Money Management | Vol. 35 No 6 | April 22, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 35 No 6 | April 22, 2021

22

TAX

Year-end tax strategies

SUPERANNUATION

24

Your Future, Your Super

A rollercoaster of changes

How four adviser breaches could escalate to 198

EQUITIES

BY MIKE TAYLOR

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Shop ‘til you drop ONE of the more unusual elements of this pandemic and recession has been the ability of retailers to hold onto their sales in what would typically be a troubling period.

While retailers usually tended to lose sales in a recession as people tightened their belts, the quick rollout of Government stimulus meant many people were less affected than they could have been.

With increased household savings and limited ability to travel, they were putting money to use in retailers instead with stocks such as JB Hi-Fi, Wesfarmers, Harvey Norman and Super Retail Group all seeing their share prices rise significantly.

There was also sharp growth for online businesses such as Kogan as people turned online after being unable to visit physical stores with the firm stating it had a 76% year-on-year increase in new customers.

Alex Shevelev, senior analyst at Forager Funds Management, said: “The stimulus demand was a big boom for retailers, especially those focused on home consumption and improvement.

It was not what we expected. The speed and the size of the stimulus was quick and significant and the reallocation of spending by consumers away from travel and restaurants was quick as well”.

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INSURANCE

Full feature on page 18

IT will be virtually impossible for small financial planning firms to comply with the new breach reporting regime proposed to be imposed on the industry via the Financial Sector Reform (Hayne Royal Commission Response Protecting Consumers (2020 Measures)) Regulations 2021: Breach Reporting legislation, according to the Association of Financial Advisers (AFA).

What is more, the AFA has cited member feedback which suggests that four breaches reported by a licensee in 2020 could be escalated to as many as 198 under the new regime.

In a submission filed with the Treasury, the AFA has strongly complained that the breach reporting measures contained in the legislation go well beyond what was

proposed in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

“We believe that the impact is much greater than was appreciated when the bill was drafted, and we have therefore recommended that the Government consider a deferral of the commencement of this new regime,” the AFA has said.

“Our serious concern with respect to the implications of the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, is that it is significantly moving away from the concept of significant breach reporting and that this new regime will involve an exponential increase in the number of breaches that need to be reported and many of these will be of a largely administrative nature,” it said.

Continued on page 3

Wilson’s loaded home deposit super questions THE chair of the House of Representatives Standing Committee on Economics, Tim Wilson, appears to have made political the issue of allowing people to access superannuation for first home deposits onto the committee’s agenda via a series of questions on notice to superannuation funds.

Wilson’s questioning of superannuation funds has been revealed in questions on notice filed by Wilson as part of his committee’s Review of the Four Major Banks and other Financial Institutions with industry fund, Prime Super, being amongst the first to provide answers.

Wilson’s use of the questions on notice comes amid claims by some member of the Federal Opposition that his actions are inappropriate and represent a politicisation of the committee process.

Among the questions asked of Prime Super by Wilson were: Continued on page 3

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April 22, 2021 Money Management | 3

News

ASIC considers regulatory relief for limited advice ROAs

BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) is actively considering providing regulatory relief so that financial advisers can provide records of advice (ROAs) with respect to limited advice.

The regulator’s intentions have been revealed to the Parliamentary Joint Committee on Corporations and Financial Services which has been told that ASIC is “considering possible relief to expand the situations where a ROA can be used, for example when providing limited advice or strategic advice”.

ASIC said it was considering the relief with respect to ROAs in circumstances where statements of advice (SOAs) had been identified by financial advisers as a significant barrier to the delivery of more affordable advice in the form of limited advice.

ASIC also noted the number of financial advisers who, as part of its affordable advice review consultation process, told the regulator it

“should talk directly to advisers, not just licensees, professional associations and lobbyists”.

Under the heading “SOAs are a key cost barrier to providing limited advice”, the regulator said respondents to its consultation around affordable advice “have raised that Government should reconsider the SOA requirements and expand the situations when a ROA is permissible instead of an SOA”.

ASIC noted that it had consulted on ‘strategic advice’, which it had defined as advice that addresses a client’s needs and goals either:

How four adviser breaches could escalate to 198 Continued from page 1 “The other key point that Commissioner Hayne made in his interim report was the need to review and reduce the complexity of the requirements of the Corporations Act,” the AFA said.

“Unfortunately, the new breach reporting regime represents a substantial increase in the scale of complexity and in our view, this is virtually impossible for a small financial advice licensee to comply with.”

Pointing to member consultation, the AFA said it had held a number of discussions with its licensee partners and was well aware of the serious concerns that many of them had about the implications of the legislation.

“In one case, a licensee who had four breaches reported in 2020, expected on the basis of the new legislation, that this would increase to 198,” it said. “Their feedback suggests that the exclusion of civil penalty matters for the failure to deliver an FSG [financial services guide] and a PDS [product disclosure

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statement] would only marginally decrease the number of breaches that would need to be reported.

“For context, financial advice licensees are required to undertake a detailed audit of a number of financial advice files for each adviser every year. This process inevitably results in a number of matters being identified, even for those advisers with a good compliance track record. The vast majority of these matters would involve no consumer detriment and are largely administrative or record keeping matters.

“The reality is that the compliance regime for financial advice is very complex, and this means that minor breaches are common. It does not in any way suggest that the quality of the advice is poor, or that the clients are at a greater risk of the prospect of detriment.

“In the context of what has been rapidly rising costs for financial advisers and their licensees over recent years, we are motivated to ensure that the cost impact of this reform is not excessive.”

• Without making a financial product recommendation to a client; or • By only making a recommendation about a class of financial products.

It said that 128 respondents thought Australians would benefit from more strategic advice and that it was now considering how to address the following key issues that were raised: • The boundary between product advice and strategic advice is uncertain: Based on this feedback, we will consider developing some examples, to show how compliant strategic advice can be given. The examples will also address when strategic advice becomes product advice; and • Licensees restrict the provision of strategiconly advice: Adviser respondents say that their licensees restrict strategic-only advice and require advisers to go through the full advice process (including product suitability tests), even though a client only seeks strategic advice. We intend to explore this issue further in the roundtables.

Wilson’s loaded home deposit super questions Continued from page 1 “What data do you have on the home ownership rates of fund members?” and whether the fund has ever: • Completed internal research that includes retirement outcomes for fund members who own their home in retirement, compared to those who do not?

• Commissioned external research that includes retirement outcomes for fund members who own their home in retirement, compared to those who do not?

Wilson also asked the superannuation fund to outline its policy on fund members using their superannuation fund for a deposit to buy their first home and retirees using their superannuation to renovate their home or pay rent.

Prime Super responded to Wilson stating it does not have a specific policy relating to his questions on the use of superannuation to fund a deposit on a first home or for retirees to use their superannuation to renovate a home.

“Withdrawals from the fund are governed by the rules of superannuation. Therefore, fund members can only withdraw funds under certain circumstances (retirement and financial hardship for example),” Prime Super said in its response.

“Where a member meets the requirements for the release of their superannuation Prime Super will pay the member the balance of their account. Given the legislative requirements around release of superannuation monies it is unlikely that any money paid as a benefit from Prime Super would be utilised by a member as a deposit for their first home.

“Where members of Prime Super retire and receive a lump sum, or receive an ongoing pension payment, Prime Super does not seek, nor retain, any information in relation to how the member intends to utilise those funds.”

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4 | Money Management April 22, 2021

Editorial

mike.taylor@moneymanagement.com.au

ASIC ACKNOWLEDGES A PROBLEM WITH PI, TREASURY SHOULD ACT

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron

It is high time for the Government to recognise that professional indemnity insurance is a problem that cannot go unaddressed as it moves towards a compensation scheme of last resort.

IT CAN hardly have escaped the attention of the Federal Government that one of the most significant contributors to the rising cost of financial advice is the rising cost of regulation.

And a significant component of that regulatory cost burden is the professional indemnity (PI) insurance which all financial planning licensees are obliged to carry notwithstanding the reduced number of insurers willing to cover the sector and the commensurately high cost of premiums.

The problem of PI insurance and its impact on the planning industry has been known for more than a decade and the Australian Securities and Investments Commission (ASIC) has acknowledged that there is a problem while stressing that it is not ASIC’s problem but, rather, a policy problem for the Government.

During recent hearings of the Parliamentary Joint Committee on Corporations and Financial Services, ASIC deputy chair, Karen Chester, was quick to acknowledge the regulator’s understanding that a problem exists with respect to PI, while making clear it was really a problem for Treasury rather than ASIC. Answering questions during the committee hearing, Chester said: “… you’re also talking about whether or not there has been a market failure or whether there are policy

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impediments that are causing unaffordability of PI cover within that sector. So they are what I’d call capital-P policy issues, which is Treasury. We’re [ASIC] lower-case-p policy issues, and we have to be very careful that we as the regulator don’t confuse the two.

“But, by all means, when we see those things, when we see evidence of that through our consultation with business and our own data collection— although we don’t have a lot of formal data collection rights in this area—we would share that with Treasury.”

Later, in a more formal response to a question on notice, ASIC stated it was “aware of concerns relating to the availability and cost of professional indemnity insurance for various sectors including those that ASIC regulates such as financial advisers”.

“ASIC does not regulate the pricing or availability of insurance in the market.

Different market sectors such as property valuers will be affected by economic conditions and market cycles which will affect their risk profile, and the consequent price and availability of insurance. These are policy matters for consideration by Government. We monitor market conditions through regular industry engagement, and we liaise with Treasury and APRA on these matters,” it said.

What ASIC might also have

mentioned is that the Treasury currently has before it the task of developing legislation for the establishment of a Compensation Scheme of Last Resort and that this task might properly segue into a thorough review of the affordability, effectiveness and coverage of the current PI regime.

If the Government is sensible, it will have ensured that the Treasurer’s office has already briefed the Treasury to consider the costs entailed in the industry funding a last resort compensation scheme in the context of the difficulties already being experienced by many licensees in finding and affording PI cover.

It is in these circumstances that there is much merit in industry suggestions that PI cover be reserved for wholesale clients, while other advised clients are covered by the upcoming compensation scheme of last resort.

As Money Management has pointed out in the past, hardpressed financial advisers cannot be expected to pay for a compensation scheme of last resort whilst also being compulsorily obliged to obtain increasingly expensive PI cover.

If ASIC can’t make any decisions then it is up to Treasury to make a capital-P policy decision on the issue.

Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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Mike Taylor Managing Editor

14/04/2021 3:28:05 PM

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12/04/2021 9:53:29 AM

6 | Money Management April 22, 2021

News

How ASIC executives paid $33,000 to a team-building consultancy

BY MIKE TAYLOR

THE team building consultancy the Australian Securities and Investments Commission (ASIC) retained ahead of the expenses controversy which surrounded its chair, James Shipton, was subsequently retained at a cost of over $30,000.

Shipton, who will leave ASIC when the Government finds a suitable successor, has confirmed to a Parliamentary Committee that the consultancy, Egon Zehnder, was retained to provide a “final” stage of its team-building offering for $33,000.

Shipton was being questioned by West Australian Labor backbencher, Patrick Gorman, about how the regulator was going to rebuild its management culture in the wake of the expenses controversy which affected both the chair and his former deputy, Daniel Crennan QC.

“We saw a lot of reports in the open about the culture at ASIC and tensions amongst commissioners. Mr Shipton, have you done anything—any team-building work, any executive retreats or any coaching—to actually repair some of the tensions that were widely reported?”

Gorman asked.

Shipton told Gorman during the committee hearing that the regulator had been continuing to work with Egon Zehnder.

“I believe we have disclosed to this committee previously that they have been doing work with us on commission effectiveness for some time, and that team has continued its work. We have transitioned that work to getting advice and guidance and facilitation, which I personally believe has been very effective, on how we as a leadership group at the commission can lead in transition. We can come back to you on the

procurement and the costs,” Shipton said.

Those costs were finally provided to the committee on Friday, in the following terms: “In continuance of previous leadership team formation and support work done for the ASIC Commission, Egon Zehnder was approached to provide a proposal and a best and final offer for this project as it was a final stage of the ongoing program of work undertaken by the Commission, assisting them build the collective behaviours, skills and practices that support strategic and timely decision making as well as building their overall effectiveness as a team.

“The total cost of this final stage was $33,000 (including GST).”

Egon Zehnder describes itself as “the world’s leadership advisory firm, sharing one goal: transforming people, organisations and the world through leadership”.

Who’s makes the complex simple?

ASIC business registers to roll under the ATO

BY CHRIS DASTOOR

THE Federal Government has announced, as part of the Modernising Business Registers (MBR) program, that the Australian Securities and Investments Commission (ASIC) business registers are rolling under the Australian Tax Office (ATO).

The appointment of the Commissioner of Taxation as the Commonwealth Registrar of the

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Australian Business Registry Services (ABRS) signified the next stage and, once fully established, would bring all 31 of ASIC’s business registers and the Australian Business Register into a new modern system at the ATO. The Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, said for the 2.7 million registered companies on the Australian Company Register, these reforms

would streamline their annual business registry engagement with the Government.

“There are on average 224,000 new company registrations in Australia each year,” Hume said.

“The new ABRS will mean for each new registration, business owners will have a single entry point through the ATO to establish their business, rather than the current system that has up to seven entry points for various business registry

interactions needed to establish a business.

“The new system will improve transparency of publicly held company data by creating a single source of trusted and accessible business data that will provide efficient registry service delivery.

“It will also provide businesses with real time access to their data and allow them to have more visibility and confidence in their transaction partners.”

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News

ASIC confirms advisers don’t back digital financial advice

BY MIKE TAYLOR

FINANCIAL advisers have sent the Australian Securities and Investments Commission (ASIC) an unequivocal message that they are unlikely to be providing digital advice services in the future in the context of the regulator’s affordable advice review.

ASIC has told a key Parliamentary Committee that 134 out of 183 respondents to its consultation paper dealing with affordable advice had stated that they did not want to provide digital advice in the future, believing it is best suited to simple advice.

ASIC said the key issues

identified by the respondents were the development costs associated with digital advice, a lack of demand and “consumer preference for a human adviser.”

“However, advisers saw a role for digital advice support services (e.g. better document management systems, fact finding, online client interactions and reporting tools),” ASIC told the Parliamentary Joint Committee on Corporations and Financial Services.

“Most considered that digital advice is only suited to simple advice needs and younger people. Respondents also noted that existing technologies often ‘promise a lot’ but in practice do

not integrate data well (assessing the interaction between income, tax and Centrelink entitlements for example), and do not allow for adequately tailored advice and strategies,” ASIC said.

The regulator detailed the limitations respondents outlined to the delivery of financial advice as being: a) Digital advice only commercially feasible ‘at scale’. The cost and scale to provide quality digital advice make it profitable only for larger entities, with the resources and systems in place; b) Digital advice is only useful

for ‘single issue’ advice.

Respondents were of the view that human advisers are required for complex advice needs. Many respondents also considered that digital advice is not conducive to building long-term relationships with clients; and c) Some respondents raised a quality concern with digital advice and that clients can receive poor advice if input information is provided incorrectly. Algorithms are not advanced enough to address the interaction of multiple advice needs and takes a limited view of a client’s solution.

Who else, but Elston.

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The largest ETFs driving growth to $100b

BY LAURA DEW

AS the exchange-traded funds (ETFs) industry passes $100 billion in assets under management, which funds have the largest market caps and how have they performed?

According to BetaShares, the ETF industry now stood at $102.9 billion after adding $8 billion in the first quarter of 2021. It forecast the industry to grow a further 25% this year.

The three largest ETFs were Magellan Global at $13.1 billion, Vanguard Australian Shares Index ETF at $7.4 billion and BlackRock iShares

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Core S&P/ASX 200 at $4.3 billion.

Over one year to 12 April, 2021, Vanguard Australian Shares Index ETF had returned 34.5%, the BlackRock fund returned 32% but Magellan returned just 5.7%.

However, over a longer time period of five years to 12 April, Magellan was the winner with returns of 86.7% compared to returns of around 70% for the other two funds.

Alex Vynokur, chief executive of BetaShares, said: “The Australian ETF industry has emerged from a year of uncertainty in a strong position.

While we have recently seen some retail traders

overseas caught up in speculative activity in particularly volatile stocks, investors more broadly continue to recognise the benefits of ETFs in establishing a resilient long-term portfolio. We are excited to see what the rest of 2021 brings”.

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8 | Money Management April 22, 2021

News

Value of advice outweighs costs

BY MIKE TAYLOR

MORE than 80% of advised clients believe the value of the advice they receive actually outweighs the costs.

That is one of the key bottom line findings of new research commissioned by IOOF and undertaken by CoreData which has significantly strengthened previous research findings around the extent to which clients value their relationship with their financial advisers.

The research, published in early April, also found that more than nine-out-of-10 (93%) advised clients rated their financial adviser as ‘very good’ or ‘good’ with respect to the value of their services.

According to IOOF and CoreData, the research has identified for the first time the degree to which the benefits of financial advice transcend age, wealth and gender.

“The research identifies an ‘advice dividend’ for advised clients – the benefit they receive compared to unadvised individuals, in return for an ‘investment’ in financial advice – that proves advice is not just valuable to older, wealthier Australians, as often assumed, but has clear and demonstrable benefits for less wealthy and younger Australians regardless of gender,” the research report analysis said.

“In some cases, the advice dividend is greater for

younger people than for older people, for less wealthy people than for wealthier people, and for females than for males,” it said.

The analysis also confirmed relatively few Australians currently receive financial advice but that the barriers to seeking advice are perceived rather than actual and are not reflected in the real-life experiences of individuals who have received advice.

According to IOOF, the research findings reveal a clear opportunity for financial advisers, supported by wellresourced and forwardthinking Australian financial services licensees, to reach more Australians and deliver valuable financial advice.

Why advisers aren’t reporting FASEA exam results

BY CHRIS DASTOOR

AUSTRALIAN financial services licensees (AFSLs) are required to update the details of their advisers on the Australian Securities and Investment Commission’s (ASIC’s) Financial Adviser Register (FAR) after passing the Financial Adviser Standards and Ethics Authority (FASEA) exam, but this information is not publicly accessible.

An AFSL had to notify ASIC within 30 business days of the licensee becoming aware the existing provider had passed the exam.

Colin Williams, HFS Consulting director, said ASIC indicated the FASEA exam had to be reported “by the licensee” to ASIC which would be made public by default on the FAR. However, the FAR does not currently disclose whether an adviser had passed the exam, only if they had completed a FASEAapproved tertiary course.

“It was later indicated that the exam results must be reported to ASIC but the results would not be published on the public FAR,” Williams said.

“There would be no charge for this.

However, some of the general instructions for completing the FAR by licensees has not be updated that well and one could believe that the exam results would be published.”

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A spokesperson for ASIC said the reason this information was not publicly available on the FAR was because it was not required under the Corporations Act. Williams said some licensees had opted – either intentionally or by error – to place the FASEA exam results under the broader definition of “qualifications and training” and often also under “FASEA approved qualifications”.

“I believe this is optional and some may be doing this intentionally as their results appear in searches under the MoneySmart find an adviser [filter]. There is a fee for doing this.”

ASIC did not confirm if there was a fee but said “some licensees choose to include information regarding the exam in the ‘qualifications and training’ field on FAR”.

“As the exam administrator, FASEA has a complete record of all advisers who have passed the exam,” the ASIC spokesperson said.

“FASEA also publishes a list of advisers who have passed the exam. An adviser must consent to their name being added to the published list.”

There were currently just over 8,750 advisers that had opted to list themselves on the register on FASEA’s website, while over 12,000 had passed the exam.

Williams said: “From the public perspective, it is confusing as if you do a search for an adviser under the MoneySmart website, you can see an adviser’s qualifications but not the FASEA exam result and you are told that FASEA approves all qualifications with some showing up as approved and others not.

“You then search the FASEA website and maybe find that adviser but told to check the ASIC MoneySmart website for all the qualifications – a bit of a loop.

“Currently the system makes it hard for someone looking for an adviser to get surety of the qualifications of a prospective adviser.”

13/04/2021 4:38:09 PM

Who’s looking beyond the short term to focus on long term opportunities?

Who else, but Elston.

Elston has been agile in the short term, moving swiftly from defensive assets and repositioning for post pandemic growth. We’re looking beyond what’s happening in the short term and focusing on long term opportunities. To learn more about our active investment approach and how our range of managed account solutions deliver tax-effective outcomes for clients, visit elston.com.au

This material has been prepared for general information purposes only and not as specific advice to any particular person. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. Prepared by EP Financial Services Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”).

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12/04/2021 9:52:05 AM

10 | Money Management April 22, 2021

News

Link Group partners with Retirement Essentials

70% of planners now use managed accounts

BY OKSANA PATRON

BY JASSMYN GOH

THE shift to managed accounts among the financial planners in Australia has accelerated with 70% of planners currently using or intending to use managed accounts, compared to 44% in 2012, according to the joint report by Investment Trends and State Street Global Advisors (SSGA).

The study found that one of the key benefits for a growing number of planners drawn to managed accounts was freeing up their time which allowed them to focus on client relationships and reduce administration time. can be a daunting process. Our clients’ “We have seen a very steady growth in managed members can now be confident that they have accounts and we have seen the benefits of managed both the systems and advice they need to accounts to both planners and advisers and the manage the transition.” reason why planners and clients talk about the Also commenting, SuperEd managing these benefits being the transparency, the efficiency director, Hugh Morrow said: “We are excited to and the freeing up their time,” Investment Trends combine our capabilities with Link Group’s chief executive, Sarah Brennan, said. technology and existing advisory services to “The COVID-19 period allowed that to be demondeliver an unparalleled solution for funds with strated and the fact that we saw an increase in alloproven benefits for fund members”. cation of funds, which increased quite sharply, is probably a confirmation that these benefits played out in the very volatile and obviously very difficult period.”

Prior to COVID-19, on average, planners allocated around 12% of new client inflows into managed THE Commonwealth Bank of Australia (CBA) has than $2 million in interest.

“CBA’s delay in remediating customers accounts, however one year on from the beginning been ordered to pay a $7 million penalty by the following this error was an aggravating factor of the global pandemic planners said they were alloFederal Court of Australia after the bank made in the court’s determination of the penalty. cating 17% of new client inflows into managed false or misleading representations and When financial institutions discover accounts. engaged in misleading and deceptive conduct overcharging, they must take immediate action According to the market forecast, this figure was regarding overcharged interest. to remediate impacted consumers. expected to grow even further with planners alloAccording to Australian Securities and “As recognised by Justice Lee, CBA made cating close to a quarter, or 23% of new client Investments Commission (ASIC) the penalty important admissions as to its many inflows into managed accounts by 2024. related to 12,119 occasions when CBA charged contraventions of the law. CBA is now making Also, the report found that planners were using a rate of interest on business overdraft investments in its systems as a matter of managed accounts for a much broader spectrum of accounts substantially higher than what its priority. All financial services institutions their clients and managed accounts were becoming customers had been advised. should make similar commitments to rebuild “more democratised”.

CBA submitted that an appropriate penalty trust in our financial system and to avoid The key group of clients who have been using the was $4 million to $5 million and ASIC submitted further failures.” managed accounts were affluent clients with that an appropriate penalty was $7 million.

The case followed from a Royal Commission balances between $250,000 to $1 million (63%), In reaching the decision, Justice Lee said case study and ASIC alleged, and the bank however what was equally interesting was that the CBA’s conduct was serious and that the number admitted, that from 1 December, 2014, to 31 second group of clients with balances between of false and misleading representations were March, 2018, that CBA: $100,000 to $250,000 (42%) was not actually far significant and that conduct of this type and • Provided customers with terms and behind, and the next two groups: high net worth nature must be prevented. conditions for certain credit facilities that clients and accumulators (aged 35-49) stood at 37%.

Justice Lee also rejected the submission that stated an interest rate to be charged or that Following this, one quarter of managed account CBA had acted expeditiously to remedy the effort had been charged (in most cases, 16% per users prefer using these structures for lower and found the bank’s delay was particularly annum); balance clients (under $100,000) while 22% said they troubling given the relationship between a bank • Sent periodic account statements to were appropriate for millennials (aged under 35) or and its customers. customers referencing the rate at which self-managed super funds (SMSFs), respectively.

ASIC commissioner, Sean Hughes, said: interest rate was being charged (in most The study also found that 72% of financial plan“Financial services institutions need to have cases, 16% per annum); and ners preferred to implement responsible investing appropriate systems, governance and • Due to a systems error, charged more than themes via a managed account, as they said these controls in place to ensure they deliver on 1,510 customers a different, higher interest structures would play an increasingly important promises made to their customers. When CBA rate on their overdraft accounts (in most role in helping investors action their responsible failed to resolve this error after it was cases approximately 34% per annum). investing goals in the future. identified, customers were overcharged more LINK Group has partnered with fintech Retirement Essentials to help customers get ready for retirement by providing affordable and accessible personal financial advice.

In an announcement, Link said the service was aimed at getting customers ready by incorporating affordable financial advice on Government Age Pension eligibility with assistance and lodgement of the customer’s Age Pension application via SuperEd’s Retirement Essentials service.

Members would also be able to have their application submitted for the Age Pension through the same service.

Link chief executive, retirement and superannuation solutions, Dee McGrath, said: “Our partnership with Retirement Essentials provides an important piece of the puzzle for an all-encompassing retirement solution offering.

“Researching and preparing for retirement

CBA to pay $7m penalty for overcharging interest

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13/04/2021 4:38:27 PM

April 22, 2021 Money Management | 11

News

AFCA’s inbuilt moral hazard for financial advisers

BY MIKE TAYLOR

FINANCIAL advisers are being exposed to moral hazard because of the rules around consumer complaints lodged with the Australian Financial Complaints Authority (AFCA), according to the Financial Planning Association (FPA).

According to the FPA, the moral hazard exposure stems from the fact that, under the rules, consumers who lodge a complaint are not exposed to any financial risk while the financial advisers against whom they are complaining are.

The FPA has told the Treasury’s current review of AFCA that all the risk is being carried by the defendant – the financial planning firm.

Explaining that “frivolous, vexatious and malicious complaints significantly divert resources”, the FPA claims the adverse consequences for advice providers can be devastating including “loss of face, financial

costs, time diverted away from servicing clients and a significant impact on professional indemnity (PI) insurance premiums”.

The FPA is arguing that there are potential steps which could be injected into the AFCA processes where frivolous, vexatious or malicious complaints could be stopped.

“However, there appears to be a lack of judicial restraint applied to such complaints if the consumer is not willing to come to a resolution,” it said.

In an effort to address the problem, the FPA is suggesting that, amongst other things, AFCA could incorporate into its fee model “an appropriate methodology for the sharing of fees for frivolous, vexatious and malicious complaints across the relevant industry sector”.

It also suggests that AFCA could consider the introduction of a dispute lodgement fee where a consumer disagrees with the initial AFCA assessment and requests escalation of the complaint.

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13/04/2021 4:38:37 PM

12 | Money Management April 22, 2021

News

Reserve Bank ‘unconcerned’ by rising bond yields

BY LAURA DEW

THE decision by the Reserve Bank of Australia (RBA) to hold rates at 0.1% indicates it is “unconcerned” by the threat of rising bond yields.

At the most recent meeting, the RBA reiterated it would leave monetary policy unchanged, it had already reiterated rates would likely at this rate until 2024 “at the earliest” or when inflation was within the 2% to 3% target range.

This was despite rising bond yields in the US which had caused concern about the likelihood of increased inflation and whether that would necessitate the need to raise interest rates earlier than expected.

In the meeting minutes, RBA governor Phil Lowe, said: “Sovereign bond yields have increased over recent months due to positive news on vaccines and the additional fiscal stimulus in the United States. Inflation

expectations have also lifted from near record lows to be closer to central banks’ targets.

The three-year government bond yield in Australia is at the board’s target of 10 basis points and lending rates for most borrowers are at record lows”.

GSFM investment strategist, Steve Miller, said: “In so doing the RBA, like most of the global central banking fraternity, is unconcerned by market expectations of inflation rebounding. While markets are anticipating a rebound in inflation, it is from an extraordinarily low base and to a level that central banks would likely welcome.

“In that context the current market-based measures of inflation expectations and what the world’s central banks, including the RBA, are seeking to achieve on inflation are entirely reconcilable. In that context too, central banks are not yet overly concerned by the recent rise in global government bond yields.”

He added the decision by the central bank

was also a way to avoid an “unwelcome movement” in the Australian dollar as this could frustrate the task of lowering the unemployment rate.

ASIC puts super funds on notice on complaints handling

BY MIKE TAYLOR

INSURERS, administrators and other entities providing services to superannuation funds have been placed on notice by the Australian Securities and Investments Commission (ASIC) that they will need to live by the new and significantly shorter 45-day complaints handling timeframe.

ASIC has reinforced with superannuation fund trustees the need to get their houses in order on internal dispute resolution (IDR) operating on a similar basis to financial planning companies and in line with the 45-day time-frame which has been reduced from 90 days, including employing more people and getting their information

06MM220421_01-16.indd 12

technology systems upgraded.

ASIC said that, if they had not already done so, superannuation trustee boards should seek advice on how their operations would meet the requirements of Regulatory Guide 271 (RG 271).

“Some of the changes may take some time to implement. These may include necessary changes to information technology (IT) and administration systems for complaints management, including capturing data, processes and procedures, and staff training,” it said.

“Trustees will also need to review their insourced and outsourced arrangements, which may require contractual and/or operational changes in order to meet the

requirements of RG 271,” ASIC said. “Any third parties involved in handling complaints (including an insurer for claim related complaints) will need to be able to meet the shortened 45-day maximum timeframe (from 90 days) to resolve complaints and to meet the data collection and reporting requirements.”

“As for external providers, under the design and distribution obligations, which also commence on 5 October, 2021, product distributors must record and report the number of complaints they receive.

Trustees are responsible for outsourced providers and must ensure there is clear oversight of these arrangements.

“We anticipate the new IDR standards may require trustees to invest in skilled staff and systems. Trustees may need to revisit how they structure delegations, including authority to make decisions and financial delegations, to ensure relevant staff are sufficiently empowered to resolve complaints fairly and efficiently, and to avoid delays in resolving complaints under the shorter timeframes.

“Trustees should also take into account the fact that levels and complexity of complaints can fluctuate, so they should consider how they use flexible resourcing,” ASIC said.

13/04/2021 4:38:59 PM

April 22, 2021 Money Management | 13

News

KKR closes US$15b Asian Fund

BY OKSANA PATRON

GLOBAL investment firm KKR is closing its US$15 billion ($19.7 billion) Asian Fund IV, focused on investment in private equity (PE) transactions across the region.

The firm, which would be investing approximately US$1.3 billion in capital alongside fund investors through the firm and its employees’ commitments, said the fund was currently the largest PE fund dedicated to investments in the Asia Pacific region and had exceeded its target size to reach its hard cap for fund investors’ commitments.

This was thanks to strong support from a diverse group of new and existing global investors, including strong representation by Asia Pacific-based investors, the firm said.

Through Asian Fund IV, KKR would plan to pursue opportunities stemming from rising consumption and urbanisation trends, as well PPSXXX_Life Insurance ad_220x155mm_AW as corporate carve-outs, spin-offs, and copy.pdf consolidation as companies look to optimise

their portfolios, a strategy led by a team of approximately 70 investment professionals based in eight offices across six major Asia Pacific markets.

Earlier this year, KKR announced the final closings of its inaugural pan-regional infrastructure and real estate funds – the US$3.9 billion Asia Pacific Infrastructure Investors fund and US$1.7 billion Asia Real Estate Partners fund.

“The opportunity for private equity investment across Asia Pacific is phenomenal.

While each market is unique, the long-term fundamentals underpinning the region’s growth are consistent – the demand for consumption upgrades, a fast-growing middle class, rising urbanization, and technological disruption.

“We are excited by the diverse opportunities we see and are pleased to deepen our commitment to the region with the 1 01/04/2021 11:05 close of our new fund,” Hiro Hirano, co-head of Asia Pacific Private Equity at KKR, said.

Ming Lu, head of KKR Asia Pacific, added that over the last 16 years KKR had built its Asia Pacific platform and diverse regional team to unlock what it believed were some of the most compelling investment opportunities in the world given Asia Pacific’s growth and dynamism.

“Our new flagship private equity fund meaningfully adds to our multi-asset platform and strengthens our investment position across the region. We are grateful to our investors who have acknowledged the success of our Asia Pacific strategy and share our conviction in the tremendous potential that the region’s businesses hold,” he added.

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13/04/2021 4:39:31 PM

14 | Money Management April 22, 2021

News

ASIC’s Shipton confirms retaining top legal team

BY MIKE TAYLOR

THE outgoing chair of the Australian Securities and Investments Commission (ASIC), James Shipton, has confirmed retaining a phalanx of senior lawyers to defend his position in the face of the issues raised last year by the Australian National Audit Office (ANAO) about payment for his personal tax advice.

During a recent hearing of the Parliamentary Joint Committee on Corporations and Financial Services, Shipton confirmed he had retained the services of two Queen’s Counsels and two other lawyers with the objective of clearing his name with respect to issues raised by the ANAO over the payment of expenses.

Under questioning for Labor backbencher, Deborah O’Neill, Shipton insisted that rather than being stood aside last year by

the Treasurer, Josh Frydenberg, he had offered to stand aside pending the outcome of an investigation into his expenses and those of his former ASIC deputy chair, Daniel Crennan QC. Shipton said he had retained the high-powered lawyers because of the matters which had been raised by the ANAO. “It’s a matter of public record.

They have been named in the press already, so I don’t think there’s any harm in releasing their names. They were James Peters QC and Philip Crutchfield QC. And I engaged Dominic Gatto, of King and Wood Mallesons, and was assisted by barrister Nicholas Walter,” the ASIC chairman said.

O’Neill responded that “for the many ordinary Australians who have no engagement with the legal system—many of them couldn’t afford to do it—that’s a pretty heavy-hitting team that you took with you to the

Many retirement planning tools not accurate in life expectancy

BY JASSMYN GOH

Treasurer’s office”.

Shipton confirmed that he had paid for the lawyers himself.

“Given that this was a personal engagement, I would prefer to keep that information private. It was an engagement in a personal capacity, not in my public capacity,” he said.

Shipton will depart his role as chairman of ASIC when the Treasurer, Josh Frydenberg, names a replacement – something which is expected to occur after the Federal Budget in May.

Adviser numbers still in net outflow

BY OKSANA PATRON

AT the end of the first quarter of 2021, gains in adviser roles year-to-date were still much smaller than the losses at the licensee level, but a number of licensees that were closing down were more often associated with accounting firms, with financial advice being just a small part of their business, according to analysis

by HFS Consulting.

But for more experienced financial advisers the trend continued and they were more often starting new licensees.

When it came to numbers, the total loss of adviser roles as of end of March stood at 312, with the biggest losses at a licensee level being attributed to AMP Financial Planning at (-59) followed by GWM Adviser Services (MLC) at (-42) and Synchron at (-33).

At a group level, MLC was down (-88), AMP at (-77) and IOOF at (-76).

Colin Williams, director at HFS, told Money Management that the losses at IOOF and MLC would be very worrying across the board as they were building a momentum of their own which would be

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hard to stop in the short term.

“Another issue will be the number of advisers who may drop out due to not completing the Financial Adviser Standards and Ethics Authority (FASEA) exam,” he said.

“The latest figures out of FASEA are not encouraging and those losses could be very high for a lot of licensees including those owned IOOF and MLC.” In the last week of March, 84 adviser roles were appointed, including five ‘new’ as provisional advisers. Therefore, 79 appointments could be seen as experienced advisers switching licensees.

At the same time, 188 adviser roles resigned to give the net total of (-104) adviser roles.

The end of March also saw 56 licensees having reported net adviser losses, with AMP Financial Planning being down (-22), Bridges Financial Services at (-17) and Link Advice who provided advisers to super funds were down 13.

Wealthsure, who were part of Sentry Group, was down (-11) and thereafter a long tail licensees with losses.

A total of four licensees were closed (now with zero advisers) who accounted for a total of (-11) roles.

OPTIMUM Pensions has called on retirement professionals to check their life expectancy calculation methods are fit for purpose.

It said many retirement planning tools might not always reflect best practice when it came to determining and allowing for life expectancy.

“If the lens we view retirement through is inaccurate then incorrect conclusions will be drawn about retirement strategies and decisions. Retirees should not be paying the price,” it said.

Optimum Pensions noted many tools reflected outdated and inappropriate life expectancy statistics.

The firm said it had launched its new Lifespan Calculator which was based on the latest Australian Life Tables but also incorporated health data from a large reinsurer of longevity risk.

The tool did not show averages but results could be personalised by considering health and lifestyle factors. It also included both spouses in a couple and let each user focus on how confident they wished to be that their retirement planning timeframe could cover both their potential lifespans.

Optimum Pensions head of innovation, Jim Hennington, said: “This can add 10 years to the results that a less-accurate life expectancy calculator provides”.

14/04/2021 1:51:44 PM

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16 | Money Management April 22, 2021

InFocus

WHY THE BUDGET WILL RESET THE SUPER GUARANTEE TIMETABLE Mike Taylor writes that political ideology will have as much to do with the future of the superannuation guarantee as economic capability.

THE SUPERANNUATION INDUSTRY should brace itself for the reality that the next rise in the superannuation guarantee (SG) to 10%, if it occurs, will be the last under a Coalition Government.

Every signal emanating from the Morrison Federal Government in the lead-up to the May Budget is pointing to the fact that the superannuation guarantee will not move beyond the scheduled rise to 10% and that it may very likely remain fixed at the current 9.5%.

And the Government’s rationale? That the economy and employers need time to recover from the impact of the COVID-19 pandemic and that to lift the SG any higher would adversely impact wages growth.

The claim about economic recovery is, up to a point, legitimate. The claim with respect to wages growth is dubious, at best.

And if anyone doubted the Government’s intentions, they need only be following the social media offerings of the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, who has enthusiastically adopted the mantra of any increases in the SG being at the expense of wages growth.

In a recent series of tweets, Hume offered the following on the

SUPER FUNDS WITH MOST MEMBER ACCOUNTS

issue of increasing the SG: “Tipping ever increasing amounts of your hard earned money into super is not and cannot be the answer to every social ill. Deferring more of your wages today comes at a trade off to your standard of living in your working life.

“Importantly, the balances of women retiring today reflect a majority of a working life without compulsory super at 9.5% and a system created by Labor that was never built to recognise women’s work patterns or the gender pay gap.

“We have made substantial progress on the pay gap and participation gap – and that work

continues. On super, our immediate focus is on making your super work harder for you – improving performance and lowering fees. It’s your money.”

So, there you have it. At a time when the latest Australian Bureau of Statistics (ABS) data shows that annual wage growth in Australia is below 1.5% and has been in decline for most of the past seven years, a serving Government minister is claiming that increasing the SG is a factor that workers should be worried about.

What is more, the Reserve Bank of Australia (RBA) has suggested that wages are likely to move back into growth in 2023 – well after the next

Federal Election.

What is more, successive Governments of both political stripes have delivered few positive policy initiatives which would help women and other low-income earners play catchup with respect to the disadvantage they are already experiencing with respect to their ability to build retirement income nest eggs.

While Hume and other members of the Government have been significant critics of superannuation and superannuation industry organisations, they need to recognise that notwithstanding the underlying ideologies and political points-scoring that most superannuation funds have been continuing to deliver for their members.

According to the latest data from SuperRatings, over the 2021 financial year to date, the median balanced option returned 9.7%, reflecting the strength and speed of the post-pandemic recovery, which has been extended through the start of 2021.

With wages growth below 1.5%, Governments would do well not to be too dismissive of average superannuation fund returns in solid positive territory. Members can’t spend it today but they’ve certainly got it in the bank.

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26/02/2021 10:18:18 AM

18 | Money Management April 22, 2021

Equities

SHOP ‘TIL YOU DROP

As managers focus on the beneficiaries of COVID-19, there is one sector which has both performed strongly during the pandemic and should continue to do so after, writes Laura Dew. WHEN IT CAME to the pandemic, there are images which will remain seared on our minds as stand-out moments of an extraordinary year. One of these is the image of empty shop shelves and customers walking out with masses of toilet rolls as they prepared to lockdown at home for an unspecified amount of time.

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Unsurprisingly, as supermarkets were one of the few places allowed to consistently remain open in the past year, their share prices rose in a downturn.

The same applied to consumer discretionary retailers as people furnished their home offices, stocked up on indoor sports equipment and ordered

the necessary items for those endless Zoom meetings. There was also a boom for online stores which people turned to after being unable to leave their house to visit shopping malls.

The trend was unusual as the normal turn of events during a market downturn would be that people stopped spending to save money.

14/04/2021 10:04:13 AM

April 22, 2021 Money Management | 19

Equities

Chart 1: Share price performance of Coles and Woolworths

Chart 2: Share price of Super Retail Group, Harvey Norman and JB Hi-Fi

Source: FE Analytics

However, in this scenario, many people were actually gaining money during the pandemic as they had reduced commuting costs, received Government stimulus payments such as JobKeeper or JobSeeker, accessed their superannuation early or were spending less on holidays or business travel.

At the end of the June 2020 quarter, household wealth increased by 1.5% and by September 2020, one-in-five Australians increased their savings.

In February 2021, almost half of households expected to save money in the next 12 months, according to data from the Australian Bureau of Statistics (ABS).

David Lloyd, equity analyst at Ausbil, said: “Saving levels are at historical highs, and imply around $18,000 per household, and the strong housing market could provide support to some categories, namely household appliances and white goods”.

Now, managers say, households will want to put that money to good use by hitting the shops, meaning the share prices could continue to grow for another year.

CONSUMER STAPLES From the start of lockdown on 20 March, 2020, to the end of the

06MM220421_18-27.indd 19

year, shares in Coles rose 9% while Woolworths rose 6% (Chart 1). The share price rise would have been greater, managers say, but for the additional costs to meet COVID-19 rules which included hiring security, installing COVID-safe precautions and paying staff.

Stores were also able to sell items without discounting them due to the lack of alternative options for consumers.

Richard Ivers, portfolio manager at Prime Value Asset Management, said: “Coles and Woolworths benefitted from all the toilet paper sales. But it is hard to forecast in this type of environment as last year was so different and there are higher levels of variance nowadays”.

Bruce Smith, principal at Alphinity, said: “Coles and Woolworths did well from lockdown, they had massive amounts of sales but did less well on earnings as they incurred extra expenses related to COVID-19 which added costs. Sales will be less strong this year but they should be able to cut costs now the restrictions are eased which will help.

“We hold Woolworths as we think the de-merger between Woolworths and BWS into two

separate companies will be a big focus and should be positive for the company. The de-merger will bring operational change and Woolworths should benefit from that.”

Another firm in this consumer staples space was Wesfarmers which owned hardware retailer Bunnings Warehouse, another store which was allowed to remain open during the lockdown, and Officeworks, which saw its share price rise 57%, Smith was positive on Wesfarmers as he said it had a “great format and great business” but Peter Gardner, portfolio manager at Plato Investment Management, said he believed it was overpriced.

“We think Wesfarmers is a really great company because of Bunnings so it is hard to say that I dislike it but we do think it is overpriced at the moment.”

CONSUMER DISCRETIONARY What was unusual in 2020 was the amount of consumer discretionary spending by consumers as this would usually reduce during a recession.

“Last year, when markets were crashing and we were in the first Australian recession in 30 years, you would have expected retail

Continued on page 20

14/04/2021 10:04:23 AM

20 | Money Management April 22, 2021

Equities

Continued from page 19 stocks to do badly as discretionary spending is usually the first to go.

But this wasn’t a typical recession and we had massive stimulus from the Government to stop people losing their jobs and unemployment didn’t go down too much. It became clear that retail was actually going to benefit from this.”

Alex Shevelev, senior analyst at Forager Funds Management, said: “The stimulus demand was a big boom for retailers, especially those focused on home consumption and improvement. It was not what we expected. The speed and the size of the stimulus was quick and significant and the reallocation of spending by consumers away from travel and restaurants was quick as well”.

From the start of the lockdown to 20 March to a year later (Chart 2), Super Retail Group, which owns sports store Rebel Fitness, rose 198%, homeware retailer Harvey Norman rose 145% while technology store JB Hi-Fi rose 100%.

Gardner said he expected retail would continue to do well in 2021 as positive factors were still in place such as the travel restrictions and property boom which was encouraging home renovations.

“We are positive on consumer discretionary, those retail stocks

06MM220421_18-27.indd 20

have seen increased sales over COVID-19 which has been huge for them. Sales at some firms are 20% to 40% higher than usual which then flows through to profits,” he said.

“We don’t expect it to continue indefinitely but we are still positive as we think it will take longer than people expect to things to get back to normal.”

While some firms were paying out dividends, managers said businesses may look to be cautious about showing off their success at a time when many businesses were being forced to close or if they received the JobKeeper stimulus payments.

Super Retail Group returned $1.7 million of wage subsidies to the Government after seeing net profit after tax of $170 million and furniture retailer Nick Scali paid back $3.6 million, although there was technically no legal duty for them to do so.

“There has been a media focus on those companies which took the payment, some have given it back but some have kept

it which can look bad optically if they have had a good year. They could be reluctant to pay out too much in dividends in case they need to cut it the following year,” Ivers said.

Smith said: “Dividends are harder to forecast for retail companies as lot of them benefited from JobKeeper so they are cautious on drawing attention to that. Quite a few companies benefitted from JobKeeper and paid out a big bonus which wasn’t well received by the community”.

ONLINE RETAILERS However, these share price rises pale in comparison to those of online retailers such as Redbubble and Temple and Webster. There was a clear pace of acceleration for online retailers but it was borne of necessity as people were stuck at home. This meant there was a doubt if this pace would continue or if it would tail off now people could return to physical retailers.

14/04/2021 10:04:36 AM

April 22, 2021 Money Management | 21

Equities

Chart 3: Share price performance of Redbubble, Temple & Webster and Kogan

Source: FE Analytics

From 20 March, 2020, to a year later, Redbubble rose by over 1,000% while Temple and Webster rose 418% and Kogan rose 216%.

In a business update to the Australian Securities Exchange (ASX), Kogan said it had been “experiencing extreme growth” with three million active customers at the end of December 2020, a 76% year-onyear increase.

Meanwhile, Temple and Webster said factors such as store closures, faster internet speeds, an acceleration in online shopping take-up and millennials entering its target demographic were all factors driving “strong market growth for years to come” for the firm.

Due to their smaller size, these companies tended to only be accessed by small-cap managers.

AMP forecast penetration of online shopping could reach 25% by 2030 and Australia could breach the 15% to 20% barrier within the next five years if online sales continued at this pace which would place it on a similar footing to the UK and the US. Geography, however, remained a hurdle in Australia as it was difficult for logistics firms to get value for money from online shopping.

06MM220421_18-27.indd 21

Another factor affecting their performance was how quickly firms were able to pivot to online shopping with those who had existing infrastructure in place benefitting the most, similar to those companies which were already equipped to let employees work from home.

“Some firms had the infrastructure set up to be efficient in the online space and could extract margins which were better than for their offline sales,” Shevelev said.

“But for other firms, that wasn’t the case and there was some indigestion at the start of COVID-19 as they took time to get up to speed and make online sales efficient.”

Ivers said: “The thing about online spending is some of it was purely because people physically couldn’t go to the shops so online sites had this sugar hit, we will have to see if that continues.”

The growth in online and likelihood of retailers reducing the number of physical stores also had knock-on effects to retail rents for companies like Scentre and Vicinity, particularly in Victoria which had a long lockdown period.

However, both stocks had maintained positive returns over the year to 20 March, 2021, with Scentre up 80% and Vicinity up 47%.

Shevelev said: “A lot of retailers are continuing to negotiate on turnover rent and the shopping centre owners are pushing against that. Shopping centres are trying to push for longer-term rents while retailers are trying to reduce their rent.

Shopping centres have raised capital at the same time as reducing the value of assets on their balance sheets”.

“The COVID-19 period only accelerated the structural trends that were already in place and, in my view, almost (if not all) categories that have moved online have yet to see penetration rates mature or decline. This suggests that online will continue to capture share from in-store sales,” Lloyd said.

“This has meaningful implications for retail landlords, in particular those that own large malls as demand for space will continue to decline, resulting in lower rents and asset values and, ultimately, a lower distribution growth profile for investors.”

Smith said: “Online shopping has accelerated significantly, it will slow down but it won’t go negative. The best mix would be for firms to have an online presence and a bunch of physical stores to respond to both environments”.

14/04/2021 10:04:44 AM

22 | Money Management April 22, 2021

Tax

A YEAR LIKE NO OTHER

The financial consequences of COVID-19 combined with legislative changes mean this will be an unusual tax year for many, Oksana Patron writes.

THERE ARE A unique set of challenges this financial year as people begin to recover from the negative economic impact of the COVID-19 pandemic, meaning advice around year-end tax strategies will be of particular importance for people.

The COVID-19 impact was combined with legislative changes with downsizer contributions to superannuation, the superannuation guarantee (SG) amnesty and bring-forward contribution changes. These were all key topics which advisers sought technical advice on in the final quarter of 2020, according to BT. According to Todd Want, director of tax services at William Buck, planners will need to reach out and provide more advice to those clients who had a rather atypical year, either in terms of

06MM220421_18-27.indd 22

surprisingly positive financial results or on the downside.

“From business and private groups perspective, advisers should be looking in particular at those clients who may have had a different year where this would be more profit than they would normally have or way less profit than they would normally have,” Want said.

“Obviously businesses which have received JobKeeper and the boost would need to be conscious with their year-end strategies that the next financial year is likely to be a very different year again.”

Similarly, Bryan Ashenden, head of financial literacy and advocacy at BT, said that due to a number of changes experienced by individuals and companies over the last few months and a changing economic situation, it was even

more important for advisers this year to engage with their clients.

“All these things combined when we are coming out of that COVID-19 environment now, are probably of high importance but it is also a great opportunity for the advisers to talk to their clients and really demonstrate the value of their advice.”

Colin Lewis, head of strategic advice at Fitzpatricks Private Wealth, said the key differences advisers and their clients needed to consider this year were mainly around superannuation.

“The big thing I am going to be stressing to my advisers for their clients this year is this whole thing about the super and I think the big story around this, leading up to 30 June, is around the superannuation indexation,” he said.

From 1 July, the transfer balance

cap, contribution caps and the total superannuation balance test limiting certain contributions are going to increase, which may create the opportunity for people to get more into super and keep more in it if they put off doing certain things until after 30 June, Lewis said.

Also, the opportunity in the current financial year arising from the increase in the concessional contributions cap involves the ‘contribution reserving strategy’, an arrangement whereby contributions made to a self-managed super fund (SMSF) in June will be allocated in the new financial year.

Lewis explained that, with the higher concessional contribution cap applying from 1 July, this strategy may allow people to claim a larger tax deduction this financial year and a maximum deduction of $52,500 (up from $50,000). At the

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Tax same time, any unused cap amounts from 2018/19 and/or 2019/20 may be available because the second contribution will now be $27,500 as it is being tested against the higher concessional contribution cap in the financial year of 2021/22. However, he warned, it was important to remember to allocate this contribution by 28 July.

Melinda Measday, superannuation director at HLB Mann Judd, agreed that superannuation will continue to be an important tax planning tool.

“Make sure you leave yourself time before 30 June to work out what contributions have already been made by your employer, then contact your superannuation fund and transfer the top-up contribution to the fund so it is received by 30 June,” she said.

“If your super balance is below $500,000, you may also be able take advantage of any unused cap from the 2020 tax year and make a top–up concessional contribution.

“If you have had a windfall or sold a large asset and have extra cash, you can also make a non-concessional contribution to superannuation.”

This kind of contribution is tax free and the cap is currently $100,000 per annum, set to increase to $110,000 per annum after 1 July, 2021.

According to Measday, the advantage of contributing these extra savings to superannuation is that the maximum tax rate someone will pay on the earnings is 15% whereas if the funds stayed in their own name, the tax on earnings would be at the marginal rate of tax, which may be significantly higher.

“You may also be eligible to bring forward an extra two years’ worth of contributions allowing you to make $300,000 contributions before 30 June, 2021. As the cap is increasing, waiting until 1 July, 2021 to make these contributions would mean you can pay in $330,000.”

RETIREMENT On estate planning within superannuation, Lewis said the unusual past year meant that some people may be re-considering going into retirement phase, even though

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moving super into a retirement phase would mean going tax free.

“Traditionally, people liked to do that but this year is different,” he said.

Lewis reminded that the transfer balance cap limits the amount people can move into the tax-free retirement phase and this will increase to $1.7 million (up from $1.6 million) which could mean people will be able to get more into a tax-free accountbased pension from 1 July but it will all depend on what they have done up to 30 June.

“The more you have used of the current $1.6 million cap before 30 June, the less of this increase you will get,” Lewis explained.

“You will only benefit from the full $100,000 increase where you have not transferred any super into retirement phase, nor received a death benefit income stream before 1 July. If you have used the entire $1.6 million cap, then you get no increase and you will receive some increase where you have had super in retirement phase but haven’t used the full $1.6 million cap.

“Normally, people would want to get as much money into super’s tax-free retirement phase as soon as possible, but with the transfer balance cap increasing, it may be worthwhile waiting until after 30 June to start an account-based pension (or move more money into retirement phase), so as to have more in the tax-free environment for the long-term.

“Accordingly, if you are looking to get as much money into super as possible, you should avoid triggering the bring-forward rule this financial year by limiting your non-concessional contributions to $100,000, thus giving you the ability to trigger it next year to get more into super,” he added.

Ashenden agreed that a key consideration for estate planning was the increase in the transfer balance cap and how the payment of a death benefit pension may impact this. According to him, this reiterates the need to consider whether pensions are set up as reversionary binding pensions or not.

“When a pension is set up as a binding reversionary pension, the

“Businesses which have received JobKeeper would need to be conscious with their year-end strategies that the next financial year is likely to be a very different year again.”

– Todd Want, William Buck amount assessed to the transfer balance cap of the recipient (beneficiary) is the balance as at the time of death of the original pensioner, but is not assessed until 12 months after the date of death,” he said.

“As a result, if someone who established a binding reversionary pension has passed this financial year, it will not be assessed to the beneficiary’s transfer balance cap until the next financial year (i.e. on or after 1 July, 2021). This means it is potentially going to be assessed against a higher transfer balance cap, meaning the beneficiary has the potential to keep a greater value inside the tax-free pension environment.

“If the pension was not a binding reversionary pension, it will have been assessed to the beneficiary transfer balance cap at the time it commenced to be paid as a death benefit pension for its value at that time. That would have been against this year’s (lower) transfer balance cap.

Therefore, careful planning and professional advice can help to manage through these complexities,” he said.

AGES 66-67 Following this, it will be a particularly important financial year for those aged 66 and 67 as they will need to consider any potential superannuation contribution strategies, Ashenden said.

He reminded that it was announced in the May 2019 Federal Budget that the ability to utilise the bring forward provision and contribute up to three years of contributions in one year would be extended from the year in which a person turns 65 to the year in which they turn 67.

“That change was due to take

effect from 1 July, 2020 – the start of this current financial year. However, the amending legislation to give effect to this has stalled in Parliament. As a result, there is no certainty this change will pass and take effect from 1 July, 2020.

“Contributions should only ever be made based on existing law, meaning until the change has been made, the bring forward provisions are not currently available for those who turned 66 or 67 this financial year.”

However, with the impending changes to the total super balance threshold (the level at which to make a non-concessional contribution) increasing from 1 July, 2021, to $1.7 million and the annual non-concessional contribution cap also indexing from $100,000 to $110,000 at the same time, Ashenden said that careful consideration needs to be given to how much to contribute this financial year (if able to do so) whilst still maximising the potential for contributions next financial year.

According to Measday, in order to contribute before 30 June, 2021, people who are between 65 years and 75 years old will have to pass a work test, which must indicate they have worked at least 40 hours within 30 consecutive days in that financial year. After 1 July, 2021, this will only be needed if the person is between 67 years and 75 years old.

“A work test exemption is now available for an additional 12-month period from the end of the financial year in which the member last met the work test to those with less than $300,000 in superannuation.

“Those over-75 are unable to make personal concessional contributions to superannuation and funds can only accept mandated employer contributions (i.e. super guarantee contributions).”

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Superannuation

A SILVER LINING FOR SUPERANNUATION? The changes coming into force with the Your Future, Your Super reforms, writes Joe Brasacchio, present an opportunity for super funds to improve their member engagement.

AS AUSTRALIANS BEGIN to tackle the vaccination phase of COVID-19, our economy is emerging with some optimism.

Australia’s $3 trillion superannuation sector remains a pivotal asset for the nation, and the Federal Government continues to focus on the superannuation sector with transparency, efficiency and member-outcome programs.

There are significant changes ahead, at a time where the whole ecosystem, including financial advisers, are weary of constant change and challenges.

Recent, important discussions include: • Stronger super Since 2013, superannuation has been on a journey to reduce the cost of administration across the employee to member lifecycle. This included policy and programs like: MySuper - low fee financial products, SuperStream standardisation/digitisation; and the Future of Financial Advice - fees for service.

• Early release of super Administering the early release of member funds in accordance with an integrity framework developed by the Australian Taxation Office (ATO) to assist hardship through COVID-19.

• Super reforms – Your Future, Your Super This includes the newest package of policy changes that focus on making sure every dollar spent by a super fund in the best interest of members.

There is also a framework to

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staple members to their initial fund so that duplicate accounts are minimised in the future, with super following an employee through their job changes.

• Community expectations - Corporates across Australia face increasing scrutiny on social and community expectations. The Financial Services Royal Commission is a not-so-distant memory for participants in the industry dealing with conflict and standards.

- In the future, those with flexible work arrangements such as gig workers, carers and part-time workers may find themselves disadvantaged when it comes to retirement if the super industry struggles to innovate for them.

Whilst the $36 billion (c.1.2% of total super assets) early release of super generated significant media attention, there is perhaps a positive impact for fund member engagement, albeit through a relative lens of negativity. Almost five million applications for early release of superannuation were made, and of that, 1.4 million were repeat applications. Is this unexpected engagement with superannuation a silver lining to the COVID-created drain on member’s long-term retirement savings?

Effective member engagement is one the longest unmet challenges for superannuation funds as many members in default funds simply ‘switch off’.

Anecdotal evidence would suggest that millions of Australians

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Superannuation

now know what their retirement balances are and which superfund/s they are invested in.

Looking at Google statistics, the week of 22 March, 2020 saw a significant spike in search volume for superannuation or fund-specific names. Can funds build upon these engagement moments to create a lasting positive impact?

The superannuation sector should be commended for responding to an unprecedented crisis having achieved an average of 3.3 business days to make payments, but much work will need to be done to repair the retirement savings of Australians who have had to access it early.

So, has the experience of engaging with members with early release of super, in an earlier phase in their lives, helped to prepare the super sector for new Your Future, Your Super changes that are set to commence on 1 July, 2021?

Let’s refresh the intention of this reform: • Your superannuation follows you, preventing the creation of unintended multiple superannuation accounts.

• Empowering members, by making it easier for you to choose a well-performing product that meets your needs.

• Holding funds to account for underperformance, protecting you from poor outcomes and encouraging funds to lower costs and fees to boost Australians’ retirement incomes.

• Increasing transparency and accountability for how superannuation funds use members’ savings.

Noble intentions, and the detail for which create significant challenges and opportunity.

Australia’s superannuation sector has traditionally worked in a

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B2B model interacting more with employers than individual employees. Notwithstanding the COVID-19 anomaly discussed above; super is mostly front-of-mind for people when they begin a new job or are thinking about retiring.

Presently, the nation has approximately 13 million working Australians and around 15% change their job every year. Many job changes have historically resulted in duplicate accounts resulting in $13.8 billion in lost super. These job changes are key moments where super funds can drive greater engagement and help workers make informed choices relating to their retirement savings.

So, in the face of reforms, how might the sector evolve its innovation and thinking to take advantage of the opportunity? I believe there are key pockets of opportunity that can make a material difference.

EMPLOYERS HOLD THE KEY Employers will be challenged to solve for an efficient process to address ‘stapling of members’ (your superannuation follows you). Today, many people experience the super choice task as purely a compliance form that needs to be completed to start a job.

This is an opportunity for super funds and service providers to think innovatively about their greater relevance in what will remain a major life moment for an individual. As with most life decisions, if presented with the right information at the right time through a more immersive experience, humans are much more likely to engage.

Super funds can maximise their investment in their digital and direct to workforce channel.

This will help them to define and control an engagement pathway for digital placement.

BE COLLEGIATE ACROSS THE ECOSYSTEM The tax office also plays an important function and proactive engagement with the ATO to help enable digital services for member stapling when a member changes jobs is a clear area of opportunity.

This experience should stay within the natural payroll process to achieve maximum efficiency, usability and minimise burden to the employer.

MORE RELEVANT ENGAGEMENT The way superfunds spend member money will be under increasing scrutiny by the regulator in the future. Super fund administration fees and costs will be benchmarked and underperforming super funds will be restricted to take new members.

Traditional marketing, advertising techniques (and sponsorship) that have attempted to capture our attention for a delayed gratification product may need to be re-tested and the investment focused to maximise member engagement at moments that matter, e.g. changing jobs.

CHANGE RESILIENT CAPABILITY Super funds should also look to increase their capability, capacity, and level of innovation to deal with the changing landscape, regulation and increasing community expectations. Incremental and efficient change can make a genuine difference to the superannuation sector that is seeking to become more relevant to their membership.

Advice is another important area,

“Effective member engagement is one the longest unmet challenges for superannuation funds as many members in default funds simply ‘switch off’.”

- Joe Brasacchio particularly with a potential increase of super contributions moving from 9.5% to 12%.

INFORMATION AND EDUCATION As superannuation becomes an even larger proportion of an individual’s wealth, the importance of access to relevant and timely information increases. Analysis by the UWA Public Policy Institute suggests that whilst Australians are relatively financially literate compared to international peers, approximately 45% of adults (8.5m) would be considered illiterate and there are further gaps relating to gender, birthplace, education, and employment.

Was COVID-19 a silver lining for superannuation? Time will tell whether the industry makes good use of this crisis. The optimist in me is hopeful that the industry tackles the new ‘Your Super, Your Future’ changes with courage and innovation beyond just the letter of the reforms. Ideally, this will position the superannuation industry as a leader in the financial wellbeing of Australians, help advisers give sound and certain ‘best interest’ advice to their clients, allow employers to efficiently fulfil their obligations and lastly, enable the Government to set policies that increase the quality of our lives.

Joe Brasacchio is chief technology officer at InPayTech

14/04/2021 12:03:40 PM

26 | Money Management April 22, 2021

Insurance

STANDING THE TEST OF TIME Providing financial advice has managed to stand the test of time, writes Michael Pillemer, despite the rollercoaster of changes which have affected the industry in recent years.

“THE MEASURE OF intelligence is the ability to change,” Albert Einstein said.

You do not need to be Einstein to understand just how much change the financial advice sector has endured over the past three decades, culminating in the Government-imposed Financial Adviser Standards and Ethics Authority (FASEA) standards of the past three years.

If we believe that navigating or embracing change is smart, then financial advisers must rank amongst the most intelligent of professions based purely on the sheer scale of regulatory, cultural, and systemic change they have dealt with.

Rather than look back in anger at the changes wrought upon advisers, this column seeks to understand the drivers of change, and celebrate the triumph of a clear consumer benefit which – arguably – is also the higher purpose of advice: serving the client’s best interest.

This core attribute has forever characterised the heart of the best of Australia’s advice community. Moving forward, it will stand the test of time as the most enduring quality trait of committed, professional advisers operating in the world’s most stringently monitored and regulated advice environment.

My following comments were written with risk-specialist advisers in mind, but also largely apply to financial planners.

THE PAST 50 YEARS AND MORE It is instructive to look back to the ‘beginning’ to understand the root cause of the reputation issues that have fallen at the feet of financial advisers, often without due cause.

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Large, systemic shifts occurred with the arrival of institutional influence in advice. This influence began with large life insurers, emerging from humble beginnings as mutual aid organisations. Life insurance mutual brands became powerhouses in their heyday. Their formation and success in Australia were in response to a failure by private companies to adequately service customer needs.

The mutuals existed for the benefit of their members.

Because mutuals can take a longterm view, they are inherently suited to life insurance due to the long-term nature of policy coverage. With the advent of multi-agents and brokers in the 1970s, advisers were able to offer consumers product choice, which was another major step forward for the consumer.

Problems for the life industry can be traced to the demutualisation of the major life companies during the 1990s.

Mutual life insurers were owned by their policyholders.

Once demutualised, a sudden shift of priorities occurred. First obligations were now to shareholders, no longer was the policyholder prime focus. This fundamental misalignment of interests between shareholders and customers was exacerbated by the short-term pressures that come with being a publicly-listed entity. Shareholders reigned supreme and meeting short-term growth targets became the priority. Watching the woes of once great AMP at present is difficult, but further proof that the demutualisation experiment of the 1990s was flawed.

We saw the (quite chic catchphrase for its time) ‘bancassurance’ model, whereby banks entered the industry by

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Insurance

setting up or purchasing major life insurers and privately-owned financial planning groups. The Commonwealth Bank of Australia (CBA) acquired mutual insurers like Colonial Mutual, a strategy predicated on the vertically integrated business model whereby high-margin in-house products were sold through captive or aligned distribution networks.

Even though it was possible to get approval for external products on bank-owned licensee approved product lists, deliberate roadblocks and conflicted incentives gave the impartial product selection part of advising a client a high degree of difficulty and risk.

The legacy of this model?

Awful. A report by the Australian Securities and Investments Commission (ASIC) in January 2018 showed the product bias of the vertical institutions, where clients invested more than 68% into in-house products and 65% for insurance placement into own products. It was common for the banks to run their licensee businesses at break-even or even at a loss, offset by margins made from in-house products and platform fees. This model clearly fell short when it came to providing advice that was in the client’s best interest.

It was this fundamental misalignment of shareholder interests with customer interests overlaid with the vertically integrated business model that was the root cause of most of the scandals identified by the 2018 Hayne Royal Commission.

The key proposition of Professor Steven Kerr’s 'On the Folly of Rewarding A While Hoping for B’, is that a company’s incentive system will always trump their stated cultural values.

If you tell employees to behave in one way and you incentivise them to behave in another way – which will ultimately win?

Had the major life insurers in Australia read Kerr’s paper, indeed

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if they had not demutualised in the 1990s, breaking the honourable link between owners and customers, then the Hayne Royal Commission and consequential actions of Government may have been avoided.

2021... AND BEYOND Fast forward to a very different time and place, but as always, an environment marked by constant change. The sector has come full circle: the 20 year ‘bancassurance’ promise has collapsed with vertically-integrated business models within the banks offloaded swiftly since 2018.

The separation of product and advice has all but happened largely due to the reputational damage incurred by the banks and the incompatibility between banks and insurers. Westpac brand BT Life, the last of the big bank owned insurers, is now up for sale.

The Hayne Royal Commission also recognised the pitfalls of selling life insurance direct to the public. The final report served serious consequences for outbound phone-based life insurance sales. The report emphasised the importance of quality advice in improving outcomes in the industry, saying the most damaging case studies of the Commission’s hearings involved consumers who were “unlikely to be armed with the information they needed to assess critically the features of the (usually complex) product that was being offered”.

Following public scrutiny of both financial advice and direct insurance over the course of the Commission’s hearings, consumers who need life insurance to protect themselves financially may ask who they can trust to provide the best outcome in terms of product quality and security.

The answer is that financial advice is still the best way for consumers to ensure they purchase the right type of life insurance that will not be denied at claim time.

The divestment by the banks of their life insurance operations and adviser licensees, mass privatisation of the adviser market, constraints on the sale of ‘direct’ insurance to customers, ‘client best interest’ duty, product neutral remuneration structures for advisers and extending unfair contract terms for insurers, has once again given us the opportunity to put client interests at the heart of everything we do as an industry.

All withstanding, adviser and client relationship has stood the test of time.

It is imperative that the life insurance industry continues to step up its advocacy of the value that advisers provide. Government and regulators also need to ensure that advisers are not smothered by reform overload and excessive red tape. Sustainability demands a strong and vibrant non-aligned life advice sector with the interests of the client at the centre of its activities.

I am a strong advocate that both receiving and acting on appropriate life insurance advice can be the most important financial decision an individual will ever make. Suncorp Life research shows a clear link between consumers holding adequate levels of insurance cover and their choice to receive advice from a financial adviser.

Recent research, compiled by CoreData on behalf of CPA Australia, found that respondents reported benefits to their physical and mental health, family and social life, relationships, and work satisfaction from receiving professional advice.

The ‘True Value of Advice' report, with research conducted

by IOOF and CoreData, found the majority (90%) of advised clients said that accessing financial advice has left them in a better position financially.

Especially regarding insurance claims, the proportion of claims paid for individual covers are far higher for claimants with an

“Financial advice is still the best way for consumers to ensure they purchase the right type of life insurance that will not be denied at claim time.”

– Michael Pillemer adviser than for non-advised claims (source: the Australian Prudential Regulation Authority’s (APRA’s) ‘Life Insurance Claims and Disputes Statistics’ report).

But claim time is not the only part of the insurance process where an adviser can assist a client to make a wiser purchase decision. Specialist risk advisers can offer technical skills and product knowledge that ensures a policy fits within the consumer’s circumstances and lifestyle.

Importantly, advisers work with clients to understand the coverage level that they need based on their own personal situation, taking into account their income, dependents, and any debts they have. Consumers not buying through an adviser, risk underinsurance – that is, not gaining enough coverage to meet their financial needs. This is a widespread problem in Australia as many people simply do not realise the level of cover they need if they cannot work due to sickness or injury.

Ultimately, the industry has come full circle. The sector has come to the blunt but honest realisation that the interests of the client must be at the centre of its activities, lest the industry will not prevail. The goal is in delivering best interest outcomes to the client. Most individual advisers focussed on building long-term relationships and trust will, like the rock-solid scientific discoveries of Albert Einstein, continue to stand the test of time.

Michael Pillemer is chief executive of PPS Mutual.

14/04/2021 10:03:23 AM

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Toolbox

BRINGING THE X FACTOR

With factor-based investing on the rise, writes Simon Lansdorp, how should investors determine the relevant factors and the most-effective way to combine these for higher returns?

OVER THE PAST decade, prominent institutional investors have publicly embraced factor-based approaches to securities selection and portfolio allocation.

Concepts such as value investing or low-volatility investing have gained popularity, with the number of retail investors introducing factorbased products into their portfolios also increasing substantially in recent times.

Factor investing is an approach used by asset managers that involves targeting specific drivers of return across asset

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classes, and can help improve portfolio returns, reduce volatility and enhance diversification.

Factor-based strategies can help to significantly improve the return-risk profile of a portfolio, for example, by reducing downside risk or enhancing longterm returns.

Yet not all factor products are created equal. For instance, generic factor-based strategies can be prone to some common pitfalls. Applying an enhanced multi-factor approach can help mitigate many of these issues.

Focusing on efficiently combining factor premiums and making sure premiums do not clash or compete

with each other will ensure a positive exposure to all the desired factor premiums over time.

The rise of factor investing in recent years has largely resulted from large flows into exchange traded funds (ETFs) based on popular smart beta indices.

While these relatively generic products offer exposure to factors in a transparent way and at relatively low management fees, they can incur significant hidden costs.

Smart beta indices are also prone to overcrowding and arbitrage, and while strategies based on generic factor indices may be fully transparent, this

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Toolbox

transparency comes at a cost to investors. It means that other investors can identify in advance which trades are going to be executed, and can opportunistically take advantage of this.

IDENTIFYING THE REQUIRED FACTORS Since the first factors were reported in the 1970s, hundreds of individual factors have been identified in the academic literature and implemented into investment portfolios, with varying degrees of success.

Different asset managers will adopt different factors for a number of reasons, including the individual market and economic nuances at play.

Most factors tend to be related to one another and ultimately measure the same phenomenon, whereas others only seem to work over short periods of time, or in a limited number of segments of the market.

Research shows it is possible to bring the number of factors down to just a handful that consistently perform over multiple time periods and across markets.

Investors should therefore be selective and focus on a small number of factors that are performing with superior riskadjusted returns, proven, and have an economic rationale with strong academic underpinnings.

There are typically four main factors that meet these required criteria across equities, including: 1) Value: The value effect is the tendency of inexpensive stocks, measured for example by the price to-book ratio, to achieve above-market returns. This phenomenon has been extensively documented in the academic literature, where it has been identified over long periods of time and in a variety of regions, including the US,

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Japan, Europe and emerging markets. A concern with conventional value strategies is that these are typically exposed to elevated levels of distress risk and other value traps. However, empirical evidence shows distress risk is not driving the value premium and such value traps are therefore better to be avoided.

2) Momentum: Momentum is the tendency for stocks that have performed well in the recent past to continue to perform well; and for stocks that have performed poorly to continue to perform poorly. The momentum effect was first documented in the early 1990s, and has been confirmed in numerous subsequent studies.

The momentum premium is one of the largest factor premiums, but its sensitivity to market reversals and high turnover are two well-known issues that can deter the implementation of this type of strategy among some asset managers.

3) Low volatility: Low-risk stocks generate higher riskadjusted returns than highrisk stocks, as demonstrated as far back as the 1970s by Robert Haugen and James Heins who showed that low-beta stocks earn higher risk-adjusted returns than high beta stocks in the US market. However, generic low volatility strategies are typically based on a single backward-looking historical risk measure, such as volatility or beta, and this construction may expose the strategy to some pitfalls, such as miscalculated downside risk. A more sophisticated approach can overcome these issues, by taking a multi-dimensional view of risk. This means using

several low-risk variables, that include both long- and short-term statistical data.

4) Quality: The quality effect is the tendency of high-quality stocks to outperform low-quality stocks and the market as a whole. Stocks of companies with high profitability, high earnings quality and conservative management are seen as high-quality stocks. The quality effect was first documented in the early 1990s where (low) accruals were used as an indicator for sound earnings quality. A key concern with generic quality strategies is that they use poor definitions. For example, quality is often measured by financial leverage or earnings stability, which are actually more related to the low volatility factor. Other quality definitions, such as growth in profitability or earnings growth, can have weak or no predictive power for future returns.

WHEN THE TIME IS RIGHT One of the most hotly-debated topics in the field of quantitative finance is whether investors should try to tactically time their exposures to factors. Single-factor portfolios can experience periods of relative underperformance or outperformance that can last multiple years. As a result, timing may appear like an appealing option, in principle.

However, there is little evidence that it is possible to predict accurately which factors are going to do well in the near future, especially if one takes the high transaction costs into account that are involved with timing factors. Instead of tactically trying to identify the best one, it is usually far more rewarding to strategically diversify across factors to be successful.

Continued on page 30

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30 | Money Management April 22, 2021

Toolbox

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

Continued from page 29 By combining various individual factor strategies, it is possible to produce a multi-factor portfolio that offers high exposure to multiple factor premiums, minimises turnover and avoids the individual factors competing against each other. This methodology results in efficient and balanced exposure to all proven factors. This leads to a better expected risk-adjusted return in the long-run for the multifactor equity portfolio.

ADDING SUSTAINABILITY INTO THE FACTOR MIX As with many other investment philosophies, sustainability is increasingly front of mind for managers needing to cater to the demands of environmentally-conscious investors in both Australia and globally.

Excluding stocks with poor environmental, social and governance (ESG) ratings is now regarded as a viable investment option, with performance now stacking up accordingly.

Factor strategies and sustainable investing can make a good combination. The rules-based nature of quant models makes it relatively easy to integrate additional quantifiable variables into the security selection and portfolio construction process. From this perspective, integrating sustainability criteria into investment methodology can be similar to a standard factor-based approach, where securities are selected based on their factor characteristics.

Through a factor approach, asset managers can create an investment portfolio that strikes a balance between sustainability objectives and risk and return expectations for each client. Empirical research increasingly points towards the ability to achieve improved sustainability profiles with proven return factors.

One approach is for the manager to ensure that the weighted ESG score of every portfolio is at least as high as that of the reference index. If the portfolio generated by the stock selection model scores below average on sustainability, the portfolio construction tool will select stocks that improve the portfolio’s sustainability profile.

Securities from companies with a higher ESG score are therefore more likely to be included in the portfolio. Subsequently, this approach positively screen stocks, in contrast to an exclusion policy that only allows negative screening. This enhanced form of ESG integration ensures the risk of being overexposed to less sustainable companies is avoided, while maintaining exposure to top-ranked stocks.

Using more generic approaches to sustainability can present issues, including the simplicity of the approach to ESG scoring leading to undesired biases, and the level of sustainability integration these products offer often being too basic, making it impossible to adjust them to specific client needs.

Factor investing is a unique to forming an investment portfolio, and gives more control to asset owners on how their portfolio behaves and what it looks like. The application of factors enhances diversification, generates strong returns and, importantly, assists in managing the risk profile of a portfolio.

Simon Lansdorp is portfolio manager – factor investing equities at Robeco.

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1. What are the main benefits of a factor investing approach? a) Improved portfolio outcomes b) Reduce volatility c) Enhance diversification d) All of the above 2. Which of the following is NOT widely considered to be a factor premium? a) Momentum b) Value c) Corporate governance d) Quality 3. What is the main concern with using quality as a factor premium? a) Poor definitions b) Market inconsistencies across jurisdictions c) Doesn’t adequately account for changes in monetary policy d) It can be a compensation for risk 4. Momentum is considered a strong factor premium for many asset managers due to which of the following? a) The tendency of high-quality stocks to outperform low-quality stocks b) The likelihood that stocks that have performed well in the past will continue to perform well in the future c) Low-risk stocks generate higher risk-adjusted returns than highrisk stocks d) The tendency of inexpensive stocks, measured for example by the price to-book ratio, to achieve above-market returns 5. Sustainability is increasingly being integrated into factor-based portfolios. Why? a) The asset manager feels a sense of obligation b) Media coverage of sustainable investing is driving awareness among investors c) To achieve a balance between financial imperatives and ethical values d) To improve diversification across asset classes

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/bringing-x-factor

For more information about the CPD Quiz, please email education@moneymanagement.com.au

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Send your appointments to chris.dastoor@moneymanagement.com.au

Appointments

Move of the WEEK Alexis George Chief executive AMP

AMP has a new chief executive with Alexis George replacing Francesco De Ferrari.

The company announced to the Australian Securities Exchange (ASX) that George would replace De Ferrari who was retiring from the role as the company completed its

Funds management industry veteran, Michael Ohlsson, has become part of Evergreen Consultants as an executive director and partner in the business.

Evergreen Consultants founder and director, Angela Ashton, said the company was currently going through a significant growth phase.

In his new role, Ohlsson would be responsible for operations, sales and marketing, allowing Ashton to focus on her investment leadership role.

At the same time the company announced the recruitment of Lia Gunawan as the strategic partnerships manager, reporting to Ohlsson.

Financial advice technology firm intelliflo has appointed MLC group executive advice, Geoff Rogers, as its first head of Australia to support its expansion and growth into the Australian wealth management market.

Rogers would begin in the role on 14 June in Sydney and report to chief sales officer for the UK and Australia, Johann Koch. intelliflo chief executive, Nick Eatock, said: “Geoff is an important addition to our global business and his extensive experience and expertise will further strengthen our capabilities to support Australian financial advisers with the most advanced open architecture solutions to grow their businesses”.

Former Cbus Super executive, Michelle Boucher, has been

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portfolio review.

George would join AMP from ANZ where she had been deputy chief executive as well as group executive, wealth, Australia.

De Ferrari would continue to lead AMP for an interim period to ensure a smooth handover.

appointed deputy chief executive at First Super.

Boucher would take on responsibility for business development, marketing and communications functions.

Boucher worked at Cbus for over seven years until early 2021 and held the roles of group executive, people, technology and enablement; group executive, member experience; executive manager, member experience and marketing and initially, executive manager, brand, marketing and communications.

First Super CEO, Bill Watson, said: “Michelle is a highly accomplished and experienced leader of the superannuation industry in Australia. We welcome Michelle to First Super, with great confidence that she will be a significant contributor to our fund”.

Synchron has appointed Ben Donohue as state manager for Queensland, effective from 6 April, 2021.

Donohue began working in financial services in 2005, and was most recently a business development manager with Challenger Limited in Brisbane.

His career in financial services began with ING and he then spent over 12 years in business development roles with Asteron Life before joining Challenger.

Donohue had experience in retail life insurance, retirement income and aged care.

AMP chair, Debra Hazelton said De Ferrari would continue to work with the board and lead AMP’s key strategic initiatives including discussions on the proposed transaction for AMP Capital’s private markets business with Ares Management Corporation.

MLC Asset Management has made two senior appointments in its managed accounts team, appointing Neil Gellett as head of managed accounts and Brent Bevan as head of investment consulting – managed accounts.

Gellett had over 20 years’ experience in the wealth management industry and was most recently head of product at Xplore Wealth, and before that held similar positions at Perpetual and BT Financial Group.

Bevan had 18 years’ experience and joined from Mercer where he previously spent six years with Commonwealth Bank, where he was most recently head of research for the bank’s multiple advice licenses.

He had also held various investment and research roles at Suncorp and Perpetual.

Mercer has appointed Helen Murdoch as sales and commercial acceleration leader and Saranne Brodrick as chief strategy officer.

Murdoch would commence in June and would be responsible for the growth agenda of the business.

She joined from MLC where she held the role of general manager – corporate superannuation for MLC Masterkey and Plum while Brodrick joined from Deloitte.

Murdoch would return to Mercer after previously having held leadership roles from 2011 to 2018.

In her previous role leading Mercer’s multi-manager funds, she drove significant growth

of the business’ funds under management.

Brodrick would be accountable for the business’ analytics, insights and strategic planning in her role as to support the firm’s sustainable growth.

Mercer had also appointed Alice Williams and Dr Susan Gosling to Mercer Investments (Australia) Limited and Jim Minto to Mercer Superannuation (Australia) Limited as non-executive directors.

Natixis Investment Managers has appointed Tim Ryan as chief executive and he will be part of the Natixis senior management committee in charge of asset and wealth management.

Commencing from 12 April, 2021, he would succeed Jean Raby.

Ryan started his career in the asset management industry in 1992, working in quantitative research and equity portfolio management at an HSBC subsidiary.

In 2000, Tim joined AXA as head of quantitative asset management before becoming chief investment officer for the insurance business in Japan in 2003 and then for Asia.

In 2008, he was appointed chief executive in charge of various regions, including Japan and Europe and the Middle East, for AllianceBernstein’s US asset management subsidiary.

In 2017, he joined Generali as group chief investment officer for insurance assets and global chief executive of asset and wealth management.

14/04/2021 12:30:57 PM

OUTSIDER OUT

ManagementApril April22, 2, 2015 32 | Money Management 2021

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

Being out-Bragged by an ex-garbo and an old workmate OUTSIDER notes that the class wars between industry superannuation funds and retail master trusts have never really ended.

For as long as he has written about the superannuation industry he has noted that there has been little love lost between the Financial Services Council (FSC) as the representative organisation for retail master trusts and Industry Super Australia as the representative organisation for industry superannuation funds.

But there are occasions on which the FSC and industry super people can agree on something and it appears that something is former FSC policy hipster and now NSW Liberal Senator, Andrew Bragg.

Thus, Outsider was amused to see Bragg working alongside former Transport Workers Union national secretary and now NSW Labor Senator, Tony Sheldon during the recent hearings of the Senate Economics Legislation Committee and the questioning of the FSC’s deputy chief executive, Blake Briggs.

With Bragg sitting in as acting chair of the committee, Sheldon did not miss his opportunity to nail his colours to the mast in

the following exchange: Senator Sheldon: I’ll make it a good one.

This is for Senator Bragg, but my introduction will be that I was a member of TWUSuper. I’m still in TWUSuper, of which Senator Bragg is well aware.

Mr Briggs: You haven’t exercised choice yet, Senator.

Senator Sheldon: Also, I was a national secretary of the Transport Workers Union. I was very happy to be a garbo as well in my past life, and also a trustee for TWUSuper.

Acting chair: I thought it was Big W. Senator Sheldon: Senator Bragg might want to declare his previous employment with FSC as well.

Acting chair: I’m very happy to declare any previous employment, but I think— Mr Briggs: To be fair, I’m trying to forget it, to be honest.

No incentive applies if Francesco has left the building OUTSIDER well understands that diligent corporate house-keeping waits for no-one and, at times, can be quite revealing.

Thus, he notes that exactly two weeks after the April Fool’s Day confirmation that AMP Limited chief executive, Francesco De Ferrari would be, as predicted, leaving the building the corporate house-keepers got around to adjusting the documentation for the AMP Annual General Meeting.

In a brief, but nonetheless eloquent, announcement to the Australian Securities Exchange (ASX) AMP noted that the board “confirms the withdrawal of Resolution 4 from its 2021 Notice of Annual General Meeting which relates to approval of a long-term incentive for the chief executive officer”.

“As announced on 1 April, 2021, Francesco De Ferrari will retire from the role as the company completes its portfolio review,” the ASX announcement said.

AMP shareholders were assured that the withdrawal of the aforementioned Resolution 4 would not affect the status of their proxy documents.

All of which must have come as a great relief to the shareholders who might have spent the early weeks of April pondering just how long the board had originally envisaged De Ferrari would be hanging about.

Perhaps we will never know what Francesco’s proposed long-term incentive would have looked like, and we’ll now certainly never know whether he’d have earned it.

Why spend $33k when you can go to the pub?

OUTSIDER chuckled when he read that Australian Securities and Investments Commission executives paid $33,000 to a teambuilding consultancy.

It reminded Outsider of a time when he worked at an organisation bent on team-building and the managing director insisted the entire management team participate in mountain bike riding as it was his new hobby.

Outsider need not go too deeply into the specifics of what happened during the activity but you, dear reader, are correct in guessing that Outsider politely declined participation but watched on as there were two trips to the ER, stitches made, muscles torn, and egos crushed.

When, Outsider wonders, did team building suddenly need to cost $33,000 and trips to

OUT OF CONTEXT www.moneymanagement.com.au

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the hospital?

Outsider firmly believes that the good ol’ days of a trip to the pub will suffice and that any injuries that may be result from said trip are the sole responsibility of the drinker and usually a sign of a good night and a way to truly bond with colleagues.

What is more, what happens at the pub stays at the pub.

Outsider will drink to that.

"There is now a market for crazy."

"Retirement should be good. It should even be fun."

– Former Prime Minister, Malcolm Turnbull.

– Shadow Assistant Treasurer, Stephen Jones.

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15/04/2021 1:03:00 PM