Money Management | Vol. 35 No 7 | May 6, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 7 | May 6, 2021

18

SMSFs

Limited advice changes

22

INVESTMENT

Risks of rising inflation

EOFY strategies

AFCA panel’s $30,000 lookback fee

PROPERTY

BY MIKE TAYLOR

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Are we back to normal?

DESPITE the last year of market uncertainty and imposed drastic lifestyle changes, with the majority of office workers forced to embrace new remote working arrangements being one of the most significant changes, COVID-19 was not the catastrophe for the property investments sector that everyone had expected. Instead, fund managers said the pandemic gave them the opportunity to stress-test their portfolios.

With non-discretionary retail and industrial sectors continuing to hold up extremely well throughout the last few months, it was the office sector that faced headwinds, leaving investors puzzled for a moment about the future of CBDs. At the same time, large shopping malls were the ones that had seen the most valuation softness through the pandemic due to significantly reduced foot traffic but there were also questions over the future sustainable rental levels in those malls.

What is more, Ross Lees, Centuria’s head of funds management, stressed interest from the offshore investors remained strong during the pandemic despite travel restrictions.

“What we actually saw in 2020 was the largest buyer cohort of Australian office assets came from foreigners. We saw investors particularly from Singapore saying that Australia looks like an incredibly attractive investment destination to them,” he said.

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30

TOOLBOX

Full feature on page 14

THE Australian Financial Complaints Authority (AFCA) charged nearly $30,000 for a panel considering an old complaint in the wake of the Federal Government allowing complaints lookbacks to 2008.

As well, significant concern has been expressed over the manner in which AFCA has moved into hearing what would be regarded as “wholesale client” complaints.

The Association of Financial Advisers (AFA) has told the Federal Treasury about the financial advice community’s concern about the Government’s decision in February, 2019, to allow AFCA to consider complaints going back to 2008 for a 12-month period from 1 July, that year.

“This was extending the timeframe back to a point beyond

where it was mandatory to retain files, and licensees could be forced to defend matters for which they no longer held the records,” the AFA said in a submission.

“This was a decision of Government, however it had a broad impact. We have recently become aware of the fees that AFCA were charging for considering these older complaints, where a decision by a panel, for a complex matter, could cost $29,860,” it said.

“Whilst this is not a matter that impacts our members, who predominantly operate in the personal advice to retail clients space, we have also become aware that there is a genuine issue with respect to how AFCA has become an attractive option for wholesale clients.”

Continued on page 3

Three-month rule won’t change: FASEA

BY CHRIS DASTOOR

IF advisers are holding out any hope they might have more opportunities to sit the Financial Adviser Standards and Ethics Authority (FASEA) exam by the 1 January, 2022, deadline, FASEA has said there won’t be any change to the three-month rule.

The three-month rule meant advisers could only register and sit every second exam, as it was held roughly every two months.

It typically took six to seven weeks for advisers to receive their exam results and registrations were usually closed for the next exam by that point.

Stephen Glenfield, FASEA chief executive, said advisers had been given multiple opportunities to pass the exam.

“If an adviser sat the June 2019 sitting, they had five Continued on page 3

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May 6, 2021 Money Management | 3

News

Adviser identifies dodgy super fund outcomes assessments

BY MIKE TAYLOR

AMID the Federal Government’s release of the regulatory underpinnings of its controversial Your Future, Your Super legislation, a South Australian academic researcher and qualified financial planner has raised serious questions about the validity of the member “outcomes assessments” being published by superannuation funds.

Mark Bastiaans, a masters research candidate at the University of South Australia, has undertaken research which concluded that the MySuper Dashboard ‘representative member’ investment return used by many superannuation funds “does not in fact accurately ‘represent’ what individual members actually earn”.

“In fact, the representation is highly inaccurate,” he claims.

“The reason why members will experience different outcomes is due to individuals

AFCA panel’s $30,000 lookback fee Continued from page 1 “This seems inconsistent with the intent,” the AFA submission said.

“The origins of external dispute resolution (EDR) schemes was a mechanism for consumers to seek redress with respect to less material matters, in a manner where it was not necessary to seek the support of lawyers. The limits and caps have risen significantly since that time. Seemingly the current model is very different to where this originated,” it said.

“The much higher limits and the model that is strongly biased in favour of clients has a very big impact on the Professional Indemnity (PI) Insurance market for financial advice, and PI Insurance is of course mandatory.

“Premiums have been rising rapidly in recent years and there are serious concerns about this market going forward. AFCA is an important factor in the considerations of PI Insurers. This adds to the rapidly rising cost of financial advice and the reduction in access and affordability of financial advice.”

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account characteristics, in particular their account balance, presence, and timing of transactions and the impact different fee structures used by super funds (flat dollar and percentage based),” he wrote.

Bastiaans said his findings were based on a study that used de-identified confidential member level data (consisting of transaction dates and categorised amounts) and Microsoft Excel’s ‘eXtended Internal Rate of Return’ (XIRR) formula to calculate a money-weighted personal rate of return for 53,770 members

invested exclusively in the MySuper product of a single Registrable Superannuation Entity (RSE) between 1 July, 2018, and 30 June, 2019.

Bastiaans’ findings revealed the range of investment returns was 98.06% (minimum -63.90% and maximum of +34.16%).

“Using the MySuper Dashboard ‘representative member’ investment return of 7.05% as a benchmark, 84.2% of the study sample received a personal rate of return below the MySuper Dashboard investment return,” he wrote.

“The evidence from the study points to the fact that the MySuper Dashboard ‘representative member’ investment return does not in fact accurately ‘represent’ what individual members actually earn.”

“Those at the lower end of account balance earn significantly less than the ‘representative member’. Within this cohort are the young, paying insurance premiums, and those in regional and remote locations,” Bastiaans wrote.

Three-month rule won’t change: FASEA Continued from page 1 opportunities to December 2020, which was further extended to eight opportunities to pass the exam before 1 January, 2022,” Glenfield said.

“The first exam offered by FASEA was sat in June 2019, and since then (as of the March sitting 2021) there have been 11 exams offered, providing over 700 sessions (430 metropolitan sessions and 272 regional location sessions).

“By the end of December 2021 (the transition date for existing advisers), FASEA will have offered 15 exam sittings.”

There was no intention to return results faster either and it was generally expected that advisers who did not pass the exam would need more time to prepare for another attempt.

“Advisers who are unsuccessful in any exam are provided with individual feedback on the knowledge and curriculum areas where they have performed below the pass mark,” Glenfield said.

“The three-month requirement enables these individuals time to prepare and revise the appropriate areas before they are eligible to re-sit the exam, therefore, advisers are eligible to sit every second exam sitting.”

With four sittings left, over 12,000 advisers had passed the exam – which accounted for only roughly 57% of advisers on the Australian Securities and Investments Commission’s (ASIC’s) Financial Adviser Register (FAR).

The last exam, which was held in January and February, had the lowest pass rate as only 67% of advisers passed.

Exam Dates

Registration Dates

Locations

Sitting 12

20 May 25 May

8 February 30 April

Sydney, Canberra, Melbourne, Brisbane, Adelaide, Perth, Gold Coast, Rockhampton, Hobart, Port Macquarie, Newcastle, Wollongong, Bathurst/Orange, Wagga Wagga, Tamworth, Bunbury and Remote Proctoring.

Sitting 13

15 July 20 July

5 April 25 June

Sydney, Canberra, Melbourne, Brisbane, Adelaide, Perth, Darwin, Gosford, Sunshine Coast, Townsville, Mackay, Albury/Wodonga, Geelong, Ballarat, Traralgon, Launceston and Remote Proctoring.

Sitting 14

9 September 14 September

31 May 20 August

Sydney, Canberra, Melbourne, Brisbane, Adelaide, Perth, Hobart, Gold Coast, Cairns, Newcastle, Coffs Harbour, Port Macquarie, Wollongong, Bendigo and Remote Proctoring.

Sitting 15

4 November 9 November

26 July 15 October

Sydney, Canberra, Melbourne, Brisbane, Adelaide, Perth, Darwin, Sunshine Coast, Rockhampton, Toowoomba, Gosford, Bathurst/Orange, Geelong, Launceston and Remote Proctoring.

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4 | Money Management May 6, 2021

Editorial

mike.taylor@moneymanagement.com.au

TIME FOR ADMINISTRATIVE FLEXIBILITY AROUND FASEA EXAM

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

An acceleration in the exit rate of financial advisers is guaranteed as the Financial Adviser Standards and Ethics Authority exam process comes to a close which is a good reason to inject some flexibility into the process.

IT WILL have escaped no-one’s attention in the financial planning industry that the Financial Adviser Standards and Ethics Authority (FASEA) exam process is reaching its crescendo – that unless advisers sit the exam in the next six months they will quite simply have missed out.

And, by missing out, those advisers will be obliged to cease practicing and, very likely, feel the need to exit the industry.

Quite simply, existing advisers are required to pass the exam before 1 January, next year, and there are now extremely limited opportunities to do so.

According to the FASEA exam timetable there are now just three sittings left, after those currently being held in May – July, September and November.

After that, legislation dictates the door is closed.

All of the above explains why the May sittings have been amongst the most heavily booked and why the heavy bookings seem likely to continue through July, September and November as financial advisers rush to meet what represents one of the

key requirements under the FASEA regime.

It is in these circumstances, and the reality that exam failures will accelerate the already disturbing exit of advisers from the financial planning industry that the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, would be well-advised to urge those running the exam to inject some flexibility and exercise a little more discretion.

The injection of that flexibility and discretion would seem necessary in circumstances where the current rules preclude someone failing the July sittings of the exam resitting within three months, meaning that they probably only have one shot left before the processes closes for good. It also means that those sitting in September may be squeezed out entirely.

Financial advisers and licensees who have closely monitored the data around adviser exits have frequently told Money Management that exam results from the September sittings will represent the start of what is likely

to be the most significant outflow of advisers which will then be magnified in the wake of the November exam results.

On past experience, around 70% of advisers will pass those exams meaning around 30% will fail but the impact on exits between September and December may be more significant given the number of advisers who have actually booked to sit or resit the exam.

That is why some pragmatic flexibility needs to be exhibited by both the Government and those remaining in FASEA to oversee the delivery of the exam.

While there were sound enough administrative reasons behind the three-month rule, it is now obvious that it is going to act as a significant inhibitor to slowing the already worrying rate of exit by experienced financial advisers. In those circumstances, consideration needs to be given to waiving the three-month rule to maximise the opportunities for advisers to succeed.

Associate Editor - Research: Oksana Patron 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 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 Account Manager: Amelia King Tel: 0407 702 765 amelia.king@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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

Subscription rates: 1 year A$244 plus GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the editor. © 2021. Supplied images © 2021 iStock by Getty Images. Opinions expressed in Money Management are not

Mike Taylor Managing Editor

necessarily those of Money Management or FE Money Management Pty Ltd.

WHAT’S ON RG 146 Superannuation AFCA: Learnings Virtual Workshop from the last 12 Webinar months 10-14 May www.superannuation.asn. au/events

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CPD Webinar 11 May fpa.com.au/events

ASFA Budget Briefing 2021 AFIA Annual Sydney/Melbourne/ Conference Brisbane 12-14 May superannuation.asn.au/ events

Sydney, NSW/Virtual 18 May apra.gov.au/events

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29/04/2021 10:48:07 AM

May 6, 2021 Money Management | 5

News

Fintech Midwinter announces integration with myprosperity

Super performance test to include admin fees

BY CHRIS DASTOOR

BY JASSMYN GOH

FINANCIAL advice fintech Midwinter has announced an integration with myprosperity, a client portal solution for financial advisers and accountants, where AdviceOS can now pull client data from myprosperity.

Ivon Gower, Midwinter head of product, said the addition of myprosperity to Midwinter’s growing list of partnerships with leading specialist technology providers.

“We are committed to working with technology providers that enhance our offering to the financial advice industry,” Gower said.

“Our partnership with myprosperity supports this broader integration strategy designed to deliver increased value and efficiency to AdviceOS customers by integrating with the industry’s leading solutions.”

Peter McCarthy, myprosperity founder and

THE announcement that the Government’s superannuation performance test will include administration fees and will be more accurate has been welcomed by Super Consumers Australia.

Super Consumers’ director, Xavier O’Halloran, said admin fees were one of the biggest drains on people’s retirement savings.

“Treasury modelling shows including admin fees will turn up the heat on even more funds, in a move that is likely to drive fast improvements to the super savings of a million more people,” he said.

“These reforms will significantly boost the outcomes for consumers, but there remains work to be done on the Your Future, Your Super package.

Currently, not all investment options face scrutiny, this needs to change and be enshrined in legislation.

“It also gives wide discretion to the minister of the day to ban investments.

We think scrutiny is a good idea, but we’d be better served by a regulator following a clear process.”

O’Halloran said the Australian Prudential and Regulation Authority (APRA) and the Australian Securities Investments Commission (ASIC) should be the entities to jointly exercise this discretionary power under a similar regime to other financial products they regulate.

“Predictably, the industry has used scare tactics to sink the reforms altogether rather than offer constructive feedback,” he said.

“It’s time for funds to put members first and stop trying to delay reforms.

Funds have been on notice for many years that they need to drop fees and lift performance and have nearly had a year to prepare for this test. If funds aren’t ready, they aren’t doing right by their members.”

The super performance test would roll out on 1 July, 2021, and the Senate Economics Legislation Committee was expected to release its report on the reforms at the end of April.

executive director, said the integration of the firm’s client portal with Midwinter’s AdviceOS would be a “gamechanger” for progressive firms looking to leverage technology to grow their revenue, increase efficiencies and create a digital presence.

“We have experienced

significant growth in-app downloads, digital doc signing, and in-app fact finds highlighting the demand from clients for more digital capabilities to meet their financial needs,” McCarthy said.

“Connecting myprosperity and AdviceOS is a win-win for advisers and their clients.”

Suncorp sells its super business to LGIA Super

BY MIKE TAYLOR

SUNCORP has sold its Australian wealth business, Suncorp Portfolio Services to LGIA Super.

The company announced the transaction to the Australian Securities Exchange (ASX) saying it had followed a strategic review started in

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February, last year.

Confirming the transaction, Suncorp group chief executive, Steven Johnston, said the sale agreement was a good outcome for the firm’s 137,000 superannuation members and would continue the simplification of its portfolio.

The announcement noted that LGIAsuper was progressing towards a merger with Energy Super and that together with the Suncorp Wealth business, the combined business would have around $28 billion in funds under administration and approximately 250,000 members.

It said total consideration was estimated at $45 million, which included a fixed amount of $26.6 million, plus regulatory capital.

Following completion of the sale, Suncorp would enter into an agreement with LGIAsuper to distribute Suncorp superannuation products to Suncorp customers for 18 months.

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6 | Money Management May 6, 2021

News

ASIC only allowed to ban financial advisers under new single disciplinary body regime

BY JASSMYN GOH

FINANCIAL advisers who breach obligations under the Corporations Act 2001 where the Australian Securities and Investments Commission (ASIC) believes banning is not appropriate will be subject to the Government’s proposed single disciplinary body, the Financial Services and Credit Panel (FSCP).

The new regime’s exposure draft legislation said the FSCP would consider ASIC’s evidence and decide whether to impose an administrative sanction,

infringement notice, both, or no action.

The panel would consist of at least two industry representatives and an ASIC staff member as chair.

The minister of the day would determine the people eligible to be appointed to an FSCP. A person needed experience or knowledge in at least one of the fields: business, company administration, financial markets, financial products and services, law, economics, accounting or taxation.

When ASIC convened an FSCP, ASIC must appoint at least

two members from this pool. An ASIC officer would be the chair of each FSCP. Financial planners, financial advisers, and tax financial advisers who were authorised to provide personal advice to retail clients would be subject to the FSCP. People only providing general advice would not be subject to the panel.

Stockbrokers, actuaries, and insurers were all subject to disciplinary action by the FSCP if they were giving personal advice to retail clients.

“An Australian financial services (AFS) licence holder will only be subject to the FSCP where it is also a relevant provider and the breach relates to that person’s conduct as a financial planner or adviser.

Otherwise, breaches by a licensee will continue to be dealt with by ASIC,” it said.

“The FSCP can impose a range of administrative sanctions, an infringement notice or recommend that ASIC commence court proceedings seeking a civil penalty.

“The administrative sanctions that the FSCP can apply are a warning or reprimand, directions to the adviser to undertake additional training or supervision, or suspending or cancelling the adviser’s registration for a specified period.”

The FSCP would also be able to improve an infringement notice in specific breaches carved out as Restricted Civil Penalty Provisions (RCPPs).

These breaches included: • Not meeting the education and training standards; • Not complying with the code of the ethics; • Not meeting the requirements for supervising a provisional relevant providers; • Not following a direction or order given by the Financial Services and Credit Panel; and • Giving financial advice while unregistered.

Currently, an infringement notice amount for an alleged contravention of a RCPP was 12 penalty units for a single contravention, which was $2,664.

Treasury to assume control of LIF review

BY CHRIS DASTOOR

TREASURY will now assume responsibility of the Life Insurance Framework (LIF) review, preventing overlap with the quality of advice review.

Speaking at the Financial Services Council (FSC) Life Insurance Summit, Senator Jane Hume, said: “One of the things we’ve been trying to do, and you will see this around the announcement of the single disciplinary body, is to make sure we have alignment in the work we’re doing.

“A lot of good work has been done, particularly by the FSC on financial advice and we would like to see this feed into the quality of advice review.

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“But it seems silly to have one review on life insurance at ASIC and another review about the quality of advice in Treasury when there’s going to be so much overlap.”

Hume noted the review would consider the “full breadth of issues impacting on both quality and affordability of all forms of financial advice”.

Hume said ASIC had already started its data collection but that data would now come back to Treasury for analysis.

“As we undertake the quality of advice review, important issues like the degree of underinsurance and maintaining access to affordable, quality advice will be at the forefront of our minds,” she said.

“These elements will enable us to

achieve the objective of a thriving life insurance sector that provides access to quality insurance products tailored to meet the needs of Australians and their loved ones at a time when they need it most.”

28/04/2021 4:25:27 PM

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8 | Money Management May 6, 2021

News

APRA data confirms value of life/risk advice

BY MIKE TAYLOR

THE Australian Prudential Regulation Authority (APRA) has delivered new data confirming that life/risk advice delivers better outcomes in terms of successful claims.

APRA’s latest 'Life Insurance Claims and Disputes Statistics‘ report covering the 12 months to 31 December, 2020, concluded that, generally, “individual advised business shows higher admittance rates than individual non-advised for the same cover type”.

It said this could be due to the policyholder having clearer expectations up front of what is covered by the product, or that an adviser discouraging the policyholder from lodging a claim that is not covered by the policy.

It said the exception was individual advised accident insurance which had an unusually low admittance rate.

The APRA analysis said that, in general,

individual products had higher acquisition costs associated with the policy compared to group products.

“As this is reflected in the premium charged, the claims payments for these products will generally be of a lower percentage of the premium income.”

It said disability income insurance (DII) business had the highest claims paid ratio for all distribution channels.

“While a ratio of over 100% suggests good value for policyholders, this is not sustainable and will threaten the ongoing availability of IDII for the Australia community in the future,” APRA said.

“With the release of the final sustainability measures and the introduction of the individual DII capital charge, APRA is working with the industry to move the product to a sustainable state and thereby deliver better outcomes for policyholders.”

Advisers worried about the cost of the single disciplinary body FACED with increasing costs which are adding to the pressure on financial advisers, industry organisations have signalled they are going to be pressing the Federal Government to absorb or at least mitigate some of the cost of the new single disciplinary body.

As well, they are concerned at the likely cost of the annual registration fees which will have to be paid by advisers.

On the back of the Government releasing the exposure draft legislation which broadly explains how the new single disciplinary body will work, there was general agreement among industry executives that some rationalisation of costs was needed in circumstances where the new structure entails pre-existing systems and operations.

Association of Financial Advisers (AFA) acting chief executive, Phil Anderson, said it had always been inevitable that the establishment of the single disciplinary body would bring another layer of cost and it was important to recognise the impact.

He said the AFA would be making a comprehensive submission to Treasury responding to the exposure draft legislation which would include pointing

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out the manner in which financial advisers and licensees were already being impacted by regulatory costs.

A number of dealer group executives told Money Management that they believed the Government should be urged to use the establishment of the single disciplinary body as a catalyst for an overall review of the regulatory layers, particularly in circumstances where the Financial Adviser Standards and Ethics Authority (FASEA) was being removed, and the those of the Tax Practitioners Board (TPB) subject to some consolidation.

However, they said that the recent substantial increase in the Australian Securities and Investments Commission (ASIC) levy had left many advisers concerned about their continuing financial viability.

“They will doubtless want to delay any wind-back of the existing regulatory structures until they see how this single disciplinary body structure works, but they simply cannot continue to just build one layer of regulation and cost on another,” a senior executive said.

“They cannot hope to achieve a more affordable advice environment if they keep imposing regulatory layers and costs.”

How FASEA’s influence will linger beyond 1 January 2022 THE Financial Adviser Standards and Ethics Authority (FASEA) will live on until it ceases to exist legislatively on 1 January, next year, but its decisions including the code of ethics will continue until amended by the minister.

That is the bottom line of the exposure draft legislation released by the Government around the new single disciplinary body which makes clear that the authority’s decisions will continue to remain in force.

“This means that financial advisers will need to continue to meet the education and training standards and the code of ethics made by FASEA, until such time as the minister amends these standards or makes new standards,” the explanatory memorandum said.

The exposure draft also makes clear that it is the Australian Securities and Investments Commission (ASIC) which will be the ultimate decision-maker about whether financial advisers who have qualified overseas will be eligible to practice in Australia.

“A person who wants to be a financial adviser in Australia and who has completed a foreign qualification may apply to ASIC for approval of the foreign qualification,” it said. “ASIC may approve an application if it is satisfied that the foreign qualification is equivalent to a degree or qualification approved by the minister and the person has completed any courses that ASIC requires the person to complete.”

The exposure draft explanatory memorandum said this “ensures that persons who study outside Australia meet the same high standards for providing financial advice, which is important for maintaining confidence in, and the integrity of, our financial advice industry”.

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May 6, 2021 Money Management | 9

News

Annual financial adviser registration at heart of new disciplinary regime

BY JASSMYN GOH

THE Government has proposed to introduce a new annual registration system for financial advisers and to create new penalties and sanctions to apply to financial advisers who have been found to have breached their obligations, including deregistration.

In its single disciplinary body for financial advisers consultation draft legislation, the Government also proposed to expand the role of the Financial Services and Credit Panel (FSCP) to allow it to cancel financial planner registrations, and act against planners, licensees, and directors of licensees.

“The draft legislation expands the role of the Financial Services and Credit Panel within

the Australian Securities and Investments Commission (ASIC) to exercise the functions of the single disciplinary body for financial advisers,” it said.

“It proposes to create new penalties and sanctions to apply to financial advisers found to have breached their obligations and introduces a new annual registration system for financial advisers.”

The draft legislation would also remove the requirement for tax financial advisers to be registered with the Tax Practitioners Board, and ensured relevant tax experts were appointed to the FSCP to hear disciplinary matters that involved tax-related advice.

Submissions for the consultation would be open until 14 May, 2021.

Why the FSC wants to do away with SOAs

BY CHRIS DASTOOR

AS part of its green paper proposal, the Financial Services Council (FSC) seeks to do away with “overregulated” statements of advice (SOAs) and replace them with simpler, consumer-focused letters of advice.

Research as part of its green paper, in conjunction with consumer testing by research agency Pollinate, found two-in-three Australians supported simpler financial advice, reducing paperwork and complexity – as long as consumer protections weren’t eroded.

Zach Castles, FSC policy manager for advice, said the FSC had proposed to bring in a letter of advice that would have a similar set of requirements to SOAs, but be directly scalable.

“So the advice experience or the document that is given to consumers is more built around what they would expect and what they need, rather than backing them in various forms of disclosure,” Castles said.

Castles said there was not a desire to go back to wholesale deregulation and that was not where the industry was at.

“But there is a strong desire for advice that’s easy to understand and a seamless consumer experience,” Castles said.

“People do want the protections to be maintained, but at the same time, the message from the research is we need to think about the format of that and what is actually being kept in the file notes.”

Consultation on the FSC green

paper was open until 1 July, 2021, which they intended to use to finalise a policy position for a white paper later this year.

Sally Loane, FSC chief executive, said the organisation was keen to hear from a wide range of stakeholders, particularly advisers.

“As leaders in policy development, we have a great opportunity to re-set the system for affordable, quality and professional financial advice, a critical component in enhancing the savings, wealth and peace of mind for every Australian,” Loane said.

“The status quo will mean advice will consolidate in the wealthy elite, and will remain out of reach for the average consumer.”

The green paper research also found:

• That while 26% of consumers had sought financial advice, 42% remained open to it but felt they could not afford it or access it; • If you had purchased financial advice today you were more likely to be in your 60s and earning a six-figure income than someone who was renting their own home or living with their parents; • If you were considering purchasing financial advice but had not yet done so, you were more likely to be female in your mid 30s living in an area like inner city Melbourne or Sydney; and • If you were in your 50s and had limited levels of education you were statistically unlikely to had ever sought financial advice.

WHETHER IT’S SUPPORTING YOUR CLIENTS THROUGH EVERYDAY LIFE EVENTS, NATURAL DISASTERS OR A GLOBAL PANDEMIC, AIA AUSTRALIA IS HERE FOR YOU AND YOUR CLIENTS – BOTH NOW AND INTO THE FUTURE.

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28/04/2021 2:18:39 PM

10 | Money Management May 6, 2021

News

ASIC moves to penalise firm for AFCA failing Investment, not

advice is the big cost for super funds

BY CHRIS DASTOOR

THE Australian Securities and Investments Commission has broken new ground by commencing proceedings against credit licensee Lightspeed Finance over failure to comply with Australian Financial Complaints Authority (AFCA) determinations.

The firm’s director, Mark Fitzpatrick, was also included in the proceedings.

On 4 December, 2018, AFCA made its first determination regarding a Lightspeed client compliant, which required Lightspeed to pay a loan debt owed by the client to a lender, prior to the client repaying Lightspeed the initial loan amount.

On 12 July, 2019, AFCA made a second determination in favour of the client, which reduced the client’s liability.

Both determinations were accepted by the client and were binding on Lightspeed under AFCA rules.

BY MIKE TAYLOR

ASIC alleged Lightspeed failed to give effect to both AFCA determinations and that Fitzpatrick was knowingly involved in these breaches.

Reforms introduced as part of the Royal Commission meant that since 13 March, 2019, that a failure to co-operate with AFCA was a civil penalty offence with

penalties of $10.5 million for a company and $1.05 million for an individual.

AFCA replaced the Financial Ombudsman Service (FOS) from 1 November, 2018, and the Government announced in the 2019 budget victims would be eligible to receive unpaid FOS determinations.

Centuria Capital Group to merge with Primewest

BY OKSANA PATRON

CENTURIA Capital Group has entered into a bid implementation deed in relation to a merger with Primewest via an off-market takeover offer made by Centuria for Primewest.

In an announcement to the Australian Securities Exchange (ASX), Primewest said the rationale behind the decision was both firms offered complementary funds management platforms with similar investment philosophies and strong track records.

Primewest’s board, whose directors represented 53%of Primewest securities, unanimously recommended to its security holders to accept the merger, in the absence of a superior proposal and subject to an independent expert’s opinion that the deal is “fair and reasonable”.

Under the terms of the deal, Primewest securityholders would receive $1.51 per Primewest security, consisting of: • $0.20 of cash per Primewest security; and • 0.473 Centuria securities per Primewest security, equating to $1.31 per Primewest security based on Centuria’s last close price of $2.77 per security on 16 April.

The merger would be expected to enhance investment

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proposition relative to Primewest thanks to: • Material earnings per security accretion of 19%,which would deliver 6.8 cents on a pro forma FY21 basis; • Substantial increase in scale and relevance with combined assets under management (AUM) of $15.5 billion; • Enhanced geographic and sector diversification; • Access to new distribution channels, and • Material synergies to support growth of AUM, expansion of property services across both businesses.

Additionally, the merged group would be expected to be well placed for S&P/ASX 200 index inclusion with an estimated pro-forma capitalisation of $2.2 billion.

Centuria chair, Garry Charny, said: “The proposed Centuria/Primewest Merger is consistent with Centuria’s dual strategy of asset acquisitions and corporate mergers and acquisitions where this is sympathetic to Centuria’s business model.

“Primewest is a high quality, well-established fund manager and the Centuria board looks forward to the successful completion of the merger and building on Centuria’s position as a leading Australasian property fund manager.”

FEES levied to pay for financial advice represent only a small proportion of the approximately $8.5 billion in fees levied by Australia’s major superannuation funds.

That is the bottom line of evidence delivered to the Senate Economics Legislation Commission review of the Your Future, Your Super legislation with Super Consumers Australia (SCA) confirming that the largest proportion of fees levied by superannuation funds went towards administration and investment.

Answering questions on notice, SCA confirmed earlier analysis of where financial planning stands in terms of superannuation fund cost structures.

What is more, the SCA answer suggested that Australian Prudential Regulation Authority (APRA) data probably failed to fully reveal the level of investment fees.

“For the financial year ending June 2020, approximately $3.6 billion in administration fees were paid to large APRA regulated funds. By comparison $2.9 billion was paid in investment fees and total fees paid equalled $8.5 billion,” the SCA told the committee.

“The remaining fees paid consisted of insurance fees, advice fees and activity fees. However, we note that this APRA data significantly under-reports investment fees as highlighted by the Productivity Commission,” it said.

“The median disclosed administration fee for a MySuper product member with a representative balance of $50,000 in December 2020 is 0.325%. The median investment fee was found to be 0.725%.”

28/04/2021 2:18:49 PM

May 6, 2021 Money Management | 11

News

Financial Services Council raises moral risk of too many self-licensed financial advisers

BY MIKE TAYLOR

INTRAFUND advice would continue to have a role to play and dealer group licensees would continue to be a source of necessary capital adequacy under a series of discussion points and recommendations contained in a Financial Services Council (FSC) green paper on financial advice.

The FSC document also makes clear its belief that the Government’s Design and Distribution Obligations (DDOs) will add yet another layer to the regulatory burden already being carried by the advice industry which will need to be addressed.

Reflecting its membership base among licensees, the FSC green paper makes clear the organisation’s view that they will need to continue to play a role notwithstanding PPS_031_Average Lapse Rate ad_220x155mm_AW.pdf professionalism and the rise in self-licensing.

The green paper said, “the current legislative and policy direction of advice affirms a role for licensees within the advice industry as well as providing a mechanism by which to promote consistency”.

“The introduction of new reference checking, information sharing requirements and breach reporting requirements for licensees reflects the importance of their ongoing role,” it said. “It is unreasonable for ASIC, or the incoming single disciplinary body, to supervise and monitor individual advisers consistently and sufficiently to the extent AFSL [Australian financial services licence] holders currently do.”

“Removing this role would make it near impossible to monitor and provide independent audits of an adviser to the single disciplinary 1 06/04/2021 09:32 body,” the green paper said.

“Premature proliferation of a sector of solely self-licensed financial advisers, without the option to sign onto a group AFSL while being individually registered, could create a moral risk for consumers. This could occur if individual advisers exit the industry leaving consumers orphaned and unremediated for misconduct.”

The green paper argued that “this consideration should influence future changes to the licensing of financial advice”.

One of the green paper’s key recommendations is that “intra-fund advice should be permitted under simple personal advice and complex personal advice”.

It argues that intrafund advice should not be defined separately, and be provided mostly as simple personal advice, or where specific product recommendations are made, as complex personal advice.

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28/04/2021 2:19:09 PM

12 | Money Management May 6, 2021

InFocus

WILL MULTIPLE FAILURES OF THE APRA SUPER FUND PERFORMANCE TEST PROVE FATAL? Mike Taylor questions whether a superannuation fund which experiences multiple failures of the proposed Australian Prudential Regulation Authority superannuation fund performance test has any hope of survival?

WHAT WOULD IT take to provoke a run on a superannuation fund?

Would it take members of that fund receiving a letter sent to them at the direction of the Australian Prudential Regulation Authority (APRA) that their superannuation product has performed poorly, and that they should consider moving their interest into a different fund?

Because that is what is being proposed within the Government’s Your Future, Your Super legislation and is clearly outlined in the explanatory memorandum.

What is more, the members would be receiving that letter only after their fund had at least twice posted notifications on its website that it had failed to pass the APRAadministered performance test.

The regulatory outline creates scope for funds to resume accepting new members when they have actually passed a subsequent performance test, but the question must be asked about how many people would want to join a superannuation fund which had arguably failed three performance tests.

While the boards of superannuation funds still bristle about “inaccuracies” associated with APRA’s superannuation fund heatmaps, the Government’s legislation is handing even more power to the regulator to administer a superannuation performance test and to require funds to notify

MANAGED FUNDS IN AUSTRALIA

members when they fail that test.

The explanatory memorandum attaching to the Your Future, Your Super regulatory consultation, states that superannuation funds who fail the performance test must provide notices to the beneficiary’s last known mailing address or email address.

“All beneficiary notifications must explain to the member that their superannuation product has performed poorly, and that the member should consider moving their interest into a different fund,” it said.

“The notification gives details of the test applied to determine the product’s underperformance, and also provides beneficiaries with information on how to change to a superannuation product that may perform better than the

current product they hold.

“The notification also directs beneficiaries to the YourSuper comparison tool for information on products that have met the requirements of the performance test.

“The notification includes standard words covering questions and answers on why the member has received the notification, and how poor performance of a superannuation product can negatively affect their retirement income.”

Prior to members receiving the written notification from their superannuation fund, those that thought to visit the fund’s website might have noted it contained a post declaring earlier failures.

Where a product does not pass the performance test for the first

time, the registrable super entity (RSE) licensee must ensure that a description of the circumstances is made available on the RSE’s publicly available website. The RSE licensee must also take this step where the product has failed the performance test previously, but it is not the product’s second consecutive failure, in which case the product is closed to new members.

The purpose of this requirement is to warn prospective beneficiaries when a product (which remains open) has been assessed as underperforming in the latest financial year. There is no need for this information to be published on the website if the product is closed to new beneficiaries (as a consequences of two consecutive fails) as there cannot be prospective beneficiaries to warn because the product is closed to new members.

The explanatory memorandum makes clear that the possibility exists of funds being reopened to new members if it subsequently passes a performance test.

“APRA may make a determination for a product to reopen to accept new beneficiaries, if the product passes the annual performance test in a subsequent financial year,” it said.

The question is, however, how many people would want to join a superannuation fund which has been publicly identified as having failed its performance test?

$3.99t

4.4%

$3.1t

Combined managed funds FUM

December quarter increase for total managed funds FUM

Total superannuation FUM

Source: ABS, as of 31 December 2020

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28/04/2021 4:26:57 PM

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26/04/2021 10:03:21 AM

14 | Money Management May 6, 2021

Property

ARE WE BACK TO NORMAL? Despite the move to remote working, the impact of the pandemic on the property market was not as bad as people had expected, writes Oksana Patron.

DESPITE THE LAST few months being filled with market uncertainty and the rampaging COVID-19 pandemic, which caused full and partial lockdowns across the globe, property fund managers say the impact of the pandemic was not as bad as everyone initially expected it to be.

This was despite hundreds of thousands of office workers temporarily vacating their towers and moving to remote working, effectively shutting down foot traffic in cities for months.

But what this healthcare, financial and economic crisis stressed in the property market was a high degree of differentiation between assets in terms of resilience and cashflows.

To help relieve some pain for businesses affected by the shutdowns of significant portions of the commercial real estate market, the Government brought in a tenancy code of conduct under which landlords were obliged to provide rental deferral or, in some cases, rental waivers.

On top of that, the start of the

Q. What’s a good income-focused investment with low relative volatility?

pandemic in Australia causing a great deal of economic uncertainty proved many property investors were still wearing scars from the Global Financial Crisis (GFC) and were concerned that once again the credit market would start to dry up very quickly.

However, Charter Hall head of direct property business, Steven Bennett, said after speaking to a number of financial advisers and their clients during the pandemic, the majority were very relaxed with the unlisted property investments their clients were in as they were

comparing it to what was happening in the listed equity markets.

“The main thing people need to understand about unlisted property or unlisted assets generally is that you need to put them in the illiquid part of the clients’ investment portfolio,” he said.

“We performed out-of-cycle independent valuations to make sure they were current in that type of market and to strengthen the communications with our clients and to provide additional investor comfort.

“Throughout the pandemic,

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May 6, 2021 Money Management | 15

Property

[advisers] were looking at the unlisted portions of their clients’ portfolios, which were relatively stable, and would say: ‘OK, I don’t need to worry about what’s happening in the unlisted property market.’ At that time equities were moving 3% to 5% a day.”

THE FUTURE OF CBDS When it came to the office sector, managers were in agreement that the question currently on everyone’s lips was how flexible working arrangements would play out going forward and how corporates would respond in terms of their space requirements.

This was particularly important in central business districts (CBDs), which bore the brunt of the losses during the pandemic and which were now expected to thrive again.

Some managers stressed that, the time in which corporates could react to a changing work environment would be also a crucial factor, given that at the start of pandemic the sector saw an increase to the 20-year highs in terms of the sub-lease of office space that had been put to market.

“When you look at some other regions around the world where lockdowns were shorter, like parts of New Zealand, their CBDs have already gone back to normal, therefore I think CBDs will thrive

once again but I also do think that flexibility will be something that many corporates will be offering to their employees,” Damian Diamantopoulos, portfolio manager and head of research property at Australian Unity, said.

“I think working in the office will return, but for many it might not be five days a week, it may be four or three days a week, depending on the industry that you are in and how much face time you really require in the office.”

Diamantopoulos, who managed the Australian Unity’s $275 million property income fund, said one reason why office space in CBD markets, particularly in Sydney, had felt the crisis slightly more was the ‘astronomical’ pre-pandemic level of rents in Sydney’s CBD versus fringe locations such as Parramatta, St Leonards or Chatswood.

When asked about his view on the fringe office markets, he said: “I think the answer is really in the view of the structure of listed versus direct [markets] because at the moment there is a divergence between what investors are prepared to pay in the physical market versus the listed market.

And the listed market always overreacts; it overreacts in the good times and then the share prices are sky high but it overreacts

Q. What’s a good income-focused investment with low relative volatility?

“COVID-19 certainly was not the catastrophe that lots of us expected it to be, it gave fund managers the opportunity to stress-test their portfolios.”

– Ross Lees, Centuria on the downside as well.

“I think that, although we did see a little bit of overreaction a year ago in the listed market, as the pandemic has evolved and the handling of the pandemic has evolved and the restrictions have come off, some sensibility has come back into some of the stock prices. But I still think listed offices are probably where the value is and there will be a handful of stocks you could look at in that space.”

According to Bennett, there was a little bit more spread within the office sector but, what was even more interesting, was the emergence of a two-tier market of office space.

“You had long leased highquality assets with strong tenants such as ASX-listed groups, government or strong corporates which went up in value in the pandemic period, and that was because investors valued those

long-term secured income streams even more highly.

“You need to remember that high-quality commercial property in an unlisted form can deliver investors 5% to 6.5% p.a. income returns and those income returns are paid out to investors typically on monthly or quarterly basis,” he said.

“The other side of the office market was your lower-quality assets, those assets which entered the pandemic with high levels of vacancy, offices with short lease terms, they were the assets that had valuations soften through the pandemic period.”

There was also interest during the pandemic from foreign buyers who were attracted to Australia’s economic strength and were undeterred by being unable to view properties in person.

Ross Lees, Centuria’s head of funds management, confirmed Continued on page 16

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29/04/2021 10:58:18 AM

16 | Money Management May 6, 2021

Property

Continued from page 15 offshore investors had remained particularly active and continued to target the property market segments in Australia during the pandemic period.

“I think one of the really interesting things we saw last year was that in the COVID-19 period from March 2020 onwards, given the international border restrictions, we fully expected foreign purchases of commercial buildings to stop given people were unable to inspect the buildings,” he said.

“But what we actually saw in 2020 was the largest buyer cohort of Australian office assets came from foreigners. We saw investors particularly from Singapore saying that Australia looks like an incredibly attractive investment destination to them.

“I think they were looking at it from the global and regional perspective, and seeing how attractive Australia was relative to other investment destinations as [our] economy effectively limited any outbreaks of COVID19, and despite the technical recession the economy continued to perform well.

“We had tenants who continued to pay the rent and the yields relative to other markets were attractive. The really interesting market was Macquarie Park [in Sydney] where we identified at least seven transactions in excess of $50 million in the last 12 months and that buying cohort was largely Singaporean groups.”

Bennett said: “Going forward we believe that the Australian office sector is offering good relative value compared to other sub-sectors of the market. Even

07MM060521_14-29.indd 16

throughout the pandemic, there has been buying interest from large sophisticated offshore investors who are prepared to pay up for the right office assets.

However, you need to be discerning and focus on the quality assets, that benefit from strong tenant covenants on long term leases.”

RETAIL AND INDUSTRIAL SECTOR The retail sector continued to be divided with the non-discretionary retail segment, which included neighbourhood shopping centres and specialty shops, having performed extremely well while large shopping centres had struggled.

“The large shopping malls, the big regional centres are the ones that had the most valuation softness through the pandemic, initially because foot traffic fell so significantly but also there were questions over the sustainable rental levels in those big shopping malls,” Bennett noted.

“If you look at the key sectors from the retail perspective, retail was already undergoing

structural challenges with e-commerce and that was having an underlying structural impact on the retail sector and COVID-19 accelerated it. The weakness in that sector was probably expected for a long time and I think COVID19 just brought it forward.”

“With the industrial sector, for the last three to five years people were predicting that this sector was the most in demand asset class globally and that was largely on back of the e-commerce penetration right cross the developed world,” Lees said.

OUTLOOK Commenting on the outlook for which assets and sectors of the property markets would draw in investors and which would continue to struggle, Diamantopoulos said there were still many opportunities in the listed market because of the mispricing potential.

“The area where many have not wanted to invest over the last 12 to 24 months is that bigger shopping mall space. But for me, nothing is off limits as long as it can provide sustainable income stream and there is a value in it. It

is about what that underlying asset is and how [the asset] is valued at a point in time. Even though the underlying fundamentals may not be good for a particular sector, if at the property level it has been mispriced, then we will look at it.”

According to Lees, real estate investments investors should focus on ensuring the acquired assets were in good locations in case the tenants decided to vacate them as this would determine the ability to re-lease those buildings. They should also consider the reliability and predictability of cashflows coming from those buildings.

“While investors might still find good opportunities in the Sydney and Melbourne CBDs, the student accommodation sector will continue to see bumps in the shortterm as universities are struggling to attract international students.

“My observation has been, in summary, that if COVID-19 certainly was not the catastrophe that lots of us expected it to be, it gave fund managers the opportunity to stress-test their portfolios and see how resilient their portfolios were through that crisis.”

29/04/2021 10:58:09 AM

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29/3/21 11:44 26/04/2021 9:59:46 AMam

18 | Money Management May 6, 2021

SMSFs

WILL SMSF ADVICE BE A TEST-BED FOR LIMITED ADVICE CHANGES? Mike Taylor writes that the popularity of selfmanaged superannuation funds and the failure of the so-called limited licensing regime may make SMSFs the test-bed for proposals around more cost-effective limited/ strategic advice.

MARKET UNCERTAINTY AND consequent volatility appear to be significant drivers of selfmanaged superannuation fund (SMSF) establishment.

Just as the Global Financial Crisis (GFC) confounded many commentators by driving an uptick in the number of SMSF establishments in 2008/09, there are already indications that a similar phenomenon is occurring as a result of the market uncertainty which has surrounded the COVID-19 pandemic.

Australian Taxation Office (ATO) data is unlikely to fully confirm this trend until later this year, but its data for calendar 2020 suggests that the pandemic uncertainty from around March last year to 30 December did not act as a particular brake on SMSF establishment.

What the ATO data revealed was that the lockdowns and other events which occurred during 2020 acted to reverse the number of SMSF establishments in Australia but that, overall, the numbers continue to rise.

What is more, the data covering SMSF establishments

07MM060521_14-29.indd 18

and wind-ups has to be seen in the context of the Government’s hardship early access superannuation regime, with wind-ups peaking in June.

The bottom line at the end of December was that there were 593,790 SMSFs in Australia compared to 582,080 a year earlier.

However, this needs to be viewed against the reality that ATO data from June 2019 revealed the number of SMSFs had stood at nearly 600,000, and that this represented an increase of 15% over the five years from 2014/15 (Graph 1).

According to the ATO data, the total value of assets held by SMSFs stood at just over $764 billion in December 2020.

It said the top asset types held

by SMSFs by value were: • Listed shares (27% of total estimated SMSF assets); and • Cash and term deposits (20%).

Other crucial data provided by the ATO was that 53% of SMSF members were male, and that 86% of members aged 45 or older.

Australian Prudential Regulation Authority (APRA) data

28/04/2021 2:21:30 PM

May 6, 2021 Money Management | 19

Strap SMSFs

Graph 1: Total super assets by fund type at 30 June 2014 and 30 June 2019

also proves revealing in demonstrating how SMSFs fared throughout 2020, indicating that while APRA-regulated funds took a hit during the period of superannuation early release, the assets of SMSFs remained comparatively stable (Graph 2).

The relatively mature age of most SMSF members is important because, as SMSF Association chief executive, John Maroney, pointed out to Money Management, the continuing rate of SMSF establishment needs to be weighed against the rate of drawdowns from SMSFs as people exit the workforce.

But Maroney is amongst those who have identified the volatility and uncertainty generated by the COVID-19 pandemic as having been a factor in what appears to be another period growth with respect to SMSF establishment.

He said he believed there was more interest in SMSF establishment among people looking to take control in the face of some of the uncertainty which had been generated by the pandemic.

Maroney’s views were endorsed by Deloitte superannuation partner, Russell Mason, who said that periods of volatility had always acted as a catalyst for people to consider an SMSF, but that he believed that other factors had been at play, not least the Royal Commission into Misconduct in the Banking, Superannuation and Financial

07MM060521_14-29.indd 19

Source: ATO, June 2019

Services Industry and recent political criticism of the broader superannuation system.

Mason said he believed that the criticism of the system and associated negative publicity had undoubtedly prompted some people to consider whether they would be better off looking after their own interests.

As well, he said that it was now possible for SMSFs to access many investment options which had previously been regarded as the exclusive domain of APRAregulated funds.

“The industry funds market has become more accessible,” he said.

That accessibility of the

industry funds market for SMSFs has also served to gradually change the investment profiles of many self-managed funds from a situation 10 years’ ago where most funds held mostly cash or cash-like products plus some equities exposure to one where there is now a greater likelihood of exposure to managed funds.

This, in turn, has driven an increased need for financial advice – something which has been strongly recognised by the SMSF Association and made clear in the association’s pre-Budget submission.

The submission clearly reflects the absence of the

Continued on page 20

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20 | Money Management May 6, 2021

SMSFs

Continued from page 19 so-called “accountant’s exemption” and the less than stellar history of the limited advice licensing which was intended to provide accountants with a vehicle via which to help clients beyond the initial set-up of their SMSF. The submission argues in no uncertain terms that the “current regulatory advice model prevents SMSF trustees from obtaining the limited SMSF advice they require”.

“After years of continual regulatory change, we now have a framework that is complex and convoluted and hard to unwind,” the SMSF Association submission said.

“The SMSF Association has found that the advice process is lengthy, costly and prioritises the needs of Australian financial service licensees (AFSL) over consumers,” it said in what represented a direct hit at the inability of accountants to provide advice without an authorisation.

In doing so, the association called for greater flexibility to be injected into the limited advice regime with core amongst its recommendations being a call for the Australian Securities Investments Commission (ASIC) “guidance and explanation of how limited advice can be provided to take a more influential role to support financial advisers to provide limited advice where appropriate, despite current concerns of their AFSL”.

The less than stellar history of the limited licensing regime established to soften the blow of the

07MM060521_14-29.indd 20

removal of the removal of the accountants exemption explains why the SMSF Association has strongly advocated for its abolition in favour of something built around a flexible approach to limited advice.

“The SMSF Association believes that the limited licence framework has failed and hence should be removed and transitioned to a new consumer-centric framework,” it said. “This may be in the form of a ‘strategic advice’ offering as indicated by ASIC in CP 332.”

“This is because: a) The exemptions and legal obligations from the limited licence framework are complex; b) The Financial Advisers Standards and Ethics Authority (FASEA) ignored the limited licence framework when designing its standards; c) Poor take up of limited licences/ licensees removing limited licence advisers because they are not profitable; d) Execution only service is occurring frequently; and

“Currently, there is increasing interest in the SMSF sector and more broadly about ‘strategic advice’. This is because many consumers demand strategic advice rather than advice on specific financial products.”

– SMSF Association e) The framework prevents SMSF trustees from obtaining the SMSF advice they require in a convenient and affordable manner (such as winding up an SMSF).

“Unfortunately, the current framework is restricting the SMSF industry and the professionals who dedicate their time to provide advice,” the submission said.

“We believe SMSF and superannuation advice lends itself to ‘strategic’ advice. In fact, the limited licence framework was

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May 6, 2021 Money Management | 21

SMSFs

Graph 2: Assets of superannuation entities

built upon this premise. That is, advice is usually centred around making contribution or starting a pension in ‘superannuation’.

“Currently, there is increasing interest in the SMSF sector and more broadly about ‘strategic advice’. This is because many consumers demand strategic advice rather than advice on specific financial products.

Additionally, with comprehensive advice out of reach for many Australians due to the costs, it is clear more are seeking piece by piece strategic guidance.

“With improvements to the way limited advice is offered out of CP 332, strategic advice could be the foundation on which a consumer focussed framework is built. This could ultimately allow appropriately educated advisers registered with the single disciplinary body to provide strategic advice on areas such as superannuation, retirement and cashflow without specific reference to financial products,” the SMSF Association submission said.

“A strategic advice model allowing suitably qualified professionals to practise under a ‘no product recommendation’ environment would see advisers given increased ability to provide strategic advice without conflicts of interest. It would also address the false perception that financial advice is simply ‘selling products’ and in time would help to address the issue of trust in the sector.”

07MM060521_14-29.indd 21

Source: APRA, December 2020

WHAT TO LOOK FOR IN THIS MONTH’S FEDERAL BUDGET The financial planning industry will be looking for a range of changes in this month’s Budget including measures to lessen the impact of the socalled “ASIC levy” but the self-managed super fund sector will be looking for the Government to finally act to extend the maximum number of members of an SMSF from four to six.

Sitting at the core of increasing the number of SMSF members to six is the Taxation Laws Amendment (self-managed superannuation fund) Bill which has not only been debated in the Parliament but has been the subject of scrutiny by the Senate Economics Legislation Committee.

Passage of the legislation has been a long time coming, dating back to the days when the now Prime Minister, Scott Morrison, was Federal Treasurer.

The SMSF Association chief executive, John Maroney, said that action on the legislation was something that would be closely watched and welcomed in the context of this month’s Budget.

He also listed the ASIC levy and the cost of professional indemnity (PI) insurance as key areas of policy concern for those providing SMSF advice.

28/04/2021 2:21:55 PM

22 | Money Management May 6, 2021

Investment

10 FACTORS DRIVING THE RISK OF RISING INFLATION

As rising concerns mount about rising inflations, writes Joel Connell, will this be a prompt for market participants to focus on key fundamentals which have been ignored by investors?

WITHOUT DOUBT ONE of the hottest topics on the minds of investors for 2021 is the risk of rising inflation and what this means for interest rates and global equity performance.

Typically, in the early stages of a cyclical recovery when inflation expectations start to rise, we see the market gravitate towards the perceived beneficiaries including commodity producers, banks and many cyclical industrials. It has been no different this time, with strong outperformance of many of the cyclical and rate sensitive parts of the market since the positive vaccine data started to emerge in early November 2020.

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In addition, a range of factors including low/negative interest rates and government stimulus, have contributed to pockets of rampant speculative activity which has driven the share prices of many unprofitable growth and thematic stocks to arguably unsustainable levels.

While we haven’t been surprised to see this take place, we strongly believe that over the long-term share prices will be driven by underlying company fundamentals. As concerns over rising inflation and higher interest rates continue to build, we feel this could be a catalyst for market participants to return their focus

to some of the key fundamentals which have arguably been ignored during the early stages of the cyclical recovery.

Below we take a closer look at some of the factors driving inflation and highlight some of the important company attributes that investors should be focused on in this environment.

10 FACTORS CONTRIBUTING TO RISING INFLATION While predicting the outlook for inflation is a difficult task given there are many variables that can influence the outcome, we believe it is a key risk factor that investors should be monitoring

closely as it can have a material influence on stock price and portfolio performance.

The top 10 factors contributing to the risk of rising inflation include: 1) Fiscal stimulus – The magnitude and speed of fiscal spending is a major factor that could drive a spike in inflation.

In the US, the $5.2 trillion in COVID fiscal relief packages announced represent close to 25% of pre-COVID-19 gross domestic product (GDP), dwarfing the $831 million relief package during the Global Financial Crisis (GFC) in 2009, which represented just 5.8% of 2009 GDP.

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Investment

2) Ongoing easy monetary policy – Low interest rates and bond purchase programs around the world continue to be inflationary for asset pricing levels and will likely contribute to broader inflation as the macro economic environment recovers.

3) Vaccine rollout – As the high efficacy vaccines get rolled out across the world during 2021, this should enable economies to re-open and support a strong rebound in economic growth.

4) Improving employment – In the US, the unemployment rate has already reduced to 6.2% after peaking at 14.8% in April 2020 but still remains well above the pre-pandemic level of 3.5%. A normalising job market could put upwards pressure on wages and improve the financial position of many households, leading to increased consumer spending.

5) Consumer confidence – Consumer confidence likely improves moving forward due to the improving job market, impact of stimulus programs and benefit from accumulated savings through the pandemic.

6) Political environment – Moving from a more pro-corporate environment (under Trump) to more pro-labour (under Biden).

In particular, the potential for a minimum wage increase in the US could be a big inflationary driver.

7) Unwind of globalisation benefits – We may see an unwind of some of the benefits of manufacturing in low cost labour countries as companies look to shore up their local supply chains and reduce the risk of tariffs.

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8) Increased ESG focus – The increasing focus on environmental and social responsibility-related factors could drive increased costs in certain areas, including wages, employee safety, supply chain and sourcing costs, and costs to meet environmental targets.

9) Supply and logistic bottlenecks – We are increasingly hearing from many corporates about supply chain issues, logistic bottlenecks and delays in sourcing parts and finished products. As an example, the dry van rate per mile (proxy used to gauge spot logistic costs), is up 45% since the start of 2020 and up 90% since the March 2020 trough.

10) Input cost inflation – We are seeing widespread inflation in input costs from a sharp increase in various soft and hard commodity prices. The S&P GSCI index, which tracks a basket of over 20 soft and hard commodities including oil, gas, gold, copper, aluminium, wheat, corn, cotton, cocoa, cattle etc., is up 12% since the start of 2020 and up over 100% from the March 2020 trough (now back close to five-year peak levels).

The combination of factors outlined above certainly mean there is a material risk of inflation spiking in the near term, which will likely lead to increased fears around rising interest rates.

However, there is still uncertainty around how sustainable any increase in inflation will be and what this means for interest rates.

From a long-term perspective, there are still many structural

“If we move into a rising rate environment then we will likely see much greater focus placed on balance sheet strength.”

– Joel Connell factors that could keep a lid on inflation concerns, including ongoing efficiencies from automation, technology, globalisation, and low-cost sourcing, so only time will tell whether inflation fears will be long lasting.

IMPORTANT COMPANY ATTRIBUTES IN THIS ENVIRONMENT If fears over rising inflation and higher interest rates continue to grow, we believe this could be a catalyst for market participants to return their focus to some of the key fundamentals which have arguably been ignored during the early stages of the cyclical recovery.

In our view, some of the most important company attributes for investors to consider during periods of rising inflation and higher interest rates include: Pricing power – In an inflationary environment one of the most important attributes for a company to possess is good pricing power (i.e. the ability to pass on rising costs without materially impacting volumes).

Companies with sustainable competitive advantages typically have the best pricing power.

Strong balance sheets – During periods of low/negative interest rates and ‘easy money’, balance sheet strength is often ignored.

If we move into a rising rate environment then we will likely see much greater focus placed on balance sheet strength.

Valuation risk – In a rising rate environment, one of the single biggest risks to equities is ‘valuation risk’, especially the parts of the market with more extreme valuations or valuations based mostly on long dated cash flows (i.e. unprofitable growth companies) which would likely be hit harder due to the influence that a rising discount rate has in lowering the present value of forecast future cash flows. Valuation discipline is therefore extremely important in this environment.

In summary, the threat of rising inflation and higher interest rates is a key risk factor that we believe all investors should be considering.

As the risk increases, investors are likely to refocus more on company fundamentals and valuations.

Looking forward, we believe investors who adopt an investment strategy focused on investing in quality companies that possess good pricing power, strong balance sheets, highlyvisible cashflows, and are trading at a reasonable price, will be well placed to outperform.

Joel Connell is senior global equities analyst at Bell Asset Management.

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24 | Money Management May 6, 2021

Fixed income

HOW DEBTS WILL RESHAPE THE ECONOMIC CYCLE Government debt accumulated during the COVID-19 pandemic will set a precedent for the next economic cycle, Kerry Craig, writes.

COVID-19 SCARS WILL linger on society and our economy in many ways, but for now, most are simply relieved that there is light at the end of what has been a long and dark tunnel. 2021 brings a brighter outlook for the economy and an optimism that is shining through in buoyant capital markets.

In the near-term, the differing paths and pace of fiscal stimulus will dictate the relative economic performance of countries. Clear contrasts are emerging – the US is still ramping up stimulus measures while China is focused on normalisation and Australia’s own measures are drawing to a close.

In the longer term, while many health-related questions remain unanswered, the big one that matters to investors and market watchers is: what is the consequence of all this debt sloshing around in the world’s financial markets?

Policy makers’ aggressive use of government spending to tackle the COVID-19 pandemic was necessary and helped prevent the crisis from being even worse, but it set a strong precedent for the new economic cycle and perhaps the one beyond that as well.

HOW DID WE GET HERE? The pandemic meant re-writing the policy playbook. The old routes to engineering a recovery had become potholed and bumpy – policy makers were forced to find a new path. This led to a

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momentous shift towards governments as the spenders of last resort and increasing political pressure to shift away from any notion of austere fiscal tightening.

The drawn-out recovery following the Global Financial Crisis (GFC) emphasised the inability of loose monetary policy to stimulate either growth or inflation, despite generating ample amounts of liquidity. A few countries managed to start down the path of policy normalisation – the US and Australia – but it was short-lived.

Government spending also became a more attractive option in light of a prolonged period of stubbornly low inflation before the pandemic, as various structural factors had kept a lid on prices.

As a result, when COVID-19 hit, the rescue from monetary and fiscal policy was tightly coordinated.

As policy rates were effectively slashed to zero, and negative in real terms, it gave policymakers greater latitude to spend and run up large fiscal deficits and higher and higher levels of government debt.

The unique nature of the COVID19 recession was another factor. It was not caused by an economic imbalance or financial instability, as in the past, but by policy decisions to close off large parts of the global economy to protect public health.

This created an obligation on many governments to offset, or at least attempt to repair, the economic

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damage created and rebuild economic confidence.

THE TRANSITION FROM DEBT-TO-GDP TO INTEREST-TO-GDP The new reality is that most economies will now operate with persistently higher levels of debt.

The recent surge in fiscal largesse means debt-to-gross domestic product (GDP) ratios globally are at levels not seen since war time. Some believe that this is not sustainable.

A decade ago, economists Rogoff and Reinhart argued that debt-toGDP ratios of more than 90% would weigh on economic activity and slow the rate of growth. They argued that high levels of debt would negatively impact the outlook for interest rates, increasing the cost of debt, draining business confidence and creating a drag on economic activity.

What we’ve learnt is that debt levels can actually rise well above this with limited side effects. This is not to say that there are no negative consequences, but simply that it’s unlikely there is a magic number at which a heavy debt burden suddenly becomes unsustainable.

The absolute level of debt still matters, but what is of growing scrutiny is the cost in servicing that debt. It’s not just ‘debt-to-GDP’ but also ‘interest-to-GDP’ that needs watching. Enter central banks.

When real rates are so low, levering up to invest back into the economy makes sense, especially given the size of the economic shock from the pandemic. The risk is that the assumption of “lower for longer” turns out to be wrong. But given the handholding between central banks and governments since the onset of the pandemic, monetary and fiscal policy are more intertwined than ever before.

There is also a greater tolerance for all this debt by markets. Low rates and free spending were welcomed by financial markets in the wake of the COVID-19 crisis. Concerns over rising debt, excess liquidity

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and asset bubbles were pushed aside as investors optimistically looked across the bridge to the other side. The rising levels of debt-to-GDP were rewarded by equity investors and shrugged off by bond markets.

In the past, free-spending governments faced the risk of being punished by the bond markets. Finding the balance between needing to repair fiscal positions without removing fiscal support too soon is a challenging task. This lesson was learnt the hard way in the austerity imposed in Europe around the time of the Eurozone debt crisis, which unfortunately only compounded the region’s economic woes.

How to get rid of all that debt?

There are three realistic means to lower government debt levels: 1) Pay it back through higher taxes and reduced spending; 2) Outgrow the debt by increasing productivity, raising incomes and generating a higher tax take without raising taxes; and 3) Erode nominal debt levels through a higher rate of inflation.

Not all of these options will suit everyone. Economies with poor demographics or aging populations will find it difficult to reduce spending, given the need to support a social safety net. Raising taxes on individuals is politically challenging and increases in corporate taxes, while very topical, are hardly guaranteed.

Inflating away debt may be appealing, as long as wages are rising and the standard of living is not being squeezed, but persistent high levels of inflation have been notoriously difficult to create.

The inflation outlook is also highly uncertain. The very large stimulus packages in places like the US come at a time when private sector activity is increasing, raising the chance of inflation overshoots, but the forces that restricted prices from rising in the past will reassert themselves in the long run.

Reducing the debt load is not

likely to be high on the list of political priorities until there is a shift in the rate outlook, making debt sustainability a more urgent issue. Until then, the risk of removing stimulus in the early stages of the recovery, the lingering risks around vaccines and virus mutations, and the tolerance for rising debt implies policies will be focused on supporting the economy.

This is not true everywhere and the Australian government is looking to get the budget back on track given the faster recovery, low case count and ongoing vaccine roll-out. Similarly in China, where they have been a step ahead in the economic recovery, the focus has shifted not to debt sustainability, but financial stability and the risk of bubbles being created from leaving the taps open for too long.

The dialling back of stimulus measures in Australia – in sharp contrast to the US – will create disparities. This fiscal divergence will show through in the form of economic divergence in the coming quarters.

WHAT DOES ALL THIS DEBT MEAN? Persistently higher debt may create a more volatile economic and market outlook. More debt heading into the next recession, which is hopefully still some years in the future, could amplify the volatility.

The implications for inflation are the current focus for markets given the uncertainly around the inflation outlook, although this differs by country. For example, it’s more likely that US policy makers may have greater success in pushing inflation above the central bank target than European policy makers.

Eventually, market attention will turn towards the sustainability of fiscal support and investors will focus on differentiating economies based on their fiscal capacity to continue spending and their ability to direct stimulus to opportunities with the

“Given the handholding between central banks and governments since the onset of the pandemic, monetary and fiscal policy are more intertwined than ever before.”

– Kerry Craig greatest economic impact. Those countries with room to spend more are likely to be viewed favourably when the time comes to increase spending to offset the next economic shock.

The implications of debt sustainability are more obvious for bond markets given the scope for bond yields to be kept low, contrasting the risk of higher than expected inflation. Low rates will also translate to higher valuations in equity markets over time, as a lower discount rate is applied to future earnings. As equity investors become more accustomed to debt, developed equities markets are likely to become a portfolio tool used for income rather than capital appreciation. Higher debt loads should enable higher shareholder payouts either though dividends or buybacks.

The upshot of all this debt is that the role of government bonds as an income generator is severely curtailed and poses a greater risk than reward in portfolios today, and equities may take up the mantel of income provider. The result will likely be an increasing allocation to alternative assets within portfolios where the characteristics of the underlying investments fulfil the role that traditional asset classes did in years gone past.

Kerry Craig is a global market strategist at J.P. Morgan Asset Management.

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26 | Money Management May 6, 2021

Insurance

THE CLAIMS EXPERIENCE IS RIPE FOR CHANGE With claims handling moving into a front-line service, it is vital for the insurance industry to balance digitisation with human empathy, writes Jenny Oliver.

THE LIFE INSURANCE industry has experienced a period of significant change over the last few years, unparalleled in recent memory. However, that same change has created a unique opportunity for life insurers to innovate in the ways we deliver experiences for our customers, as we continue to invest in evolving our businesses and processes.

Nowhere has that been more apparent than in the way we are working to transform the claims experience, which is at the heart of a customer’s life insurance experience. It is fundamentally important that we get it right.

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At a time when a customer is already dealing with the challenges associated with a trauma, the prospect of then having to lodge a claim with a life insurer can be daunting. The stories that are often told about people’s experiences with life insurance claims don’t reflect the many thousands of positive tales of help, support and hope that we see through our claims work every year.

CUSTOMERS’ SHIFTING EXPECTATIONS Consumers are experiencing a transformation of their own at the moment – with the majority of

lives moving towards virtual experiences, and the increased demand for instant gratification, consumers are losing patience for traditional processes.

Combined with many consumers’ increasing financial and contractual literacy, this has meant the expectations consumers have of financial service providers have never been greater and that is certainly the case in life insurance.

The opportunity this presents for life insurers is to embrace the challenge of evolving the customer experience and, in particular, the claims handling

process to continue meeting the shifting expectations customers have of their service experiences more generally.

To do that successfully, the industry needs to embrace innovation and digitisation, but also to carefully consider how to employ technology to enhance customer experience across every stage of the journey.

EMBRACING TECHNOLOGY Claims was traditionally viewed as a more administrativeprocessing function by life insurers. In the modern world, however, the claims function has

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Insurance

come out of the back office and into a front-line service function, making claims consultants some of the most important people in the industry. Now more than ever, the claims experience must be streamlined and leverage the digital transformation that we are seeing in all aspects of life to make every interaction easier for the customer.

But just as importantly, the experience needs to recognise that each customer is unique; no one else has the same life story or the same medical journey. It is deeply personal, and when customers want to tell their story or share their concerns with another human, we must ensure that claims consultants are well equipped to listen and feel empowered to support them.

We have been looking at how we can draw on digital transformation to empower customers in different ways at different points of the process but that does not mean every single process needs to be completely digitised.

MEETING CUSTOMER NEEDS Getting digital transformation right means finding the right balance between leveraging digitisation to streamline the customer’s claims experience, while at the same time ensuring the human empathy component remains part of the process.

Knowledge is power so when customers are looking to engage on more of a transactional basis, they expect to be able to get the information they need, when they need it, and in the way they want it with minimal friction. That is where digitisation plays its first key role – in enabling these aspects of the experience to be addressed through automated systems.

This could be through the use of a digital service or an app that

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allows customers to track the status of their claim, upload documents and clearly understand what information requirements are still outstanding. For our Claims Assist service, we found this led to faster submission of requirements, lower inbound calls and increased satisfaction ratings.

But when customers want to discuss something more personal or complex about their situation, and how that might impact their claim, they are expecting their insurer to deeply understand them, their claim, their circumstance and consider how their insurer can adapt its service to match that situation.

At the end of the day, most claimants will want to talk to a real person at some point in their claims journey and will want to know that another human has critically considered their circumstances and developed a personalised response, because there is nothing more personal to anybody than their own health, their own outlook and their financial situation.

There is a gap for the insurance industry to look at the role that digitisation and technology can play in enhancing human connections and enabling them where they may not previously have been possible.

But, at the same time, the quality and capability of claims consultant is greatly important.

FREEING UP CLAIMS CONSULTANTS Getting that balance right, and leveraging technology to remove much of the administrative work from the claims consultant’s role, allows them to focus their efforts on the most important aspect of their job – supporting claimants during what is often the most difficult time in their life.

“There is a gap for the insurance industry to look at the role that digitisation and technology can play in enhancing human connections and enabling them.”

– Jenny Oliver Today’s claims consultants are expected to wear many different hats as they assess a claim. Not only are they required to be proficient across a range of medical, financial, legal and product concepts, they must also have exceptional relationship skills.

They need to be able to talk to customers about their circumstances and concerns, explain the claims process to them and what they need to do in way that recognises the unique emotional needs of each customer and then implement solutions to respond to these.

Ensuring claims consultants can continue to develop these skills by providing them with the right training and coaching, and ensuring they have access to support so they can look after their own wellbeing, continue to be areas of strong focus.

at a set time, setting a clear expectation with the customer and alleviating their concerns by providing them with confidence in the status of their claim.

Another investment we have made in equipping our claims consultants has seen us change the way we train team members who are new to both our industry and the role.

Where historically, new recruits spent a number of weeks in the “classroom” developing and honing their skills before working with their colleagues, we now spend four to six months training these new claims consultants before they are introduced to an operational role, to ensure they have the right level of skills and knowledge to deliver the best experience for our customers, in recognition of the multiple skills that a claims consultant must develop.

A PERSON-CENTRIC APPROACH

CONCLUSION

One way to do this is through psychology-based training including motivational interviewing techniques and person-centred communication skills, designed to ensure claims consultants are equipped to deeply understand a claimant’s situation and work constructively and collaboratively with them as they progress their claim.

A recent example of this was a customer who a claims consultant recognised was frequently calling to seek an update on their claim, motivated by a high degree of anxiety around missing an update.

The claims consultant committed to calling that customer every day

The fundamental thing that customers want from their insurer is for their claim to be determined and paid as quickly as possible. We understand this, but we also understand that the experience in getting there is critically important during what is invariably a difficult time already.

Realising the potential to really accelerate the evolution and transformation of that experience through digital and technology, in a way that makes sense for our customers, is where the insurance industry must continue to focus.

Jenny Oliver is chief claims officer at TAL.

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28 | Money Management May 6, 2021

Equities

AN ALL-TERRAIN EQUITIES PORTFOLIO New growth can stem from the wreckage of the established, writes Lawrence Lam, a principle that also applies to equities.

EPICORMIC BUDS LIE dormant, hiding underneath tree bark waiting for the right conditions to sprout. They serve a regenerative purpose in the overall forest system and flourish when conditions are at their most dire. Bushfires for example, trigger epicormic buds to sprout with extreme heat and the clearing of nearby vegetation. In other words, the emergence of new growth stems from the wreckage of the established.

Just as a botanist studies epicormic growth, I’ve been looking at buds and shoots in a different world. The questions remain the same. Which environments foster this latent growth? Where can I find the most regeneration?

I’ve spent a lot of time investigating these questions in the context of the current investment environment and I’ll outline how I’ve positioned my fund.

NOISE, DISTRACTIONS, AND EPICORMIC BUDS There’s a lot of noise in financial markets. Think back only a few months ago during the Trump presidency. The headlines were volatile and anxiety inducing. We had it all, from a promise to clamp down on big pharma, to the US expulsion of Chinese companies accused of breaching data security, and the US withdrawal from the Paris climate accord.

I’ve raised these headlines as examples because as much noise as they created at the time, they have all fizzled out like an old balloon. The world keeps revolving. But feel for Mr Market, for at the time he was brought to

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his knees by the amount of anxiety this news had caused him. One can look back now and reassure him everything is OK, but at the time he was in no state.

Today the noise is all to do with interest rates and inflation.

Endless predictions about the actions of central bankers and the interpretation of every word spoken at press conferences.

The problem with short-termism and quick news is that everyone is focused on it. Everyone has an opinion. It’s a crowded space. It is not where you can get a competitive edge as an investor.

Instead, the edge comes from being able to strip away the noise and focus not on the smoke and fire, but seeking out the epicormic buds that are developing underneath. Don’t be like Mr Market.

THE MOST COMMON THEME OF TODAY Let me paraphrase today’s rhetoric: A huge wave of inflation is coming. Bond yields will rise in response, and so too will interest rates. This leads to a revaluation of assets as the time value of money increases the value of predictable cashflows as opposed to the uncertain.

This means companies with predictable cashflows come back into favour (value), as opposed to those with unpredictable future revenues (growth). It’s a matter of perception – interest rates alter how analysts value companies, just like how the sea level changes the impression of a mountain’s height.

The fact remains, a valuable

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LAWRENCE LAM

company will remain valuable, just as a mountain remains a mountain. The effectiveness of either strategy, growth or value, is driven by the prevailing market conditions and whichever curries favour. Just like fashion trends, market conditions are becoming increasingly unpredictable.

Growth investors flourished last year as technology companies soared, but if your allocation had been solely to growth, you would be having a rough couple of months of late. The key to a resilient strategy is to remain adaptive. This means having a balanced portfolio that flexes with prevailing conditions without being overly extreme any which way.

And this is how I’ve positioned my portfolio.

PORTFOLIO STRUCTURE IN TODAY’S ENVIRONMENT Given the inherent uncertainty and whimsical views of the market, there is opportunity to profit from both growth and value when markets flip from one school of thought to the other.

With a dual structure, a portfolio remains balanced, there are no big bets and risk is tempered.

What I’m seeking is a resilient portfolio that focuses on two types of buds.

Bud 1: Emerging companies selling new products and services.

Bud 2: Existing companies

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experiencing temporary price dislocations but due for a resurgence.

This structure captures the rise of both growth and value whichever the direction of sentiment. A 50/50 split at the start, which is then flexed when the opportunities prevail.

When I look for the Bud 1s, I’m looking for emerging companies that offer a compelling new product or service. They aren’t startups, their product should be new, yet proven with growing demand. The customer base absorbs the new product like a fresh paper towel to a drop of water. It solves a problem the world has struggled with previously and craves for.

When analysing the Bud 2s, the lens is different – I’m looking for a resurgence or reinvention of an established business. Sentiment surrounding them may be negative and they may be facing a challenging macro environment.

I’m looking for headlines that make Mr Market nauseous. The bigger his overreaction, the better the opportunity.

GROWTH – THE FIRST MOVER ADVANTAGE Delving further into the first type of buds – emerging companies selling new products and services. This is all about capturing long-term possibilities and investing in growth opportunities.

Given today’s market conditions, it’s important to de-risk growth investing given the uncertainty with inflation and interest rates. I mentioned one of the strategies is to stick with proven new products that are already experiencing growing customer demand. Equally important is to find companies facing few competitors. If they’re selling a new product or service,

they should be one of the first movers solving a big problem for the world. Again it’s all about de-risking the potential for a margin squeeze if inflation picks up. The safest companies in inflationary environments are those that command monopolistic pricing power.

Some readers may wonder whether they should just avoid growth investing altogether? The weakness of this strategy is it assumes you’ll be 100% right about the timing of when interest rates will rise. The all-terrain portfolio seeks to capture gains from any possible direction the market takes, including the next generation of world-changing companies. Sea levels fluctuate with the tide, but mountains will still be mountains.

VALUE – OPPORTUNITIES LIE WHERE THERE IS GREATEST ANXIETY Equally important is the search for the second type of buds – existing companies experiencing temporary price dislocations but due for a resurgence. These are the established businesses that haven’t fully recovered from the pandemic – and there’s plenty of them globally.

In Australia we’ve recovered quickly but if you look across Europe, US and Asia, industries such as entertainment, hospitality, drinks, logistics and leisure will explode when their lockdowns abate.

Mr Market ruminates on uncertainty and often winds himself up in knots. Look for areas of greatest anxiety and that’s where you’ll find the greatest value. Value investing is about picking up immediate mispricings and targeting shorter term profits. But be prepared when stocks reach full value, you’ll need to offload and recycle

“As the world recovers from this one-in-acentury event, pay attention to both the emerging new buds and the recovery of the existing trees.”

– Lawrence Lam the strategy when growth plateaus to normalised rates.

BALANCING THE RISK AND REWARD How the portfolio gels together is equally important as each individual investment. I spend the same amount of time thinking about the correlations between each investment to ensure the all-terrain portfolio spreads volatility. Look far away to Europe and Asia which are on a different recovery trajectory to the US and Australia.

As specialists in founder-led companies, I also find European and Asian founders more prudently focused on generating profits rather than pumping revenue metrics, which again tempers the risk.

After any devastation, there will always be new growth. As the world recovers from this one-ina-century event, pay attention to both the emerging new buds and the recovery of the existing trees.

There are two types of gains to be made so make sure your all-terrain portfolio places you well for both.

Lawrence Lam is managing director and founder of Lumenary.

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30 | Money Management May 6, 2021

Toolbox

EOFY STRATEGIES, TIPS AND TRAPS As the end of financial year approaches, Anna Mirzoyan gives financial advisers tips and strategies to use with clients and the traps to avoid.

WITH THE END of the financial year fast approaching, it may be the time for financial advisers to review certain strategies and ensure their clients are maximising opportunities. The following article provides a summary of common end of financial year (EOFY) opportunities, highlighting the potential tips and traps that are worth considering.

SUPERANNUATION Maximise concessional contributions – concessional contributions (CCs) are capped at $25,000 for the 2020/21 income

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year and will be indexed to $27,500 from 1 July, 2021. If certain requirements are met, individuals can carry forward unused amounts from the 2018/19 and 2019/20 financial years and make contributions above the annual cap without having to trigger penalties. As the carry forward arrangement was introduced on 1 July, 2018, unused caps from previous financial years cannot be carried forward to future years. To be able to take advantage of the carry forward arrangement before 30 June, 2021, individuals’ total

superannuation balance (TSB) on 30 June, 2020, must have been below $500,000.

Maximise non-concessional contributions – non-concessional contributions (NCCs) are capped at $100,000 for the 2020/21 income year and will be indexed to $110,000 from 1 July, 2021. If certain requirements are met, individuals can bring forward two years of NCCs and contribute up to $300,000 before 30 June, 2021, without having to exceed the cap.

To be able to take advantage of the full bring forward arrangement before 30 June, 2021, the individual

must have been below age 65 on 1 July, 2020, and their TSB on 30 June, 2020, must have been below $1.4 million.

Should the full bring forward amount be contributed before 30 June or after 1 July considering the indexation of the cap? If the bring forward is triggered after 1 July, 2021, up to $330,000 can be contributed as opposed to a maximum of $300,000 if triggered before 1 July, 2021. The optimum outcome may be limiting NCCs to $100,000 in 2020/21 and using the bring forward after 1 July, 2021. By doing this, a total of $430,000 can

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be added to super for a couple of months (June-July).

Accessing the co-contribution – individuals with assessable income of below $54,838 may qualify for the government co-contribution of up to $500 if they make a NCC of $1,000 before 30 June, 2021. To qualify for the co-contribution: • At least 10% of assessable income must be received from employment or selfemployment arrangement; • The individual must be below age 71 at the end of the financial year; • They must have TSB of less than $1.6 million on 30 June 2020; and • They must lodge a tax return for the 2020/21 income year.

Make a spouse contribution – ITAA 1997 s290-230 – couples with one spouse earning a low income or no income, may benefit from the spouse tax offset if the highincome earner makes a spouse contribution into the low-income earner spouse’s superannuation.

The maximum offset that can be claimed is $540 where the low-income earner spouse’s income is below $37,000 and $3,000 is contributed before 30 June. The contribution amount is not limited to $3,000, however, the maximum offset that can be applied is limited to $540 ($3,000 at 18%). The amount contributed will count toward the receiving spouse’s NCC cap for the year and can only be accepted if their TSB was below $1.6 million on prior 30 June. The amount can be contributed regardless of the work test if the receiving spouse is below age 67. If aged between

07MM060521_30-36.indd 31

67 and 75, the receiving spouse must meet the work test requirement or the one-off work test exemption. The contributing spouse does not need to meet any eligibility criteria.

Contributions splitting – another way to increase spouse’s super is implementing the contribution splitting strategy. The strategy allows eligible spouses (married or de facto) to split up to 85% of concessional contributions (including mandatory employer contributions) made in the prior financial year. 30 June, 2021, is the deadline for splitting concessional contributions made in the 2019/20 income year. Amounts split are assessed as a rollover for the receiving spouse and do not count towards the receiving spouse’s contribution caps.

First Home Super Saver (FHSS) Scheme – individuals saving for their first home may benefit from making voluntary contributions to super before 30 June. The FHSS Scheme allows first home buyers to make voluntary contributions of up to $15,000 to superannuation per financial year while saving towards the deposit in a tax-effective environment. After contributing for a couple of years, they can withdraw these contributions (up to $30,000 per individual) and use the proceeds towards the acquisition of their first home.

Reviewing Transition to Retirement (TTR) strategies – individuals transitioning to retirement may benefit from the review and refresh of strategy before 30 June. In reviewing the strategy, the indexation of concessional contributions to be taken into consideration together

with the increase in the rate of superannuation guarantee charge (SGC) to 10% (both changes are due on 1 July, 2021). TTR pensions may be refreshed in June without having to draw a minimum amount from the new pension that commences in June.

Commencing a retirement income stream – with upcoming indexation of the transfer balance cap (TBC) from $1.6 million to $1.7 million, when recommending a new retirement income stream to individuals who have not started a transfer balance account or partly used the TBC in the past, consideration may be given to whether the new pension should commence before or after 1 July, 2021. If commenced after 1 July, 2021, these individuals may take advantage of the indexed cap and be able to transfer greater amounts to a tax-free pension. Individuals that have fully utilised the current TBC will not benefit from the upcoming indexation.

Self-managed super fund (SMSF) contribution reserving – this strategy allows SMSF members to make personal deductible contributions over the annual cap in June and claim a tax deduction for the current year. The contribution is then allocated to the member's account before 29 July and counts towards the next year’s cap. The strategy may be beneficial to an individual with a TSB greater than $500,000, and as such, not eligible to utilise the carry forward arrangement.

SMSF meeting the minimum pension requirement – SMSF trustees with members in the retirement income phase must ensure the minimum pension

requirement is met before 30 June.

Otherwise, the income stream will be taken to have ceased for income tax purposes at the start of the year and they will lose the eligibility to claim exempt current pension income (ECPI) for that year.

SMSF with in-house assets – generally speaking, in-house assets cannot be more than 5% of the fund’s total assets. In normal circumstances, if at the end of the financial year the level of in-house assets exceeds 5% of the fund’s assets, the trustees must prepare a written plan to reduce the market ratio to below 5%, and the plan must be executed before the end of the following financial year. However, due to the economic impact of COVID-19, the Australian Taxation Office (ATO) will not be undertaking compliance activity if in-house assets exceeded 5% on the 30 June, 2020, and trustees have been unable to execute the rectification plan before 30 June, 2021, because the market has not recovered.

TAXATION Pre-pay income protection premiums – individuals holding income protection insurance outside of superannuation can pre-pay premiums for the next 12 months to bring forward the tax deduction to the current financial year. This may be beneficial where individual has larger than expected taxable income for the current year.

Prepay interest on investment loan – similar to pre-paying income protection premiums, pre-paying deductible interest on an investment loan before 30 June, 2021, will bring Continued on page 32

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32 | Money Management May 6, 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 31 forward the tax deduction to the current financial year.

Trust distribution resolution – trustees wishing to make beneficiaries of the discretionary trust presently entitled to trust income for the 2020/21 year by way of making a resolution, must do so before 30 June, 2021, unless the deed specifies otherwise. The resolution establishes beneficiaries assessed on the trust’s net income.

SOCIAL SECURITY Gifting – social security recipients wishing to gift an amount or an asset within the allowable disposal amount can do so before 30 June.

These individuals can gift up to $10,000 before 30 June and another $10,000 after 1 July, 2021, a total of up to $20,000 over June and July. Individuals in receipt of government benefits can gift up to $10,000 in a single financial year or up to $30,000 over five rolling financial years. However, the amount gifted in any given financial year cannot exceed $10,000 or the deprivation rules will be applied.

The approaching end of the financial year presents a great opportunity for advisers to ensure that their clients are strategically positioned to maximise the opportunities appropriate to their personal circumstances. It is important that you have these opportunities front of mind during your ongoing engagement with your clients, and allow sufficient time to implement appropriate strategies prior to 30 June.

Anna Mirzoyan is technical and compliance officer at Lifespan Financial Planning.

07MM060521_30-36.indd 32

1. Elisa (age 66) retired two years ago and has been living on investment earnings since then. Her assessable income for the 2020/21 is likely to be around $31,000. Elisa made a non-concessional contribution of $100,000 into superannuation in March 2021. Her total superannuation balance (TSB) on 30 June, 2020, was $800,000. Would Elisa qualify for the co-contribution after lodging her tax return for the 2020/21 income year? a) Yes - her assessable income is below the income threshold. b) No - her assessable income is derived from investment income only. c) No – she is over age 65. d) Yes – she is below age 71.

2. Alan (age 57) sold an investment property in August 2020 and realised large capital gains. Alan’s TSB on 30 June, 2020 was $480,000. The TSB in May 2021, when the contribution is being made, is $520,000. Would Alan be able to carry forward unused concessional contributions (CCs) and make a personal deductible contribution of $50,000 in the 2020/21 without exceeding the cap based on the following assumptions?

Unused CC cap for 2017/18: $10,000 Unused CC cap for 2018/19: $15,000 Unused CC cap for 2019/20: $5,000 Unused CC cap for 2020/21: $25,000 a) No, Alan is not able to make a personal deductible contribution of $50,000 because his TSB at the time of making the contribution exceeds $500,000. b) Yes, Alan is able to make a personal deductible contribution of $50,000 as his TSB on 30 June, 2020, was below $500,000. c) No, Alan is not able to make a personal deductible contribution of $50,000 as the amount will exceed the available cap for 2020/21. d) Yes, Alan is able to make a personal deductible contribution as of $50,000 as the amount is within the available cap for 2020/21.

3. Which of the following answers is correct when considering gifting an amount to charity before 30 June, 2021, assuming no prior gifts have been made by the individual over the past five years: a) Maximum of $10,000 can be gifted. b) $30,000 can be gifted as the individual has not gifted any amounts in the past five years. c) $20,000 can be gifted. d) None of the above.

4. Sanjay commenced a tax-free retirement income stream in September 2019 with a purchase price of $1.6 million. With the transfer balance cap (TBC) due to be indexed to $1.7 million on 1 July, 2021, is Sanjay able to make a non-concessional contribution of $100,000 and commence a new account based pension with $100,000 after 1 July, 2021? a) Yes. The TBC will be indexed to $1.7 million on 1 July, 2021, and Sanjay only used up $1.6 million of the cap in September 2019. b) Yes. The indexation will apply to everyone with no restrictions. c) No. Sanjay has fully used the TBC in September 2019 and will not be able to access the indexed amount. d) No. The indexation of TBC only applied to individuals who have never had a transfer balance account before.

5. Jill (age 45) sold an investment property recently and wishes to maximise her after tax contributions to superannuation over the next few months. Jill’s TSB on 30 June, 2020, was $250,000. Which of the following would best meet Jill’s objective? a) Making a non-concessional contribution of $100,000 in June 2021 and $330,000 in July 2021. b) Making a non-concessional contribution of $300,000 in June 2021 and $330,000 in July 2021. c) Making a non-concessional contribution of $200,000 in June 2021 and $130,000 in July 2021. d) Making a non-concessional contribution of $300,000 in July 2021 and $30,000 in July 2021.

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/features/tools-guides/ eofy-strategies-tips-and-traps For more information about the CPD Quiz, please email education@moneymanagement.com.au

28/04/2021 4:36:29 PM

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26/02/2021 10:18:18 AM

34 | Money Management May 6, 2021

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

Appointments

Move of the WEEK MOVE OF THE WEEK Annick Donat Chief executive

Madison Financial chief executive, Annick Donat, has been appointed as chief executive of Clime Investment Management.

Clime announced to the Australian Securities Exchange (ASX) that Donat would become the company’s CEO from 1 May.

MLC Life Insurance has made two senior appointments, Lesley Mamelok as general manager, finance and deputy chief financial officer (CFO), and Robert Baillie as general manager, capital management and corporate finance.

Mamelok would oversee the financial management and control of MLC Life Insurance, which included the areas of expense management, investment control, tax, financial accounting, and reporting.

She had worked in Australia and the UK and was formerly the CFO for Integrity Life, and for the past year had also been the company’s acting chief executive.

Baillie would be responsible for the overall capital management of MLC Insurance, which included the areas of treasury, corporate finance, business planning and reinsurance strategy.

He was a qualified actuary with over 30 years’ life insurance experience in Australia and overseas, primarily with global insurance groups.

Prior to joining MLC Life Insurance, Robert was the head of actuarial (capital and ALM) at TAL since 2015.

Both would report to CFO, Kent Griffin, who said the appointments would help strengthen the company’s goal to be sustainable in the long-term.

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Donat became part of Clime as a result of the company’s acquisition of Madison Financial in June, last year.

Prior to heading up Madison, Donat was head of licensee development at BT Group licensees.

Privately-owned South Australian wealth advisory firm Perks Private Wealth has appointed Christo Hall as chair of the investment committee.

Hall joined at the start of May and had over 30 years’ experience in senior roles with organisations such as BlackRock and Argo Investments.

As well as having served on numerous investment committees in the past, he was currently the chief investment officer at Ellerston Capital.

Simon Hele, Perks Private Wealth head, said the appointment reinforced the firm’s commitment to further building out its investment research capabilities and continuing to enhance its innovation in investment strategies in the South Australian market.

Mercer has appointed Tricia Nguyen as head of Mercer Sentinel, Pacific, where she will lead the firm’s outsourced due diligence and custody consulting capabilities.

Mercer’s institutional wealth leader, Simon Eagleton, said Nguyen’s appointment was the final step of a carefully planned succession strategy as current head Peter Baker transitioned to a part-time basis.

Nguyen joined Mercer in 2015 and had been leading the team in assessing operational risk

within investment management operations across all asset classes.

As an outcome of the organisational change, Ash Moosa, would assume the role of lead consultant, heading up Mercer Sentinel’s custody consulting services.

Having joined Mercer in 2015, Moosa had more than 30 years’ experience in financial services, with significant expertise in the custodian space.

ClearView has appointed former Australian Unity Financial Advice executive, Tony Mantineo, to the newly-created role of head of business growth.

In the role, he would be responsible for leading adviser recruitment for the group’s flagship dealer group, Matrix Planning Solutions, and B2B outsourced offer LaVista Licensee Solutions.

Mantineo’s previous roles included general manager of business growth at Australian Unity Financial Advice, and national business growth and alliances manager at Millennium 3.

He would be based in Melbourne, reporting to ClearView general manager licensee services, Todd Kardash.

T. Rowe Price has appointed Mike Weigand to the newly-created role

of Asia Pacific (APAC) regional operating officer.

Weigand brought nearly two decades of global management experience and was previously T. Rowe Price Group’s head of internal audit based at the firm’s headquarters in Baltimore, US. Based in Hong Kong, he would be responsible for client account services, investment operations, enterprise risk, finance, enterprise change, tax, human resources, legal and compliance, procurement, technology, and real estate and workplace services.

He would continue to report to Baltimore-based Céline Dufétel, chief operating officer and chief financial officer.

Investment consulting firm JANA has appointed Morningstar risk director, Eleanor Cheng, as a consultant.

In the role, she would bring technical expertise to JANA’s clients through governance and operational due diligence research and process. She would be based in Sydney, reporting to senior consultant Jo Leaper.

At Morningstar, Cheng was director of risk management (APAC).

Ann-Mary Rajanayagam was also recently appointed as head of technology and operation in March.

28/04/2021 2:28:43 PM

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26/02/2021 10:55:29 AM

OUTSIDER OUT

ManagementMay April6,2,2021 2015 36 | Money Management

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

Plenty of fizz in Douglass as he backs himself OUTSIDER would never be so unkind as to repeat the rather cruel description of Magellan boss, Hamish Douglass as “the San Pellegrino of Australian funds management” just because he may not have played his absolute “A” game lately.

No, no. Just like a superannuation fund trustee, Outsider knows that good investment management is a long game requiring an eye for detail, astute strategy and a certain amount of patience for when things don’t entirely go your way.

Just like San Pellegrino, the market doesn’t always fizz.

What is more, those who have raised a quizzical eyebrow at the occasional Douglass analysis of COVID-19 and the efficacy of vaccines

Aberdeen, Abrdn – the devaluation of vowels?

should perhaps reserve judgement until the fat lady sings or finds herself on a ventilator – whichever comes first.

Thus, Outsider feels sure that Magellan’s dedicated investors and shareholders will not begrudge Douglass topping up his investments in the Magellan Global Fund and the Magellan High Conviction Trust by a modest 100,000 units apiece on the basis that if you can’t back yourself, who can you back?

Douglass watchers will know that his interests in Magellan are held via the rather modestly-titled Midas Touch Investments Pty Ltd, Douglass Employee Share Fund Pty Ltd, Douglass Foundation Pty Ltd, and Hambella Pty Ltd. Not a mention of overpriced Italian fizz anywhere.

IT goes without saying that Outsider is an elderly gent who sometimes struggles to keep up with modern practices and idioms.

So, he knows that local Standard Life Aberdeen boss, Brett Jollie, will forgive the grey-haired Outsider for being absolutely, positively, eye-wateringly and abjectly confused about why anyone would want to turn Aberdeen into Abrdn.

Pondering the issue, Outsider wondered whether someone at Aberdeen Central had repeated one of Outsider’s greater misjudgements by employing a journalist who had trouble with both facts and spelling and had compromised by just accepting a total absence of vowels.

Aberdeen is in reasonable proximity to a number of good distilleries so perhaps the vowels got mislaid in the tasting room.

Then he read Standard Life Aberdeen had explained the new identity had been driven not by an over-indulgence in single malt but by a desire to have “a modern, agile and digitally-enabled brand” and wondered whether the undoubtedly high-priced consultants who inspired the exercise were actually numerate rather than literate as opposed to the former Money Management journalist who was neither.

Either way, Outsider takes the view that people who spend big money on a rebranding exercise rarely acknowledge that a mistake might have been made and so he is now keeping his old Aberdeen golf polos in the hope that they become collector’s items.

If only advisers Persevered like Jane Hume “DID you know that the marginal tax rate in 1973/74 was 66%? Oh my heavens, thank goodness for the Liberal Party,” our persevering Senator Jane Hume said at the FSC Life Insurance Summit.

And thank goodness for dear Persevering Jane, indeed. Now only dealing with a 45% marginal tax rate on her $264,000 a year Parliamentary salary, which also includes a generous 15.4% superannuation contribution, while she continues to debate the merit of raising the super guarantee to 10%.

Outsider understands that

OUT OF CONTEXT www.moneymanagement.com.au

07MM060521_30-36.indd 36

many would argue it’s fair enough that the wealthy should be able to keep as much of their “hard-earned” cash as possible, but in reality, taxation revenue can be used to fund public services like roads, schools and hospitals – particularly if it is in a marginal seat. But also, of course, it can be used to fund corporate regulators.

What is more, when there is not enough tax revenue to fund these services, Governments are required to come up with other ways to fund them, as is the case with the corporate

regulator which requires advisers to foot the bill.

Thus, at a time when financial advisers are fleeing the industry due to the costs of fulfilling the education requirements, as well as fees to continue to practice in the industry, hopefully they can remain comfortable knowing that Persevering Jane has not had to compromise her lifestyle and fit in with the other plebians, because the Liberal Party has her back.

As Persevering Jane said, thank goodness for the Liberal Party. Perhaps advisers should move to a marginal seat.

"We have the beginnings of artificial intelligence, no match for natural stupidity obviously."

"For a lawyer to have the chance to win this award, there must have been a lot of regulatory change."

– Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume

– Chad Downie, TAL general manager – legal, after winning the FSC Life Insurance Industry Leader award

Find us here:

28/04/2021 3:08:03 PM