Money Management | Vol. 33 No 7 | May 23, 2019

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MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 33 No 7 | May 23, 2019

ETFs

ETFs: Are they soon to be an adviser’s best friend?

ETFs: SOON TO BE AN ADVISER’S BEST FRIEND?

27

PORTFOLIO PROTECTION

30

In a crisis, is crash protection better than cash?

GENDER IN FINANCIAL SERVICES

Leading the charge on super fund member engagement

ASIC suggests formal IDR complaint recognition of Twitter comments

BY MIKE TAYLOR

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Why are women losing out?

THE ways in which women lose out where money is concerned are wellknown, from the pay gap between men and women to how that funnels down to cause a difference in their superannuation fund balances.

But the difference goes beyond just women’s bottom lines. Women are less likely to see a financial adviser than men, citing both cost and not understanding the role of planners as reasons why. They’re also more reticent to supplement their income with any additional investment than men, with a recent report finding that less than half held money in any savings products other than superannuation.

Again, cost was a factor in this, with many female respondents saying they didn’t have spare money to invest. Some also felt investing was too complicated or too risky and that they didn’t know where to start, indicating a clear knowledge gap between women and men looking to invest.

Teaching women about the value of both financial advice and investments then, as well as how to actually go about getting both, could help improve the savings gap between them and men.

There’s also a gap between the numbers of men and women hired in the financial services industry, despite the fact that having more of the latter could improve client outcomes.

A report from the Financial Services Council found that some female financial advisers believed that their gender was an advantage in the profession, for example, as clients were more likely to open up to them about their circumstances.

A fund manager also observed that many women in their 40s had years of experience making financial decisions for themselves and their families, and that the industry needed more people like that around the table.

This is on top of the general business benefits associated with having greater gender diversity in workplaces, such as a greater ability to stabilise profits and revenues.

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Full feature on page 18

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WIFS

THE Australian Securities and Investments Commission (ASIC) has canvassed giving social media comments such as those made on Twitter or Facebook formal complaint status under the internal dispute resolution (IDR) processes required of financial planning firms and superannuation funds.

ASIC had issued a discussion document in which it has not only canvassed the recognition of social media comments, but also an expansion of what represented a complaint to include “expressions of dissatisfaction about staff”.

The discussion paper said ASIC considered the move to be appropriate, “given that long-established patterns in how consumers complain to organisations are changing dramatically”.

“We consider that as consumers move beyond telephone, email and traditional written mediums, financial firms should: (a) adopt a proactive approach to identifying complaints made on their

social media platform(s); and (b) have processes in place (including appropriate links between media and complaints departments) to deal with these matters through their IDR process,” the discussion paper said.

It said that, at a minimum, ASIC expected that “complaints made on a financial firm’s own social media platform(s) will be dealt with through the firm’s IDR process when the consumer is both identifiable and contactable”.

The discussion paper said ASIC’s own research into consumer experiences with financial IDR processes and consumer research conducted by the Central Bank of Ireland indicated that social media was being used by consumers as a complaints channel to financial firms.

“In addition, more general consumer research in the Australian, UK and US markets strongly indicates that social media is being used by many consumers as a preferred channel for customer service interactions with organisations,” it said.

Last report by Parliamentary Committee backs continuing vertical integration IN a report tabled well after the proroguing of the Parliament, a key parliamentary committee has rejected legislation which would have substantially ended vertical integration in the financial services industry The Senate Economics Legislation Committee rejected the legislation put forward by the Pauline Hanson’s One Nation Party which was aimed at protecting bank deposits by ending vertical integration and therefore eliminating cross-selling.

Hanson had backed the legislation in the Senate with a second reading speech which stated: “The vertical integration of the banks providing additional services including financial advice, insurance Continued on page 3

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2 | Money Management May 23, 2019

Editorial

mike.taylor@moneymanagement.com.au

FRANKING CREDITS PROOF THAT NO POLICY IS SET IN STONE Strategies based on particular government policy positions should be regarded as having reliable shelf-life no longer than that of the Government which introduced them.

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775

FINANCIAL PLANNERS know better than most how quickly Governments can change policies and how that knowledge should be factored into the strategies they recommend to clients.

In the immediate aftermath of the 2019 Federal Election, it is worth suggesting that financial planners should take pause to consider the transitory nature of Government policies and just how careful they need to be in helping clients set their strategies.

Nothing serves to illustrate this better than the reality that the election of a Labor Government would result in the removal of two staples of many wealth creation strategies – negative gearing and refundable franking credits.

To put this into context, readers need to reflect upon the numerous other policy decisions put in place by governments over the past 15 years and which therefore became embedded in wealth accumulation strategy decisions only to be removed or significantly pared back when a new government came to power. Transition to retirement (TTR) comes to mind, as do superannuation co-contributions and, of course, the allowable level of concessional super contributions.

It is therefore incumbent on advisers, as it always has been, to explain to their clients that all policy-based strategies (virtually all

of them) should not be regarded as set in stone but, rather, open to change at the discretion of the government of the day subject to passage through the Parliament.

Few proposed policy changes over the past 20 years have served to animate the financial services industry more than the ALP’s proposals to end the refundable franking credits regime simply because it had become such an integral part of so many postretirement planning strategies, particularly for those with selfmanaged superannuation funds (SMSFs).

No one, not even the ALP, debated the degree to which the proposed changes would impact the retirement incomes of those affected but its Labor proponents judged that it would not affect the vast majority of the electorate and that therefore the political downside risks were manageable.

By comparison, the ALP arguably hedged its bets where ending negative gearing was concerned by undertaking to grandfather existing arrangements.

Why the difference between negative gearing and franking credits? Because of the Labor Party’s desire to avoid a knee-jerk reaction in the housing the market and because eliminating refundable franking credits has the virtue of delivering an almost immediate

boost to the Budget bottom line.

At the time of writing the outcome of the 18 May Federal Election is still not known, but should a change of government occur then financial planners, particularly those providing advice to clients with SMSFs, will find themselves busy adjusting strategies and investment allocations to cope with the changed circumstances.

Will there be an impact on markets? Probably. Will it unsettle a Shorten Labor Government?

Probably not.

And the question needs to be asked: In the event of a loss on 18 May, is it likely that a future Liberal/ National Party Coalition would reinstitute the franking credits regime introduced by the former Howard Government and which became effective in 2001.

The answer is maybe, but the prospect is remote in circumstances where for at least the next decade a future of Australian government is unlikely to have charge of an economy capable of funding such a policy.

In the meantime, the ALP’s approach should serve as a reminder to planners that governments change and so too do policies.

Mike Taylor Managing Editor

mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@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@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi

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May 23, 2019 Money Management | 3

News Last report by Parliamentary Committee backs continuing vertical integration Continued from page 1 and superannuation have been shown to be the root cause of rorts, over charging and profit gouging”.

However, both Coalition and Labor Party senators rejected the bill with the chair of the Committee, Victorian Liberal Senator, Jane Hume stating the Committee was confident the current legislative protections “are sufficient to ensure that the money held in bank deposits are safe”.

“In support of that conclusion, the Committee notes that during 2008-09, no Australian bank collapsed and no deposits were lost despite the worst financial crisis since the Great Depression of 192933,” her report said.

Labor members of the committee also rejected the bill noting that neither the Royal Commission nor the Productivity Commission had recommended any structural separation of the banks.

However, their part of the committee report stated: “Labor Senators are determined to ensure that the banking and financial sector is held to account for their actions wherever there has been misconduct or unethical behaviour” and added that they were focused on implementing the recommendations of the Royal Commission to “deliver lasting, comprehensive change to financial services”.

“Labor will fully implement 75 of the 76 recommendations, and will implement the final recommendation, Recommendation 1.3— Mortgage Broker Remuneration, in a manner that achieves the objectives but without harming competition in the retail mortgage market.

We are sticking to our tougher, fairer and faster plan to implement its recommendations,” the Labor Senators said.

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Adviser use only. Information current as at 16 April 2019. AMP Life Limited ABN 84 079 300 379. *Insurance bought through advisers, source: moneysmart.gov.au/tools-and-resources/calculatorsand-apps/life-insurance-claims-comparison-tool April 2019. ^Based on AMP claims paid during 2018.

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4 | Money Management May 23, 2019

News

Industry funds mark both parties down on Age Pension taper

Insurtech industry growing

BY CHRIS DASTOOR

BY MIKE TAYLOR

NEITHER of the major political parties have adequately addressed the Age Pension taper rate, according to industry funds representative body, the Australian Institute of Superannuation Trustees (AIST).

In an analysis of the superannuation policy approaches being offered by the Australian Labor Party (ALP) and the Liberal/ National Party Coalition, the AIST surprised no one by giving higher marks to the ALP, but marked both sides down on the pension taper rate.

AIST chief executive, Eva Scheerlinck said neither party had made a clear commitment to addressing concerns with the Age Pension taper rate, which was too steep and denied many retirees with

relatively low super balances access to the part Age Pension.

“We think the current taper rate is unfair and this need to be addressed to restore integrity in the super system,” she said.

The AIST had produced a policy scorecard rating the ALP’s policies against that of the Government and concluded that “Labor’s policies will have more positive impact on superannuation and the retirement outcomes for most working Australians”.

Scheerlinck said Labor’s package of reforms - which included reforms to improve women’s balances, addressing unpaid super and reducing tax concessions for high income earners – would improve the fairness and sustainability of Australia’s retirement income system.

She claimed key Coalition

superannuation policies were more limited and would largely benefit wealthier individuals with the means to make voluntary contributions.

“The nation’s ageing population, changing work conditions, the gender pay gap and falling levels of home ownership are among the key issues that need to be considered in developing appropriate superannuation and retirement policies,” Scheerlinck said.

“Good superannuation policy needs to be firmly focused on the long-term, with the aim to ensure that all genders and generations get a fair deal. This includes the young and old, those working full-time as well as those working part-time, and those taking time out of the workforce to care for family members, which is the situation for many women in our community.”

Planning/accounting convergence predicted in post-RC world MARKET trends will inevitably force greater convergence between financial advice and accounting practices, with advisers adopting modes of behaviour and conduct more in line with established norms in the accounting profession, according to a new white paper developed by publicly-listed accountancy-based planning firm, CountPlus.

The whitepaper, based on research undertaken by CoreData, argues that between now and 2024 the financial planning industry faces several critical challenges, with fault lines having already emerged within the underlying business models of certain financial advice businesses, “notably those residing within larger, vertically-integrated financial institutions”.

“Some may withstand additional shocks, while others are likely to succumb to these new pressures and simply disappear,” the whitepaper said.

It said that accounting firms that provided financial advice were likely to flourish as consumers increasingly sought out independent, highly-educated advisers who are free from conflicts

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of interest.

“As some financial advisers leave the industry, being unable to meet new professional and educational standards, the deficit will be filled by professional accountants, in whom the public holds greater confidence,” it said.

“The data is clear: The question is how likely is the service provider to act in your best interest? This behaviour (acting in a client’s best interest before the providers best interest) is the most powerful driver of trust.

For accountants the score is 82.3 per cent of mass affluent Australians agree, for advisers the score (post Royal Commission) 41.2 per cent.”

“The findings in this whitepaper are supported by research prepared for CountPlus by CoreData in the CountPlus Market Intelligence Report which concludes that the combined effect of regulatory changes and consumer demands for better services and transparency will be to push financial planning ever-closer to its desired status as a profession, converging with the accounting profession,” it said.

What is more, the whitepaper said the push had already begun for quality financial advisers to migrate away from the major institutions and to small independent businesses including accounting firms.

“As a result of this transformation, the market dominance of vertically integrated financial firms will, in all likelihood, diminish,” it said.

A report from Ernst & Young Australia (EY Australia) and Insurtech Australia has found Australia’s insurance technology (insurtech) sector has significantly grown the last year, with the number of companies in the market increasing by 53 per cent.

Internationally-founded insurtech companies that entered the Australian market accounted for 30 per cent of this growth.

Andrew Parton, partner at EY Australia, said Australia’s insurtechs had an increasingly important role in the future of incumbent insurers, particularly in health and life insurance markets.

“In the last year, we’ve seen collaboration between incumbents and insurtechs – one of the major impediments last year – increase significantly, with a 75 per cent increase in active partnerships,” Parton said.

“While the majority (72 per cent) of insurtechs are now collaborating with incumbent insurers, it’s now about making that collaboration more impactful.

“The research found only 18 per cent of insurtechs believe incumbents are currently doing enough to collaborate with them in order to truly drive industry innovation.”

Simon O’Dell, Insurtech Australia chief executive, said Australia had been fast becoming a global centre for insurance innovation, which had been demonstrated by the rapidly increasing size of the insurtech ecosystem.

“Both locally founded start-ups, and international insurtechs looking to scale internationally now recognise our local market as a springboard to global markets, in particular the US,” O’Dell said.

“We have all the major international insurance companies in this market, but the market is small enough for big companies to be agile, embrace innovation, and make decisions quickly.”

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May 23, 2019 Money Management | 5

News

Ethics Centre develops FASEA accredited ethics course for financial advisers

BY OKSANA PATRON

THE Ethics Centre has announced it is developing a new Financial Adviser Standards and Ethics Authority (FASEA) accredited ethics course for financial advisers.

Both the pilot ethics and professionalism bridging course would be delivered in conjunction with an Australian university in late 2019, the organisation said, and they would aim to support advice practices in integrating the FASEA reforms into their operations.

All expressions of interest from higher-education providers to facilitate the course after the pilot is complete would be welcomed, the Ethics Centre said.

The Ethics centre’s executive director, Simon Longstaff, stressed that the aim for the pilot course was to set the benchmark for ethics education for the financial advice community.

“Financial advisers should be encouraged to offer a competitive professional service in all areas but one – their ethics,” he said.

“The ideal is for this emerging profession to have a common ethical foundation, enriched

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by a common understanding informed by a common set of educational experiences.

“Our hope is that this new course will be widely embraced across the profession – for the good of

society and the clients it serves.”

FASEA clarified that it was yet to approve any of the

25 applications it had received by postgraduate diploma and bridging course providers

following the Ethics Centre’s announcement, saying that it would do so by mid-June.

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6 | Money Management May 23, 2019

News

Wilson sees post-election hope for franking credits

BY MIKE TAYLOR

ONE of the mainstays of the campaign opposing the Australian Labor Party’s (ALP) move to remove refundable franking credits, fund manager Geoff Wilson, has signalled a continuation of the fight even if Bill Shorten becomes Prime Minister.

In a letter to shareholders, the chair of Wilson Asset Management said it was still possible the ALP’s franking credit changes would be blocked in the Senate.

“Regardless of which political party wins

the upcoming Federal Election, we hope that Labor abandons or dramatically changes this inequitable policy,” he said.

“We believe there is cause for hope. For example, nine of the 10 crossbench Senators have committed to blocking the changes if they reach the Senate in their current form and two have adopted our term for the policy – “retirement tax”.

Wilson said his company’s campaign against the proposal to remove franking credit refunds “had secured the policy’s position as a key election issue and ensured it has attracted the scrutiny it deserves”.

Tax advisers held to higher standard with client data

TAL cements dominance in super sector with new mandate

BY HANNAH WOOTTON

REGISTERED tax advisers are held to a higher standard than other financial planners when disclosing clients’ information to third parties, with the Tax Practitioners Board’s (TPB) Code of Conduct imposing more stringent requirements even than the Privacy Act. According to The Fold Legal associate, Chris Deeble, this difference came down to registered tax (financial) advisers holding highly confidential information for their clients, with the rigorous disclosure obligations in the TPB Code recognising that their clients had a strong interest in ensuring their information remained confidential.

Deeble believed that financial advisers broadly could benefit from considering the Code’s standards, however: “The TPB Code standard is helpful for any professionals who hold personal, legal or financial information for their clients,” he said.

“If you’re a registered tax (financial) adviser or hold confidential client information, it’s a good idea to review your disclosure and consent processes and documents to make sure you meet your obligations.”

The difference between the Code and the laxer privacy legislation were threefold. To start, the TPB Code extended to cover all client information for example, whereas the Privacy Act extended only to personal information.

Privacy law also only required a client’s consent if advisers were disclosing secondary information or personal information for a secondary purpose, while the Code required it for any disclosure to third parties. What could qualify as a third party was extensive – storing client data in the cloud, or entering client contact details into MailChimp, would both require disclosure under the Code.

Finally, the TPB Code also required that clients actively consent to the disclosure of their information.

The Privacy Act, in contrast, only required that advisers notify their clients on how their information would be used, with implied consent even proving permissible in some situations.

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HOT on the heels of TAL acquiring major industry fund Rest’s insurance mandate earlier this week, LGIAsuper has announced the company will take over its insurance contract from 1 July, this year, bringing a seven-year partnership with OnePath to an end.

The new mandate saw TAL reassert its market dominance within the group insurance sector, with multiple funds to offer contracts to the company citing its product offering and costs to super fund members as key to their decisions.

LGIAsuper’s decision to swap insurers came after an eight-month tender process managed by SuperRatings, which chief executive Kate Farrar said was sparked by a desire to find the best possible cover for members.

“Our members are our key driver and we firmly believe the new contract with TAL will help us to deliver better coverage, more convenient services and an enhanced member experience,” Farrer said.

“For instance, LGIAsuper members will have access to new digital tools, including an insurance needs calculator, to help them understand how much cover they might need across life stages.”

Farrer didn’t think the change from OnePath to TAL would have much impact on members’ accounts in the short-term, but said that there would be “excellent opportunities” to improve its insurance offering once TAL took over the contract.

TAL Group chief executive and managing director, Brett Clark, echoed this sentiment, saying: “Life insurance through superannuation is in the spotlight, however the superannuation model provides outstanding value for members. We look forward to working with LGIAsuper to provide tailored, value for money insurance solutions and supporting their members when they need us most.”

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8 | Money Management May 23, 2019

News

Remediation costs weigh on profits at Commonwealth Bank

BY LAURA DEW

COMMONWEALTH Bank has reported a 28 per cent fall in cash profit from continuing operations of $1.7 billion for the three months to 31 March as a result of paying out $714 million in

customer remediation.

This compared to an average during the first two quarters of the year of $2.3 billion.

The big four bank, which is Australia’s largest bank, said the remediation consisted of $334 million for Aligned Advice

remediation, $72 million for wealth customer refunds, $152 million in banking customer refunds and $156 million in other costs.

The total costs paid out by the bank so far were $2.17 billion with the majority of this, some $1.7 billion, paid out to wealth management customers.

Statutory net profit was $1.75 billion while operating income was down four per cent due to seasonal impacts and temporary headwinds.

Chief executive, Matt Comyn, said: “We continue to make progress on our strategy to become a simpler, better bank.

While headline profitability was impacted by higher remediation provisions, our sound business fundamentals ensure we remain well-placed in a challenging environment, highlighted in this quarter by volume growth in our core businesses, a strong capital position and continued balance sheet strength.”

ANZ P&I deal with IOOF on track, with caveat

BY MIKE TAYLOR

DESPITE the fall-out from the Royal Commission, ANZ and IOOF appear to be on track to complete the sale of the ANZ OnePath Pensions and Investment business to IOOF before the end of the year.

ANZ issued a statement saying that the two companies were continuing to work cooperatively on the transaction, albeit that ANZ was continuing to monitor IOOF’s response to matters raised by the Australian Prudential Regulation Authority (APRA) before making a decision about the transfer of the business.

It said ANZ completed the legal separation of its P&I business from its Life Insurance business last month and the sale of its Life Insurance business to Zurich was on track for completion on 31 May, 2019.

The announcement said that as of 11 May, the coupon rate ANZ paid on the debt note subscribed

by IOOF had reduced from 14.4 per cent a year to two per cent a year.

It said this related to an agreement reached in July, last year, under which ANZ agreed to transfer a partial economic interest of its Pensions and

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Investments business and legal ownership of its Aligned Dealer Groups to IOOF from 1 October, last year.

Under the agreement, ANZ received an initial payment of $800 million from IOOF, equivalent to approximately 82 per cent of the economic interests in ANZ’s P&I business, and ANZ paid a coupon rate on the debt note subscribed by IOOF.

Regulation stymieing retirement income product market

BY HANNAH WOOTTON

DESPITE Australia having a limited retirement income product offering compared to other developed countries, a regulatory framework created over two decades ago stymies companies wanting to launch new offerings.

Head of distribution for Allianz Retire+, a relatively new player on the post-retirement product stage, Catriona Wortley, told delegates at a Lonsec Symposium that the biggest issue the company faced in entering the Australian market was navigating its regulatory framework.

“Getting all the legislation, the Superannuation Industry Supervision (SIS) Act and Life Insurance Framework legislation, to work together for quite an innovative product was challenging,” she said, and took far longer than Allianz Retire+ had originally anticipated.

Wortley said that this “was not surprising at all”, however, “considering we have regulation that was put in place in the nineties”.

The SIS Act was enacted in 1993, while the LIF came into force in 1995.

Wortley also said that the providers faced commitment issues when bringing retirement products to the Australian market, needing to take a more long-term perspective when launching new offerings, and that there were distribution issues for such products in Australia.

Recent research by Allianz Retire+ found that people fear running out of money in retirement more than death however, and Wortley observed that the depth of retirement products on offer in Australia was “pretty poor”, emphasising the importance of improving the barriers faced by new offerings in the retirement income space.

15/05/2019 4:52:19 PM

May 23, 2019 Money Management | 9

News

ASIC spotlights industry fund vertical integration

BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has drawn a direct commercial link between Industry Fund Services (IFS) and the industry superannuation funds which both use it and utilise its financial planning services.

In doing so, ASIC made clear that it is prepared to treat industry superannuation fund structures in the same fashion as bank and other institutional structures where shareholdings and overlapping service agreements exist.

In a finding which has implications for 27 superannuation funds which are shareholders in IFS and as reported by Money Management, industry HostPlus was required to pay a $12,600 infringement notice issued by ASIC for making misleading claims about offering ‘independent advice’.

However, the critical element in the ASIC approach was that the regulator formally expressed concern that “HostPlus and IFS were not independent of each other”.

It said this was the case because “HostPlus employees were appointed as authorised representatives to provide financial advice under IFS’ Australian financial services license, HostPlus paid service fees to IFS for adviser services and at the relevant time, HostPlus was a shareholder of IFS’ ultimate holding company”.

In doing so ASIC clearly referenced that HostPlus was a shareholder in in IFS alongside 26 other industry superannuation funds including some of the largest including AustralianSuper, UniSuper and Cbus.

Midwinter acquires InvestmentLink

BY CHRIS DASTOOR

FINANCIAL planning software provider Midwinter has announced it has completed its transaction to acquire InvestmentLink.

InvestmentLink was Australia’s largest independent data feed repository, which fully serviced the Australian financial planning market.

The acquisition was completed on 10 May 2019 and financial details of the transaction had not been disclosed.

The majority of InvestmentLink staff would be retained, and the technology and teams would be consolidated over time.

Midwinter co-founders James Murphy, Andrew McClelland and Julian Plummer had been appointed to the InvestmentLink board.

Plummer would become managing director, while Salvador Saiz would maintain key relationships with platforms and datafeed clients.

“Midwinter identified that the InvestmentLink datafeed service will be a crucial component of the future advice landscape, given that the impending Open Banking legislation completely ignores superannuation products.” Plummer said.

“Additionally, we have found many of our digital superannuation fund clients prefer not to implement any systems where their members are required to share credentials to banking portals.”

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RETIREMENT INCOME MONTHLY UPDATE

Has the financial services industry failed retirees?

THE focus of the financial services industry for the last 30 years has been on producing wealth accumulation solutions to cater for all types of client risk appetite, meaning those looking for solutions in the decumulation phase have been let down.

Retirement solutions were limited by a one size fits all approach, instead of tailoring offerings to individuals’ specific needs. With over five million baby boomers moving into retirement, the need has never been greater for new and innovative solutions for Australian pre-retirees and retirees.

A study in the United States revealed that 63 per cent of respondents across generations fear running out of money in retirement more than death.¹ This may also be the case in Australia, where more than half of Australian retirees are spending less than the Age Pension each year.² These findings raise the question: do we need to re-think retirement income solutions altogether?

At the forefront of many retirees’ minds is the type of risk they want to mitigate. Unlike many people in the accumulation phase, retirees’ key metric of risk isn’t volatility. It is the fear of running out of money. The importance of financial security becomes far greater as we age, and this in turn can create financial anxiety.

An individual’s journey in retirement has its own set of challenges that can be overcome with the help of the financial services industry. For instance, forecasting the future cost of household expenses and healthcare can be overwhelming in the context of an unknown timeframe. There’s also anxiety around making the ‘right’ financial decisions during retirement.

Medication, sensory changes, and physical and mental changes can all affect the efficiency of how information is processed.³ How do we help retirees overcome financial anxiety and help them sleep at night? How do we ensure our communications are optimal at all times, especially when there’s a shift in cognitive efficiency?

Retirement planning requires a more holistic approach than might have been required during the accumulation years. As an industry we need to better understand the fears surrounding retirement, retiree definitions of risk and what behavioural or psychological factors might be influencing their attitudes to money.

We can and must do better. The retirement journey can be lived and enjoyed in many ways. Retirees deserve more than cookie-cutter solutions to invest their hard-earned money. The industry needs to give financial advisers retirement solutions that deliver security and income, with the flexibility and longevity to help clients adapt to and evolve with life’s ups and downs. ¹ 2017 Allianz Generations Ahead Study – Quick Facts #1, May 2017. ² Retirement Expectations and Spending Profiles, Milliman, 2018. ³ Emory Alzheimer’s disease Research Centre, Cognitive Skills & Normal Aging Fact Sheet.

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IN PARTNERSHIP WITH MONEY MANAGEMENT

15/05/2019 4:51:43 PM

10 | Money Management May 23, 2019

News

TAL to pull Asteron retail off-sale

BY MIKE TAYLOR

MAJOR insurer TAL has decided to take the Asteron retail product off-sale from new customers from 1 July, this year.

TAL, which acquired Asteron from Suncorp earlier this year, decided to take the retail product off-sale following a strategic review process.

The company said it had completed a strategic review of the retail business and operating model across both the TAL and Asteron brands with the ambition

of creating a single, market-leading life insurer and delivering the best outcomes for its customers and adviser partners.

“A key outcome of the review will be the restructure and realignment of both TAL and Asteron’s retail adviser focused businesses.

In addition, the Asteron retail product will be taken off-sale to new customers from 1 July 2019,” it said.

TAL said the restructure was anticipated to impact some employees within the TAL and Asteron businesses, with an introduction of some new roles and a reduction in the total number of roles in the retail channel across TAL and Asteron.

“TAL will be working with and supporting all employees throughout the consultation process,” it said.

Commenting on the move, TAL Group

chief executive and managing director, Brett Clark said that to deliver the best outcomes for customers and adviser partners, the company needed to simplify its retail business model.

“We believe it is in our customers’ and advisers’ best interest not to offer two similar retail propositions in the retail advised market,” he said.

“Having one retail adviser proposition gives clarity to the market, creates a simpler business structure and a more efficient service model, which allows us to provide better value propositions for customers and our adviser partners.

“The restructure and realignment will have no impact on our ability to service financial advisers or customers on existing Asteron or TAL policies.”

PIN-POINT GLOBAL OPPORTUNITIES Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) is part of the Global Legg Mason Inc. group.

Investors should brace for geopolitical volatility GEOPOLITICAL factors will impact Australian investment decisions over the next decade in a far more serious way than in the past, according to leading geopolitical strategist, Dr Alan Dupont.

Dupont opened the Lonsec Symposium in Sydney with the admonition that geopolitical risk has been on an upward trend for the past two decades, doubled after the 9/11 World Trade Centre attacks and is continuing to rise.

He said that understanding the implications of the rising geopolitical risks had become increasingly important to investment managers as they sought to deal with the implications of factors such as Brexit, US/China tensions, North Korea and rising great power rivalry.

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Further, Dupont said investors also needed to face into these changes while be cognisant of the shift from “pax Americana” to a new more turbulent world.

He said that in these circumstances there was likely to be continuing high levels of geopolitical volatility because it might take 10, 20 or even 30 years before a more stable environment evolved.

However, he said that he believed that in the evolving new dynamic, China would not rule the world, but neither would the US or Russia.

Dupont said that, rather, he believed that the US power would endure and strengthen in the medium term but that European power would decline and be more difficult to reverse.

15/05/2019 4:51:12 PM

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May 23, 2019 Money Management | 11

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ASIC may want codes of practice strengthened before granting approval

BY HANNAH WOOTTON

BANKING Royal Commissioner Kenneth Hayne’s recommendation that insurance codes of practice are subjected to greater enforceability could well extend to other industry codes, and The Fold Legal has warned that the Australian Securities and Investments Commission (ASIC) would likely require certain code provisions were strengthened before it gave its approval to them.

In addition to the general insurance code of practice, Hayne also recommended that the life and superannuation insurance

codes go before ASIC for approval and to determine which provisions would be legally enforceable, suggesting a deadline of June 2021 to do so. While financial services industries could apply to ASIC to approve codes, just two of the 12 codes currently in the sector had been accepted.

And the general insurance code, at least, would likely need significant strengthening before it would be approved by the regulator, according to a blog by The Fold Legal.

Provisions regarding code governance, compliance, monitoring and sanctions would need to be

“comprehensively strengthened and addressed” before ASIC would approve any industry code, the blog said, as well as prior stakeholder engagement and adequate provisions for dispute resolution, remedies and sanctions.

Licensees would also need to better track their compliance with the code, especially should aspects become legal, if they wanted to ensure they didn’t breach its provisions.

“It is clear licensees will require much more stringent oversight of code compliance to be alerted where they or their service providers breach the code to

prevent systemic failures and to manage their licence conditions,” The Fold Legal’s solicitor director, Charmian Holmes, said.

ASIC had also already previously said that any code it approved must be administered and enforced by an independent body, and also include appropriate sanctions. It had additionally said that it would require consumers have access to internal and external dispute resolution processes for breaches resulting in direct financial loss, and the ability to complain to the independent body about any other code breach.

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Should ESG be made a regulatory necessity?

BY MIKE TAYLOR

THE industry funds-backed Australian Council of Superannuation Investors (ACSI) has called on the major parties to commit to strengthen investment stewardship and environmental, social and governance (ESG) considerations for institutional investors.

Among the changes being sought were explicit regulatory recognition of the importance of ESG issues in investment strategies.

The organisation claimed businesses and their boards needed to rebuild trust with Australians and that this could be supported through the responsible management of assets via reform of Australia’s framework for investment stewardship.

ACSI chief executive, Louise Davidson said a stronger stewardship framework would support the quality and integrity of financial markets and contribute to sustainable, long-

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term value creation for beneficiaries.

Among the remedies being proposed by ACSI were a revision of the Australian Prudential Regulation Authority’s (APRA’s) investment guidance to explicitly recognise the importance of ESG issues in investment strategies.

As well, it wanted a review of the regulatory framework of stewardship to consider appropriate minimum standards of reporting, the appropriate regulatory framework and a stewardship code that applies to all institutional investors.

Davidson said Australia’s regulatory framework lagged behind other developed economies in recognising the importance of ESG factors.

“There is a significant opportunity to bring Australia up to date by clarifying that ESG risks and opportunities are financially material and should be taken into account in risk and return analyses,” she said.

15/05/2019 4:54:05 PM

12 | Money Management May 23, 2019

News

SMSFs appealing to younger members

Lonsec makes strategic IMA planner offer

BY HANNAH WOOTTON

BY MIKE TAYLOR

THE average one-member selfmanaged superannuation fund (SMSF) has a starting balance of around $225,000, in line with traditional wisdom that a quarter of a million is needed to set up an adequate SMSF. The age of new SMSF members was also decreasing, research from Class found, with average age at establishment of 48.9 years old coming in below the 2012 average of approximately 50.

“One factor that may see this trend continue is the proposal to increase the Superannuation Guarantee from its current rate of 9.5 per cent by half a percentage point from July 2021, until it hits 12 per cent in 2025,” Class said.

“This will enable the younger workforce to accumulate greater super balances at a younger age over time.”

The average age at establishment was slightly different between male and female SMSF members of one year,

with starting balances of men being 42 per cent higher. This gap narrowed with time however, as the average gap between men and women’s balances for 21 per cent in favour of the former.

The research also showed that the over 72 per cent of SMSFs were established as two-member funds, which Class said showed the importance of considering overall fund balance when

determining the viability of setting up an SMSF. The average fund balance on establishment was $406,000, with two-member funds having a shade above that, threemember funds clocking initial balances over $500,000, and four-member funds coming in at half a million.

The research was based on data from 26,100 SMSFs comprising of 46,943 that were established from 2014 – 2018.

Super fund segregation should be front of trustees’ minds WHETHER superannuation funds segregate members’ assets into separate accumulation and pension pools or continue combining them is a critical decision for trustees and needs to come down to much more than just fund size, a leading implementation manager has warned.

While there was no set rule on what superannuation fund boards and executives should decide, 2.8 million accounts would move from the accumulation to pension phase over the next decade as the Baby Boomers retire, making it an increasingly important choice.

According to Parametric, a key benefit in segregation of the two asset pools lay in the performance drag on international equity portfolios from foreign dividends withholding tax.

“This drag—38 basis points on a passive international equity portfolio over 2018—is a permanent cost to pension, but not accumulation, members and can be addressed if super funds can design exposures specifically for pension pools,” the company’s Australian

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managing director, Raewyn Williams, said.

Another consideration for trustees would be the final form of the Government’s Retirement Income Covenant, which could impose legislative requirements that the portfolio levers available in an unsegregated structure mightn’t be nuanced enough to meet.

“This would be a disturbing development, given that we believe segregation is a highly individual decision and should be a question of super fund fit, not regulatory impost,” Williams said. “Asset segregation will be a good strategy for many super funds, as a powerful instrument in their plans to genuinely deliver mass customisation to members, but it will not be the answer for every fund.”

Parametric strongly believed that the decision should come down to funds themselves, with Williams saying it should ultimately tie back to a fund’s broader strategic thinking as to whether mass production or mass customisation would better drive its future.

RESEARCH and ratings house, Lonsec is offering to acquire in-house managed portfolios from advice licensees in a move it says is aimed helping planners take advantage of best practice governance principles.

The company is making the offer in the context of helping planners better meet their obligations in a post-Royal Commission environment and would be in the business of acquiring the investment management rights from existing managed account providers, enabling them to focus on the provision of advice without conflict.

Commenting on the move, Lonsec chief executive, Charlie Haynes said the Royal Commission may have stopped short of a ban on vertically integrated or conflicted financial advice, but advisers knew they needed to start moving quickly in this direction to meet community expectations.”

He said that while it was becoming increasingly unpalatable for licensees or advisers to charge portfolio management fees for in-house managed accounts, advisers were also cognisant of regulatory developments.

The Lonsec statement said an “empowered ASIC” was investigating how platform providers ensured the integrity of managed accounts constructed by advice licensees who might lack the expertise or resources to act as specialist investment managers.

It claimed that for many advisers, the question was how best to manage conflicts, either by outsourcing the portfolio construction process or introducing a greater degree of independence in their investment decisions.

“Lonsec is proposing to acquire the investment management rights from existing managed account providers, enabling them to focus on the provision of advice without conflict,” it said. “Licensees have the flexibility to retain their existing branding, investment mandate and platform, or transition to Lonsec’s own professionally managed portfolios incorporating best ideas and insights from Australia’s leading investment product research house.”

“An outsourced managed account solution is becoming increasingly popular, not just in order to reduce conflicts but to allow advisers to focus on their clients’ needs and aspirations while leaving the investment process to specialised portfolio managers,” said Haynes.

16/05/2019 3:27:21 PM

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Issued by National Wealth Management Services Limited ABN 97 071 514 264. The information in this flyer is correct as at 4 February 2019, but may change in the future. Interests in MLC Wrap Super and MLC Navigator Retirement Plan are issued by NULIS Nominees (Australia) Limited, ABN 80 008 515 633, AFSL 236465 as trustee of the MLC Superannuation Fund, ABN 40 022 701 955. Interests in MLC Wrap Investments and MLC Navigator Investment Plan are issued by Navigator Australia Limited, ABN 45 006 302 987. Before making a decision to purchase or continue to hold a product, you should read the relevant PDS or Financial Services Guide, which can be obtained by calling us on 133 652. The information in this document is general information only and doesn’t take into account your personal financial situation or individual needs. A149377-0419

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13/05/2019 15/04/2019 11:20:17 3:24:50 AM PM

14 | Money Management May 23, 2019

News

Lawyers call for standardised group life policy terms

BY HANNAH WOOTTON

A leading superannuation and insurance law firm has given its “hot agreement” to Banking Royal Commissioner Kenneth Hayne’s recommendation that the rights and obligations of insurers and insureds need to be better delivered in the delivery of MySuper products, calling for the standardisation of insurance terms and conditions.

The law firm, Berrill & Watson, offered its support to Hayne’s comments in a submission to the Treasury Financial Services Reform Taskforce, saying that “the question is the what and the how” rather than whether change was needed.

It advocated the standardisation of terms and conditions for group insurance, saying that the current formula to deviate from standard cover currently used for individual

insurance contracts could be maintained for super fund members applying for additional cover or seeking to opt out of non-mandatory standard terms and conditions.

A working group of insurance companies, super funds and consumer representatives could consider the issue.

Berrill & Watson also said that, in its view, any total and permanent disability (TPD) insurance benefit under a MySuper product that was inconsistent with the ‘permanent incapacity’ definition under the Superannuation Industry (Supervision) Regulations 1994 was contrary to law.

“Accordingly, it is our view that the permanent incapacity definition which could be characterised as the standard ‘suitable occupation’ definition with a comparatively generous ‘unlikely’ test is already prescribed by legislation for all MySuper products,” lawyers from the firm wrote.

“In practice, a significant number of MySuper TPD definitions deviate from this permanent incapacity definition and in some cases adopt a much narrower definition, which is of concern.”

Berrill & Watson also called for other common terms and conditions to be standardised, such as eligibility requirements, exclusions, benefit limitations, offset clauses, and claim requirements.

“There is a balance to be struck between certainty and flexibility and it would be important to foster and not stymie market competition and innovation,” the authors of the submission acknowledged.

“However, in our submission, the case for some standardisation to bring the life insurance industry in line with other financial services industries and to restore public confidence is overwhelming.”

Westpac confirms commercial logic of advice exit

BY MIKE TAYLOR

WESTPAC has acknowledged that because its financial advice business was a loss-maker it expects that its exit from advice and the resetting of its wealth operations will reduce costs by around $280 million a year over the remainder of this year and next year.

The big banking group used its half-year results announcement to confirm the fundamentals of its decision to exit its financial advice business via a transaction with mid-size Melbourne-based group Viridian.

It said that taken together with the organisational realignment of BT Financial Group’s businesses, with the Private Wealth, Platforms & Investments and Superannuation businesses moving into an expanded Business division and with insurance moving to an expanded Consumer division, the group had raised a provision for exit and transition costs of $190 million.

The bank’s report filed with the Australian Securities Exchange (ASX) confirmed the group booked an after-tax cost of $617 million of provisions for estimated customer refunds, payments and associated costs.

It said that in the first half, the major items included in the provisions were related to customer refunds for ongoing advice service fees associated with the group’s salaried financial planners.

“These provisions add to those in prior period and reflect an increase in the estimated proportion of instances where records of financial advice are insufficient for the purposes of remediation,” it said.

The half-year documents also confirmed a similar situation with respect to ongoing advice service fees charged by the Group’s authorised representatives that provided financial planning services under the Magnitude and Securitor brands.

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Half-year bank results see decline

BY CHRIS DASTOOR

HALF-YEAR major bank result analysis by Deloitte shows the banks are still struggling to make growth against the headwinds.

Aggregate cash profit declined by 4.1 per cent to $14.5 billion, while total income declined by four per cent to $41.1 billion.

Total operating expenses went down three per cent to $18.9 billion, and the total refund and remediation bill since 2017 had stood at $5.6 billion.

Paul Rehder, Deloitte Australia Banking Leader, said large scale remediation programs, intensifying regulation and increased risk management because of the Royal Commission were the common themes of Australia’s major banks half-year results.

“Looking ahead, the banks are accelerating their focus on productivity and the ‘core’ and continuing to keep their operating expenses down,” Rehder said.

“All four chief executive officers (CEOs) announced simplifying their operations and offers, and where appropriate continuing their demergers and divestments.”

Steven Cunico, Deloitte financial services treasury advisory lead and author of the report, said while overall results for the banks appeared largely flat, the underlying detail showed divisional performance did vary.

“All four major banks experienced weakness in their retail businesses,” Cunico said.

“However, they were able to offset this by recording growth in their business banking, institutional banking and New Zealand operations.”

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by NULIS Nominees (Australia) Limited, ABN 80 008 515 633, AFSL 236465 (NULIS), as trustee of the MLC Super Fund ABN 70 732 426 024. Interests in MLC MasterKey Investment Service Fundamentals are issued by MLC Investments Limited, ABN 30 002 641 661, AFSL 230705 (MLCI). NULIS and MLCI are each part of the National Australia Bank (NAB) Group of Companies. An investment with NULIS or MLCI is not a deposit or liability of, and is not guaranteed by or underwritten by, NAB. Before making a decision to purchase or continue to hold a product, you should read the relevant Product Disclosure Statement (PDS) or Financial Services Guide (FSG), which is available at mlc.com.au. The information in this document is general information only and doesn’t take into account your personal financial situation or individual needs. A149377-0419

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13/05/2019 15/04/2019 11:20:49 3:24:13 AM PM

16 | Money Management May 23, 2019

News

We were right to sell AMP Life says Murray

BY MIKE TAYLOR

AMP Limited’s financial results and the actions of other owners of life insurance businesses have validated the company’s decision to sell its life insurance business to Resolution Life, according to AMP chairman, David Murray.

Murray used his address to the AMP Limited annual general meeting to defend the much-criticised sale decision stating that since the sale agreement in October “our financial results have reinforced that AMP is not the best owner of a life insurance business with higher capital requirements and earnings volatility”.

“Indeed, the recent sale of many major life insurance groups in Australia are also attributable to these factors,” Murray said.

“There has been some criticism of the transaction with Resolution Life,” he said. “As a board we respect

differing viewpoints, but we are bound to act in the best interests of the company and all shareholders, rather than satisfy the particular agenda of a view.”

“Life insurance is a very long-term business. Given we were faced with deteriorating prospects, a sale was the best option when considering the interests of the company over the longterm,” Murray said.

Macquarie feels loss of financial services fees

BY HANNAH WOOTTON

Elsewhere in his AGM address, Murray foreshadowed that AMP chief executive, Francesco De Ferrari would outline his position on the future of AMP at around the time of the company’s interim financial results in August.

“We expect by then to have a line of sight on completion of the sale transaction and clarity of relevant legislation post the Federal Election,” he said.

IOOF’s flows deliver telling story FUND flow data has revealed the adverse impacts being felt by IOOF Limited as it seeks to navigate the consequences of the Royal Commission and legal action initiated by the Australian Prudential Regulation Authority (APRA).

The company has revealed net inflows of $337 million in funds under management, administration and advice for the third quarter of the current financial year, well down on the prior corresponding period.

It said financial advice net inflows were $263 million for the quarter compared to $736 million in the prior period, while portfolio and estate administration flows were $183 million compared to $346 million for the prior period and investment management actually recorded a net outflow of $129 million, compared to $47 million in outflows in the prior corresponding period.

Commenting on the data, IOOF acting

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chief executive, Renato Mota said it was pleasing to see continued positive flows into the company’s proprietary platforms despite the challenging market conditions.

“In an extremely competitive environment, subject to much uncertainty, it is a credit to our people and advisers that we continue to support advice through our products and services,” he said.

Mota noted that financial advice had recorded positive flows for the quarter in line with the previous trend and that IOOF’s Insignia Wrap range (BT badge) had seen significant inflows and had reached over $3 billion in funds under advice.

The IOOF announcement reiterated the company’s forecast of expected revenue impacts of approximately $3 million for the removal of exit fees in addition to other Protecting Your Super measures of $5 million.

MACQUARIE Group recorded net profit for the European financial year to March’s end of $2.982 billion, up 17 per cent on FY18, with modest growth for its banking and financial services arm being offset by a loss in fee income following the realignment of its wealth business to target high net worth investors.

Its banking and financial services business’ net profit contribution of $756 million represented a three per cent increase on the year before. The improved result stemmed from growth in Australian mortgage, business banking loan, deposit and funds on platform average volumes, but was offset slightly by lower wealth management fee income associated with the above realignment.

Increased costs associated with technology to support business growth and the full-year impact of the Australian Government Bank Levy, relative to FY18, also offset growth somewhat.

Comparatively, its asset management and corporate and asset finance arms performed poorly. Its net returns for asset management of $1.503 billion was down four per cent from FY19, while corporate and asset finance delivered a profit contribution of $1.028 billion, a 10 per cent decline on the previous year.

Macquarie pinned the drop in asset management profit to a decrease in invested-related and other income, as well as higher operating costs.

The decrease in corporate and asset finance was due to the impact of reduced provisions and impairments the year before and one-off investment-related income in FY18.

Its commodities and global markets arm contributed a net profit contribution of $1.505 billion, up 65 per cent on FY18, while Macquarie Capital recorded impressive growth of 89 per cent in profits from FY18 to hit $1.353 billion.

At the same time as announcing the results, the bank announced that Macquarie Capital’s group head would be stepping down from both that role and the executive committee at the end of the month. He would step in as chair of Macquarie Capital to assist with the transition, with Daniel Wong and Michael Silverton stepping up as group co-heads. Both already held executive positions within Macquarie Group.

Speaking on the results, Macquarie Group managing director and chief executive, Shemara Wikramanayake, said: “FY19 demonstrated the continued benefits of our diverse business mix. Our annuity-style businesses had a solid, steady year while our markets-facing businesses delivered strong performance in favourable market conditions”.

15/05/2019 4:48:10 PM

May 23, 2019 Money Management | 17

InFocus

FINANCIAL PLANNING FACES INTO CHANGING COMMERCIAL DYNAMIC Mike Taylor writes that new research and real-time market realities have pointed to the significant changes now confronting financial planners.

THREE issues arose earlier this month which paint a telling picture of the future of the financial advice sector in Australia.

• A Money Management survey confirmed that more than 30 per cent of advisers are very likely to exit the industry over the next two years • Financial Planning business brokerage, Radar Results revealed a significant disparity between the value of ‘high quality’ financial planning practices and those ‘conventional’ practices still in some way reliant on grandfathered commissions and without consistently close client contact.

• Accountancy-based planning group, CountPlus released the results of research undertaken

by CoreData which pointed to a continuing convergence of accounting and planning practices but, more importantly, highlighted the industry’s continuing search for more viable commercial models.

Arguably, these three separate elements must also be viewed against the background of the major banks substantially exiting wealth management and the reality that, with them, will go many of sector’s unacknowledged commercial underpinnings.

Those unacknowledged

WHAT CONSUMERS WANT FROM BANKING AND INSURANCE

commercial underpinnings came in the form of the banks’ continued support for loss-making planning businesses – virtual subsidies something which was rationalised on their balance sheets by their value in terms of cross-sell and product distribution.

The findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry combined with the multi-billion dollar burden of provisioning for customer remediation combined to signal to the bank boards that it was time to head for the exit and rule a line under their exposures. However, it could be more than two years’ before the costs disappear from their balance sheets.

As indicated by the CountPlus research, financial planning businesses must now adjust to the reality of an industry in which product will finally be separated from advice.

To quote from the CountPlus analysis; “A sales-based culture is no longer appropriate for a sector that seeks to be regarded as a true profession. In Q4 of 2018, 61.1 per cent of consumers believe ‘the problem with financial services is an industry-wide culture problem, not a few bad apples’, up from 49.0 per cent in Q1 of 2018.”

It said this increase was most likely attributable to the events

56%

would like their bank to blend physical branches and digital services.

played out in the Royal Commission and that the exposure of the financial services industry’s misconduct had significantly decreased trust in the industry.

“The value chain as it is now will evolve where the individual adviser becomes a more important player, as well as converged advice and accounting firms,” it said.

The CountPlus/CoreData analysis suggested that in these circumstances the winners would be “those nimble enough to adjust rapidly, create an environment where advisers can focus on advice as their ‘core’, as distinct from product sales and still meet the higher professional and educational standards expected of them”.

“Advisers and advice businesses unable to meet new regulations and higher professional, educational and ethical standards, face a very uncertain future,” it said.

All of which meshes with the real-time market experience of Radar Results which noted that the multiples which could be expected from those seeking to sell practices with grandfathered commissions

68%

are interested in receiving adjusted car insurance premiums based on safe driving

and less than pristine paperwork were well below those for a high quality practice – 1.5 times recurring revenue, compared to up 3.2 times recurring revenue.

The Radar Results analysis should also be weighed against Money Management’s most recent survey which sought to determine whether the election of a Labor Government at the 18 May Federal Election campaign would prompt more planners to leave the financial planning industry.

The survey found that, rather than increasing the number of departing planners, the election of a Labor Government would simply reinforce the decisions of those planners who had already opted to depart.

It confirmed that just over 40 per cent of respondents intended leaving the industry with their minds having been substantially made up by factors such as the Financial Adviser Standards and Ethics Authority (FASEA) regime and the end to grandfathering being recommended by the Royal Commission.

58% would be willing to share significant personal information with their bank and insurers in exchange for lower pricing on products and services.

Source: Accenture's global 2019 Financial Services Consumer Study

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18 | Money Management May 23, 2019

Gender in financial services

WHY ARE WOMEN LOSING OUT?

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Gender in financial services

A lack of women in the financial services industry is having a knock-on effect on the finances of women in Australia as women find themselves with a huge gap in retirement savings, less willing to invest and less likely to see an adviser. Laura Dew asks whether having more of their peers in the sector change could this.

IT IS NO secret women are penalised when it comes to their finances, the combination of the glass ceiling, taking maternity leave, supporting a partner’s career or requiring flexible working can make it difficult for women to climb up the career ladder.

Unsurprisingly these difficulties are having a financial impact on women with the full-time gender pay gap for women being 14.1 per cent, according to the Workplace and Gender Equality Agency (WGEA), meaning women earn $239 less per week than men. The average full-time weekly wage for a man is $1,695 while the average for females is $1,455.

This lower wage then leads to a lower superannuation balance with the average super balance for a women aged 60-64 being $157,049 compared to $270,710 for a man, according to the Association of Superannuation Funds of Australia.

As well as having lower salaries and lower super, women are subsequently less likely to supplement this income with any additional investment. Fidelity found over half of 815 women surveyed for its ‘The Financial Power of Women: A state-of-the-nation report on the barriers to women investing’ did not hold any other savings products other than their super. Less than half had invested in shares and less than a quarter had invested in a managed fund.

Survey respondents said this was because they either didn’t have spare money to invest, didn’t know where to start, felt it was too complicated or felt investing was too risky. This indicates there is a clear knowledge gap among women who lack the confidence to invest compared to their male counterparts.

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Fidelity International managing director, Alva Devoy, said: “If women’s ability to earn and therefore save during their working lives is less than men’s, then it is even more important that they have access to the tools to help them to make their money work harder for them. A lack of time and confidence, and fears about the risks, are all obstacles that are stopping women from believing that investing is for them.”

The fact women are less likely to invest is interesting given research by UK investment platform Hargreaves Lansdown which found, over three years, female clients saw the value of their investments grow by 0.81 per cent more than men. If this was replicated over 30 years, women would end up with 25 per cent more than their male counterparts.

This was, HL said, because women were more naturally likely to have diverse portfolios, tended to hold safer investments and were more likely to utilise a ‘buy and hold’ strategy instead of frequently turning over their portfolios.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Women are far better investors than they think. Women who invest overwhelmingly have the knowledge they need in order to make sound investment decisions.

And rather than working against them, their determination not to take excessive risk with their investments is one of the things that makes them such good investors.”

So what would help women and encourage them to invest?

Women said they wanted the finance industry to be more transparent on costs and help them understand how to invest.

They also wanted to see less risky products on the market as the majority of women surveyed said minimising loss was a key priority for them. In contrast, just seven per cent said they were ambitious with their investments and keen to make gains, indicating they remain fearful of the markets.

“Investment industry communications are seen as complicated by over half [of women], a quarter see communications as intimidating and about one in five see them as being tailored to men. Women are less likely to feel they have the right level of information or knowledge they need about investing,” the report said.

“It’s clear how the investment industry needs to respond to cater better to the needs of female investors. Almost half want greater transparency on the industry costs, more than a third want greater education to help improve our understanding of investments and just under a third want communication from the industry to be more relevant and useful. Meeting these needs would encourage more women to either start investing or to invest more.”

FEMALE FINANCIAL ADVISERS When it came to seeking financial advice, women were less likely than men to see an adviser and said cost was an issue as well as not understanding the role of an adviser.

According to a study entitled ‘Attitudes to Women in Financial Advice’ conducted by the Financial Services Council and BT’s Stella Network in 2017 this presented an opportunity for education by the industry.

“Perceived needs and fees are key barriers but poor information

Continued on page 20

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Gender in financial services

Continued from page 19 on the value of consulting an adviser suggests an opportunity to educate the benefits and increase the reach of the profession. Females are more likely than males to blame cost, lack of a perceived need and lack of understanding. Males are slightly more likely to question the profession itself, expressing doubt regarding the value of the service and level of trust in financial advisers.”

Would having a female adviser help? The report found female advisers felt their gender was advantageous as clients were more likely to open up and engage with them about their circumstances.

Some 85 per cent of female advisers felt being a good listener was important and 77 per cent said building a strong relationship with clients with key. They also felt being caring, supportive and empathetic were positive characteristics for an adviser.

Pene Lovett, chief operating officer at the Financial Planning Association (FPA), said: “The research report showed that knowledge and empathetic skills are more important to consumers than age and gender when looking for financial advice. However, some female financial planners noted that once they began to establish a relationship with a client, many believed that their gender was an advantage because clients were more likely to open up about their circumstances.”

Female advisers were found to have better emotional intelligence than men, which was an important driver of both trust and satisfaction for a client. Clients who had a

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female adviser also felt more connected to their adviser on an individual basis rather than to the wider company.

Asked why they liked their job, female advisers said they gained satisfaction from meeting new people and building a relationship in order to help the client reach their goals whereas men cited a preference for the numerical and data factors of the job. In contrast to men, just 38 per cent of female advisers said they joined the industry because they wanted to ‘work with numbers’.

WOMEN IN THE INDUSTRY A further factor to consider is the lack of female representation in the overall industry, leading to the perceived view that finance remains a ‘male’ industry. Even today, many women choose to leave the household finances to their partner, leaving them in the dark and at risk of losses in the event of divorce.

Returning to the gender pay figures from the WGEA, financial services and insurance had the highest gender pay gap of all sectors at 26.9 per cent, nearly double the national average. For the highest decile of earners in that sector, it rose further to more than 30 per cent.

Looking at the sector’s workforce breakdown, 48.1 per cent were women and 37.7 per cent of managers were female.

The share of female executives was 25.3 per cent, only a minor increase in the last five years from 24.6 per cent. Finance was also noted as one of the top five sectors with the highest glass ceiling for management ranks.

According to the Australian Institute of Company Directors, the percentage of women on ASX 200 boards was 29.5 per cent. So far, in the first quarter of 2019 there have been nine women appointed to board positions.

There were 27 financials companies on the ASX 200 and

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Gender in financial services

only four were chaired by women; AMP, Commonwealth Bank, Insurance Australia and Medibank Private. Across the sector, the average percentage of female directors was 29 per cent, as of 31 January 2018, with the best being Medibank Private at 56 per cent and the worst being Blue Sky Limited at just 11 per cent.

Kathryn McDonald, head of sustainability at AXA IM Rosenberg Equities, said: “It is very common to have women in their 40s who have years of experience making financial decisions for themselves and their families and these are the women who are our end client. So we need women like that around the table in financial services.”

Women cited barriers to entry as being their own selfconfidence, having to wait for a suitable role to become available, needing to work flexibly around their families and being less aggressive at promoting their abilities than men.

“We are not seeing women in financial services rise to the very top, they are being stopped just beneath the top level. Some women require things like flexible working and maternity leave but there are others who are willing to do whatever it takes and yet they still are not seeing that rewarded,” McDonald added.

She commented there were additional economic benefits, as well as marketing ones, to companies running a genderdiverse business with firms reporting a greater ability to stabilise profits and revenues when they employed a genderdiverse workforce.

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“People need to connect the dots for those who are sceptical about diversity and share this type of research with their employees.”

Despite the aforementioned benefits of the financial adviser role, only 20 per cent of the Australian financial planning community is female.

The report suggested more emphasis on the ‘soft’ factors of the job might encourage this to change and more women into the industry. To become a financial adviser, a candidate must complete an approved bachelor degree, gain a year of supervised professional experience with an AFS licensee and including 100 hours of structured training, and lastly complete an exam set by the Financial Adviser Standards and Ethics Authority (FASEA).

“There is a perception that financial advice is more of a quantitative role strongly associated with ‘numbers’ when in fact, these advisers feel advising is not only about financial knowledge but about building relationships.

“By highlighting the qualitative nature of the role which includes listening and getting to know people, many female financial advisers believe this could attract more women into the industry.”

When it came to staying in the industry long term, Lovett said factors that encouraged and helped women to remain in their role included flexible working arrangements, access to good mentors and quick career progression.

“Mentoring is particularly important, being someone that a younger person in the industry can

“We are not seeing women in financial services rise to the very top, they are being stopped just beneath the top level.

Some women require things like flexible working and maternity leave but there are others who are willing to do whatever it takes and yet they still are not seeing that rewarded,” - Kathryn McDonald, head of sustainability at AXA IM Rosenberg Equities come to and ask questions and play an active role in their career development,” added McDonald.

WHAT IS BEING DONE? Following the report, the FPA has launched its own Women in Wealth program in association with Financial Executive Women (FEW) which is designed to advance the progression of women in financial planning by offering mentoring and professional development opportunities.

In funds management, firms such as Fidelity, Challenger and Macquarie have signed up to the Future IM/Pact, an industry initiative founded by Yolanda Beattie which is encouraging women to pursue careers in investment management. The Asset Management Council also runs a special interest group called Women in Asset Management group which runs a mentoring program.

Lastly, Money Management runs its very own Women in Financial Services awards which will take place later this year and recognises women in financial services.

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22 | Money Management May 23, 2019

Fact check

FACT CHECK:

VERDICT: PASS

SGH EMERGING COMPANIES FUND Laura Dew writes that the SGH Emerging Companies Fund is bouncing back from a difficult 2018 with a focus on technology and resources stocks.

HAVING LAUNCHED BACK in 2001, the SGH Emerging Companies Fund has a longestablished track record investing in smaller companies and as such, has received a five out of five crown rating by FE. It’s managed by Adrian Di Mattina who joined SG Hiscock from NAM and has 28 years’ experience in the investment industry across both equities and fixed interest.

The fund aims to provide longterm capital growth over three and five years and seeks to outperform its benchmark of the S&P ASX Emerging Companies index, but notes suitable investors should have a five-year time horizon. It sits in ACS Equity-Australia Small/ Mid Cap sector, one of 97 constituents and has consistently outperformed over one, three and five years against its peers. It has met these objectives from its product disclosure statement (PDS) more than satisfactorily, meaning it passes Fact Check.

The fund has returned more than double the sector average over five years to 13 May 2019 with annualised returns of 20.7 per cent, according to FE Analytics, compared to average returns of 9.5 per cent by the sector. This makes it not only top quartile but also the top fund in its sector.

But the fund struggled during

2018 as the small-cap market tumbled, losing 15 per cent during the year, versus losses of 7.7 per cent by the sector but losing less than its benchmark index, which lost more than 20 per cent. After top quartile rankings in 2017 and 2016, 2018 saw it plunge into fourth quartile.

However, it has managed to turnaround performance and return to the top quartile over three and six months. Over six months it has returned 20.3 per cent versus sector returns of 6.9 per cent while it has returned 15.9 per cent over three months versus sector returns of 4.1 per cent.

In its latest factsheet, the manager was optimistic, noting emerging companies were wellplaced going forward due to the combination of improved monetary conditions and a sluggish domestic economy in Australia.

PORTFOLIO BREAKDOWN Some 99.5 per cent of the fund is invested in growth-focused Australian equities while the remaining 0.4 per cent is in defensive money market positions, although it can have up to 20 per cent in cash. SGH classify small companies as those which are less than $500m at the time of purchase and up to 30 per cent of the fund can be in assets

Table 1: Top 10 holdings of SGH Emerging Companies fund Rank

Name

%

1

Atomos

6.06

2

Westgold Resources

4.46

3

Dubber Corp

4.09

4

Redflex Holdings

3.72

5

Volpara Health Technologies

3.26

6

Zip Co

3.19

7

Galena Mining

2.99

8

Cooper Energy

2.95

9

Powerwrap

2.62

10

Resonance Health

2.57

Total top 10 weighting

35.91

whose market cap has grown beyond $500m after they were first purchased. It is also willing to consider companies at IPO stage, unlisted companies and micro-cap companies.

“It is our belief there are more stock selection opportunities, less fund manager competition and better prospects for growth in companies with market capitalisation of less than $500m.

Further, we have found there is significantly greater deal flow in emerging companies in the form of IPOs, institutional share placements and M&A activity, providing increased outperformance potential through active management.”

As at 31 March, 2019 there were 92 holdings in the fund, up from 87 the previous month, which may sound high but is not unusual for smaller companies funds as the companies are smaller and riskier so managers don’t want to be too exposed to one particular business, unlike large cap funds which tend to be more highly concentrated.

In its PDS, the firm notes it will not have more than 10 per cent allocated to any individual company and that emerging companies may be less liquid than large companies, have significant project risk and be speculative in nature.

“The fund has exposure to both micro-cap companies and unlisted investments which are traded at lesser volumes and less frequency, and therefore considered to be less liquid than larger companies. Micro-cap companies and unlisted investments can also be more volatile than other listed shares.”

The firm notes it is particularly focused on resource exploration companies, early-stage biotechnology companies and technology start-ups, which is reflected in the firm’s top 10 holdings which are divided solely between technology and resources companies. Technology is a popular choice for small and micro-cap funds as many of these companies are small start-ups with the potential to grow significantly very quickly.

Its top ten holdings, as of 31 March, 2019 made up 35.9 per cent of the total fund. Its largest holding at six per cent is Atomos, a manufacturer of hi-tech camera and recording equipment, which was set up in 2010 and now works with businesses such as Adobe, Sony and Panasonic. On the resources side, top ten holdings included Westgold Resources at 4.4 per cent, Galena Mining at 2.9 per cent and Cooper Energy at 2.9 per cent.

Chart 1: Total return over five years of the fund compared to the ACS Equity- Australia Small/Mid Cap sector and S&P ASX Small Ordinaries index

Source: FE Analytics

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WIFS

LEADING THE CHARGE ON ENGAGING SUPER FUND MEMBERS Hannah Wootton talks superannuation fund member engagement, rebranding, and improving consumer trust with a woman making strides in these areas, last year’s Women in Financial Services Superannuation Executive of the Year, Jenny Dean.

THE ROYAL COMMISSION into Misconduct in the Banking, Superannuation and Financial Services Industry crystallised what many superannuation funds, financial advisers and consumers had all already been thinking – funds need to do better in gaining trust and engagement from members.

2018’s Money Management/ Super Review Women in Financial Services Awards’ Super Executive of the Year and Aon Hewitt principal, retirement and investment, Jenny Dean, was making headway in achieving this long before the Commission, overseeing Aon Master Trust’s rebrand to smartMonday in 2017.

WHAT’S IN A NAME? At its core, the rebrand – which Dean says went beyond just a name change to deeper cultural reform – was driven by a desire to make the brand more approachable, engaging and member-centric.

“Aon Master Trust wasn’t the most exciting name in the world,” Dean says. “It’s a legal name … it had no resonance or cut-through with members.

“Our clients are the members, and a super fund needs to have a business to consumer brand, [whereas] Aon is a business to business brand.”

There could be lessons for funds looking to increase member engagement here.

Since smartMonday launched, unique log-ins on the member portal have jumped, with members entering the portal showing heightened engagement with the fund. General satisfaction from members with their relationship with the brand also grew, going from 45 per cent positive/very positive ratings before the relaunch

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to 54 per cent 12 months after.

Perhaps most interestingly for an industry renowned for struggling to engage members in the present (there’s no need to rehash the realities of future discounting), ambivalence from members toward the fund also dropped. Sitting at 40 per cent before the rebrand, it was down to 33 per cent a year later.

From an employer default perspective, Dean says they’ve also been getting “some great feedback” from corporate clients.

PUTTING MEMBERS FIRST Dean also cites cultural change through the smartMonday transition as key to improving members’ experiences with the brand.

“It’s easy [for staff] to get stuck in a complaints and compliance cycle and that can be

worrying,” she says. The fund worked to make sure staff better understood what superannuation, at its core, tries to do, however.

“Now staff understand more how their job impacts the members,” Dean says, pointing to insurance claims as an example. “They know superannuation helps members take action and control of their financial futures, and funds help them do that when they don’t have to.”

More than just improving staff morale, this then taps down into how members are treated. Dean cites a well-known Richard Branson quote in explanation: “If you take care of your employees, they’ll take care of your customers. Simple.”

Even service from call centres has improved – monthly surveys of those members who’ve had experiences with a contact centre that month have recorded on

average 80 per cent satisfaction ratings for the last year.

It’s not just those in the contact centre who deal with members’ problems, either. Cuts from call centre calls are played to the wider smartMonday staff so that they can get more of a sense of what members are worried about.

Part of improving customercentricity has involved delving into an area most funds are traversing: understanding member behaviours.

And understanding the motivations and behaviours that drive members attitudes toward and decisions around money has wrought some surprising results.

“For example, we’ve seen that our learnt behaviours have an even bigger impact on our behaviours with money than our life stage,” Dean says. Family attitudes and cultural background are two such factors.

“So, it doesn’t make sense to send a blanket email for transition to retirement to all 55-year-old members. We’ve stopped segmenting on that … and now we may need four or five emails to different types of member, for example.

“We’ve still got a long way to go. We’ve come a long way, but we’re still dipping our toes into what members what from their super and their finances.”

While the transition to smartMonday is still a work in progress, Dean believes that above all, its success depends on not just doing things the way they’ve always been done.

For an industry experiencing a trust deficit from its members in a time of industry upheaval, there could be a lesson in these words from the 2018 Super Executive of the Year.

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PLATINUM SPONSOR

Celebrating Excellence

MONEY MANAGEMENT MANAGING EDITOR WITH THE YOUNG ACHIEVER WINNER, MACQUARIE’S CHARIS CAMPBELL

THE LIFETIME ACHIEVER WINNER, FIDUCIAN FOUNDER INDY SINGH, ADDRESSES THE CROWD WHILE PERPETUAL’S DAVID LANE LOOKS ON

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CATEGORY SPONSORS

Nearly 400 people turned out to the Sofitel Wentworth to celebrate the best and brightest in the funds management industry last week, as Money Management held its annual Fund Manager of the Year Awards. From Indy Singh’s recognition as a Lifetime Achiever to AllianceBerstein’s ultimate victory as the overall Fund Manager of the Year to TAL’s two wins in the Business Development Manager of the Year award, it was a night of well-deserved recognition for those in the industry who go above and beyond for their clients. Winners were crowned across all the major asset groups as well, with a list of finalists littered with stellar performers in the funds space.

ALLIANCEBERNSTEIN’S JEN DRISCOLL AND MARK WILLIAMS CELEBRATE THEIR OVERALL FUND MANAGER OF THE YEAR WIN, AND CATEGORY PRIZES FOR AUSTRALIAN LARGE CAP EQUITIES AND SEPARATELY MANAGED ACCOUNTS

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WINNERS OF THE LONG SHORT EQUITIES CATEGORY, THE SOLARIS AUSTRALIAN EQUITY LONG SHORT FUND

CHRIS CYNKAR TAKES THE PARAPLANNER OF THE YEAR TITLE FOR THE SECOND YEAR RUNNING, PRESENTED BY FIDUCIAN GROUP’S INDY SINGH

GENERATION WHOLESALE GLOBAL SHARE FUND CELEBRATE THEIR WIN IN THE GLOBAL EQUITIES CATEGORY

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FINANCIAL PLANNER OF THE YEAR, FELICITY COOPER OF COOPER WEALTH MANAGEMENT, BACKED UP HER WIN AT THE WOMEN IN FINANCIAL SERVICES AWARDS LAST YEAR

VANECK’S ARIAN NEIRON WITH HIS WINNING ETF PROVIDER OF THE YEAR TEAM

RESPONSIBLE INVESTMENTS CATEGORY WINNERS, THE AUSTRALIAN ETHICAL AUSTRALIAN SHARES FUND (WHOLESALE).

Continued on page 25

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Celebrating Excellence

FIDELITY CHINA FUND TEAM MEMBERS WITH THEIR TROPHY FOR THEIR GLOBAL EMERGING MARKET EQUITIES CATEGORY WIN

PETER ADALEY, NIKKI PANAGOPOULOS AND MARK LUMBY OF THE AUSTRALIAN UNITY RETAIL PROPERTY FUND, WINNER OF THE DIRECT AND HYBRID PROPERTY CATEGORY.

ANGELA MACPHERSON, FROM THE COLCHESTER GLOBAL GOVERNMENT BOND FUND AND MICHAEL ANGWIN, FROM THE BMO PYRFORD GLOBAL ABSOLUTE RETURN FUND, CELEBRATE THEIR CATEGORY WINS

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JAMES DOUGHERTY, FROM THE EMERGING MANAGER CATEGORY WINNING FUND, THE LENNOX AUSTRALIAN SMALL COMPANIES FUND, IS CONGRATULATED BY THE CROWD

OVERALL BDM OF THE YEAR, TAL’S CHRIS MURPHY, WITH MONEY MANAGEMENT MANAGING EDITOR MIKE TAYLOR

THE TAL TEAM CELEBRATES WITH ITS TWO BDM OF THE YEAR STATE WINNERS, JADE CONSTANCE (SA/NT/QLD) AND CHRIS MURPHY (WA AND NATIONAL)

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ETFs

ETFs: SOON TO BE AN ADVISER’S BEST FRIEND?

Exchange-traded funds haven’t been offered on the Australian market for long. Their presence is already being strongly felt however, and Hannah Wootton looks at which products and asset classes will fuel their continued rapid growth.

“OUR BASE CASE is that the ETF [exchange-traded fund] industry will exceed $100 billion within the next five years, and perhaps even $150 billion should growth continue as it has been.”

A bold claim by BetaShares’ head of strategy, Ilan Israelstam, perhaps, considering the Australian ETF market is currently worth less than half that at $45 billion, but one that looks set to be proven true.

The ETF market overtook that of listed investment companies midway through last year, with its liquidity, ease and diversification benefits combined with lower fees proving too promising for many

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investors to say no to.

Indeed, according to Investment Trends, the number of ETF investors in the year to last October was up 23 per cent, going from 314,000 to 385,000. The research firm believes this will hit a whopping 437,000 by this October.

So where is this growth set to come from?

DEVELOPING STALWARTS To start, the ETF market’s development won’t come at the cost of the ‘traditional’ ETF offerings that are becoming the mainstays of the new ETF-dominated investment landscape.

According to ETF Securities’ chief executive, Kris Walesby, we will see continued popularity from simple offerings such as those tracking the ASX 200, as the investor market isn’t yet fully saturated in terms of its exposure to those offerings. The markets that have turned to more specialist ETFs, such as the US, have done so because they hit a point where most people looking to invest in general index trackers already had.

BetaShares launched its Australia 200 ETF last year, for example, and, according to FE Analytics, it already has $545.8 million in funds under

management (FUM) despite there already being other options on the market for investors wanting exposure to the ASX 200.

“So, while the move toward specific areas will continue, it won’t be to the detriment of those basic [portfolio] building blocks,” Walesby says, suggesting that in the next six months we will even see price wars between ETF providers for that type of offering.

The more ‘traditional’ ETF products also include those offering general exposure to global investments, and Pinnacle Continued on page 28

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ETFs

Continued from page 27 Investment Management’s director of listed products, Chris Meyer, believes Australia should expect to see more growth of these.

“It is easier to invest in global equities than directly in foreign shares … there are 300,000 Australian investors who have brokerage accounts that can invest in global equities, of which only about 50,000 are active,” he says.

The three major reasons for this – expense of investing abroad, disengagement from investors as most major global equity markets operate in our night-time and American tax forms – don’t apply to global ETFs, meaning interest in them will likely continue.

Further, the market’s present reticence to accept risk will strengthen the appeal of these more general offerings: “We’ve just come from a risk-off period – whereas before there were more risky ETFs looked at, that’s changed in the last six months,” Walesby says.

NOT A TECH HEAD? NO WORRIES Of course, the continued growth of general ETF mainstays doesn’t mean specialised ones won’t keep growing too.

For investors or clients wanting exposure to niche asset classes, they provide appealing exposure while keeping the need for expert knowledge to a minimum. Where once riding off the rise of Apple would’ve required insight into the development of both the design and personal technology markets, buying into an ETF focused on technology, for example, allows investors to buy into a range of growing companies without needing to research any.

Walesby believes that this is why ETFs (and funds) are the best way for Australian retail investors to invest in technology trends. It’s near-impossible to predict what specific companies will take off without specialist knowledge, so an ETF allows consumers to spread their chances of having exposure to the unicorns like Apple.

And they want this exposure.

“People want access to disruption and structural change in how we live our lives, such as robotics, technology and AI [artificial intelligence],” Walesby says.

“They see these as likely to fuel growth in their portfolio.”

Table 1: Top ETFs by 12 month flows to 10 May, 2019

ETF

Flows ($m)

Vanguard Australian Shares Index ETF

740.4

BetaShares Australia 200 ETF

456.1

Vanguard MSCI Index International Series

453.0

VanEck Vectors Australian Equal Weight ETF

274.0

iShares MSCI South Korea Capped ETF

259.7

BetaShares Australian High Interest Cash ETF

236.2

iShares Core Cash ETF

226.1

BetaShares Active Australian Hybrids Fund

195.6

BetaShares Australian Investment Grade Corporate Bond ETF

178.9

Vanguard MSCI Index International Series (Hedged)

173.9

Source: ETF Securities Weekly ETF Market Monitor

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“People want access to disruption and structural change in how we live our lives, such as robotics, technology and AI. They see these as likely to fuel growth in their portfolio … and ETFs offer access to them.”

- Kris Walesby, ETF Securities So, while 70 – 80 per cent of the typical portfolio is in standard offerings, the ETF Securities CEO says that there’s a 10 per cent bucket that’s being invested for accelerated growth to which specialised ETFs are often well-suited.

FIXATED ON FIXED INCOME In what may be a surprising development for Australians, who are used to their retirement income being at least somewhat taken care of by superannuation, fixed income ETFs are rising in popularity globally.

According to BetaShares, fixed income products accounted for 68.2 per cent of total ETF flows for Q1 2019 in the US, compared to 30.3 per cent from equities. In stark contrast, in Q4 2018 they amounted to just 68.2 per cent of flows, with equities filling 70.8 per cent.

In Canada, fixed income ETF inflows were double that of equity ETF inflows in March alone this year.

“Fixed income was most definitely the flavour of the quarter, as investors moved into a decidedly risk-off position in their portfolios,” Israelstam says.

This trend looks set to contribute to the growth of the Australian ETF market, too. In Q1 2019 domestically, fixed income ETFs received over $500 million in new flows. From March 2018 to March 2019, the share of the total ETF market that was fixed income products went from 11 to 15 per cent.

“This reflects both the introduction of innovative new fixed income ETFs into the market place, an ageing investor population seeking relatively reliable sources of income return without undue equity risk, along with a growing sense that the long global equity bull market is “late cycle” and at increasing risk of turning down,” Israelstam says.

Further, Israelstam believes ETFs have made it much easier for investors to gain access to the Australian bond market, as well as being the subject of “particularly strong growing interest in defensive exposures such as cash and fixed income products”.

Fixed income ETFs’ growing popularity also may lead to a broader suite of products on the market. Meyer notes that in Canada there are specialist fixed income ETF offerings, such as ones specialising in environmental, social and governance (ESG) investments, while Walesby says that in the US there are already lots more options for fixed income ETFs than here, such as ones in municipal bonds.

THE PARADOX OF ACTIVE ETFs Active ETFs, offering a hybrid of ETF-style tracking and fees with active management, have been lauded as the next major player on the Australian ETF landscape for the last year. They are currently only worth $3.5 billion here but most of the ETF industry believes

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ETFs

Chart 1: Performance of the top ETFs by YTD (10 May, 2019) total return

this is set to grow strongly, as investors seek an open-ended and low fee alternative to actively managed funds.

Looking again across the Atlantic, the path that growth may take is visible. Active ETFs currently account for 21 per cent of Canada’s total ETF market – one of the few countries other than Australia to allow active ETF trading – compared to nine per cent in Australia, which hasn’t had them for as long.

“These figures suggest there is upside to the growth of the Australian ETF industry in terms of overall industry penetration (active and passive) and even more growth potential, off a much lower base, for active ETFs,” Meyer says, pointing to the increased adoption of the product type by planners, stockbrokers and direct investors of this predicted growth.

Walesby warns however, that the growth may be stymied at first by poor offerings.

“We’re seeing many companies come to the market with active ETFs but without a business plan on how to gather the assets within that,” he says.

These companies may have the adviser networks needed to garner interest in their offerings, but not the relationships with stockbrokers or sales teams that creating an active ETF requires.

There are just a couple on the market who have both of these – Walesby points to Magellan and Platinum.

While some of the predicted growth in the active ETF market will be realised, Walesby believes that it will then contract again unless the current approach by providers changes.

Building on the trend of adding a bit of management to ETF offerings, managed accounts and ETF managed portfolios are also on the rise – indeed, the managing director and head of SPDR ETFs Australia and Singapore, Meaghan

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Source: FE Analytics/ETF Securities Weekly ETF Market Monitor

Victor, believes that they will be “a key driver in the growth of ETFs over the next year”.

“Managed accounts incorporating ETFs can provide investors with access to professional funds management at a fraction of the cost and demonstrate the numerous ways ETFs can be incorporated into investor portfolios,” she says.

AN EDUCATED ADVISER’S GAME According to Walesby, ETF usage in Australia is predominately still in the adviser space, particularly for those with clients with selfmanaged super funds (SMSFs) or investment accounts. While some people are starting to invest independently, “the big money is still in advisers managing investments for their clients”.

The use of ETFs by advisers is gaining momentum. The 2018 BetaShares/Investment Trends ETF Report found that 53 per cent of planners were providing advice on ETFs last year, up from 45 per cent in 2017.

According to the study, ETFs’

low cost, diversification and ability to help bring down fees in clients’ portfolios (particularly pertinent in a fee-focused financial services landscape) were key benefits of ETFs for advisers.

The main barrier to ETF investment for investors and advisers alike however, according to the industry experts interviewed in this piece, was education, which clearly needs to be worked through if their growth potential is to be tapped into.

“Despite gaining significant traction and popularity over the last ten years, investors are still faced with a barrage of myths about the risks ETFs and index investing,” Victor says.

“These myths can deter investors from exploring the countless benefits, such as lower total cost of ownership, transparency and liquidity, that ETFs can bring an investment portfolio …

To break these myths, it is essential that advisers and investors have access to the right information to evaluate how ETFs can be used to support and achieve their goals.”

Indeed, many of the barriers to

using ETFs cited by advisers in the BetaShares/Investment Trends study could be overcome with education, such as a preference for actively managed funds or individual shares.

An example of the benefits of education lies in the increased use of shorts to neutralise downward market moves in portfolios.

According to Walesby, “advisers are getting smart on playing recovery trades” and, instead of trying to select stocks in recovery stages, are increasingly buying ASX 200 ETFs and seeing the recovery play out through those. In this, advisers and investors can access the opportunity of market movements without risking the burn of poor stock selection, a short-term trading strategy that is already “a big, big part of what’s going on with ETFs in the US”.

While the practice used to be relatively unknown in Australia, as education around it increased so did its adoption. The same could prove true for utilisation of the multitude of ETF options, from fixed income to active to specialist tech offerings.

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30 | Money Management May 23, 2019

Portfolio protection

IN A CRISIS, CRASH PROTECTION IS BETTER THAN CASH

In retirement, our investment objectives need to pivot. With most investment strategies designed for people in accumulation, Alastair MacLeod writes that retirees may need to turn over a few more rocks to find the right investment approach.

A WELL-DESIGNED CRASH protection strategy makes sense for many retirees. The crash protection in their portfolios are like little sleeping securities, for the most part. They are always there, and in a good year you hardly notice their impact on returns. However, they are evervigilant, and wake during times of crisis to aggressively protect capital – precisely when you need them most. These little sleeping securities allow the portfolio to remain fully invested in the pursuit of equity returns, all the while adding a significant element of capital protection to the portfolio.

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Retirees should be especially concerned with capital protection.

After a typical 40 years spent working and accumulating wealth, the switch to retirement introduces unique risks that simply don’t exist when we are working.

With our retirement savings all our financial capital in retirement, and with less flexibility to re-enter the workforce should we experience a financial misstep, it’s no surprise that protection of our financial nest-egg becomes a far higher priority in retirement.

For many retirees, this means an increased portfolio allocation to

cash to minimise harm and reduce downside risk. And this approach is prudent and perfectly sensible.

Cash is the lowest risk asset out there – but it’s also the lowest returning. Consider the current annual interest rate on term deposits of around 2.5 per cent.

Bank interest is even lower. Once inflation has staked its claim, this capital is earning less than one per cent in real terms, which is often significantly less than the rate at which most retirees draw down on their capital.

If we’re spending more than we’re earning in returns, the issue of capital erosion becomes

increasing relevant – especially as our retirements now stretch to 30 years or more. The magical power of compounding, which worked so well when retirees were employed and saving, begins working its ‘magic’ in reverse.

With yields so low, we believe retiree investors need to turn over a few more rocks to find a better retirement solution. One alternative way of doing so is including crash protection in portfolios.

Crash protection is a fundamentally different way of reducing risk in an equity portfolio, as opposed to increasing exposures to cash. Because the

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Portfolio protection

premium paid to secure crash protection is a fixed outlay, it allows the rest of the portfolio to remain fully invested in the pursuit of equity returns. Depending on market conditions, this can have a meaningful impact on long-term investment outcomes.

Similar to a payment for house insurance, crash protection is bought for a certain period (e.g. 12 months) and is attached to a certain notional value. Also, similar to insurance, the premium is significantly cheaper if the investor wears the first few percentages of declines, in the same way that house insurance is less expensive if we opt for a larger excess.

The analogy with insurance doesn’t end there. When we are working, raising families and building a retirement nest egg, the primary source of capital that we rely on is ourselves. Because so much depends on our ability to work, many of us take out income protection insurance as a means of safeguarding our human capital. So, in retirement, doesn’t it also make sense to take out some form of protection on our financial capital, which at that stage of life is critical to funding our lifestyle?

For example, our own fund’s crash protection is currently costing an annual premium of 1.4 per cent. While this is not an insignificant amount, the protective strategy we designed is intended to limit losses to 50 – 60 per cent of the market’s fall when in correction. So, in crisis periods, or a move of greater than 10 per cent down, our protection is designed to remove nearly half of our risk for all further declines.

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To deliver a similar protective characteristic through cash (and assuming no stock outperformance), the portfolio would need to have a 40 – 50 per cent allocation to cash.

The return characteristics of a portfolio with 100 per cent in equities, less 1.4 per cent for crash protection, are quite different to a portfolio with 50 per cent in equities and 50 per cent in cash (assuming equity markets annualise at 10 per cent return).

Clearly, both approaches are defensive, but their suitability depends on what problem we’re solving. The portfolio with 50 per cent cash will outperform in shallower market declines (so less than -10 per cent, when our protection is designed to engage), although we have other mechanisms in our portfolio to protect capital for these smaller moves.

We would also argue that in order to deliver equity returns, investors (including retirees) need to assume some element of market volatility. A 100 per cent capital protected strategy can only hope to deliver a cash return at best, and if it promises greater than this then be assured there are other unconsidered risks that are being assumed to deliver such a profile.

The other major advantage of our own crash protection is that it’s always on. We don’t try to time when protection is or isn’t required, meaning the portfolio has crash protection for unforeseeable ‘bumps in the night’, such as the September 2001 terrorist attacks or surprise election results like Brexit or Trump.

We also consider slower burn declines, where it may take many months for damage to be wrought.

This is a key advantage of the approach – crash protection is ready and in place well before the event ever crystallises, so by the time the event is on the news and before the market even opens, our little sleeping securities are wide awake and ready to defend.

This is a critical point – it means we never need to sell a single security to reduce the risk in the portfolio. Markets react instantly to these types of news events, far quicker than anyone could ‘pull the trigger’ to sell shares (and at what price!). This has implications for tax realisations as much as for portfolio turnover.

The other key advantage of crash protection is the concept of ‘convexity’. As the market begins to get closer to targeted protection levels, the hedge securities begin increasing at a non-linear rate. In other words, for every one per cent decline, they may appreciate by two per cent. For the next one per cent decline, they may appreciate by a further three per cent.

The worse the decline is, the more aggressively these securities increase in value. This is a very different profile to holding cash, which by its nature can only ever protect capital in a linear relationship.

Crash protection isn’t something that can be bought as a band-aid for every portfolio. It needs to be tailored to the underlying portfolio exposures, and match the risks that are present in the portfolio. Poorly designed strategies can also be more expensive and, if incorrectly positioned, can disappoint in their protective abilities.

ALASTAIR MACLEOD

Similar to a well-managed equity portfolio, crash protection needs to be actively managed in order to maximise its effectiveness, and you need to know when to monetise portions of the protective overlay and reposition the hedge for a changing market environment.

Crash protection isn’t for everyone. Indeed, we would argue that in a systematic form, such as we use in our fund, it isn’t required for younger investors, who have enough time to ride through market storms and average down their acquisition costs along the way.

For retirees, however, this math is completely reversed. Time is shorter, capital is more critical, and there is far less flexibility to return to work if there is a financial misstep. In a low interest rate environment, the defensive qualities of crash protection permit a retiree’s portfolio to be more fully invested, harvesting steady income streams and accessing equity rates of return, thus reducing the risk of capital erosion and critical failure.

Alastair MacLeod is managing director of Wheelhouse Partners, a Bennelong boutique.

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32 | Money Management May 23, 2019

Long/short strategies

THE LONG AND THE SHORT OF SUSTAINABLE RETURNS Jun Bei Liu writes that there are many benefits to long/short investing, going far beyond the most obvious advantage of reaping the rewards of both rising and falling prices.

WHILE THE MERITS of short selling – and its impact on markets – will always be hotly debated, the fact remains that short selling plays an important role in ensuring that securities are priced correctly relative to fundamentals. It also provides an additional opportunity for portfolio outperformance.

Traditional long-only fund managers are, by definition, skewed towards identifying opportunities to buy, whereas those managers that adopt a long-short approach can take a position in a range of investment opportunities across a much wider spectrum of investment options through both buying and short-selling.

The most obvious benefit of long-short investing is that it offers investors the ability to benefit from both rising and falling prices.

A long-short equity strategy seeks to profit from share price appreciation above the index in its long positions as well as from price declines below the index in its short positions.

A long-short fund has double the opportunity for alpha. It can focus on short selling a range of stocks with weak investment characteristics while reinvesting the proceeds in long positions in preferred stocks. This combination of long and short

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provides managers with flexibility and enables more active decision making.

Essentially, a long-short approach also enables portfolio efficiency to better capture alpha insights while diversifying away unintended risk exposures. This is particularly relevant with the current uncertain market outlook both globally and domestically.

MARKET OUTLOOK Equity markets have surged back towards highs in recent times as a combination of a dovish pivot by the US Federal Reserve and positive progress on a trade deal between the US and China has bolstered risk appetite.

The rebound in markets has been unequal, however, with the rally concentrated in technology, REITs, utilities and resources while there has been more moderate participation from cyclicals. This indicates to us that that the market is reacting more to the improvement in the liquidity environment and lower bond yields than it is to improved expectations for growth.

Domestically, the housing market continues to decline as credit tightness bites on clearance rates, prices and new dwelling construction. Meanwhile, recent reads on GDP growth,

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Long/short strategies Strap

housing starts, retail sales and new job adds all point to further weakness ahead.

On the positive side, the terms of trade have received a significant boost from higher iron ore prices and this will help to foster an ongoing recovery in the resources sector. There is also a reasonable tail of infrastructure work which will provide some offset to weaker household consumption. Of course, the exchange rate also provides a relief value to the economy if growth takes a hit, especially if the Reserve Bank of Australia moves to cut rates further.

The uncertainty in all of this was the Federal election, and the outcome would have been keenly watched by markets.

PORTFOLIO PROTECTION In this environment, investors would be well served by reviewing their investment approach and ensuring their portfolios are positioned for an appropriate risk adjusted return.

This means actively managing portfolios and looking to incorporate adequate diversification.

A long-short investment approach, for investors with an appropriate risk return profile, should be part of this.

Long-short equity strategies aim to provide investors with returns that beat the benchmark, whatever the market conditions. In managing a long short fund, a manager doesn’t just look for the good news stories in the way that traditional Australian equity managers – it can take advantage of negative views of stocks and sectors, as well as weaker fundamentals.

Because it is focusing on short selling a range of stocks with weak investment characteristics and reinvesting the proceeds in long positions in preferred stocks, a fund manager has a large degree of

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flexibility which enables more active decision making.

This is particularly relevant in the local context, given that the Australian share market is small by global standards and is dominated by a small number of very large companies.

When using a benchmark for constructing an investment portfolio, such as the S&P/ASX 200 Accumulation Index, the performance of a traditional fund which only takes long positions will be determined by the size of the fund’s shareholding of these very large companies relative to that company’s weighting within the benchmark.

By contrast, a fund that is also able to take short positions in securities by borrowing securities from other holders and selling on market and reinvesting the proceeds in other long positions has a larger set of investment opportunities and gives more opportunity to outperform the fund’s benchmark.

RISK/RETURN TRADE OFF That said, a short investment strategy is not for all investors, not least because returns and exposure are amplified on the upside as well as the downside. It is true that poor stock selection in a shorting strategy may provide a worse investment outcome than poor stock selection in a long only approach.

Manager and strategy selection are important. Managers that have a good track record over a long period of time should be preferred, particularly those that have been through various market cycles.

Another important determinant factor of returns is risk control.

Managers with inappropriate risk modelling will find it difficult to consistently outperform. An effective way to ensure that is to

invest in a manager that uses a combination of quantitative and fundamental investment processes.

The strength of quantitative investing is the breadth of information that captures and enables a transparent and objective assessment of a company’s relative prospects.

A well-designed quantitative process seeks to exploit particular behavioural biases that are exhibited by investors and can be explicitly measured through precisely defined factors. These factors generally fall into the categories of either value or momentum and can be implemented through bottom-up research or top-down research.

The benefit of this approach is the significant amounts of company detail that can be unearthed and used to generate insights into its future prospects and likely investment returns. It provides an enormous amount of breadth to the investment process and enables a company’s likely outperformance to be assessed in an objective manner.

The advantage of the fundamental approach is the level of detail that can be gathered on a particular company and level of investment insight that can be obtained from a detailed knowledge of a company’s operations.

Essentially, a quantitative process provides breadth and objectivity for stock selection while the fundamental process delivers detailed high conviction insights for investment.

Investing is an art, but with appropriate science/quantitative tool, investors can expect to generate higher return while controlling the risks and hence delivering outperformance over the long term.

JUN BEI LIU

Jun Bei Liu is portfolio manager of the Tribeca Alpha Plus Fund.

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34 | Money Management May 23, 2019

Global property

LOCAL MARKET CLEARS PATH FOR GLOBAL PROPERTY PLAY

Chris Bedingfield makes the case for investing in global property, suggesting that Australians can use the asset class to satisfy their desire to own property while also adding diversification to their portfolios.

PROPERTY. AUSTRALIANS ARE obsessed. And it appears our unwavering fascination isn’t influenced by the time in the cycle; whether it’s rocketing skywards or, such is the case now, prices have peaked and values are well and truly heading south.

But the current picture painted by the domestic residential market shouldn’t deter investors from looking towards other property classes, with global property leading the charge.

As an asset class, real estate can deliver attractive, long-term, inflation-protected returns, and importantly, offers portfolio

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diversification. It can also offer investors both capital and income growth and, if a disciplined and well-researched approach is taken, risk can be managed effectively – for instance, by limiting exposure to developments.

One of the big advantages of real estate as an investment is that it’s based on real assets. As long as leverage is managed, real assets rarely lose all of their value. Even under a worst-case scenario, the rate of obsolescence for quality property is low.

Since 2000, global real estate has consistently outperformed both Australian and US equities. Even

when performing relatively poorly, global real estate has made a strong recovery in the ensuing years.

DIVERSIFICATION REMAINS KEY For Australian investors, global real estate can provide as much diversification as global equities - with a better return track record. It’s therefore likely to provide much needed diversification even for investors who hold domestic property.

There’s a steep learning curve for investors as they move from a mindset focused on acquiring an investment property, to recognising

other property sectors such as commercial or retail, to considering whether to invest directly or through unlisted or listed funds, and finally looking at opportunities outside the somewhat limited domestic market.

In order to access these opportunities, investors should look beyond the Australian property market to the global environment. Global real estate is a large and diverse industry offering access to many attractive themes that are often not readily available or of sufficient scale in Australia. As such, it can offer an attractive investment proposition

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Global property

regardless of any short-term risks to the market.

Australian investors who seek diversification by coupling Australian shares with domestic residential investment property may not be able to obtain the benefits they seek. With a significant proportion of the S&P/ ASX 200 represented by banks and other financial institutions, and approximately 60 per cent of the banks’ assets in residential mortgages, the current decline in Australian property values may subsequently have a detrimental impact on the local sharemarket.

In extreme market environments – a time when diversification is perhaps most valuable – a portfolio of Australian residential property and shares may offer no real diversification at all as the two asset classes could turn out to be highly correlated.

Instead, a better option for property investors may be to diversify into global property exposure. An important aspect for portfolio construction is to allocate capital to uncorrelated asset classes while maintaining an overall return objective, making global property – with low correlation - an appropriate option.

GLOBAL REAL ESTATE SECTORS ABOUND While Australian listed real estate is significant in size, it provides limited access to the sectors expected to benefit from some of the strongest real estate themes.

For example, listed real estate entities investing in health, aged care, student housing and apartment (rental) sectors are very limited or non-existent in Australia.

Aged care is a prime example.

While the issues and opportunities of an ageing population are relatively well understood in Australia, it may not be as well recognised how

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these same trends are playing out overseas. For instance, over 10,000 Americans are turning 65 every day and, as a result, demand for aged care facilities is expected to increase significantly over the next five to 10 years.

Internationally, there are property sectors that offer strong prospects to investors but either aren’t as readily available in Australia or don’t yet have the scale, including the following.

Student housing The demand for Western-style higher education is a theme prevalent around the world. With more and more people looking to study at educational facilities based primarily in developed markets such as the US and the UK, the demand for student housing is growing, and with it the opportunity for investors. While it’s also a theme in play in Australia on a smaller scale, the opportunities for investors are much broader and stronger overseas. Student accommodation offers a reliable and non-cyclical cashflow.

Manufactured housing This term is used primarily in the US to describe homes that are built in a factory and meet strict, federally-defined criteria. After being constructed in the factory, the homes are transferred to specific sites. Essentially, the home owner owns the house but not the site, where they instead pay a lease. Such approaches are rising in popularity in the US, where they allow retirees in particular to live in areas such as Florida or California, and generate extremely predictable cashflow.

Healthcare and aged care This is a sector that has some local opportunities for investors but the size of the market is significantly bigger overseas. And while spending on healthcare assets has

increased in the past decade, in the face of the demographic landslide we believe over time it will barely keep pace with demand.

Affordable housing Housing affordability remains a big issue in developed markets around the world. In Europe and North America, people tend to be more willing to rent, creating a groundswell demand for apartments. Different laws and regulations also make renting more attractive in many European countries, where tenancy is seen as a long-term option rather than a stepping stone before buying.

Industrial property This sector is very strong almost everywhere including Europe, the US, the UK and Canada. From data storage facilities to warehouses for shipping products around the world, the demand for industrial property looks set to continue for some time. Undersupply continues to be a problem and in the UK, self-storage offers an attractive and defensive earnings outlook.

Shopping centres Despite the threat of e-commerce, best-in-class malls offer good opportunities for investors, particularly malls that focus on luxury and value-based retailers.

Smaller shopping centres that meet local needs, focusing on groceries, services and pharmacy, will also continue to perform well.

LISTED VS UNLISTED? The arguments for investing in property can be readily understood, but appreciating why to invest in listed real estate rather than directly is more complicated.

For many investors, the main attraction of investing in property is that it’s a physical building they can visit, photograph, renovate and touch. However, there are several advantages to taking the

CHRIS BEDINGFIELD

listed rather than the direct or unlisted route, and these relate predominantly to liquidity and minimum investment.

Liquidity is a key attraction for investors. Being able to quickly and easily redeem any investment has become an important consideration, and direct or unlisted property is notoriously illiquid. Even unlisted pooled property funds, which may own several quality buildings, can have difficulties selling a property quickly in order to raise cash.

During a crisis or downturn, it is often the best assets that are sold while the poorer ones remain within the fund, impacting its quality and investor returns. This was the case during the global financial crisis, when many unlisted property funds were forced to hold ‘fire sales’ to dispose of assets, in order to raise money to pay out investors. Listed property funds, however, have much better liquidity and can respond to any investor withdrawals more easily.

Buying a property directly is an expensive business, and there are numerous tax and legislative requirements to consider. Even investing in an unlisted property fund can require a significant minimum investment of tens of thousands of dollars, which isn’t the case with listed real estate.

Chris Bedingfield is principal and portfolio manager at Quay Global Advisors.

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36 | Money Management May 23, 2019

Emerging markets

INVESTING IN INCLUSION: HOW BANKS ARE ADDRESSING POVERTY IN EMERGING MARKETS Investing in improving the lives of those living in poverty in emerging markets not only has an altruistic advantage, Jack Nelson writes, but can benefit the companies that do so and their clients.

AN EFFECTIVE ORGANISATION needs a sense of purpose and integrity in order to maintain coherent behaviours, create a sense of culture, and maximise its chances of thriving over time.

This truth is particularly applicable to financial services firms. Banks and insurance companies are simultaneously some of the most complex corporate bodies in the economy, and remain central to the livelihoods of everyone.

In emerging markets, financial services firms have an additional consideration – inclusivity. For those of us who travel in developing countries, it is eminently clear that people in those countries do not suffer from a misunderstanding of markets, or an inability to utilise them, when given the opportunity.

Rather, in poor countries, markets regularly fail to function properly or do not include vast proportions of the population.

In the right institutional environment, and where markets are able to adapt practices to include a broader swathe of society, the circumstances are in place for the disadvantaged to pull themselves out of poverty

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through participation in the capitalist economy.

Given a reasonable time frame, reaching out to the next set of consumers at an early stage is likely to prove a good investment for listed corporates. It is one which plays out over many years, rather than just a few months or quarters.

For financial services firms operating in emerging markets, adopting a strategy for inclusion is a long-term business strategy, rather than ‘social responsibility’ or an attempt at charity or for positive public relations.

It is a means for insurance companies and financial firms to achieve several objectives all at once: work towards a long-term goal of expanding the addressable market, address the need to generate profits in the medium-term, and fulfil a part of their social requirement, to serve a broad cross-section of society and not just the relatively small affluent population.

A MULTI-FACETED CUSTOMER Poverty is far more multi-faceted than the lack of wealth or income.

Indian economist and philosopher

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Amartya Sen famously described it as freedom or, roughly, ‘deprivation in the capability to live a good life’, with ‘development’ thus pertaining to ‘capability expansion’.

If poverty is not the absence of income but the presence of voicelessness, social exclusion and the inability to participate in society fully, it opens up lots of challenging questions. AfricanAmerican men in Louisiana have a lower life expectancy than men in Egypt or Bangladesh, a higher chance of being illiterate than men in Cuba or Kerala, less political voice and representation than men in Uruguay or Estonia, and a far higher chance of being incarcerated by the state than in any of these places.

Looking at poverty around the globe as a function of where those living on less than $1.25/day are situated, thus misses a lot. Many very relevant social exclusions are nestled within what, from a top-down perspective, are some of the more advanced developing countries. This marginalisation might relate to educational attainment, political empowerment and, most acutely

relevant for us as investors, real participation in the economy.

These do not always correspond with economic income.

Development levels explain some of the exclusion that poor people face, but industry structures, socioeconomic divisions and historic patterns of inequality are also very important. Over centuries, Mexican society has marginalised certain groups (e.g. indigenous groups in the south) and the banking industry has always been controlled by and thus has developed to serve the needs of others (i.e. European Mexicans in the capital).

TAILORING BUSINESS MODELS Established, large and listed businesses can do a lot to help the process of inclusion, by adapting their business models to serve a lower socioeconomic market.

Numerous public companies have managed to effectively combine boosting profits with creating positive social change.

Unilever’s Shaktayama program is one of the betterknown examples, in which thousands of female entrepreneurs were hired as

ADDRESSING THE NEEDS OF THE BOTTOM OF THE PYRAMID: TWO EXAMPLES Mahindra & Mahindra is an Indian conglomerate which has used its extensive rural presence to build a brokerage business, connecting consumers who would not otherwise have access to insurance products with companies which otherwise would not be able to reach them.

This has taken very little additional capital, since it leverages existing infrastructure, and has been an easily scalable and profitable model.

In Thailand, one of the country’s leading banks, Kasikornbank has been partnering with insurance specialists and the 10,500 branches of 7-11 convenience stores across the country, in order to reach a wide audience in a cost-effective way. Some of these policies include accident insurance for high-risk professions like motorcycle taxi drivers, which cost only AUD$10/year. Such initiatives help to build an exciting new business as well as contribute to the sustainable development of Thai society

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door-to-door distributors, enabling both employment as well as greater reach for Unilever’s products in rural areas.

Less well-known but no less impactful adaptations of existing products include the fortification of food staples with vitamins and minerals to combat nutritional deficiency, mobile banking and providing affordable insurance policies.

In each case, a small innovation, usually of process rather than technology, improves access to markets for the previously marginalised. In doing so, the lives of the poor are improved as they gain in terms of Sen’s capabilities. Simultaneously, the company in question is likely to see its cash flows boosted and brand strengthened.

THE BOTTOM OF THE PYRAMID One area that we at Stewart Investors have been aware of for a few years is inclusive protection at the bottom of the pyramid, through financial products such as micro-insurance.

Micro-insurance is simply health, protection, life or another insurance policy which has been adapted to meet the needs of people whose cash flow is low and/or less reliable, and who have the greatest need for insurance protection and the ability to smooth income over time.

Its aim is to profitably address the need for people with lower incomes to access financial protection, through adept product design, claims infrastructure, collection processes and disbursement techniques.

One of the least understood aspects of life at the bottom of the pyramid is that incomes are not only very low, but that they are very irregular and unpredictable.

JACK NELSON

Financial products are a means of moving resources through time.

The act of saving capital today is deferring it for use in the future, and the act of borrowing is drawing from future wealth to utilise it in the present. This ability to smooth out cash flow over time greatly reduces the risk arising from the vagaries of life. It enables poor families to make decisions like sending a child to school or upgrading agricultural equipment, which will help them climb out of poverty, without fear of an injury or a poor monsoon endangering their ability to put food on the table.

Those with low incomes are thus simultaneously the population which stand to benefit most from financial products and services, and yet are those who have the lowest levels of access. Financial institutions in developing countries have both a deep responsibility as well as a fantastic opportunity in providing products to fit this need and overcome the exclusion aspects of poverty.

As long-term investors in emerging markets, we continue to work to engage with companies to encourage them to take the longterm view, keep a sense of purpose central to decisionmaking, and ensure inclusive protection is part of their business model for the next ten years.

Jack Nelson is a portfolio manager at Stewart Investors.

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Alternatives

HOW TO USE ALTERNATIVES TO OFFSET MARKET RISK Not only can infrastructure and property investments help offset risk in portfolios, but the asset classes are no longer the sole domain of institutional investors as managed funds increase access for retail consumers, Russel Chesler writes.

FOR TOO LONG, infrastructure and property have been lumped together as ‘alternative assets’ in portfolios. Yet, these assets are already in the mainstream.

Large institutions use them, most notably Australia’s sovereign wealth fund, the Future Fund, and more and more investors are catching on to their benefits.

Infrastructure and property assets typically deliver reliable

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income streams and potential capital growth to investors, as well as portfolio diversification.

Recently, demand has increased as investors consider property and infrastructure as substitutes for historically high-yielding Australian equities given the slowing Australian economy and fears of lower yields ahead coupled with the potential winding back of franking credit refunds.

INSTITUTIONAL INVESTMENTS Institutional investors and large superannuation funds have long invested in infrastructure and global property assets.

Australia’s single largest investor, the Future Fund, has lead the way. At 31 March 2019, a significant 44.6 per cent of the Future Fund’s $154 billion portfolio was allocated to

so-called ‘alternative assets’ including infrastructure, property and private equity, which has helped to buoy returns and reduce investment risks.

Australia’s sovereign wealth fund has earned a return of 10.4 per cent pa against a target of 6.5 per cent pa over 10 years. These returns have been helped by a high allocation to alternative assets, which aren’t highly

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May 23, 2019 Money Management | 39

Alternatives

Chart 1: AustralianSuper MySuper option asset allocation at 31 December, 2018

“With rising risks around the maturing economic cycle and ongoing trade tensions between the US and China, infrastructure and property provide a hedge against an equity market downturn.”

- Russel Chesler, VanEck 2018 for example, AustralianSuper had an allocation of 25.3 per cent to alternatives, more than its weighting to Australian shares.

Infrastructure alone represents 12.7 per cent of its assets. This is shown in chart one.

BUT I’M NOT INSTITUTIONAL? Source: AustralianSuper

correlated with stock markets.

Table one shows the asset allocation most recently reported for the Future Fund. Notably property and infrastructure are listed on different lines and are not bundled with ‘alternative assets’, indicating the acceptance of the former asset classes into the mainstream by Australia’s largest fund.

Another large institutional investor, industry superannuation fund Hostplus, treats property and infrastructure as separate asset classes too, saying they can be classified as defensive investments when they “derive a high proportion of their returns from strong income (cash) flows rather than capital growth.””

AustralianSuper is another big investor in infrastructure assets and property, also treating them separately from alternative assets. AustralianSuper has significant holdings in Ausgrid,

07MM2305_18-41.indd 39

NSW Ports, Westconnex and Brisbane Airport. Elsewhere around the globe, AustralianSuper holds stakes in Indiana Toll Road, Manchester Airport Group and Vienna Airport.

In its Balanced (MySuper) investment option at 31 December

While the Future Fund, AustralianSuper and HostPlus have the scale to buy infrastructure and property projects directly, a good option for investors who do not is to invest in listed property and infrastructure funds.

Such funds are often more diversified than owning a single asset as they are diversified across multiple assets and also provide

Continued on page 40

Table 1: Top 10 holdings of the Future Fund

Source: Future Fund, portfolio update at 31 March, 2019

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Alternatives

Chart 2: Risk and reward of asset classes since inception of FTSE infrastructure benchmark

Continued from page 39 much greater liquidity. This means investors can buy and sell as required on an exchange, whereas an investor in a direct real estate or infrastructure asset must first commit to a large capital outlay for an illiquid investment.

While Australian real estate investment trusts (A-REITs) have been a staple in most Australian portfolios due to their stable income and potential for capital growth, opportunities in Australia are limited as A-REITs account for just three per cent of the world’s listed global property opportunity.

One or two securities and sectors dominate the Australian market.

In contrast, the US, Europe and Asia offer real estate investment opportunities not readily available in Australia, including lodging/resorts, healthcare and storage including data warehouses which can offer reliable income, as well as the potential for capital gain.

Yet many Australian investors still consider property and infrastructure as alternative assets and not mainstream asset classes. As a result, they may be

Source: Morningstar Direct. All returns in Australian dollars. Risk-reward 1 January 2010 - 31 March 2019.

underrepresented in most retail portfolios and investors are likely missing out on their potential benefits to offset market risk.

DEFENCE WHEN YOU NEED IT With rising risks around the maturing economic cycle and ongoing trade tensions between the US and China, infrastructure and property provide a hedge against an equity market downturn. They have strong defensive qualities as they achieve a high proportion of their returns from income rather than capital.

As chart two illustrates, infrastructure and property are

correlated to asset classes in most Australians’ portfolios using the standard market benchmarks as a proxy for each asset class.

The FTSE Developed Core Infrastructure 50/50 Index Hedged into AUD has become the global infrastructure benchmark used by industry participants including asset consultants and asset managers.

Chart two also shows that infrastructure has been among the best performing asset classes since inception of this benchmark on 1 January 2010 while also being lowly correlated with traditional asset classes that dominate Australian portfolios, including local and global equities,

Chart 3: Correlation of asset classes

Source: Morningstar Direct. All returns in Australian dollars. Correlation: 1 January 2010 to 31 March 2019.

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Australian listed property, Australian bonds and cash.

Most Australian investors with global bonds in their portfolio seek a hedged exposure to limit the impact of currency movements on income and the same is true of the standard international (ex-Australia) property index: the FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged.

In chart three, a correlation of one means the asset values move together while a score of negative one means they move in opposite directions. Anything below 0.5 could be considered a low correlation.

IN CONCLUSION ETFs have opened up infrastructure and property making them accessible to all types of investors and no longer just large institutions. Because ETFs are traded on the ASX, investors can easily buy and sell in amounts that suit their individual investment needs.

So, it’s now possible to invest like the Future Fund, but without the capital outlay required to buy assets directly.

Russel Chesler is director investments at VanEck.

16/05/2019 3:19:56 PM

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R O S F T E S S E I S G A E E F T S S A A STR LING SMENT PH SEL ETIREM IN R

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May 23, 2019 Money Management | 43

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Melanie Dunn looks at how advisers can help self-managed superannuation fund clients plan for changes to the exempt current pension income rules to lessen compliance costs and poor tax outcomes.

THE TAX IMPLICATIONS of realising capital gains and losses in a self-managed superannuation fund (SMSF or Fund) have traditionally been in the realm of what accountants consider at year end. However, changes to the exempt current pension income (ECPI) rules which applied from the 2017-18 financial year and going forward mean it is now important for SMSF retirees to plan in advance and be strategic around the sale of assets (and more specifically the capital gains tax consequences) where an SMSF is moving into the retirement phase.

A strategic wrong turn can mean additional compliance costs and poor tax outcomes. The new ECPI rules provide an opportunity for advice to improve client outcomes.

TAXATION OF CAPITAL GAINS AND LOSSES The net capital gains of an SMSF for an income year form part of the Fund’s assessable income.

How capital gains or losses are taxed will depend on whether any of the Fund members are in retirement phase, and the method the Fund must use to claim ECPI. For an SMSF with no retirement phase interests (i.e. only accumulation or non-retirement phase transition to retirement income stream

(TRIS) accounts), all net capital gains will be taxable and capital losses can be carried forward.

Where an SMSF has retirement phase interests we must first determine whether the Fund will use the proportionate method, the segregated method or both when claiming ECPI to understand the taxation of any capital gains and losses.

SMSFs solely in retirement phase for the entire income year (account-based pensions, TRIS in retirement phase, market linked pensions) will disregard capital gains and losses. This means that capital gains are fully tax exempt and capital losses carried forward from previous years do not need to be offset against capital gains realised in the current year.

However, where an SMSF has both non-retirement phase and retirement phase accounts in the income year, the taxation of capital gains will depend on the retirement phase status of the Fund at the time of sale. If the Fund had a non-retirement phase account at all times in the income year, or had disregarded small fund assets, then the actuarial exempt income proportion will apply to the net capital gain over the whole income year. If the Fund had net capital losses, then those can be carried forward.

Disregarded Small Fund Assets A Fund will have disregarded small fund assets in a financial year and cannot use the segregated method to claim ECPI if: • A member had a total superannuation balance at 30 June of the prior financial year above $1.6million, and that member also had a retirement phase interest in superannuation • In the current financial year any member had a retirement phase interest If the Fund did not have disregarded small fund assets and had periods of the year where assets were solely supporting retirement phase accounts, then: • A net capital gain realised during any period where the Fund had a non-retirement phase interest would have the actuarial exempt income proportion apply, and a net capital loss could be carried forward.

• Capital gains or losses realised when the Fund was solely in retirement phase must use the segregated method and are disregarded.

Under the ECPI rules, the timing of when capital gains and losses are realised becomes a very important consideration in the advice process when looking to sell assets as

Table 1: Assets in Sam and Catherine’s SMSF

SMSF asset Business real property

Market value $1,200,000 (Cost base $800,000)

SMSF members move into retirement.

Case study: Business real property sale when a member retires Sam, aged 64, and his wife Catherine, aged 63, have been saving for retirement using an SMSF and have no other superannuation accounts.

At 1 July 2018 all balances were in the accumulation phase and tables one and two show the assets and interests that were in the SMSF. The SMSF is expected to receive income in 2018-19 of around $53,000 which will have been earned approximately uniformly over the year except for managed fund distributions of approximately $6,000 that will be paid on 30 June.

Sam has operated his HR business out of consulting rooms owned by his SMSF and has done so for many years. He is planning to wind up his business in May 2019 and retire. He was thinking he would commence an accountbased pension on 1 July 2019.

Catherine receives taxable income from their family trust investments of around $50,000 per annum. She had been working part-time at university in an admin role but retired effective from 31 December 2018. She commenced an account-based pension with her entire balance at 1 January 2019.

Table 2: Interests in Sam and Catherine’s SMSF

SMSF interests Sam

Balance in accumulation $1,100,000

Cash

$80,000

Catherine

$400,000

Shares and managed funds

$220,000

Total value

$1,500,000

Total value

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$1,500,000

Continued on page 44

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Continued from page 43

Sam and Catherine do not wish to retain the business premises in the SMSF as it will require some significant updates to optimise the rental income. Retention of the property may also lead to liquidity issues in the SMSF down the track.

They have received some offers on the premises and are likely to sell the property this financial year.

Sam and Catherine have come to you for advice… “Does the timing of when Sam retires and the business real property owned by the SMSF is sold effect the tax payable on any capital gain?”

To answer this question, we need to understand how capital gains would be taxed in the SMSF if realised as expected in the 2018-19 financial year.

Selling the property in the 2018-19 financial year In 2018-19 Sam and Catherine’s SMSF may be expected to have the liabilities shown in chart one over the year: A key takeaway from chart one is that in the 2018-19 year the SMSF always has a non-retirement phase account.

In green, we see Catherine and Sam’s accumulation interest in the

first half of the year, and Sam’s accumulation interest in the second half of the year. The grey section represents Catherine’s account-based pension which commenced 1 January 2019.

The SMSF will use the proportionate method to claim ECPI in the 2018-19 financial year and the actuarial exempt income proportion would apply to any capital gain(s).

If the transactions played out as described above and the $400,000 capital gain was realised prior to the end of the 2018-19 financial year, the actuary would certify an exempt income proportion of just over 13 per cent. This would mean that 13 per cent of the net capital gain would qualify as exempt current pension income, and 87 per cent of the gain would be taxed.

To increase the amount of exempt income on a capital gain incurred in this scenario for the 2018-19 financial year, we need to take actions in order to affect an increase in the actuarial exempt income proportion.

IMPROVING TAX EXEMPT CAPITAL GAINS We know that Sam is looking to retire and commence an

Chart 1: Sam and Cathy’s SMSF’s liabilities for 2019

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account-based pension in the SMSF. He turns 65 on 14 May 2019, at this time he will be eligible to commence an account-based pension in the SMSF even if he has not fully retired at that time.

Thinking strategically, we also know that another income stream in the SMSF for part of the year could be expected to increase the value of the retirement phase liabilities and in turn increase the actuarial exempt income proportion.

We decide to examine the impact on the tax outcome if we recommended that Sam commence his pension on 14 May 2019 with his entire balance instead of on 1 July 2019.

In 2018-19 Sam and Catherine’s SMSF may be expected to have the member liabilities shown in chart two over the year if Sam commenced an account-based pension on 14 May 2019.

We see in chart two that the SMSF would now have a period where the Fund is solely in retirement phase from 14 May to 30 June 2019 after Sam commenced his pension.

To determine the taxation of a capital gain we need to identify whether the SMSF has disregarded

small fund assets in 2018-19.

Looking back at Catherine and Sam’s total superannuation balance at 30 June 2018 we see that neither member had a retirement phase account and total superannuation balance in excess of $1.6million. The SMSF will therefore not have disregarded small fund assets in the 2018-19 financial year. This means the SMSF will be deemed to have segregated pension assets where those assets are solely supporting retirement phase liabilities.

The SMSF will use both of the methods outlined above to claim ECPI on Fund income in the 2018-19 financial year as follows: • Proportionate method from 1 July to 13 May; then • Segregated method from 14 May to 30 June.

The Fund actuary will exclude the retirement phase segregated assets from their calculation which results in an exempt income proportion of just over 11 per cent which will in turn apply to all Fund income and any net capital gains incurred from 1 July to 13 May. Income incurred in the period that the segregated method is used will therefore be 100 per cent exempt and capital gains will be

Chart 2: SMSF liabilities for 2019 had Sam commenced an account-based pension

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May 23, 2019 Money Management | 45

Toolbox

Chart 3: Sam and Catherine’s SMSF’s liabilities for 2020

disregarded for tax purposes.

Chart two outlines that the timing of when a capital gain is incurred in this Fund will be critical in terms of the taxation of the $400,000 capital gain. If the property is sold prior to 14 May 2019, 11 per cent of the capital gain will be exempt, but if it is sold on or after 14 May 2019, the capital gain will be 100 per cent exempt. This could result in a significant difference in the tax payable based on the timing of when the capital gain is realised.

Where Catherine and Sam have an offer to sell the property in the 2018-19 financial year, you might recommend that (to maximise the exemption on the capital gain), a retirement phase income stream is commenced for Sam prior to selling the property with his entire balance. This will create a period of deemed segregation and the capital gain will be tax free.

HOW WOULD DISREGARDED SMALL FUND ASSETS CHANGE THE TAX OUTCOME? If a Fund has disregarded small fund assets then that Fund must use the proportionate method to claim ECPI. This means that even if

07MM2305_42-48.indd 45

the Fund had a period where assets were solely supporting accounts in retirement phase, the Fund would use the proportionate method to claim ECPI. If we re-consider the case study above and assume that Catherine was also in receipt of an accountbased pension in a retail superannuation fund with a balance of $550,000 at 30 June 2018, the SMSF would then have disregarded small fund assets in the 2018-19 financial year. This is because at 30 June 2018, Catherine had a total superannuation balance in excess of $1.6million and a retirement phase account.

Irrespective of when the $400,000 capital gain was realised in 2018-19, the SMSF must use the proportionate method to claim ECPI and the tax exemption on the capital gain would be based on the actuarial exempt income proportion.

If we again assume that Catherine had commenced a pension on 1 January 2019 and Sam commenced a pension on 14 May 2019 then in this case the actuary would not exclude the period where assets were solely supporting retirement phase interests from 14

Chart 4: The SMSF’s liabilities for 2020 had Catherine or Sam made a $10 contribution

May to 30 June. The exempt income proportion applying to all income including the $400,000 capital gain would be just over 22 per cent.

This is an improvement over the original 11 per cent in the initial part of the case study but not nearly as good as the 100 per cent exemption obtained by realising the capital gain in a deemed segregated period.

Unfortunately in this scenario, the SMSF would have no choice. Where an SMSF has disregarded small fund assets, the proportionate method must be used.

In this scenario, in order to improve the tax outcome on the capital gain you might recommend that Sam and Catherine defer the sale of the property until the 201920 financial year.

In 2019-20 Sam and Catherine’s SMSF may be expected to have the liabilities shown in chart three.

At 1 July 2019 we see that the SMSF is solely supporting retirement phase accounts. Both Catherine and Sam have their entire balance in account-based pensions. The Fund’s income will be 100 per cent exempt and capital gains and losses disregarded.

By deferring the capital gain to 2019-20 the $400,000 will be

Continued on page 46

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46 | Money Management May 23, 2019

Toolbox

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

Continued from page 45 entirely exempt compared to 22 per cent exempt if realised as shown previously in 2018-19.

Note that because Catherine continues to have a total super balance above $1.6 million the Fund continues to have disregarded small fund assets in 2019-20. This means the Fund has to use the proportionate method to claim ECPI and an actuarial certificate would be required to claim other income as exempt current pension income on the annual return.

The Morrison Government’s Budget on 2 April 2019 proposed a change to the ECPI rules to remove this requirement for an actuarial certificate.

Under the proposal an SMSF in this situation would not require an actuarial certificate to claim income as exempt current pension income in its annual return.

WHAT WOULD CHANGE IF THE ASSET BEING SOLD WOULD REALISE A CAPITAL LOSS? Capital losses realised when an SMSF is solely in retirement phase are disregarded for taxation purposes and cannot be carried forward to offset future capital gains. Where an SMSF asset is being sold at a capital loss it may be beneficial to consider strategies that allow for that loss to be carried forward.

This is relevant for SMSFs which may realise taxable capital gains in the near future, and also those Funds which are currently solely in retirement phase. For example, if one person in a couple passes away with large balances, the spouse may commute some of their pension to accumulation in order to receive a death benefit income stream. In this scenario, any capital gains incurred in the SMSF would go from 100 per cent exempt to only partly exempt, and the Fund would benefit from having capital losses carried forward to offset those gains.

Let’s consider the scenario above where Catherine and Sam sold their property in the 2019-20 year when the Fund was solely in retirement phase. If the property was sold for a capital loss that loss would be disregarded for tax purposes.

If Catherine or Sam made a contribution to the SMSF of say $10 at 1 July 2019 then the Fund would no longer be solely in retirement phase.

We see an illustration of the Fund liabilities in chart four. The green section shows the accumulation balance over the 2019-20 financial year and the Fund would therefore be required to use the proportionate method to claim ECPI. The capital loss realised could be carried forward, and the ECPI claimed on other Fund income would have the actuarial exempt income proportion apply.

In this case the Fund actuary would certify 99.9 per cent of the Fund income is exempt. The Fund would be able to carry forward the capital loss without materially impacting their tax exemption on other Fund income.

CONCLUSION It is important to understand ECPI and disregarded small fund assets when making investment decisions about selling Fund assets. In order to better manage the tax outcomes a trustee and their advisers should aim to be strategic and make plans in advance of assets being sold.

Melanie Dunn is the SMSF technical services manager and an actuary at Accurium.

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1. A fund will have disregarded small fund assets and not be eligible to use the segregated method for claiming income on assets solely supporting retirement phase liabilities as tax free if a) At the prior 30 June a member of the fund had a total superannuation balance in excess of $1.6million b) As for a) and the member with the TSB in excess of $1.6million also had a retirement phase account anywhere in superannuation at 30 June c) At the prior 30 June all members of the fund had a total superannuation balance in excess of $1.6million 2. A capital loss realised when a fund is solely in retirement phase over an entire income year cannot be carried forward. a) TRUE b) FALSE 3. Maintaining a small accumulation balance in the SMSF will avoid deemed segregation. a) TRUE b) FALSE 4. Where a capital gain is realised in a period of the year where the SMSF assets were not solely supporting retirement phase liabilities which of the following is true? a) The actuarial exempt income proportion provided by the fund actuary would apply to the net capital gain under the proportionate method for ECPI b) The capital gain would be entirely tax free using the segregated method if the fund did not have disregarded small fund assets c) The capital gain would be disregarded as long as the fund had a retirement phase account in the year 5. For a capital gain realised when the fund is using the proportionate method to claim ECPI you can improve the exempt income on a net capital gain by: a) Maximising the retirement phase balance on average over the financial year b) Minimising the non-retirement phase balance on average over the financial year c) Both a) and b) 6. Consider a fund with disregarded small fund assets has an opportunity to sell an asset for a large capital gain over the next couple of years. In the 2018-19 financial year the fund was half in retirement phase and half in non-retirement phase, in the 2019-20 financial year the fund was solely in retirement phase. When would you sell the asset to realise the capital gain tax free? a) It doesn’t matter. Sell the asset in either year and the capital gain would be tax free. b) Sell the asset in the 2018-19 year to realise the capital gain tax free c) Sell the asset in the 2019-20 year to realise the capital gain tax free

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ strategies-selling-smsf-assets-retirement-phase For more information about the CPD Quiz, please email education@moneymanagement.com.au

15/05/2019 4:08:04 PM

May 23, 2019 Money Management | 47

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

Appointments

Move of the WEEK Chris McLaughlin Director, cyber solutions group Aon

Aon has launched a new cyber solutions group, with cyber adviser Chris McLaughlin appointed to lead as director.

The cyber solutions group would bring together Aon’s cyber consulting and insurance solutions to meet the evolving risk needs of its Australian clients.

McLaughlin would be tasked

SuperFriend has announced three new appointments to its board of directors: Sarah Guthleben, Professor Niki Ellis and Mitch Wallis.

Guthleben joined as a partner fund representative and had o ver 19 years’ experience in the human resources and financial services industry.

Ellis joined as an independent director with over two decades of experience in the private and public health sectors.

Wallis also joined as an independent director and had recently founded an international not-forprofit mental campaign called “Heart On My Sleeve” to help reduce the stigma of mental health.

David Atkin, SuperFriend chair, said the new members would complete their board growth from four directors to eight, as part of their growth strategy and performance review.

“Their experience and collective passion for supporting mental health

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with building out Aon’s security offering through expansion of its global offering into the Australian market, growing the local team and building additional solutions.

According to Aon’s Global Risk Management Survey released this month, global businesses had ranked cyber

as the sixth most pressing risk.

Aon predicted cyber would jump to the third-highest overall risk in 2022.

McLaughlin said while a cyber-attack often causes disruption, it could also result in significant damage to reputation and brand, as well as other liabilities.

in workplaces will amplify our shared vision that all Australian workplaces are mentally healthy,” Atkin said.

Aberdeen Standard Investments (ASI) has appointed Bill Hartnett to strengthen its environmental, social and governance (ESG) capabilities.

As ESG investment director, Hartnett would report to Euan Stirling, global head of stewardship and ESG investment, and would be based in London.

He would have a specific remit to support investment colleagues in emerging markets and Asia Pacific.

Hartnett had over 20 years’ experience of responsible investment and active ownership across roles in asset management, research and asset ownership.

Before ASI, Hartnett was head of responsible investment at Local Government Super and was responsible for ensuring pension assets were invested responsibly, with a long-term sustainable return.

Calvert Research and Management has announced John KS Wilson has joined as vice president and director of corporate engagement.

In the newly created role based in Washington DC, he would report to John H Streur, president and chief executive officer.

Wilson would lead the design and execution of Calvert’s corporate engagement and shareholder activism strategy.

He would be responsible for overseeing Calvert’s approaches for environmental, social or governance (ESG).

Wilson joined from Cornerstone Capital Group in New York, where he was head of governance and research.

Global institutional investment specialist, Liquidnet has announced two new appointments with, David Barrett-Lennard and Andrew Murphy, joining its Australian business.

Barrett-Lennard would join

Liquidnet’s execution and quantitative services (EQS) team and Murphy would serve as the company’s relationship manager.

David, who joined from ITG where he worked in equity sales for six years, would be responsible for supporting the further expansion of the firm’s execution services into Australia.

At the same time, Murphy would work closely with the firm’s existing client relationship team, ensuring Australian members could leverage Liquidnet’s entire execution ecosystem including block trading, algorithmic modelling and execution as well as market intelligence capabilities.

“Bringing these two experienced hires on board will further strengthen and deepen our relationship with members as we continue to enhance the Liquidnet ecosystem,” Kate Weidenhofer, Liquidnet’s head of Australia, said.

16/05/2019 12:11:46 PM

OUTSIDER

Money Management ManagementMay April23, 2, 2019 2015 48 | Money

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

Jonathan Wu changes car and marital status OUTSIDER offers his heartiest congratulations to Premium China Fund Management’s Jonathan Wu on his recent marriage to Wendy.

As Outsider hears it, the Wu nuptials were something to behold with the wedding at St Thomas’s Anglican Church in North Sydney followed by a reception at the Pier One Hotel overlooking the harbour, Luna Park and the Sydney Harbour Bridge.

For the record, there was a fair smattering of financial services “personalities” at the wedding reception but, sadly, all of them seemed to be on their best behaviour.

Outsider believes “Wu the younger” has come a long way since he was named as Money Management’s 2013 Young Achiever which was around much the same time as he came out as a “Lexus Ambassador”.

But, of course, six years is a long time in the Australian financial

services industry and Outsider hears that not only has Jonathan changed his matrimonial status but that he has changed car brands, forsaking Lexus to champion the motoring virtues of Audi although this should not be taken as a measure of Premium China’s funds under management.

Outsider looks forward to seeing Wu when he returns from his honeymoon and wishes him and his new bride health and happiness.

OMG, LOL, ASIC seems to be serious about social media OUTSIDER happens to know that the Australian Securities and Investments Commission (ASIC) has a very serious social media strategy, but he really does wonder whether any of the senior executives at ASIC have ever been “trolled”.

In Outsider’s experience watching Money Management's social media channels, instances of trolling occur daily, if not hourly, and need to be recognised for what they usually are – barbed snipes.

Thus, Outsider wonders whether ASIC is being entirely sensible in suggesting that financial planning businesses should be required to count social media comments as “complaints” for the purposes of internal dispute resolution “IDR”.

The problem with social media is that many of the comments are anonymous or of dubious origin, and Outsider pities the poor soul tasked with determining what is a spur-of-the-moment snipe, and what is a genuine complaint.

Outsider more than most understands the value of a nom-de-plume, and therefore urges #ASIC to be very careful about making too much of #twitter or #facebook. LOL, whatever that means.

Fitbit? I think I’ll quit OUTSIDER always enjoys attending the Money Management Fund Manager of the Year Awards not so much for celebrating those who walk away with the trophies (but congratulations Alliance Bernstein anyway) but for those who make their mark without winning anything.

He therefore sends his particular good wishes to “Mr Bean” who was the winner of the Fitbit in the business card draw but wonders whether the chap will ever actually use the device in circumstances where, like Outsider, he appeared to be built more for comfort than for speed and owned up to the fact.

Outsider does not own a Fitbit and probably never will. As he has always done, if Outsider feels like exercising he will lie down until the mood passes.

As for Mr Bean? Perhaps he will see the 2019 Fund Manager of the Year Awards as a turning point in his life and begin pounding the pavement. On the other hand, he might choose to continue using Merlot as his preferred method of hydration.

OUT OF CONTEXT www.moneymanagement.com.au

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"It is going to rely on the co-operation of the banks which hasn't been always forthcoming in the past."

"We want 669 in life. What is 669? Six times in six days, the emphasis is on nine."

SQM Research's Louis Christopher on whether the banks will cooperate with the Liberal's new home buyer plan.

Alibaba executive chair, Jack Ma's weird advice on how much sex his employees should have.

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14/05/2019 10:23:56 AM 13-5-2019 10:56:59