Money Management | Vol. 35 No 9 | June 3, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 9 | June 3, 2021

12

INFOCUS

An era of regulation

22

ADVICE

Goal setting with clients

Property exposure

Breakthrough acknowledgement on FDS arrangements

CHINA

BY MIKE TAYLOR

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The year of normalisation AFTER being hit with the COVID-19 pandemic last year, China has managed to recover the fastest from the virus and return to business as usual.

Returns from MSCI China last year were 18.1% compared to returns of 1.4% by the ASX 200 and the country had returned to positive gross domestic product growth by July 2020.

The country is also targeting foreign investors in the hope of growing its economy beyond the scope of domestic retail investors, which it is worried is creating an inefficient market.

“Domestically, increasing foreign investor participation, particularly that of institutional investors, in the onshore markets can help to improve market dynamics, reduce trading volatility (induced by high retail investor participation), enhance risk pricing and ultimately make the allocation of financial resources more efficient,” said AXA IM’s Aidan Yao. But managers have warned that investors looking to replicate the strong returns of 2020 would be wise to “temper their expectations” as last year’s returns had been coming off a low base.

Schroders’ Stephen Kam said: “The market did so well at a headline level last year that valuations are elevated, that good news is priced in so will the earnings be good enough to support those high valuations?”

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TOOLBOX

Full feature on page 14

THE Government will be almost compelled to change the arrangements for annual client renewals to address what would represent almost an impossibility for financial advisers, according to the Association of Financial Advisers (AFA).

AFA acting chief executive, Phil Anderson, is arguing that as the legislative and regulatory arrangements currently stand, advisers might literally have only one day to provide a fee disclosure statement (FDS) – something which is virtually impossible.

What is more, the AFA has had its understanding of the situation confirmed by the Australian Securities and Investments Commission (ASIC) and Treasury.

“We have been very adamant that it is simply not possible to provide an FDS in one day and

have equally been clear that it is inappropriate to take the risk, as any breach in terms of the content of an FDS or getting the amount wrong would result in the ongoing fee arrangement being terminated,” Anderson has said in a message to members.

“Some of the obvious reasons for why this is impossible are as follows: • There is often a delay in fees being processed into the remuneration systems; • It is not possible to precisely predict in advance the amount for asset-based fee clients; • FDSs are important disclosure documents and should be subject to careful checking; • ASIC expect advisers to manually check FDS amounts against product systems (ASIC Report 636); Continued on page 3

UniSuper appoints Peter Chun as CEO

BY JASSMYN GOH

UNISUPER has appointed Peter Chun as its new chief executive and he will start in the role on 6 September.

Chun would replace CEO Kevin O’Sullivan who announced earlier this year that he would be stepping down after eight years.

Chun had 30 years of experience in financial services and was most recently group executive, member growth at Aware Super where he was responsible for leading the bank, marketing, digital, product and business development functions.

Chun also spent over a decade at Colonial First State in roles across product, distribution, and investments.

Continued on page 3

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June 3, 2021 Money Management | 3

News

Former Sydney planner sentenced to six years

BY OKSANA PATRON

KILLARA financial planner and the sole director of QWL, Ross Hopkins, has been sentenced by the District Court of New South Wales to a maximum period of six years’ imprisonment after having been convicted of 15 dishonesty offences under the Corporations Act. The Australian Securities and Investments Commission (ASIC) found that Hopkins, who managed his clients’ self-managed superannuation fund (SMSF) accounts and had almost complete control of his clients’ superannuation which allowed him to transact on their accounts, misappropriated approximately $2.9 million of his clients’ funds without their knowledge between 14 October, 2016, and 8 October, 2019.

According to ASIC, Hopkins also used his clients’ funds for his own benefit, such as holidays, rent, paying his own credit card debt

and repaying personal loans.

“Financial advisers should always allow clients to have direct access to information about their own investments. If this is not occurring, clients should contact ASIC with their concerns,” ASIC commissioner, Danielle Press said.

“Hopkins lied to his clients, and the Court’s decision demonstrates the seriousness of this conduct. Financial advisers must be open and honest with their clients and if they aren’t, they face serious consequences.”

QWL, which held an Australian financial services licence (AFSL) since 1 January, 2004, provided QWL clients with financial advice including dealing in securities and advising on SMSFs. ASIC’s investigation into Hopkins and QWL commenced in 2019 in response to allegations that QWL had failed to assist the Australian Financial Complaints Authority (AFCA) in resolving client complaints.

Breakthrough acknowledgement on FDS arrangements Continued from page 1 • Advice businesses like to do FDSs in batches and, putting aside everything else, this would make it impossible to check them all in the time available; and • Importantly this is the first year where the services and the fees for the next 12 months must be included in the FDS, and this will be extra complicated for assetbased fee clients, where you need to prepare an estimate and explain the basis of the estimate.

“Since we became aware of this potential issue, we have engaged with ASIC and

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Treasury to ascertain whether our understanding was correct. Once it was confirmed that we were correct, we have then proceeded to raise this issue with the Government and to submit a request to ASIC that they take a facilitative compliance approach during the transition year. We did this letter jointly with the FPA. “It is important to understand that ASIC does not have the powers to provide relief.

They can only take a facilitative compliance approach, where they would agree not to take any regulatory action where breaches occur. An ASIC no action position or facilitative compliance approach would not stop ongoing fee arrangements from being automatically terminating if you breach the FDS requirements. This also does not prevent other parties from taking action.

Ultimately this issue can only be solved by legislative change, however this is unlikely in the time left before commencement on 1 July, 2021.”

Anderson said the AFA would continue to work with ASIC and the Government on finding a workable solution, with ASIC currently working on guidance for advisers which would be released as soon as possible.

UniSuper appoints Peter Chun as CEO Continued from page 1 Unisuper chair, Ian Martin, said: “Peter has worked across all aspects of the superannuation sector and brings immense qualifications, experience and insight to the role. We look forward to welcoming him to the business later in the year”.

Commenting on his appointment, Chun said he was excited to lead a dynamic and successful team.

“This is an exciting time for UniSuper and its members. The superannuation sector is changing rapidly, and it is important that funds continue to evolve and adapt,” he said.

“The fund has a uniquely deep relationship with its members; particularly in the higher education sector and UniSuper’s core purpose – to deliver greater retirement outcomes for members – will continue unchanged.

“I am motivated and committed to making impactful change to retirement outcomes for Australians and this role furthers that opportunity for me professionally and personally.”

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4 | Money Management June 3, 2021

Editorial

mike.taylor@moneymanagement.com.au

FE Money Management Pty Ltd

TIME TO END THE LEGACY THAT IS FASEA’S STANDARD 3

Level 10 4 Martin Place, Sydney, 2000

Editor: Jassmyn Goh Tel: 0438 957 266

As the Government winds up the Financial Adviser Standards and Ethics Authority it must also fix the code of ethics.

jassmyn.goh@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au

AS the Government moves further towards finalising the legislation underpinning the new Single Disciplinary Body (SDB) covering financial advisers, it must also ensure that the continuing issues with the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics are sorted out, particularly Standard 3.

What should be obvious to the Government’s advisers as they scan the industry’s submissions to Treasury on the proposed legislation surrounding the establishment of the SDB is that the first step must be to clean up the many loose ends still surrounding the FASEA regime, with Standard 3 being a priority.

The issue has been raised by all the major financial planning groups, with both the Association of Financial Advisers (AFA) and the Stockbrokers and Financial Advisers Association (SAFAA) making it a core element of their submissions to Treasury regarding establishment of the SDB. The SAFAA has quite rightly recognised that with the formal winding-up of FASEA, responsibility for the code of ethics will fall within the remit of the Minister, and therefore Treasury. The SAFAA believes that Standard 3 of the code must be amended and Standard 6 must be removed.

“SAFAA urges the minister to make these changes as soon as the bill comes into effect,” the submission said.

It is hard to argue against the

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urgings of the SAFAA and the AFA in circumstances where breaches of the FASEA code of ethics will be regarded as a contravention, therefore allowing the proposed SDB panel to issue an adviser with an infringement notice and to recommend to the Australian Securities and Investments Commission (ASIC) that it seek to impose a civil penalty.

As the SAFAA submission stated: “SAFAA has consistently voiced its serious concerns that elements of the code are unworkable and conflict with the law.

“Standard 3 of the code that imposes a blanket prohibition on any conflict of interest is impossible to comply with and conflicts with the law. The test in Standard 3 has no element of materiality or proportionality.

For example, in any payment mechanism (commission, hourly rate, asset-based fee etc), there will be potential conflicts between the interests of the adviser and/or of their licensee and the client.

“SAFAA has recommended in submissions to FASEA that the code should utilise the wording of the Intent as Standard 3, so that the Standard states: ‘Advisers must not advise, refer or act in any other manner where they have a conflict of interest or duty that is contrary to the client’s best interests.’ This gives effect to the intent of the FASEA board without conflicting with the corporations law.

“Standard 6 of the code

conflicts with the provision of scaled advice and is inconsistent with section 961B of the Corporations Act (the ‘best interest duty’). The Minister and ASIC have strongly supported the provision of scaled advice.

Stockbroking involves the provision of scaled advice. While Standard 6 remains unchanged, stockbrokers and investment advisers providing scaled advice risk being found to be in breach of the standard by failing to take into account a client’s broader, long-term interests and likely circumstances.

“SAFAA has called for Standard 6 to be removed from the code. Until these changes are made, advisers risk contravening a civil penalty provision and being subjected to disciplinary action.”

At the same time as the SAFAA used its submission to make these points, AFA acting chief executive, Phil Anderson, used social media to argue that as Standard 3 currently exists, doctor referrals to pathologists and specialists would probably not comply.

In all the circumstances, the Minister owes it to financial advisers to take on board their concerns about Standard 3 and ensure it is amended to a more workable form to ensure that FASEA’s legacy does not become the SDB’s continuing burden.

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Mike Taylor Managing Editor

25/05/2021 3:17:24 PM

June 3, 2021 Money Management | 5

News

Actuaries support life insurers remaining under APRA scrutiny

BY MIKE TAYLOR

DISABILITY Income Insurance has been the biggest drag on the balance sheets of Australia’s major life insurance companies and the Actuaries Institute is now supporting the Australian Prudential Regulation Authority (APRA) maintaining its intervention in the area.

Releasing the findings of the Actuaries Institute Disability Insurance Taskforce, the institute has backed the continued regulatory intervention “until such time as the industry demonstrates a sustained improvement in practices and outcomes”.

However, among the recommendations of the taskforce is the use of a reference product by insurers to aid in “balancing innovation and clarity with respect to definitions” and a deferral of the proposed standardisation of insurance policy definitions for at least two years to allow a review of those definitions.

The report also argues that the Australian

Securities and Investments Commission (ASIC) should produce examples of application of best interests duty (BID), “including the trade-off of features and price, for IDII (and other life insurance) and include this in RG 175”.

“This should include consideration of customers moving from legacy to new IDII products. Pending ASIC provision of examples in RG 175, the Actuaries Institute, Financial Services Council (FSC) and the Financial Planning Association (FPA)/ Association of Financial Advisers (AFA) should produce examples of application of BID for IDII (and other life insurance),” it said.

The chair of the Actuaries Institute Taskforce, former APRA deputy chair, Ian Laughlin, stated simply that the disability income insurance ecosystem was not healthy.

Indeed, the introduction to the final report of the taskforce suggested that without intervention the market was at risk of failure.

AMP launches six PMPs on MyNorth platform

BY LAURA DEW

AMP has launched six new partnered managed portfolios (PMPs) through its MyNorth wrap platform.

The MyNorth range, launched in 2018, now included 11 PMPs with $2 billion in assets under management.

AMP said eight advice practices had launched the new PMPs including four which worked with Zenith and two with Mercer.

Nicole Mahan, AMP Australia’s director of wealth distribution, said the additions demonstrated AMP’s commitment to building out the platform’s investment choice.

“We’re competing strongly and transparently on price, while continuing to strengthen MyNorth’s technology and administrative capabilities,” she said.

“Advisers can expect more managed portfolios and innovative retirement solutions to be launched through the MyNorth platform in the coming months.”

Greg Major, general manager of Blueprint Wealth in Western Australia, one of the eight practices to launch the new PMPs, said: “The new managed portfolios provide our clients with access to high-quality funds, expertly managed by Zenith.

“Working with the MyNorth Managed Portfolios team to create the PMPs has also been a seamless and professional experience, from concept through to execution.”

AMP had also recently announced fee reductions across its MyNorth range.

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Where financial advice is concerned, the report recommends key amendments to the products ratings process with ratings houses working with licensees to ensure the products achieve what they are meant to achieve in the long-term interests of the customers.

Higher fees no barrier to Australian ESG investors HIGHER cost is not a significant barrier to Australians embracing environmental, social and governance (ESG) investing, according to new research conducted by Investment Trends.

The inaugural ESG Investor Report produced by Investment Trends has revealed that the majority of Australian investors already apply ESG principles when selecting investments (33%) or intend to do so in the future (45%).

Commenting on the findings, Investment Trends head of research, Irene Guiamatsia said that the pandemic and social movements like Black Lives Matter along with bushfires and droughts had prompted Australians to closely examine how their actions impact the world around them.

“Increasing, many are realising how they allocate

money plays a vital role in supporting positive initiatives or avoiding harmful outcomes,” she said.

Guiamatsia said that there was a common misconception that ESG investing involved a trade-off involving sacrificing returns or accepting higher fees.

However she said current ESG investors were unperturbed in their endeavour to align their portfolio with their values and principles with the majority (81%) believing the long-term performance of ESG investments would be comparable or better than non-ESG equivalents.

“Ultimately, the proof will be in the returns,” Guiamatsia said.

“As we march towards the 2050 target for net zero emissions, climate risk impact and ESG factors will increasingly become material in any well-considered long-term investment strategy.”

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6 | Money Management June 3, 2021

News

Major banks signal interest in a return to financial planning: Deloitte

BY MIKE TAYLOR

THE major banks may have exited most of their financial planning licenses, but they are not done with wealth management or advice provision.

That is the bottom line of comments delivered to the Stockbrokers and Financial Advisers Association (SAFAA) Conference in Sydney with Deloitte’s Mark Ryan saying that rather than believing that the banks had exited wealth, it was a question of how long they would remain out.

Ryan, a Deloitte director specialising in wealth management, told a conference panel that he had had a number of conversations with banking clients around how they might ultimately move back into wealth.

He said that their interest in moving back into the wealth

space had been prompted by the current discussion around affordable advice delivery and the future role of general advice.

Ryan said that the discussion had involved two large banks in Australia and some US businesses who were considering entering the Australian market.

Ryan revealed the renewed

bank interest in financial planning at the same time as other members of the panel suggested there was a need for a comprehensive overall of the legislation covering financial planning.

Rice Warner founder, Michael Rice, said that the legislation needed to be rewritten in circumstances where further

tweaking would only lead to the creation of greater complexity.

Professor Pamela Hanrahan from the University of NSW agreed on the need for comprehensive legislative reform but said such changes needed to be considered in the context of the existing legislation and the business models which had evolved.

Treasury urged to investigate AFCA ‘coaching’ AMID continuing complaints from advisers that they believe they have witnessed the Australian Financial Complaints Authority (AFCA) “coaching” complainants, the Federal Treasury is under pressure to address the issue.

The concerns about AFCA coaching have been raised in the context of Treasury’s current review of AFCA alongside equal concerns about the manner in which the authority has also been perceived as inappropriately handling complaints from wholesale clients.

The concerns around AFCA coaching became public last year when the authority was censured by the NSW Supreme Court – something which then led to a change in the AFCA rules to address the issue.

Notwithstanding that rule change, the Financial Planning Association (FPA) has pointed out to Treasury that members have been raising complaints about the coaching by AFCA. In its submission to Treasury as part of the AFCA review, the FPA said that its members had raised concerns about AFCA “coaching complainants through the external

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dispute resolution (EDR) process”.

“This is not something we can provide case study evidence on. However, the FPA believe the concerns raised warrant Treasury investigating this issue further,” it said.

The FPA also suggested that “there is a need to assess AFCA’s internal systems and processes to ensure the scheme is performing in a manner consistent with its obligation to be independent and impartial to all parties”.

A dealer group director also told Money Management that he had first-hand experience of the terms of a complaint becoming progressively polished as the complainant had increasingly close contact with AFCA. The concerns about complainant coaching come at the same time as both the Stockbrokers and Financial Advisers Association (SAFAA) and the Association of Financial Advisers (AFA) raised concerns about AFCA’s willingness to deal with complaints from wholesale clients in

seeming contravention of the intent of the legislation.

The SAFAA submission told Treasury that different provisions in the Corporations Act apply to clients depending on whether they are retail or wholesale.

“For example, wholesale clients are not subject to the statement of advice requirements that retail clients are.

Financial advisers who advise wholesale clients are not subject to the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics or education requirements. This is because the Parliament has decided that wholesale clients don’t require the consumer protections that are afforded retail clients,” it said.

“It is not uncommon, however, for a client to suddenly ‘transform’ from a wholesale to a retail client when an investment does not perform as well as was hoped, and for them to lodge a complaint with AFCA to reimburse them for the market risk they took.”

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8 | Money Management June 3, 2021

News

CFS states opposition to tapping super for home loans

BY MIKE TAYLOR

THE Government backbenchers who have been agitating for a change in superannuation policy to allow people to tap their superannuation for a first home deposit have run into an unequivocal “no” from one of Australia’s largest corporate financial services players – Colonial First State (CFS).

Answering a written question on notice from one of the loudest proponents of superannuation for home loans, House of Representatives Economics Committee chair, Tim Wilson, CFS made clear it was firmly against such a move.

“From a public policy perspective, CFS does not support a superannuation early

release mechanism which permits fund members to withdraw money to fund a deposit to buy their first home,” CFS said in its formal answer to Wilson.

“We are concerned this is not aligned to the sole purpose test, which is primarily to fund income in retirement.”

The big platforms and superannuation

Macquarie Securities pays infringement notice

BY CHRIS DASTOOR

MACQUARIE Securities (Australia) Limited (MSAL) will pay a penalty of $126,000 after it was deemed to have entered a market transaction that was not in accordance with the client’s instructions.

The infringement notice was given by the Markets Disciplinary Panel (MDP) who believed MSAL contravened Rule 3.3.1(b) of the ASIC Market Integrity Rules (Securities Markets) 2017.

MSAL were engaged by an Australian Securities Exchange (ASX) listed company to act as the broker to conduct, on behalf of the company, an on-market buy-back, which buys back shares on a market in the ordinary course of trading.

The MDP said it was satisfied that the client’s instructions included an overarching instruction for the buy-back to be conducted in the ordinary course of trading. The MDP considered that orders that were matched otherwise than in price/time priority were not in the ordinary course of trading.

MSAL conducted part of the buy-back on ASX Centre Point (ASXC), a “dark” market operated by ASX. Participants may enter orders into the

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order book for ASXC, but they are not visible to the rest of the market before the orders are matched as trades.

MSAL enabled a participant preferencing functionality in ASXC under which its orders will be satisfied before any existing unmatched orders of other participants, unless those unmatched orders have price priority.

The MDP said it was satisfied that the purchase of 1.2 million shares at $2.465 on 6 May, 2019, on ASXC was not in the ordinary course of trading as MSAL‘s sell order, which traded with MSAL’s buy order, was preferenced ahead of two existing sell orders on ASXC that were submitted by another participant and which had time priority.

The MDP said it was not satisfied that MSAL’s conduct in relation to any of buy-back transactions on ASXC resulted in the market for the shares not being both fair and orderly. MSAL’s conduct did not affect the price of the shares and did not result in the other participant’s sell orders not being able to transact with MSAL’s buy orders.

This was the first matter considered by the MDP under the new penalty regime that applies to conduct occurring after 13 March, 2019.

MSAL had subsequently ceased using ASXC to effect buy-back trading.

provider also suggested that such a policy strategy was flawed, in any case.

“There is also a concern that such a strategy could be ineffective. That is, it may exacerbate affordability issues by fuelling demand for existing housing stock and therefore increasing prices,” CFS said.

It said that from a superannuation preservation perspective CFS left it to super fund members to determine how they used their funds.

“Retirees were assumed to have met a condition of release (for example – retirement following preservation age or age 65). Once a release condition is met and a member gains access to their funds it is up to the member as to how to use those funds in meeting their retirement lifestyle needs,” the CFS answer said.

‘Groundswell’ of ETF interest from younger investors

BY LAURA DEW

THERE has been a ‘groundswell’ in younger investors using exchange traded funds (ETFs), according to BetaShares, with those under 40 accounting for two-thirds of new investors.

According to the BetaShares/Investment Trends ETF report 2020, the firm found first-time investors were mostly made up of investors under 40 who were using ETFs to achieve their financial goals as accessing growth exposure was their top priority. Other popular reasons included access to overseas markets, avoiding individual stock exposure risk and efficiency.

Younger investors were also more interested than older investors in socially-responsible ETFs with 28% of millennials expressing interest in these compared to 20% of overall investors.

BetaShares said it expected to see growth in ethical ETFs to outpace that of traditional ETFs with more products of this type to be launched to the market in coming years to meet demand.

The total number of investors using ETFs in Australia rose 58% from 455,000 to 720,000 in the 12 months to August 2020.

Alex Vynokur, chief executive of BetaShares, said: “The fact that investors, particularly younger investors, continued to invest in ETFs throughout 2020 suggests that not only are investors attracted to the liquidity ETFs offer in volatile markets, they also appreciate a simple, cost-effective way to diversify portfolios and minimise single stock risks.

“The COVID-19 pandemic has also brought social and governance considerations strongly into focus. We think this trend is likely to continue as the global economy emerges from the pandemic, and investors favour portfolios and companies whose practices align with their ethical values.”

The firm expected a further 190,000 people to use ETFs for the first time in the next 12 months and some 120,000 of these were forecast to be under 40.

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June 3, 2021 Money Management | 9

News

Can advice be a profession with product sales still legislated?

BY MIKE TAYLOR

“THERE is no such thing as financial advice in the Corporations Act unless someone sells a product and until that is subject to amendment it will be difficult to fully professionalise the financial planning industry, according to dealer group executive, Paul Harding-Davis.

Harding-Davis, who played a part in industry input around the Financial Services Reform (FSR) legislation, said he believed that because the Corporations Act continued to hold a connection between product and advice all future efforts will amount to trying to hammer a square peg into a round hole.

“If you were a product manufacturer in the 2000s and 95% of your sales came via advised channels you immediately set about taking a strong position in owning and influencing advice which they called and still refer to as distribution,” Harding-Davis said in an analysis provided to Money Management.

“Add to this the licensee structure and it was inevitable, and not a surprise as Hayne found it, that the advice industry grew centred around product. Nor is it surprising that the regulatory frameworks are product centric and keep trying to hammer a square peg into a round hole.

“The regulators have little choice – that is the law.”

Harding-Davis said that perhaps the most material problem with the current legislated definition of advice was that the product recommendation represent the final and least valuable part of the advice process.

“At least now there is substantive research to back this up. It is the strategic and behavioural coaching that adds almost all the value,” he said.

“I do understand that products can fail, and one of the consequences of this definition of advice has been advice aimed at picking up the pieces after those failures.”

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25/05/2021 3:06:21 PM

10 | Money Management June 3, 2021

News

FASEA approves new degrees

Academic appointed as new AFCA chair

BY MIKE TAYLOR

A man who the Government has appointed to a succession of recent roles has now been appointed as the chair of Australian Financial Complaints Authority (AFCA) succeeding former Liberal Government minister, Helen Coonan, who is also chair of Crown Resorts.

AFCA announced that it had appointed the Chancellor of Swinburne University of Technology, Professor John Pollaers as chair– a man who is also a member of the Prime Minister’s Industry 4.0 Taskforce and was chair of the Aged Care Workforce Strategy Taskforce and chair of the Australian Industry Skills Committee.

Coonan’s term as the inaugural chair of AFCA is expiring.

Commenting on appointment, Coonan said Pollaers was an

experienced chair and leader who had always created strong, effective relationships between

industry, government and consumer bodies in all sectors he had been involved in.

IOOF partners with Invesco for passive mandates

BY CHRIS DASTOOR

IOOF has partnered with Invesco to manage $23.1 billion in index investments within the former ANZ pensions and investments business, which was acquired by IOOF last year.

The 14 index mandates, which formed the OneAnswer index funds as well as Smart Choice and OnePath diversified funds, would transfer to Invesco by early June 2021.

The changes would occur at the underlying asset level of the funds so there would no change to fees, buy/sell spreads, investment objectives, asset allocation ranges, standard risk measures or distribution frequency, or tax.

Stanley Yeo, IOOF’s deputy chief investment officer and head of equities, led the Invesco move and said the firm reviewed several index managers as part of the due diligence process.

“Invesco was selected based on its high aggregate score across the following criteria: portfolio construction, implementation and risk management, business management, smart beta capabilities and

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environmental, social and governance (ESG) credentials,” Yeo said.

“Further, Invesco has the necessary skill, experience, resources and scale to deliver close tracking of indices.

“The scale of Invesco’s operations provides it with significant resources relative to smaller competitors.”

Invesco’s indexing business was worth over $388 billion which extended across equities, fixed income, and alternatives.

Andrew Lo, Invesco’s senior managing director and head of Asia Pacific, said this partnership would deliver the firm’s indexing capabilities to IOOF’s nationwide adviser network and client base.

“We are proud to work with IOOF in providing this broad range of compelling investment offerings to Australian investors, and this agreement marks a major milestone for Invesco’s Australian business,” Lo said.

“We also look forward to supporting IOOF’s clients in meeting their financial goals.”

THE Financial Adviser Standards and Ethics Authority (FASEA) has approved new degrees from Southern Cross University and the Australian Institute of Management (AIM).

Any bachelor with a major in financial services commencing March 2021 from Southern Cross University and any graduate diploma in financial planning commencing from May 2021 from AIM have been approved.

FASEA said advisers who completed these courses would meet the education requirement.

Three bridging courses from AIM, which were offered from second semester 2021, had been approved: • Financial Advice Regulatory and Legal Obligations; • Ethics for Professional Advisers; and • Behavioural Finance.

The approved courses would be added to a future degree, qualifications and courses legislative instrument.

Stephen Glenfield, FASEA chief executive, said: “The approval of these additional courses builds on the body of courses approved by FASEA and provides additional choice to advisers seeking to meet the education standard”.

25/05/2021 3:06:43 PM

June 3, 2021 Money Management | 11

News

Theta AM ex-MD banned by ASIC

BY JASSMYN GOH

THETA Asset Management’s former managing director, Robert Patrick Marie, has been banned by the corporate regulator from providing any financial services for four years.

The Australian Securities and Investments Commission (ASIC) said Marie had also been banned from controlling an entity that carried on a financial services business and from performing any function involved in the carrying on of a financial services business in any capacity.

Theta was the responsibly entity of the Sterling Income Trust which was a registered managed investment scheme placed into external administration in 2019.

ASIC said Marie had been banned due to Corporations Act contraventions stemming from five defective product disclosure statements (PDSs)

for the trust under which $16,710,669 had been raised from retail investors between 20 May, 2016, and 1 May, 2018.

“Theta had previously been held by the Federal Court, in civil penalty proceedings commenced

by ASIC, to have failed to comply with the duties imposed on a responsible entity by issuing the defective PDSs,” ASIC said.

“Marie was found to have failed to comply with his duties

as a managing director, by failing to ensure Theta complied with the Corporations Act. ASIC’s banning of Mr Marie was based on the conduct of concern to the Federal Court.”

In November 2020, Theta was ordered by the Federal Court in Western Australia to pay a penalty of $2 million and Marie to pay a penalty of $100,000 for contravening the Corporations Act.

How pandemic temporarily reduced Australia’s wealth gap

BY MIKE TAYLOR

BABY boomers may have lost some of their edge in the Australian wealth stakes, according to the latest Australian Actuaries Intergenerational Equity Index, which shows younger Australians closing the gap due to the disruption caused by the COVID-19 pandemic.

Up until last year a record gap existed between baby boomers and younger generations, but while it still exists it no longer as significant.

“2020 was a year like no other for everyone,” according to one of the authors of the Index report, Dr Hugh Miller.

“The Index shows, perhaps surprisingly, younger people doing slightly better than they have previously, closing what had been a record gap between generations,” he said.

However, Miller said the change was likely to be temporary.

“It reflects, among other things, government support directed towards young people through JobKeeper and JobSeeker payments, which ended in March this year.”

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The Index tracks equity over two decades and from 2012 it shows a marked widening of the gap between the generations. The latest iteration shows the gap still close to record levels, with six years - from 2015 to 2020 - showing a gap of more than 40 points. Some of the latest narrowing reflects worsening outcomes for the oldest age cohort, including rising rates of homelessness for older Australians.

Within the Index results, the economic domain showed the pandemic disproportionately affected employment for young people, but temporary government support helped offset loss of income as businesses shut and jobs were lost.

It showed that poverty rates actually fell, with the larger decreases for the youngest cohort. Overall, the number of people expected to be in poverty was estimated to have dropped 13% during the pandemic, compared to an increase of 90% had the government failed to provide additional support. Poverty rates remain high for single, aged pensioners who do not own their own home.

Advisers wary of property syndicate DDO referrals FINANCIAL advisers have expressed concern at the manner in which property syndicators are being impacted by the Australian Securities and Investments Commission’s (ASIC’s) approach to property syndicators under the upcoming Design and Distribution Obligations (DDO) regime.

With ASIC’s approach, as outlined in RG 274, making it clear that property syndicators will need to make sure that their products are appropriate for clients within Target Market Determinations (TDM), advisers are concerned at how this might ultimately impact them given their own obligations under the new DDO regime.

Advisers have pointed out that property syndicates are regarded as being usually the preserve of sophisticated investors and suggested they would be reluctant to give advice to relatively inexperienced retail investors referred to them by property syndicators.

The concern amongst advisers has come as they receive increasing numbers of notifications from platform providers about how they intend to approach the new DDO regime and the obligations this will impose on advisers.

Amongst the first to be received by advisers in May was a communication from Westpac-owned Asgard which outlined advisers’ obligations as distributors under the new regime.

Asgard has signaled 5 October as the date by which intends to make all TDMs available online.

But the Asgard documentation also made clear the challenge for property syndicators in terms of their obligations as issuers of financial products including that issuers must design financial products that are likely to be consistent with the likely objectives, financial situation and needs of clients for whom they are intended.

It also states that issuers must “monitor client outcomes and review products to ensure that clients are receiving products that are likely to be consistent with their likely objectives, financial situation and needs”.

Advisers point out that in most instances, this can only be achieved via the use of a financial adviser.

25/05/2021 3:08:15 PM

12 | Money Management June 3, 2021

InFocus

WHY THE FINANCIAL PLANNING INDUSTRY’S ILLS GREW OUT OF FSR IN 2001 As Mike Taylor takes his leave from Money Management, he reflects upon the well-intentioned 2001 legislation which proved to have so many adverse, unintended consequences.

AS I COME to the end of my time as managing editor of Money Management, it is worth reflecting that it has traversed a period coinciding with the implementation of the Financial Services Reform Act (FSR), through the introduction of the Future of Financial Advice (FoFA) and then the Hayne Royal Commission.

What is interesting in that span of around 18 years is that, while the legislation and the regulations have changed, the number of complaints lodged against financial advisers did not rise and, what is more, did not appear to be particularly higher than those against many other participants in the financial services industry.

But what has always stood out amid the seemingly interminable debate about commissions and the separation of product and advice is that, under the Corporations Act, financial advice is only financial advice when it involves the recommendation of a product.

What has also stood out is that, without FSR, the major banks might have seen less benefit in fully entering the financial advice industry.

It therefore came as no surprise to me to hear that there are those in the Federal Treasury who have lately acknowledged that if they had their time over again, they would have done things differently back in 2001 when the Financial Services Reform Bill was introduced to the Parliament and that, for a start, they might have taken a different approach to the licensing and general status of financial advisers.

Some of those who were part of the industry consultation processes around FSR, including my friend and industry veteran, Paul Harding-Davis, agree with

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those in Treasury who believe, with 20/20 hindsight, that mistakes were made in that legislation the consequences of which have given rise to the problems which continue to bedevil the industry today.

Harding-Davis, asked to reflect upon what FSR generated, said that it gave rise to an industry structure that created systemic conflicts that were rarely understood, and were never likely to be aligned to the way that professions evolved or operated.

“To start with, it was obvious that a great many product manufacturers would create and acquire advice licensees and/or seek to influence them with product revenue,” he said. “In addition, it had a negative impact on the development of a profession, which is about individual professionals.

“I also believe it forced the industry associations to work

around this and inhibited their development to something more akin to the Law Societies or the accounting bodies,” HardingDavis said. “Not to say that the organisations currently known as licensees don’t provide valuable services but being the arbiter – even now to an extent – of who is able to be an adviser is not an effective role.”

According to Harding-Davis, FSR entrenched a gap in the understanding of how advice as a profession works and how the policy makers and regulators who are understandably looking through the lens of the Corporations Act try to make it work.

“Holistic advice is largely delivered by a person working with another person. The relationship with the client is and always has been there,” he said.

“However, the law says that I, as a licensee, provide the advice and own the client data if not the

relationship. Financial advice has never worked that way and any licensee will tell you that.

“Even if they try to keep the clients, most follow the individual adviser. That is where the trust must be earned and maintained, as per professions. Inevitably when legs and regs are put out they are disconnected from how the profession actually works on the ground. A square peg trying to be hammered into a round hole created by FSRA.” So, as I end my time with Money Management to continue my writing elsewhere, I agree with Harding-Davis and other veterans that many of the ills of the financial planning industry were perpetrated by good intentions in 2001 and that 20 years later the industry is still struggling to find the answers.

Perhaps those answers reside in a thorough legislative and regulatory rewrite.

26/05/2021 10:25:05 AM

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25/05/2021 4:05:17 PM

14 | Money Management June 3, 2021

China

A YEAR OF NORMALISATION

China is opening up its market for foreign direct investment, writes Laura Dew, but investors should temper their expectations for the country after a remarkable recovery in 2020.

CHINA IS MAKING large strides to target foreign investors as a way to fulfill its domestic interests and global ambitions, becoming the world’s top destination for foreign investment in 2020. It has also staged a successful recovery from the COVID-19 pandemic versus other major developed economies.

In 2020, China surpassed US as the top destination for foreign direct investment, climbing 4%

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with US$163 billion ($210.8 billion) compared to US$134 billion invested in the US. This was a reversal of 2019 when the US attracted US$251 billion and China some US$140 billion.

China was forecast to become the world’s largest economy by 2028, according to the Centre for Economic and Business Research (CEBR).

“For some time, an overarching theme of global

economics has been the economic and soft power struggle between the United States and China. The COVID-19 pandemic and corresponding fallout have certainly tipped this rivalry in China’s favour,” the organisation said.

2021 also has the dual honour of being the first year in the country’s ‘14th Five-Year-Plan’ and the 100th anniversary of the founding of the Communist Party

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June 3, 2021 Money Management | 15

China

Chart 1: Northbound flow into China A shares

of China. Its goal to become a leading major economy would also help the country meet its target of becoming a ‘xiaojang’ – a moderately-prosperous society.

The 14th Five-Year-Plan, developed during last year’s pandemic, prioritises the ‘internal cycle’ which aims to strengthen the domestic economy and reduce reliance on foreign technology and imported resources by doubling down on modernisation and technological innovations. It targets China becoming a ‘moderately developed’ economy by 2035 with a per capita gross domestic product (GDP) of US$30,000 which would be triple the 2020 level.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said: “China is actively promoting its assets to foreign investors to fulfil both domestic interests and global ambitions.

“Domestically, increasing foreign investor participation, particularly that of institutional investors, in the onshore markets can help to improve market dynamics, reduce trading volatility (induced by high retail investor participation), enhance risk pricing and ultimately make the allocation of financial resources more efficient.

“Externally, increased holding of Chinese assets by global investors will help to internationalise the renminbi currency, making it an investment and reserve currency, beyond its role in facilitating global trade settlement.”

Jun Bei Liu, portfolio manager at Tribeca Investment Partners, said: “This policy has been planned far ahead but it takes a long time to get into place, the reforms were first talked about 10

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to 15 years ago. They are good at giving forward guidance!

“Foreign capital inflows have been incredible in the last 12 months and in order to be successful, any economy needs to have capital flows and a capital-driven model.”

A-SHARES AND STOCK CONNECT In order to invest onshore, foreign investors can buy A-shares which are the shares of mainland Chinabased companies that trade on the Shanghai and Shenzhen Stock Exchanges and are valued in renminbi. Previously these were only available to mainland citizens but are now available to foreign investors (albeit with a 20% monthly limit).

In 2017, their status was further established when they were included in the MSCI Emerging Markets index.

Including A-shares, China now accounts for 38% of the MSCI Emerging Markets index and 43% of the MSCI AC Asia ex Japan index.

While China now represented almost 40% of the MSCI EM index, Wenli Zheng, portfolio manager at T. Rowe Price, said China’s dynamics warranted it having a larger weighting in the broader MSCI World index where it was just a 5% weight.

“There is a big gap between China’s GDP and its weighting in the index, I think people will eventually see China as a separate class in the same way as we have Asia ex Japan as the dynamics in China are so different to other emerging markets.”

One of the first steps in its move to becoming a more open market for foreign investors was for China to introduce a Stock

Source: Bloomberg, Goldman Sachs, April 2021

Connect system between the Shanghai Stock Exchange and Hong Kong Stock Exchange in November 2014 and then expand this with a system between the Shenzhen Stock Exchange in 2016.

The aim of the system is to allow offshore investors access to the onshore Chinese market which previously had only been possible by being a Qualified Foreign Institutional Investor (QFII) holder.

In 2013, prior to the introduction of the Stock Connect, the percentage of equities held by offshore investors was 2% and this was now at 10%.

Tim Campbell, chief investment officer at Longlead Capital Partners, said: “Average Northbound trading values [from Hong Kong to China] was US$20 billion per day in the first quarter of 2021, up 63% year-on-year.

“People are growing more familiar with the process and companies are being added which is helping penetration, it is incredibly successful and that will continue.”

Continued on page 16

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16 | Money Management June 3, 2021

China

Continued from page 15 Stephen Kam, portfolio manager at Schroders, said: “The Stock Connect has been a game changer when it comes to ease of access, it has opened up that accessibility and provided offshore investors with access to those sectors which were otherwise unavailable but that are domestic drivers such as white liquor and electric vehicles. That is what makes it interesting, it taps into that opportunity set of companies in that growth space”.

He said Schroders mostly used the Stock Connect to access Chinese shares but retained its QFII for now as not all stocks were available on the Stock Connect yet. Currently, only around 25% of total A-shares were available via the Stock Connect.

However, investors need to remember that A-shares can be more volatile than other major markets and many major Chinese companies such as Tencent are also listed as American depositary receipts (ADRs) on US markets which are easier to access. Campbell added, however, regulatory change in the US was prompting companies to consider a secondary listing in Asia to protect themselves in the event of sanctions relating to the US/China trade war.

“The liquidity is not great on Chinese A-shares,” said Liu. “They are very interesting and easier to buy now but they are volatile.”

As of September 2019, 82% of A-shares were traded by retail investors and just 18% by institutional investors, a statistic which China was trying to change as it was creating an inefficient market.

“For active investors, the

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A-shares market is immature relative to developed markets and trading volumes are driven by domestic retail investors whereas developed markets are more driven by institutional investors.

More than 70% of daily A-shares volumes are retail but this means there are lots of inefficiencies created as retail investors move money around,” added Kam.

ACCESSING CHINA While China was the first country to be hit with the COVID-19 virus, it was also the first country to emerge and return to a positive stockmarket, making it an appealing destination for investors.

As the virus took hold, China’s GDP was the worst in decades in the first quarter of 2020 with a decline of 6.8%. But by July, it reported GDP growth of 3.2%. CEBR said it expected China to average economic growth of 5.7% a year from 2021 to 2025 before slowing to 4.5% a year from 2026 to 2030.

“The outlook is positive for China as COVID-19 is well contained,” said Kam, “the economy is doing well, it is on a solid footing and momentum has been maintained.”

According to FE Analytics, the MSCI China index returned 18.1% during 2020 and the Shanghai Stock Exchange saw positive returns of 10.4% over the same period. This compared to returns

“Returns will be measured this year so if investors are expecting a blow-out year then they might want to temper those expectations.”

– Stephen Kam, Schroders of 1.4% by the ASX 200.

However, investors are being warned not to expect such positive returns in 2021 as last year’s figures were coming off a low base.

Kam said: “The market did so well at a headline level last year that valuations are elevated, that good news is priced in so will the earnings be good enough to support those high valuations? Overall, returns will be measured this year so if investors are expecting a blowout year then they might want to temper those expectations”.

He suggested investors considered cyclical areas where valuations were reasonable compared to expensive areas such as e-commerce and healthcare.

Zheng said: “The shift in economic growth drivers in 2021 is expected to drive a rotation in sector performance. While internet, technology and certain infrastructure-related names face the challenge of a high 2020 base, we think small caps, global traderelated names and services

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June 3, 2021 Money Management | 17

China

Chart 2: Performance of MSCI China and Shanghai Composite Index versus ASX 200 during 2020

businesses should all benefit from the normalisation of the economy”.

There was also uncertainty regarding the well-known technology names Baidu, Alibaba and Tencent, the so-called BAT stocks, as they were currently subject to anti-trust legislation.

These were perhaps the most wellknown Chinese companies by foreign investors but the new guidelines put pressure on monopolistic practices and aimed to protect fair competition.

The State Administration for Market Regulation stated that the technology firms’ use of “data, algorithms, platform rules and so on make it more difficult to discover” what are monopoly agreements.

As a result, shares in the three firms were negative or flat over the six months to 19 May, 2021, with Baidu down 28%, Alibaba down 15% and Tencent up 1.1%.

Liu said: “Big technology is undergoing a regulatory reset and these always provide good buying opportunities but everything is uncertain so maybe it is better to wait for more clarity. But these companies have incredible business models so it is an incredible opportunity for investors”.

“These are very powerful businesses which are operating under Government scrutiny and have evolving business models which lack a clear regulatory definition, such as fintech, so we are still learning,” said Campbell.

Zheng pointed out the guidelines would apply to all technology companies, not just BAT stocks, “There will be more scrutiny in technology, similar to what is happening around the world where no one knows how to regulate it. The BAT stocks are in the spotlight but it is less

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Source: FE Analytics

dependent on a company’s size and more on whether they’ve built that business based on favourable treatment.”

For Australian investors to invest in China, according to FE Analytics there were six funds within the Australian Core Strategies universe which were predominantly focused on China specifically, four of which were actively-managed and two which were exchange traded funds (ETFs).

These were Fidelity China, Premium China, Schroder All China Equity Opportunities, VanEck Vectors China New Economy ETF, VanEck Vectors FTSE China A50 ETF and Vasco ChinaAMC China Opportunities.

There was also the option to invest in an Asia fund or a global emerging markets fund, which would still likely have a large weighting to China but be more diversified, or directly invest via a specialist brokerage.

All commentators agreed, however, that investors would have a better chance at achieving

outperformance if they invested via an actively-managed fund.

“Passive exposure can work for those who are cost-sensitive and not interested in outperforming the market. But we think active strategy is the best approach to invest in this market, given the level of market volatility, dominance of retail trading, onshore/offshore price discrepancies and inefficient risk pricing that still presents vast opportunities for active asset managers,” Yao said.

“It does not make sense to invest in A-shares via passive means, if you do the work then you can generate outperformance in China relative to the market.

Whereas in the US, it is hard for active managers to beat the index,” Kam said.

“We have a view that positive economic growth doesn’t necessarily mean positive returns so it is important to focus on highquality companies with strong management teams rather than taking a broad exposure.”

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18 | Money Management June 3, 2021

Emerging markets

MEETING LONG-TERM GOALS WITH EMs The outlook for emerging markets over the next 12 months is challenging and patience is important for advisers looking to invest in the asset class, Jassmyn Goh writes.

WHILE MOST DEVELOPED markets have been able to take a breath as COVID-19 vaccination rollouts have been swift, this can’t be said for many emerging markets (EMs).

The pandemic has had a devastating impact on EM countries as they have some of the highest population densities in the world.

Investments in EMs have always been tricky as investors have needed patience and they will continue to need confidence as managers forecast a challenging year ahead.

However, flows into EM funds have picked up with inflows amounting to US$1.2 billion ($1.5 billion) globally in the first three weeks of May, according to Bank of America data.

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COVID-19 IMPACT Fidelity director and cross-asset investment specialist, Anthony Doyle, said in the year post the March 2020 global sell-off, the regions more heavily weighted towards technology such as China and Asia performed really well and had outperformed their developed market counterparts.

On the other hand, since the development and rollout of vaccines, the emerging market regions skewed towards basic materials, financials and commodities such as Latin America and EMEA generally had had a tailwind behind them.

“Whilst you have that strong rotation theme, it is undeniably still the case that these parts of the world in EMs, whether it is Brazil or Russia, are still dealing

with this pandemic,” he said.

“When we look at how many vaccines these governments been able to obtain – whether actual or in terms of commitments – and subsequent rollouts they’re far behind say the US, UK and other developed markets.

“Subsequently you’ve seen a further wave in countries such as Brazil and India which has impacted on sentiment in those countries.”

Doyle also said while China was the only economy to expand in 2020, there was a shift in expectations that developed market growth would be superior to emerging markets over the next year given the strengthening US dollar.

“When the US dollar weakens, you’ll find EMs tend to outperform as US-based investors look to EMs for capital flows,” he said. “However,

the US dollar has strengthened and in the short-term this will be a headwind for EM performance.”

Aberdeen Standard Investments (ASI) senior investment specialist, equities, Ben Sheehan, said the global economic growth recovery was good for EMs. “We expect strong earnings momentum thanks to a combination of long-term structural growth forces and cyclical growth forces.

“We have a re-opening and reflation trade that has benefitted cyclical sectors in 2021 including energy, materials, financials, and industrials,” he said.

“In terms of structural growth drivers, we still have longer-term trends such as premium consumption growth, the role of EM-domiciled companies in tech supply chains, increasing levels of

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June 3, 2021 Money Management | 19

Emerging markets innovation in tech and healthcare, urbanisation, and the need for infrastructure. The broader backdrop for EMs moving forward will benefit from these cyclical and structural growth forces.”

Sheehan said some of the bigger trends in EMs were the rising living standards, demand for healthcare services and products, financial services, and technology. He noted that he had experienced a lot of support over the past year for EMs as investor allocations to EMs returned strongly after ‘soft data’ in 2020.

“Valuations in EMs are about 30% to 40% cheaper than the developed world on a price-toearnings basis so there’s value to be found,” Sheehan said.

“On the earnings side, EMs are broadly expected to have a strong recovery in earnings this year.

While earnings per share (EPS) growth for MSCI EM index dropped 15% in 2020, earnings expectations for 2021 are at 50% plus EPS growth.

“So, the earnings recovery and the visibility in earnings drivers I believe are bringing investors back to the market and clearly they are getting good value as well.”

FORECASTING A PANDEMIC Despite the pandemic and the global sell-off, Northcape Capital Global Emerging Markets fund returned the highest against its peers at 32.8% during 2020, according to FE Analytics.

The sector average was 5.75% and the Northcape fund beat the next best-performing fund by almost 40%. The fund was also the highest performer over the 10 years to 30 April, 2021, at 187.47%.

The sector average during this period was 90.76%.

The fund’s director and portfolio manager/analyst, Patrick Russel, said one of the fund’s longstanding beliefs had always been that a pandemic would a big exogenous shock risk to capital markets. Therefore, it had maintained ‘healthy’ exposures to healthcare and personal protective equipment for many years.

“We’ve been investing in EMs since 2008 so we had more

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knowledge of pandemic risks because we’d seen them come to play in Africa and Asia from time to time. There were a lot of near misses and we were of the view that it was only a matter of time before there would be a really bad pandemic,” he said.

“We felt like the bullet was already in the chamber of the gun and, as a consequence of this risk management system, we had a structural overweight to PPE stocks. Not only that, we had strong knowledge on how a pandemic would impact an economy and capital markets so we were able to make tactical adjustments to our portfolio quite quickly which underpinned our performance last year.”

Russel said, when the pandemic hit, the fund further boosted its exposure to the PPE sector, and elevated its exposure to companies that would benefit from the shift to working from home which was mainly in North Asian tech firms.

TIPS FOR ADVISERS Russel said a pitfall for any advisers looking to invest in emerging markets for clients was to invest in an exchange traded fund (ETF) as sovereign risk was quite significant and investors were unable to manage that though an ETF. “You also end up investing in a lot of large mega caps in EMs and many of them are government controlled and those businesses are not necessarily run in a balanced way for shareholders.

I’d encourage advisers to invest in active fund managers that address the asset class, are acutely active, and highly selective,” he said.

This sentiment was echoed by Doyle who said investors would not want to be in a passive fund as investors did not want to be buying “the losers and the winners” given the idiosyncratic risks of the EM universe.

Doyle said the biggest queries he received from advisers were issues regarding environmental, social and governance (ESG) factors along with geopolitical risks.

“The reason we forecast higher return in EMs is that there is that

risk premium involved in investing in a part of the world where the institutional framework isn’t as strong as what you see in say developed markets,” he said.

“With that in mind you have to undertake proper due diligence whether it be on the ESG side and of course on the corporate fundamentals of a company where you are allocating capital. We acknowledge the risk and compensate for taking those risks which is why we are based on the ground within the regions meeting with company management and undertaking proper due diligence to avoid any likelihood of permanent capital destruction.

“When we are looking at governance, we’re looking at who the auditor is, is it the company’s chief executive’s cousin down the road? We’re looking at whether it is a reputable auditor.”

Doyle noted that there were over 4,000 available companies on the Shenzhen Stock Exchange but once governance was screened, this number fell to 500.

Russel said his strategy included weeding out areas at risk of capital loss and putting investors in front of best opportunities at company and sovereign level. Core to this was having unrivalled focus on ESG factors, which advisers needed to turn their attention to when looking for an EM fund.

“If you focus on companies with exemplary ESG everything else seems to performs really well.

Companies with high levels of corporate governance run more tightly and have better risk management systems, they produce better quality products and services and customers are happier. Staff morale is high with low turnover and they tend to attract higher quality staff,” Russel said.

“The dropdown of that is better financial outcomes, better return on income, better growth, more innovation, and more focus on longterm strategic decision making which is beneficial for sustaining shareholder value creation.”

While his fund tended to focus on the governance side of ESG, Russel said if a firm had a high level of governance then it also tended to

have high ‘E’ and ‘S’ scores.

“That’s getting the horse and cart around the right way. The genesis of good company is good corporate governance and if that is in place the preconditions are there for good E and S. If corporate governance is weak you’ll probably see weak scores in E and S as well,” he said.

OUTLOOK Despite the challenging outlook over the next year, Doyle said, over the long-term, EMs would be an attractive entry point on a risk-adjusted basis once normality returned and the pandemic was under control.

“For Australians it’s a part of the world that would do a great job for you if you are trying to meet those long-term investment goals especially when cash is going backwards in inflation-adjusted terms today,” he said.

Looking over the next three to five years, Russel said there were powerful tailwinds such as growing population pools which led to the expansion of the household sector which is growing demand for EMs. “There’s a lot of industries that are somewhat underpenetrated relative to advanced economies so you’ve got structural growth in a whole range of consumer technological, autos and so on. Those are the tailwinds the asset class offers that are not so existent in advanced economies, where you’ve got much higher levels of household debt, more mature populations, and you’ve got much higher penetration of consumer goods into the household expenditure,” he said.

“It’s about hiring a manager that seeks those opportunities and avoids some of the risks you get from the asset class such as capital flight risk to a particular country or corruption due to some issue associated with a breach of corporate governance.

Those are some of the risks in the sector that you need to avoid and then you need someone with a keen eye on best opportunities to capture strong capital growth from those aspects.”

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20 | Money Management June 3, 2021

Policy update

WALKING THE WALK ON ADVOCACY It has almost been a year since the FPA policy platform was launched and there has been significant progress on a number of fronts, Dante De Gori writes.

AT THE HEART of our five-year roadmap, launched last year, is the desire to reduce red tape and the duplication of regulation in the financial planning profession. Achieving these goals will not only cut costs for financial planners but will make advice affordable to Australians.

Although it is a long-term plan, we have already achieved some early wins. In December, only six months since our policy platform launch, the Government announced that it would wind down the Financial Adviser Standards and Ethics Authority (FASEA) and has released draft legislation on a single disciplinary body (SDB) for the profession.

This is a major development for our profession. It also addresses two key pillars of focus in our roadmap around members and advocacy.

A streamlined legislative framework for our members is part of the financial planning model of the future for our members.

Through our regular conversations with Government, the proposed SDB legislation includes a number of reforms we have been advocating for. This includes simplifying professional standards, standardising regulation and removing duplication in regulators which means financial planners will no longer need to be separately registered with the Tax Practitioners Board (TPB).

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But it is crucial we get this reform right. One of our key concerns is trying to avoid unnecessary costs and duplication in the system. We agree in principle to the SDB, but we will be holding the Government to account to ensure that it is just that – a single disciplinary body. On the surface it seems we are on the path to achieving that and we are working through our submission to the consultation process.

THE GOOD FIGHT We have continued to dispute the Australian Securities and Investments Commission (ASIC) levy model since it was introduced three years ago. The levy emerged as one of the big challenges for financial planners in our recent member survey.

This is not surprising given that it has increased by 160% over three years. We have already been on the record for calling the model flawed and dangerous and believe it is timely for this review.

We want an outcome where any levies won’t impact the competition and viability of financial planners.

The bigger picture for us is in advocating for tax deductibility of financial advice fees. We are actively working to change this position in the interest of the Australian public – tax deductibility will mean more choice and access to professional advice for more Australians.

We have also been influential in driving some practical

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June 3, 2021 Money Management | 21

Policy Strap update

amendments to a number of the Royal Commission recommendations. One of the recommendations was to ban adviser fees from MySuper. We were successful in overturning that recommendation.

Consumers can still have a choice of paying a financial planner out of their MySuper.

Our commitment to helping all financial planners build sustainable and scalable practices over the long-term will be achieved through a consistent voice and courageous advocacy and a key part of this is through industry collaboration.

MAKING ADVICE AFFORDABLE We support ASIC’s consultation process on affordable advice. As it is a key strategy in our policy platform we have been actively engaged with ASIC on this critical issue.

While the Government can look at the legislation, the role of the regulator is to provide guidance and give the industry more clarity and certainty on the provision of simple advice. There is no need for 100-page disclaimers to provide simple advice. ASIC’s decision to allow financial planners to provide shorter records of advice instead of the lengthier statements of advice during the pandemic proved that the profession can operate within the laws in a more cost effective way, and we will remain focused on delivering the right outcomes for both our members and consumers.

Another way to deliver on affordable advice is through technology. Technology is playing an increasingly important role in advice businesses as financial

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planners look to digital solutions to drive efficiencies. We will be encouraging and supporting financial planners to adopt technology as they must recognise technology is their friend and an efficient way to deliver costeffective advice to clients.

SECURING THE FUTURE OF OUR PROFESSION We want Government and regulators to start talking about advice more positively. While it is not their job to do a recruitment drive for planners, it is their job instil confidence and trust in the profession. Now that the Royal Commission recommendations are being implemented, Government and regulators must start backing that legislation. They must start supporting their own reforms through positive messaging and giving Australians confidence that the right safeguards are in place and that it is important that people get advice.

This is even more crucial in the current low rate environment where people may be encouraged to take on more risks.

We are also pushing hard to address the risks in the growing area of unregulated advice. We are seeing a rapid rise in ‘money coaches’ or ‘influencers’ who are operating outside the regulations because it is too costly. These ‘money coaches’ and ‘influencers’ also operate with no regulatory obligations.

There is concern from our perspective, that this is an area of growth. There are no safeguards, and this could lead to consumer detriment. Unregulated ‘money coaches’ don’t have access to professional indemnity, do not operate within the realm of the

Australian Financial Complaints Authority (AFCA) and sit outside the ASIC regulations, leaving consumers completely exposed. It is an example of how, without Government foresight, a system can be created that encourages people to take on advice.

The only thing ASIC can do is to monitor if these people are providing any unlicensed services and report to the public of their existence and what to watch out for. The main question is what legislation could be developed to bring these people into an environment where there is regulation and oversight, but also allow existing highly-qualified financial advisers to engage in this as well.

Looking ahead, we are focusing on the signature piece of our platform, which is the licencing regime. It needs to be fit for purpose and support the way financial advice is going to be delivered for the future. Currently, the licencing regime does not deliver on that model and must change. We are aware that it is a change that can’t be achieved today and it is something that we have to keep working on.

Our commitment to helping all financial planners build sustainable and scalable practices over the long-term will be achieved through a consistent voice and courageous advocacy and a key part of this is through industry collaboration.

A UNITED VOICE We continue to engage with the broader industry. I recently chaired a roundtable at our offices with the peak industry groups including the Association of FInancial Advisers (AFA), the SMSF Association, CPA Australia,

“The licencing regime needs to be fit for purpose and support the way financial advice is going to be delivered for the future.”

– Dante De Gori

DANTE DE GORI

the Institute of Public Accountants, Chartered Accountants ANZ, Financial Services Institute of Australasia (FINSIA), the Stockbrokers Association, the Financial Services Council (FSC) as well as staff from Treasury and ASIC. Industry engagement is a key part of our advocacy plans as it ensures that industry bodies are aligned with our goals – affordable advice for all Australians and reduced costs for financial planners. It also ensures that these issues are amplified. The discussion by all stakeholders on how to ensure regulation is effective and efficient while also ensuring there is genuine choice and access to professional financial advice for all Australians is not only positive – it is a must for our future financial wellbeing.

Dante De Gori is chief executive of the Financial Planning Association.

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22 | Money Management June 3, 2021

Advice

THE GOAL OF GOALS-BASED ADVICE

Setting a goal with clients is a good step in the financial advice process, writes Johann Maree, but there are ways that these goals can be SMARTER. GOALS-BASED ADVICE ALLOWS financial advisers to provide recommendations to clients regarding the strategies, decisions, conduct and effort required to increase the chances of reaching their goals, as well as to track progress and make periodic adjustments to stay on course.

By using a goals-based advice approach, financial advisers can help their clients define their goals, resolve goal conflicts, prioritise them, and track them across various time horizons.

This type of approach in financial planning is not new but what is new are the types of tools, processes and engagement skills available for advisers to efficiently deliver goalsbased advice.

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WHY GOALS-BASED ADVICE? The Australian Securities and Investments Commission (ASIC) wants to see evidence that the financial adviser has identified the objectives (goals), financial situation and needs of the client as disclosed by the client through instructions (client’s voice); and that there is evidence that the subject matter of the advice sought has been thoroughly explored and is relevant to the client’s circumstances (RG 175). In March 2021, the Certified Financial Planner (CFP) board in the US added psychology to its eight principal knowledge topics for 2021 and one of the ways in which psychology helps the financial planning process is in setting goals.

Goal setting enables the

creation by clients of a successful plan of action and helps them to choose the right moves to make, at the right time and in the right way. The comprehensive nature of goals-based advice develops a stronger bond with the client as it considers what they want from life, when they want it and what they need to do to get there.

A goals-based advice process: • Sets meaningful goals; • Determines time horizons; • Quantifies effort and resources to be applied to each goal; • Prioritises goals; • Identifies key risks; and • Sets purposeful strategies to attain the goals.

Clients do not always understand how important it is to clarify and define their expected outcomes in

a clear and measurable way and this is where the SMART approach to goal setting proves very useful.

THE SMART APPROACH Goal setting enables the creation by clients of a successful plan of action and helps them to choose the right moves to make, at the right time and in the right way.

In her paper on the science and psychology of goal-setting, psychiatric counsellor, Madhuleena Roy Chowdhury, said: “Setting goals are linked with higher motivation, selfesteem, self-confidence, and autonomy (Locke and Lathan, 2006), and research has established a strong connection between goal-setting and success (Matthews, 2015).”

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Advice The ‘Locke’ she referred to is Edwin A. Locke, a pioneer in the field of goal setting, who found that individuals who had highlyambitious goals had better performance and a better output rate than those who did not.

Further, research in behavioural economics shows that the key reasons for not sticking to a plan or process are a failure to consider personal motivations and lack of coaching. Having a goals setting process not only unpacks a client’s goals but helps them stick to the plan.

Goal setting as a psychological tool for increasing productivity involves addressing five criterion.

These are known as the SMART rule, first written down by George T. Doran in 1981 and modified over the years. Today, the SMART rule is typically defined as: • Specific • Measurable • Achievable • Relevant • Timeframe The SMART framework helps clients who are driven to action but find themselves stuck with ill-defined goals like I want to save more.

This goal tells us what the client wants but lacks clarity. By asking ‘how will you know when you have achieved that goal?’ advisers can help clients make the goal more ‘Specific’.

The goal should also be ‘Measurable’. How much does the client wants to save and what is the purpose of the savings? Without having a specific measure, it will be difficult to track progress in achieving the goal.

Sometimes clients select goals that, after discussion, appear to be in conflict with other goals or are not ‘Achievable’.

Understanding the rationale behind the goal makes it easier to determine if the goal is ‘Realistic’ and in line with the client’s desired outcome.

All goals will need a ‘Timeframe’ within which they need to be accomplished. Applying the SMART goal approach may well result in a client goal changing to an agreed goal. For example: “I want to start saving now so

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that when I retire at age 65 I will have an income stream of $10,000 per month.”

A goal like paying off debt is a good goal but it’s not a SMART goal. By using the SMART approach, advisers can help clients turn their goals into SMARTagreed goals over short, medium, or long-term. For example: “We will pay off our debt of $200,000 (Specific) by June 2025 which is five years earlier than planned (Timeframe) by applying additional monthly payments of $5,000 (Achievable), by allocating 100% of my salary increase of $4,000 after tax and by reducing monthly expenses by $1,000 (Realistic and Measurable).”

The client’s goal of paying off their debts just became a SMART goal.

“Goal setting enables the creation by clients of a successful plan of action and helps them to choose the right moves to make.”

– Johann Maree Two further components have been added to the above so that it is now called the SMARTER rule.

• Evaluative/Ethical – where interventions, evaluation of goals and execution follow personal and professional ethics and express something about the person’s values; and • Rewarding /Readjustment – where the end results of the goal setting come with positive reward and bring a feeling of accomplishment even if slight readjustment is required.

SIX STEPS TO HELP CLIENTS SET SMARTER GOALS 1) Help clients discover and articulate their values and goals A discussion around the client’s values will deepen the emotional tie to their goals and will provide avenues to broaden their goals. If one of the client’s core values is the welfare of their family then a conversation about life insurance and estate planning can lead to goals being set to achieve outcomes in these areas.

2) Explore client resources Ensure clients have the maximum opportunity to achieve their stated goals. This will mean ensuring they have sufficient financial and other resources available.

3) Determine if alternative approaches exist If the value or goal does not feel right or resources are lacking, consider a different approach. You may be able to come up with an alternative to the stated goal. However, be aware that some clients may think an alternative approach means giving up, rather than an alternative way to achieve their goals.

4) Write the goals down Research has shown that if goals are written down and clients commit, on paper, and revisit their goals often, the chances of success are exponentially improved.

5) Help clients be accountable To help clients overcome their resistance to implementing goal recommendations use methods such as nudges, as proposed by Richard H. Thaler and Cass R Sunstein, in their book: Nudge and behavioural coaching.

These work best with clients who agree that the action is important and necessary and may want reminders to ensure tasks get done. For clients unsure how to assess whether an action or recommendation is important, use strategies involving smart heuristics (mental shortcuts) which are less about completing tasks and more about helping clients understand the path to goal attainment, by having more meaningful discussions with you.

6) Recognise the client’s progress Celebrating efforts to goal attainment makes sticking to the plan more comfortable for clients. Provide tangible feedback through review meetings to ensure clients are staying on track and sticking to the plan.

Once goals are defined, advisers can discuss the importance, flexibility and likelihood of attaining each goal.

They can then use this information to refine and prioritise them with the client and document the strategies in a Statement of Advice (SOA). For example, a client may adjust their dream to purchase a brand-new SUV and caravan and instead decide to purchase second-hand items at a lower cost freeing up money to help achieve other goals.

THE BENEFITS OF GOALSBASED ADVICE Some of the most important benefits of this approach are: • Clients have greater clarity of purpose; • Clients can focus on achieving their goals, rather than being distracted by market volatility; • A closer client/adviser relationship, facilitated by constructive conversations that go deeper into the real issues motivating the client; • A financial plan that is focused on the client’s goals and contain strategies that are appropriate for their priorities and time frames; and • A sense of achievement when the client and the adviser meet and can tick goals off the list as they are achieved.

Goals-based advice is an ongoing process. Clients’ goals will change over time as new goals are added and existing goals are altered or discontinued as circumstances change.

By creating a goals discovery process that is built around the psychology of deeper engagement, you can lay the foundations for a more meaningful long-term relationship with clients and a review process that revolves around what’s really important to them.

Johann Maree is a practice development manager at AstuteWheel.

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Financial advice

THE VALUE OF ADVICE The proliferation of retail investors entering the market during the COVID-19 induced downturn has highlighted the value that can be demonstrated by seeking financial advice, writes Robin Bowerman.

MUCH HAS HAPPENED in the financial services industry following the 2018 Banking and Financial Services Royal Commission – many of the recommendations strengthening consumer protection laws have been implemented and, as a result, the wealth management industry as a whole looks very different to what it was pre-Royal Commission.

The advice industry has been a key part of that transformation.

The major banks, once leading players in providing financial advice, have or are in the process of withdrawing from the industry, driven by the reputation risk coming out of the Royal Commission and the increased regulatory focus.

But one of the downsides of the reputational damage stemming from the Royal Commission findings has been the loss of confidence in the value of getting advice. And as a result, there is an expanding ‘advice gap’ in the Australian market, being compounded by the move by many professional planning firms upmarket to serve high net worth individuals. At the same time several thousand advisers have exited the industry.

Just like how some of us choose to embark on a fitness journey on our own and are able to set our own goals and achieve them through sheer discipline and willpower, there are an equal if not greater number of us out there

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who would benefit from having the support and encouragement of a fitness coach. The same applies to the journey of building wealth.

THE VALUE OF A FINANCIAL ADVISER Proprietary research by Vanguard titled Adviser’s Alpha estimated that financial advice improved net returns by 3%. Coined by Vanguard’s US business in the early 2000s, the adviser’s alpha term refers to the real value of financial advice, interpreted as a value more than just a return on the investment statement that has outperformed market benchmarks. It is a wealth management framework that highlights the value of good strategic financial advice beyond just investment selection and provides strategies that advisers can use to bolster their services and further define a unique value proposition.

Advisers leaning on this framework are encouraged to shift their value proposition away from trying to pick best-performing investments. Instead, it suggests expanding their role to that of a wealth manager and behavioural coach; someone who guides clients through an investment journey that is likely fraught with emotional ups and downs.

The value of a financial adviser as a behavioural coach was perhaps best illustrated in 2020 when the financial regulator, the Australian Securities Investments Commission (ASIC), issued a cautionary report

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FinancialStrap advice

E about the increase in trading frequencies amongst retail investors. According to ASIC, up to 5,000 new accounts were opened daily on retail brokerage platforms in February-April 2020. These new investors also held on to their securities for only one day, less than the 4.5 day average in the year prior.

What’s more is that up to 80% of these investors made losses through their speculative behaviour.

The owners of those new trading accounts would likely have benefited from the experience and stewardship of a good financial adviser. Perhaps they would have been advised to invest for the longer term and encouraged to hold on to their securities for longer than just a day. And as a result, perhaps a figure much lower than 80% of those new investors would have suffered losses.

Data clearly shows that investors who sold during the March 2020 market low have missed out on more than a 50% return since. As markets have completely recovered from that dip, and are on track to reach the previous high recorded in mid-Feb 2020, those who stayed invested would have recouped their perceived losses from March 2020.

Indeed, left alone, most investors often engage in behaviour that is more akin to gambling than investing, thereby risking their ability to grow their wealth in the long-term.

But beyond the balance sheet and emotional coaching, there are a few more reasons for why anyone looking to build their wealth should seek out a good financial adviser.

TAILORED TO SUIT NEEDS Many of us took to relying on online instructional videos or live streams to help us exercise in our living

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rooms or garages during lockdowns last year. But instructional videos can only provide general guidance, as opposed to a personal trainer who could point out an incorrect posture or help adapt an exercise for a specific injury. Similarly, a client seeking advice from a good financial adviser, instead of relying on general advice gleaned from the internet and social media, can expect to be presented with a financial plan that is tailored to their needs. A good financial adviser will take the time to understand their clients’ circumstances and work to define goals that are short, medium and long term, and unique to their client.

While any financial adviser dispensing personal advice is now legally required to fact find, and provide a fee disclosure agreement, Statement of Advice and Record of Advice, a professional financial adviser will create a plan that balances a client’s risk profile alongside their goals, and construct a portfolio based on that profile.

Knowing that a specific asset was chosen as part of a well-considered strategy that is balanced and diversified can often help quell the inevitable anxiety that surfaces during particularly volatile periods.

TECHNOLOGY, TOOLS AND KNOWLEDGE The other benefit of seeking out financial advice is gaining access to adviser technology and tools that can accurately model various financial scenarios in an effective manner. Many financial advisers often invest in a digital toolkit to help them simplify the delivery of the more complex aspects of financial planning. For instance, using a forecasting tool that easily takes into account factors such as goals, spending glide-paths, tax

ROBIN BOWERMAN

implications and the age pension allows advisers to better project expected income and wealth in a client’s retirement.

A good financial adviser also brings to the table other knowledge like the tax implications of an investment portfolio and how it could diminish a positive return.

Rather than leaving the tax bill as an afterthought, a tax-conscious financial adviser would help demystify the intertwined tax implications of each asset class in an investment portfolio and employ tax-efficient strategies during the construction of the entire investment portfolio. This is not an easy manoeuvre even for the most sophisticated of investors.

“Left alone, most investors often engage in behaviour that is more akin to gambling than investing, thereby risking their ability to grow their wealth in the long-term.”

– Robin Bowerman

BEYOND THE BALANCE SHEET While good financial advice will hopefully boost an investor’s portfolio returns, its value should not be solely measured in dollar terms. Instead consider the value of advice more holistically because although elements such as the emotional support that helped weather a period of anxiety is intangible, it is by no means not valuable.

That is advice worth paying for.

Robin Bowerman is head of market strategy at Vanguard Australia.

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Toolbox

ALTERNATIVE PROPERTY EXPOSURE

Commercial real estate debt can offer an alternative investment source for investors seeking regular income and diversification, writes Yin-Peng Chiew.

TRADITIONALLY, INCOME PLAYS an important role for Australian investors. With global interest rates at all-time lows, investors are having to search harder for alternative investments that will help them achieve a consistent and reliable income to fund their lifestyle and retirement.

And when low rates combine with increased fiscal stimulus to cause asset price inflation, investors’ effective yields are eroded further.

In this Money Management Toolbox, we will introduce commercial real estate (CRE) debt – an alternative investment that aims to achieve an attractive

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regular income while preserving capital.

We’ll explain where CRE debt sits within the income investment universe, how alternative lenders complement traditional bank lending for CRE borrowers, and the important role alternative lenders play within the global financial system.

From there, we’ll discuss some of the features of the asset class and how your clients can benefit, before delving into the investment opportunity as it stands in Australia in 2021 and some of the key structural tailwinds that have led to year-on-year growth of CRE debt over the past decade.

THE INCOME INVESTMENT UNIVERSE For investors seeking income, there are many options available.

But, most don’t offer any worthwhile yield unless you’re willing to take on sizeable risk.

Term deposits carry the lowest risk and usually offer the lowest return. Bonds issued by developed market governments such as Australia, the US and the UK are also very low risk and low (sometimes negative!) return, while emerging market government bonds can offer higher yields as you climb the risk curve.

Corporate bonds can offer higher yields too; but across the

board, government and corporate bond yields have declined steadily since 2009 as central banks have kept interest rates very low in an attempt to keep their economies afloat. In other words: bonds are expensive and much less attractive as a source of income compared to years gone by.

Equities can provide a compelling source of dividend income for those investors willing to put their capital at risk, but may not be suitable if you want to preserve it.

Property in the ownership form, is also a major asset class for income but there are other debt investments that provide exposure

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Toolbox

to property such as residential mortgage-backed securities and commercial real estate debt.

COMMERCIAL REAL ESTATE DEBT A CRE debt investment seeks to generate regular income by providing loans to commercial borrowers who require funding for real estate purposes. The income is derived from loan interest and fees and agreed up front. The loans can be provided by banks or by alternative lenders (known as private CRE debt).

The borrowers of CRE loans are distinctly commercial – typically property developers, private corporations, or high net worth groups or individuals. It’s important to note that these are not home loans to retail borrowers such as individual owner occupiers and investors.

In Australia, the CRE debt market is circa $380 billion, with banks providing around 93% of those loans and alterative lenders the remaining 7%.

With any investment, it’s important to understand where it sits in the capital structure.

CRE debt is always classified as secured debt – the highest priority in the capital structure – which means it’s repaid first if the borrower defaults on the loan. This is a key feature of the asset class as it means investors’ capital is much less at risk.

BANKS AND ALTERNATIVE LENDERS: WHAT’S THE DIFFERENCE? Alternative lending is where any party other than a bank provides a loan to a borrower. This includes financing commercial real estate.

The biggest difference between banks and alternative lenders is how they fund their lending activities. Banks raise their capital from deposits and wholesale funding, whereas alternative lenders raise their capital primarily from investors.

So for an investor seeking a regular income from CRE debt, the opportunity sits solely within the alternative lending sector.

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The second difference is how these entities are governed.

Alternative lenders in Australia are not regulated by the Australian Prudential Regulation Authority (APRA), the prudential regulator for Australian banks, which are categorised as Authorised deposittaking institutions (ADIs).

Depending on how an alternative lender funds its lending activities and the types of loans it provides, it may be regulated by the Australian Securities and Investments Commission (ASIC).

The loans offered by alternative lenders are commonly referred to as private debt, as they’re not traded in secondary markets in the same way that bonds or syndicated bank loans are.

But like banks, alternative lenders range in the size of their operations, their funds under management and their experience. They can also have many different ownership structures and can service both retail and wholesale borrowers.

THE ROLE OF ALTERNATIVE LENDERS IN GLOBAL FINANCE Globally, 50% of all loans are provided by alternative lenders, and 50% by banks. Together, these loans comprise the global credit markets. Alternative lenders now provide US$200 trillion ($259 million) worth of debt, after decades of year-onyear credit market growth and increased market share taken from banks.

Alternative lenders play an important and significant role in the global financial system by providing borrowers with an alternative source of finance to banks. For investors, the deep alternative lending market represents an income-focused investment opportunity across a wide range of debt investments, including corporate loans, bonds and CRE debt.

Because alternative lenders are typically more flexible than banks, borrowers are willing to pay a premium for alternative financing.

This flexibility extends to the terms

Chart 1: Composition of Australian CRE debt market

of the loan, the availability of loan options and the speed of funding.

Plus, alternative lenders can often form a closer relationship with borrowers, due to their smaller size and more flexible approach.

How your clients can benefit from investing in CRE debt There are several key benefits from investing in CRE debt. The first is a regular and predictable income. With interest rates and cash and bond yields at historic lows – and forecast to remain low – CRE debt can provide attractive risk-adjusted returns over the current low cash rate.

The second benefit is portfolio diversification. CRE debt is unique in that it can be categorised as fixed income, property or alternatives. Fixed income, given it’s a credit instrument which generates a fixed level of income from pre-agreed interest and fees; property, given it provides exposure to the property market but without the equity risk of investing in property; and alternatives, since it doesn’t neatly fit into traditional asset classes.

Most investors want to lower their risk by diversifying across the capital structure. So an allocation to CRE debt may suit investors looking to avoid the capital volatility that can come from investing in property.

The third key benefit of the asset class is capital preservation.

All CRE loans are secured by real property mortgages and carry the highest repayment priority in the capital structure. If the borrower cannot repay the loan, the lender

Chart 2: Capital structure

Source: Qualitas

has the right to sell the property to recoup repayment.

The CRE debt opportunity in Australia For many decades in Australia, CRE debt was the domain of institutional and wholesale investors. That’s now changing, as the asset class opens up more to retail investors by way of the alternative lending sector.

It’s also underinvested, both compared to traditional asset classes and to the more established markets in the US and Europe.

There, alternative lenders comprise 45%-50% of the CRE debt market, demonstrating not only the importance of alternative lending in Continued on page 28

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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 27 the global financial system, but the potential for growth in the Australian CRE debt market.

The growth so far in the CRE debt space has been driven by a number of structural tailwinds. Our steady population growth drives urban expansion, creating demand for CRE development, while low interest rates support cheaper borrowing which fuels demand for loans to support CRE investment. Additionally, the Australian economy has been relatively sound compared to other countries, with uninterrupted gross dometsic product (GDP) growth.

Importantly, banks have pulled back from CRE lending, which has widened the gap for alternative lenders to fill. Not only do banks typically reduce their lending in times of uncertainty and market downturns, but since the Global Financial Crisis (GFC) there has been a structural and permanent decrease in banks’ CRE lending appetite as a result of increased APRA and government regulation.

There are now at least 50 recognised alternative lenders in Australian CRE debt. Some only lend while others are also equity investors in property, which requires a broader skill set. Just like on the global stage, alternative lenders play an important role in financing property loans.

They don’t compete with banks, but fill the funding gap created by banks that are not willing to lend in certain situations. They provide more lending options for borrowers and they create liquidity in the market to support third-party loan refinancing. This improves the efficiency and accuracy of market pricing and ultimately investment returns.

HOW TO ACCESS CRE DEBT CRE debt is an accessible and easily-understood asset class for all investor types, whether institutional, wholesale or retail. And though small compared to global peers, it’s a well-established sector: alternative lenders have been operating for more than 30 years in the Australian CRE debt market.

Investors can access CRE debt by purchasing units in a fund structure like a managed investment scheme, which can be listed or unlisted. An investment manager with a specialised skillset in the asset class manages the fund and invests pooled equity capital into CRE loans on a discretionary basis.

The CRE loans generate loan interest and fee income for the fund, which is then paid as a regular cash distribution to investors, typically monthly in line with interest payments.

The role of the investment manager is an important one. They will source all lending opportunities and undertake loan assessments and due diligence to ensure all loans meet the investment objectives and mandate of the fund. They also actively manage the fund’s loans throughout their lifecycle to mitigate repayment risks and other risks.

Commercial real estate debt is an excellent diversifier which can complement your clients’ exposure to traditional asset classes. It’s compelling because it can deliver a stable and predictable income and healthy risk-adjusted returns compared to equities or traditional property, which are higher up the risk curve. And its focus on capital preservation means it’s an attractive investment for more risk-averse investors.

Yin-Peng Chiew is director, strategy at Qualitas Group.

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1. Select the option that does not describe CRE debt: a) Loans that finance real estate investment and development b) Commercial borrowers c) Secured by real property mortgages d) Retail borrowers 2. Where does CRE debt rank in the capital structure? a) Secured debt b) Unsecured debt c) Subordinated debt d) Hybrids 3. The credit assessment for CRE loans does not involve the following: a) Assessing the property quality b) Documenting the loan as per the agreed terms c) Determining the appropriate pricing for the risk d) Assessing the market conditions, both macro and microeconomics 4. Select the correct statement that applies to the CRE debt capital structure: a) As equity is ownership of the asset, it always gets repaid first from a sale of the property b) The value of the loan can increase or decrease in line with the value of the property c) Equity returns are fixed and known so sit at the lower end of the risk/return scale d) Senior debt is first ranking and gets paid in priority to mezzanine debt which is repaid second 5. Select the statement that does not apply to the legal framework for CRE lending: a) In the Australian CRE debt market, a formal contractual loan agreement and security documents are entered into between the lender and the borrower b) Loan documentation for CRE debt is tailored and extensive reflecting the risk profile of the specific transaction through the terms, financial covenants and obligations in the loan documents c) A guarantee does not provide the lender with recourse back to another entity to support repayment and servicing of the loan d) A key transaction document of a mezzanine loan is the intercreditor deed, which is between the senior lender, the mezzanine lender and the borrower/mortgagor

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ alternative-property-exposure For more information about the CPD Quiz, please email education@moneymanagement.com.au

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25/05/2021 4:03:33 PM

30 | Money Management June 3, 2021

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Appointments

Move of the WEEK Jassmyn Goh Editor Money Management and Super Review

In what will be an end of an era for Money Management and Super Review, managing editor, Mike Taylor, will depart the company with news editor, Jassmyn Goh, taking over as editor.

Goh had been with Money Management and Super Review for almost five years and her previous experience included having reported from London, New York, and Jakarta covering institutional investment, wealth management, finance, international development, sustainability, and the environment.

With her depth of industry experience and tenure with the company, Goh was the

Ratings house Lonsec has appointed former Xplore Wealth chief executive Mike Wright into the same role, effective from 5 July, 2021.

He had left Xplore Wealth in April, which was acquired by HUB24 via a Scheme of Arrangement, completed on 2 March, 2021.

Mark Spiers, Lonsec chair, said: “Mike’s unique blend of leading teams to develop and implement client-oriented growth and service initiatives along with his strong industry relationships and knowledge were exactly the leadership attributes that we were seeking.

Wright had also worked for Westpac/BT Group where he held senior executive roles with Westpac’s retail and business banking, and was state general manager of Queensland before leading the advice business at BT. Investment consultancy firm JANA has appointed Rachel Halpern as head of sustainability, where she will oversee the firm’s sustainability team, with a focus on managing climate change risk for clients.

Halpern joined from Westpac Group as executive manager for risk, prior to that, she worked in senior counsel and legal roles

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standout candidate for the position.

“Mike has been an indispensable part of the team over the past 18 years, and I will forever be grateful for his support, wisdom, and energy he has imparted daily,” Goh said.

“The team will no doubt miss his lively presence but wish him the very best for his future ventures.

“The team is looking forward to a new era at Money Management and the future opportunities to come.”

As a journalist for the past 46 years, Taylor’s career spanned coverage of financial

across the UK and Australia.

This included roles as regulatory counsel for APAC and EMEA at State Street Bank, and as an investigator in enforcement and financial crime division of the UK’s Financial Conduct Authority.

Halpern had decades of experience in developing investment strategies which minimise regulatory and fiduciary risk through the effective integration of environmental, social and governance (ESG).

Stock exchange Chi-X Australia has appointed Oran D’Arcy as director – investment products, effective from 31 May, 2021.

Based in Sydney, D’Arcy would be responsible for further enhancing the opportunities for Australian investors through ChiX’s range of investment products including transferable custody receipts (TraCRs), warrants and the range of Chi-X Funds.

D’Arcy joined Chi-X with over 15 years’ experience across Europe and Australia and was most recently national business development manager – investment products for the Australian Securities Exchange (ASX), where he focused on the sales and distribution of ASX’s

services, federal and state politics, and industrial relations.

Taylor had been at Money Management and Super Review for 18 years and was instrumental in positioning them as leading publications to the wealth management and superannuation sectors.

“I have had the privilege of editing Money Management and Super Review for more than 18 years and I know that I am leaving it in the safe hands of Jassmyn Goh – someone who has cut her teeth on the publication and respects its objectives in the same way as I do,” Taylor said.

investment products suite and optimisation strategies.

During his seven-year tenure at ASX, D’Arcy was previously a technical account manager, where he led the technical relationship management of exchange customers across trading, market data and technology sectors.

D’Arcy had also worked at Citibank, Merrill Lynch and Macquarie Funds Group, where he held senior positions within investment services, securities lending and fixed income trading functions.

AXA Investment Managers (AXA IM) has appointed Bevan Green as business development manager in Australia for AXA IM Core.

Green had over 20 years’ experience in asset management distribution and would support and strengthen AXA IM’s relationships with Australian wholesale investors.

Green joined from Colonial First State Investments where he was a business development manager.

Prior to that, Green held business development roles with Zurich Investments, NAB Asset Management, Russell Investments, and Nikko Asset Management Group.

Based in Sydney, he would

report to Michelle Lacey, head of core client group.

State Street Corporation has appointed Damian Hoult to its Global Markets’ agency outsourced execution team as a trading sales executive.

Hoult would work with asset managers and asset owners to identify where State Street’s multiasset class execution capabilities could add value as an outsourced service.

Based in Sydney, Hoult would work with clients across the Asia Pacific region and would be responsible for developing sales strategies as well as contributing to the continued development of the outsourced trading product at State Street.

Hoult had over 25 years’ experience and was most recently chief executive of Basis Global Analytics.

Prior to that, he was global head of trading and execution services at Macquarie Securities where he oversaw global portfolio trading, electronic execution and transition management.

Before that, he previously worked for State Street Global Markets as Asia Pacific head of agency execution.

26/05/2021 10:49:31 AM

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25/05/2021 4:02:44 PM

OUTSIDER OUT

ManagementJune April3, 2,2021 2015 32 | Money Management

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

Boardroom bingo no fun when old grudges die hard

The Joye of knowing that when you’re right, you’re right

OUTSIDER has long accepted that when politicians retire they frequently pop up in what could quite accurately be described as corporate sinecures.

Former ministers seem to be particularly blessed when it comes to settling their posteriors into boardroom leather and perhaps no one in recent memory has played boardroom appointment bingo better than former Howard Government Treasurer and failed Prime Ministerial aspirant, Peter Costello.

Costello may never have got to sit in the big chair in the ministerial wing of Parliament House but he has got to sit in the big chairs at Channel Nine and the Future Fund – which is a far more remunerative position to be in, frankly.

But it seems to Outsider that no matter whether a politician was good, bad or indifferent, for some reason those running major companies seem to believe that having them in the boardroom will add value, possibly delivering influence when it is needed or providing insight into the workings of Government.

OUTSIDER loves a fund manager prepared to back themselves and, frankly, such people are never in particularly short supply.

But he particularly admires Coolabah Capital’s Christopher Joye, and not just because Joye was one of the first “Alpha Managers” identified by Money Management’s owners, FE fundinfo.

When you’re right, you’re right and Joye last week lost no time in asserting his perspicacity when Westpac printed what he described as “the first monster senior bond deal from a major bank since the before the pandemic”.

The always-modest Joye stated: “We had repeatedly predicted that a major bank would come to market with a senior deal before 30 June, a view that was rejected by the majors themselves and the market. The consensus amongst analysts was that issuance would not begin until the third or fourth quarter. And the consensus held that the issuance would be small in size. The reality proved very different”.

And Joye had no reluctance in lauding the author of his predictive triumph – “Westpac’s outstanding treasurer, aka the Queen of Credit, Jo Dawson”.

But he is wondering how those running Equity Trustees are feeling after receiving feedback from both planners and superannuation funds about their appointment of former Financial Services Minister, Kelly O’Dwyer, to a board position.

As Outsider hears it, there are a few Equity Trustee clients who are still less than overwhelmed by O’Dwyer’s handling of the portfolio and her legislative legacy and they have not been shy in expressing their views.

Here comes the money shot AS an older gentleman, Outsider has already felt flustered trying to navigate the world of alternative investments, including cryptocurrency.

Bitcoin, the leading option for “crypto” as it is known colloquially, is now worth over $40,000, although it was, however, worth over $70,000 just a couple of months ago.

And thus, realising he was late to the party, but also suffering from something called ‘FOMO’ which his younger colleagues tell him means the “fear of missing out” – he wanted in on the action, so he scouted for alternative options for his lunge into this alternative currency.

In doing so, Outsider noted a story published by Morningstar referencing a forceful new entrant in the crypto space – Cumrocket.

OUT OF CONTEXT www.moneymanagement.com.au

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Now, despite his less than politically correct ways, Outsider was somewhat taken aback by the branding of this crypto tyro and wondered how he could explain this investment to the somewhat genteel Mrs O who might surely blush at the company’s letterhead, presuming such an outfit has a letterhead.

But 2021 has been marked by what Outsider has been told are called “meme” investments, generated through interest on social media, something Outsider also doesn’t understand.

Hopefully the ‘semenauts’ will blast him off to into unfathomable wealth, or he will lose his money in an internet scam.

Life was so much simpler when Outsider simply flirted with Nigerian princes.

"Some people may die."

"Now this is a real commitment to recycling."

- Virgin Australia CEO, Jayne Hrdlicka, willing to opening up borders.

- Liberal Senator James Paterson, on opposition leader Anthony Albanese copying Bill Shorten's post-Budget response.

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26/05/2021 1:53:10 PM