over the years. Zac Kessner started working for Tony on a part-time basis while still studying at the University of South Australia and then started his Professional Year in January 2022. Tony quickly realised that while Zac needed training in some areas of financial advice, he was very tech-savvy and willing to learn. So, he asked him to attend training webinars and watch training videos for the client engagement software that the business had been using for years but had never quite managed use to its full capability. Zac quickly learned how to use the software. He was able to assist Tony in preparing for and conducting client meetings, as well as preparing the SOAs and ROAs. Using the software’s online questionnaires, they received client information prior to
“The concern for many advisers is how the business can gain value through this process for all the work required by the supervising adviser.” meetings and could discuss the client’s broad financial circumstances, issues and goals and determine what the client’s priorities were. This gave Zac valuable experience in planning out the meeting and ensuring that all the important issues identified by the client were being covered as well as identifying other opportunities where they could add value. Zac attends the meetings, capturing the relevant information from the conversation directly into the software allowing Tony to use the visual modelling calculators and tools on the wall mounted TV screen to explain the strategies and possible options explored with the client. Zac found the retirement cashflow calculator was particularly useful as he was able to model a number of strategies before the meeting and then adjust them live to show the clients the impact of changes. After the meeting, Tony and Zac would quickly de-brief and discuss how the meeting went and what the next steps would be, there was no need for a detailed instruction as Zac already knew the strategies discussed and what the client wanted. The information entered and saved into the software during the meeting would also make up a substantial part of the required file notes and SOA/ROA, saving time in the process. Tony sees a number of benefits from having Zac assist in meetings: • Zac gets a better understanding of the various strategies that may apply to clients with different circumstances and is able to watch Tony conduct a client meeting, build rapport and handle tricky questions. These are the skills he will need when he starts seeing clients unsupervised;
• Tony is able to maintain an uninterrupted conversation with the client as he is not the one inputting data and he is able to show the value of his advice through the visual explanations of the impact of various strategies; and • The clients experience a much more interactive and interesting meeting and are making informed decisions as they have a better understanding of why Tony is recommending certain strategies and what the expected benefits are to them. Another advantage is that Tony’s mentoring obligations for Zac are conducted largely as part of the normal business processes and, with several client meetings a week, Zac’s logbook is quickly filled with examples of ‘supervised support’. Tony feels that Zac is complementing his strong technical knowledge, learned at university, with the soft skills required to build client relationships and is learning how to conduct client meetings by actively participating in the client meetings. Both Tony and Zac feel he will easily transition to a Provisional Financial Adviser after the first six months of his Professional Year are completed, at that time he can add further value to the business by seeing clients and preparing advice with indirect supervision from Tony. A challenge for Tony will be retaining Zac once he is fully trained and experienced, however, Tony can see a pathway for Zac to grow with the business as they take on more graduates in this way and would ultimately like to see Zac providing a succession plan when Tony is ready to retire. Hans Egger is managing director of Astute Wheel.
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26 | Money Management April 7, 2022
Asia
CHANGING WORLD ORDERS AND INVESTMENT OPPORTUNITIES The changing world and dominance of Asia offers opportunities, writes Jonathan Wu, with investors encouraged to think beyond Western markets. WE ALL KNOW the famous saying – “two things in life are certain, death and taxes.” I’d like to add one more, and that is volatility. While investors and advisers alike look to deploy client capital in times of market calm, the reality is that volatility is always here. As we face the next bout of volatility wherever it may come from, we must consider it within the context of the changing world order. To start, let’s consider the last 500 years of history. There have been four major changes in the world order. This started with the Dutch empire, and no-one will forget the power of their naval supremacy during their reign. Then came the British with their reign ending at the end of World War II overtaken by the United States. There are a few similarities that can be drawn between each empire and the rationale of their reign. The first of these similarities is that at the height of their might; they controlled the lion’s share of global trade. Given this trade was mainly settled in the reigning empires currency, it became the reserve currency of the world. This is the ultimate characteristic of the success being atop of the world order. Conversely, their downfalls also have shared characteristics; with the main one being a heightened level of external conflict overtime in order to protect their position in the world order leading them to ultimately spend more than they earned. In order to keep the party going, the only way to deal with this issue is ultimately to print money. Sound familiar? Now this brings us to today’s conundrum. What most people are
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not aware of is over the course of the last 100 years the US has defaulted twice (yes, they ran out of money!) on their sovereign bonds. The first instance was under President Roosevelt in 1931 with the second time being in 1971 under President Nixon. So why does this story matter for the future of investing? Because today, the US is looking down the barrel of having to stay atop the world order while managing increasing discontent within its own borders. This requires an incredible amount of money printing which over the long term will drive a greater divergence between the rich and the poor. It will also lead it to currency devaluation as other world powers push for the next changing of the guard. While each change of the world order isn’t identical, they do rhyme. Without a doubt, the collective power of the Asian region, spearheaded by China, has grown substantially over the last few decades. At the end of the day, the world is limited by its resources, and as the next global power’s standard of living of its populous grows, others must make way and potentially cede their standard of living. We have long seen companies from Western economies invest significant resources into getting a piece of the ‘China Dream’ knowing that as the global tides of economic might change, so does the power of the consumer. This is not a new story, but what has changed over the last half decade or so is very relevant for positioning investments to take
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Strap Asia Chart 1: PE ratio of global markets
JONATHAN WU Source: Factset, I/B/E/S, Goldman Sachs Research, February 2022
advantage of the next set of tailwinds of the Chinese consumer. Traditional Western brands are now being superseded by local brands. Strong patriotism by the Chinese people to their nation has brought about this change in consumer patterns. Partially spurred upon by President Trump’s negative sentiment towards China, and coupled with the quality of Chinese brands, both added further fuel to this fire. Johnny Walker Black has been replaced by Moutai; Nike by Li Ning and Samsung by Huawei. This transition hasn’t happened overnight, but it has happened. If one continues to invest in the notion of the ‘safe route’ by investing in Western stockmarkets to gain access to China, it will simply be an ever-increasingly diluted exposure to China, mixed in with the declines of traditional markets. Same can be said by investing in an emerging market (EM) strategy given that around 80% of EM is Asia, with the remaining 20% simply noise which will generate more volatility without material value added.
Going back to the risk of ‘living in excess’ or spending more than you earn, is a characteristic of the start of the downfall of an empire. We saw that with the Dutch, followed by the British and now the US. China has seen how history has played out for these countries and is now seeking a longer-term solution to de-risk its population. Say hello to the goal of common prosperity. We have coined the term recently calling it “adjusted capitalism”. Let’s be clear here; this is not communism making a comeback, but at its base roots, improving the Gini Co-efficient (the measure of wealth distribution) to a level which will not allow the roots of populism as seen in many Western democracies fester. There has been plenty of media commentary over the last nine months coining the actions of China’s government ‘authoritarian’ and ‘heavy handed’. But if you consider each of the policies they have enacted, no-one disagrees with their fundamental form. Here are the key ones: • Reining in the affordability
Chart 2: Tailwinds for China and the US
pressure of property ownership in China, clearly stating that property is for living, not for speculating; • Reducing monopolistic behaviour of mega cap companies to ensure innovation can still challenge the incumbents, which leads to higher productivity and competitiveness; and • Reducing the burden on the cost of living for families who want to give their children equal opportunity in achieving their best in their education endeavours. The only difference between Western democracies enacting policies and the Chinese central government is due to their style of government, they simply GSD (Get Stuff Done) without having to obtain everyone’s buy in. It’s the way the Chinese government has succeeded on the world stage since its opening up in the 1990s. It is what is known as the utilitarian model - achieving the greatest good for the greatest number of people. One final piece of evidence which is suggesting a change in the world order is reflected in changing sentiments in trade settlements. At the time of writing, China and Saudi Arabia announced a potential new partnership in which China will buy Saudi oil and settle in Chinese Yuan. Currently, 80% of all oil trade is settled in US dollars, so what can we look forward to in the future as this develops further? The key change will have to come from countries increasing their allocation of foreign reserves to Chinese Yuan. Currently as reported by the IMF, only 2.48% of reserves are held in Chinese Yuan compared to 55% in
US Dollars so there is clearly a long runway to go for global acceptance. What is the long-term implication of this? Oil producers receiving Chinese Yuan would then in turn spend it on Chinese debt and imports which further strengthens the Chinese economy. This in turn will then pave the way for further trade to be settled in Yuan, be it base metals or other soft commodities. This in time we believe will secure the Chinese Yuan as the next major reserve currency of the world. If we then relate all these concepts back to investing, where does one see itself as an asset allocator in the current market cycle? On a relative and absolute basis, can you allocate at an attractive price? The answer is yes if you have a three to five year investment horizon in mind: Right now, Asia has endured a correction over the last 12 months but is now positioned with numerous tailwinds. These are summarised in Chart 2. By contrast, the US is facing a huge amount of headwind as it unwinds the last decade’s worth of easy monetary policy, and lives with the reality of tightening conditions in order to bring inflation back under control. Furthermore, valuations are at extreme levels with a relatively low margin of safety if severe corrections were to eventuate. Are you and your clients now positioned to take advantage of the next changing of the world order and the investment returns linked to it? Jonathan Wu is chief investment specialist at Premium Asia Funds Management.
Source: Premium China Funds Management
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28 | Money Management April 7, 2022
Toolbox
REVISITING CASH OUT RE-CONTRIBUTION STRATEGIES
There is lots to consider when withdrawing lump sum amounts from superannuation, writes Anna Mirzoyan, especially if they want to recontribute it at a later date. THE RECENT CHANGES introduced to superannuation contribution rules provide increased opportunities for cash out recontribution strategies. While the strategy aims to increase the tax-free portion of superannuation interest, there are important issues for financial advisers to consider. This article provides a summary of: • The cash out re-contribution strategy; • Potential benefits; and • Important points to consider before recommending the strategy.
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CHANGES TO SUPER CONTRIBUTION RULES In February 2022, the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 passed both houses of Parliament and received Royal Assent. The key superannuation measures in this Bill for individuals aged between 67 and 75 include: • Changing the work test requirement and extending the non-concessional contribution bring-forward rules effective 1 July 2022.
This means from 1 July, 2022, individuals aged between 67 and 75 will be able to make non-concessional contributions to superannuation without having to meet the work test. These individuals will also be able to take advantage of the bring-forward arrangements and contribute up to $330,000 to superannuation in a single financial year (subject to their total superannuation balance being below $1.48m on prior 30 June). This change may open planning opportunities for older Australians including being able to cash out and re-contribute to super and ability to
make non-concessional contributions post-age 67 without having to meet the work test.
CASH OUT RE-CONTRIBUTION STRATEGY The cash out re-contribution strategy involves withdrawing some or all of the superannuation interest and re-contributing the amount as a non-concessional contribution. The amount withdrawn from superannuation is paid to the individual in accordance with proportioning rules, which is in proportion to
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Toolbox Table 1: Case study
existing taxable and tax-free components. When re-contributed to superannuation, the amount is allocated to the tax-free component of superannuation interest. As such, the strategy may potentially convert some or all of the taxable component into a tax-free component. Ultimately, this may result in reduced tax payable if superannuation death benefits are paid to non-tax dependent beneficiaries (eg adult non-dependent children).
POTENTIAL BENEFITS OF CASH OUT RE-CONTRIBUTION STRATEGY Benefits of the strategy include: • Increase in the tax-free component of superannuation interest; • Reduction in tax paid by non-dependent beneficiaries in the event of death; • If aged between preservation age and age 60, increase in tax-free component resulting in paying less tax on pension payments made prior to age 60; • Depending on income and other eligibility requirements, once the contribution is made the individual may qualify for Government co-contribution of up to $500; • Equalising superannuation balances for couples where the amount is withdrawn from one person’s superannuation and contributed into the other person’s superannuation account. By doing so, each person may be able to better manage their individual transfer balance caps or total superannuation balances. This may provide an opportunity to transfer more amount to pension or to make additional superannuation contributions; and • Similarly, where one spouse is younger than the other, by withdrawing an amount from the older person’s superannuation and contributing to the younger person’s superannuation account, the couple may be able
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Stephen
Taxable component
Tax-free component
Tax payable upon Stephen’s death (incl. Medicare levy)
Superannuation balance
$350,000 (70%)
$150,000 (30%)
$59,500 ($350,000@ 17%)
Super balance
$500,000
Lump sum withdrawal of $330,000 paid in 70/30 proportion (July 2022)
$231,000 (70% of $330,000)
Total withdrawn
$330,000
Tax components after the withdrawal
$119,000 ($350,000 less $231,000)
Super balance after the withdrawal
$170,000
Re-contribution of $330,000
$0
Total re-contributed
$330,000
Super balance after the re-contribution
$119,000 (23.8%)
Super balance
$500,000
$99,000 (30% of $330,000)
$51,000 ($150,000 less $99,000)
$330,000
$381,000 (76.2%)
$20,230 ($119,000 @ 17%)
Source: Lifespan Financial Planning
to access additional social security benefits while the younger person is below age pension age.
CASE STUDY Stephen (aged 74, turning 75 in August 2022) has $500,000 in superannuation. The amount consists of 70% taxable ($350,000) and 30% tax-free ($150,000) components. Stephen retired five years ago and has been unable to make personal superannuation contributions since, due to being unable to meet the work test. He is single with no financial dependents. Stephen has made a superannuation death benefit nomination to his non-dependent son, Matthew. If Stephen was to pass away, Matthew would receive the superannuation death benefit payment as a lump sum. When the lump sum is paid, the tax-free component of $150,000 would be paid to Matthew free of tax. However, he would pay 17% ($59,500) in tax and Medicare levy combined on the amount of $350,000 paid from the taxable component. If Stephen implements a cash out re-contribution strategy of $330,000, he could potentially reduce Matthew’s tax liability
from $59,500 to $20,230. The strategy must be implemented between 1 July, 2022 and 28 September, 2022. This is because Stephen is turning age 75 in August 2022 and as such, he is able to make the contribution within 28 days after the end of the month in which he turned 75. This makes the deadline for Stephen’s contribution 28 September, 2022. When the lump sum of $330,000 is withdrawn from Stephen’s superannuation, the amount will be paid in the same proportion as current components, that being 70% from the taxable component and 30% from the tax-free component. When the same amount is contributed back to Stephen’s superannuation, it will be added to the tax-free component. By implementing the strategy before turning age 75, Stephen will be able to reduce the taxable component and increase the tax-free component of his superannuation interest as follows:
IMPORTANT CONSIDERATIONS When recommending the cash out re-contribution strategy to your clients, be aware of the following important points.
When withdrawing lump sum amounts: • Ensure one of the specified conditions of release is met; • If the client made personal contributions to super for which they wish to claim a tax deduction, the Notice of Intent form must be submitted and acknowledged by the superannuation trustee before the lump sum is withdrawn. Otherwise, the client may not be able to claim the full deduction; • If making a full withdrawal, be aware of any existing insurances held within superannuation and potential loss of the ‘retirement bonus’; • The tax components cannot be separated. The amount withdrawn will be paid in proportion of taxable and tax-free components; • If below age 60, any amount withdrawn from the taxable component is included in the individual’s assessable income. For individuals aged between the preservation age and age 60, the low rate cap will be applied. No tax will be deducted from the amount being withdrawn from the taxable Continued on page 30
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30 | Money Management April 7, 2022
Toolbox Continued from page 29
•
•
•
• •
component up to the cap. Amounts withdrawn above the low rate cap are taxed at 17% including Medicare levy; For individuals between the preservation age and age 60, although no tax will be paid on the amount withdrawn within the low rate cap, the withdrawal may impact other payments and benefits including child support liabilities, certain Government benefits, and concessions; For SMSF members a journal entry is not sufficient. The amount must be withdrawn from the SMSF and paid to the member’s personal bank account; If multiple superannuation interests exist, it may be more tax effective to withdraw the amount from the interest with the higher taxable component; Transaction costs such as buy/sell spreads may apply; and Time out of the market during the implementation process.
When re-contributing the amount to superannuation: • For individuals turning age 75, amounts contributed must be received no later than 28 days after the end of the month in which they turned 75; • The amount withdrawn can be contributed to the same superannuation account or another superannuation account for the same individual; • The amount withdrawn can also be contributed to the spouse’s superannuation instead. • Amount contributed will be preserved until one of the conditions of release is met; • If amounts contributed are retained in the accumulation account, future earnings will be added to the taxable component; • Before fully utilising the bring forward amount, consider future contributions. If the bring-forward is fully used in a single year, the individual will not be able to make additional non-concessional contributions in year two or three; • If the bring-forward rule was triggered in previous years but not fully utilised, the non-concessional cap available to the individual may be less than the full cap of $330,000; • Amount contributed in excess of the available cap will be assessed as an excess contribution; • Check the Total Superannuation Balance (TSB) on prior 30 June. If the TSB on prior 30 June exceeded $1.7 million, the individual is not eligible to make non-concessional contributions in that income year. As such, there will be no benefit in cashing out the amount from super; and • To be able to utilise the bring-forward cap in full (that being $330,000), the TSB on prior 30 June must be below $1.48 million. When the TSB on prior 30 June was between $1.48 and $1.7 million, the available cap will reduce as follows: TSB on prior 30 June
Non-concessional cap amount
< $1.48 million
$330,000
$1.48 million to < $1.59 million
$220,000
$1.59 million to < $1.7 million
$110,000
$1.7 million and above
$0
CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit points, which may be used by financial planners as supporting evidence of ongoing professional development. 1. From 1 July, 2022, the superannuation contribution rules will change for older Australians. Which of the following statements is correct in relation to these upcoming changes? a) Individuals aged 67-75 will be able to make non-concessional contributions without having to meet the work test requirement. b) Individuals aged 67-75 will be able to use the bring-forward rule and contribute up to $330,00 to superannuation in a single financial year (subject to their Total Superannuation Balance being below $1.48m on prior 30 June). c) Individuals aged 67-75 may not be able to use the full bring forward cap of $330,000 if they have triggered the bring forward in the past two years and did not fully utilise the cap. d) All of the above. 2. Larry is a self-funded retiree who is due to turn age 75 in September 2022. Larry has not been gainfully employed since 2015, has not contributed to superannuation since then, and has $1.4m held in superannuation. Larry’s financial adviser recommended cashing out $330,000 of his existing superannuation benefits and re-contributing back as a non-concessional contribution. Which of the following answers is most appropriate in relation to implementing the strategy? a) The strategy must be implemented before 30 June, 2022. b) The strategy must be implemented between 1 July, 2022 and 28 October, 2022 assuming Larry’s total superannuation balance on 30 June, 2022 is below $1.48m. c) The strategy must be implemented before Larry’s 75th birthday, due in September 2022. d) The strategy can be implemented any time before 30 June, 2023. 3. Assuming all other requirements are met, what is the maximum amount that can be contributed to superannuation when an individual’s Total Superannuation Balance on prior 30 June was $1.6m. a) $330,000 b) $220,000 c) $110,000 d) $0 4. When withdrawing a lump sum from superannuation, the tax components cannot be separated. The amount withdrawn must be paid in proportion of taxable and tax-free components. a) True b) False 5. Which of the following statements is NOT correct? a) Superannuation death benefits paid to a non-tax dependent as a lump sum may be subject to tax. b) When implementing a cash out re-contribution strategy, it is important to be aware of an individual’s Total Superannuation Balance on prior to 30 June. c) The lump sum amount being withdrawn from superannuation for the cash out re-contribution purposes is paid to the individual tax free regardless of their age or amount being withdrawn. d) If multiple superannuation interests exist, it may be more tax effective to withdraw the amount from the interest with the higher taxable component.
Source: Lifespan Financial Planning
CONCLUSION These recent changes to superannuation contribution rules have been welcomed by the industry. Although the new arrangements will be effective from 1 July, 2022, advisers may start planning now and exploring new opportunities for clients going forward. Anna Mirzoyan is technical and compliance officer at Lifespan Financial Planning.
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TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ revisiting-cash-out-re-contribution-strategies For more information about the CPD Quiz, please email education@moneymanagement.com.au
29/03/2022 3:01:42 PM
April 7, 2022 Money Management | 31
Send your appointments to liam.cormican@moneymanagement.com.au
Appointments
Move of the WEEK Ali Dibadj Chief executive Janus Henderson
Janus Henderson appointed Ali Dibadj as its new chief executive to replace Dick Weil, effective no later than 27 June, 2022. In an announcement to the Australian Securities Exchange (ASX), the firm said Dibadj had been unanimously appointed by the board and would join from Alliance
Bernstein (AB). He would also join the board of the company upon commencement of the CEO role. He first joined AB in 2006 and had worked in a variety of roles including senior research analyst and head of finance before becoming chief financial officer in February 2021.
Weil had been chief executive for 12 years and announced last November that he would retire on 31 March, 2022. Roger Thompson, chief financial officer, had been appointed as interim chief executive until Dibadj could join and Weil would remain as an adviser until 30 June, 2022.
Australian Super appointed Peter Curtis as its first chief operating officer (COO), to take effect from 4 April, 2022. Curtis was previously group executive for finance operations and his appointment would extend his responsibilities across finance, legal, investment and technology services. Australian Super chief executive, Paul Schroder, said: “The appointment of Curtis to this new role enables us to further enhance our operating rhythm as we continue to grow globally. This is a key component in the delivery of our 2030 Strategy and goal to be Australia’s leading superannuation fund for members”.
than 25 years’ experience and was previously at MetLife where she was a member of the executive team for the last seven years as chief distribution officer and then chief marketing and customer officer. Prior to Metlife, Stafford spent 10 years at OnePath and MLC in sales and financial advice strategy roles.
She would replace Sandra Buckley who left at the end of 2021 after eight years to join the Australian Institute of Superannuation Trustees (AIST).
HUB24 appointed Chesne Stafford as chief growth officer (CGO) as the company positions for further growth, effective from July. In the newly-created role, Stafford would lead the company’s distribution and marketing functions and work with the broader team to leverage the group’s product and technology solutions to deliver segmented customer propositions whilst also looking for new opportunities for growth. Stafford would join with more
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Women in Super (WiS) appointed Jo Kowalczyk as its new chief executive. Kowalczyk had over 15 years’ experience advocating for change in the education sector and a robust background in strategy, advocacy, and delivering transformative change and worked for six years as the compliance and operations manager for the NSW Teachers Federation. Kowalczyk also served as at the National Tertiary Education Union. Commenting on the appointment, WiS chair, Kara Keys, said: “We’re thrilled to welcome Jo as our new CEO. The gender super gap largely exists because of wage inequality, and having spent her life advocating for working people in the education sector, Jo has a deep understanding of the structural policy barriers that we are trying to change”.
Frontier hired Megan Mulia as its head of strategy, responsible for corporate strategy and capitalising on its recent growth momentum. Mulia would join the firm on 19 April and also join the firm’s leadership team, moving to Frontier from specialist software provider Data Action. She had 25 years’ experience in the industry across strategy, consulting and technology roles and had spent 14 years in Asia. Frontier said the role would help the firm to “capitalise on its recent growth momentum” where it had grown its client base by a quarter since July 2021 as well as drive expansion into new markets. Abrdn announced the launch of its sustainability group and appointed Amanda Young to the executive role of chief sustainability officer to lead the team. The group would provide subject matter expertise to abrdn’s investment processes and support its sustainable investing value chain through generating insights,
setting frameworks and standards, ensuring active ownership, supporting product design, commerciality, client reporting and outcomes. Also participating in the group, Danielle Welsh-Rose was appointed to head of sustainability Asia-Pacific and head of sustainability specialists, Mike Everett to head of active ownership, Eva Cairns to head of sustainability insights and climate strategy and Dan Grandage to head of sustainable investing. SuperFriend chief executive, Margo Lydon, would depart the non-profit after 11 years, effective from 14 April, 2022. However, she would remain connected to the organisation as their chief mental health adviser until mid-August. Dina Goebel, general manager of strategy and innovation, would be acting CEO until a full-time appointment was found. SuperFriend’s chair, Elizabeth Proust, said, “The board acknowledges the significant and important contributions Margo has made to SuperFriend, the superannuation and life insurance industry, and to workplace mental health and wellbeing in Australia”.
30/03/2022 10:25:05 AM
OUTSIDER OUT
ManagementApril April7,2,2022 2015 32 | Money Management
A light-hearted look at the other side of making money
Sharing money saving tips WITH finfluencers coming under scrutiny, Outsider wonders if he is missing a trick by not putting his own financial knowledge to good use. While he does not claim to be a financial adviser or have specialist expertise in investments, nor it seems do these finfluencers either. Outsider is sure he can cobble together some videos about moneysaving tips - one area which the regulator has confirmed is perfectly acceptable for finfluencers.
One of Outsider’s best moneysaving tips would be taking a packed lunch to the office, or even better, organising a PR to take him out to lunch. Alternatively, he would also suggest pounding the pavements around the city or sending Mrs O to pick him up instead of taking a taxi. The next thing he needs to discover before he can become a fully-fledged finfluencer maverick is how to actually use TikTok…
Forecasting a market direction IN a world where careers and money are built on the ability to forecast the direction of markets, rarely does Outsider hear someone dispute the viability of this. He was therefore pleasantly surprised to hear it admitted on a Morgan Stanley & SG Hiscock webinar that those forecasters were unlikely to always get it right. Asked for her views on whether the market would see a selloff this year, Laura Bottega, lead portfolio specialist at Morgan Stanley, said: “Anybody who tells you they do know where it’s going, is in our view, perhaps not being fully authentic”. After all, the famous comment is that a monkey throwing darts at the financial pages could pick stocks as well as a professional stockpicker so why should forecasting markets be different? Outsider just hopes no-one tells AMP Capital’s chief economist Shane Oliver, perhaps one of Australia’s mostprolific market forecasters.
A holistic comment DURING his regular Sunday in front of the tele, Outsider’s ears pricked up when he heard a familiar sound from the other side of the house. Perhaps it was the sound’s distinctly monotone pitch that reminded Outsider of his days spent watching advisers speaking at webinars. Whatever the case, Outsider’s curiosity grew until it surpassed his natural laziness threshold, forcing him to take a break from ABC’s The Business and investigate the source of the droning sound. As he got further down the hallway, Outsider heard those beautiful words taking him back to his happy place.
OUT OF CONTEXT www.moneymanagement.com.au
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“It was a holistic comment” the voice said, “Do you see us having longevity in our relationship”. ‘Holistic’, ‘longevity’, could it be true? Could Mrs O have found a new interest in financial advice webinars? Had she finally understood how interesting financial advice could be? In a state of pure bliss with thoughts of a new dimension to his relationship, Outsider asked Mrs O what she was watching on TV. Quicker than his neurons could fire to create new pathways, Mrs O replied: “Shut up, I’m watching MAFS. Jack the financial planner is about to get his heart broken”.
"If you want to get half pregnant with emerging markets, then the FTSE 100 is a good way to go about it" - BlackRock's Ben Powell on his EM allocation
"There wasn't much red pill thinking going on." - Spheria's Marcus Burns likens markets to The Matrix
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30/03/2022 2:47:17 PM