Money Management | Vol. 34 No 12 | July 16, 2020

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 34 No 12 | July 16, 2020

16

FIXED INCOME

Being defensive with bonds

INSURANCE

22

Writing claims forms

Opportunities in home equity

Advicetech adoption driving advice practice dividends

LEGAL

BY MIKE TAYLOR

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Does Australia need new regulations on the class action industry?

THE recent launch of an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding has sparked a discussion around a conflict of interest between financially-motivated litigation funders and plaintiffs who need proper protection and, most of all, access to justice.

While law firms argue that their profits are often misunderstood by the public who have a limited knowledge on how class actions are run and funded, their opponents claim it is those profits which become a key motivation for starting proceedings in too many cases. Therefore, they say, the litigation funding should be viewed as any other financial product and require stricter regulations.

This would, on the other hand, place the lawyers in the same regulatory boat as financial advisers who were obliged by law to hold an Australian Financial Services Licence (AFSL) in order to guarantee their transparency.

James Mathias, chief of staff at the Liberal Party’s think tank Menzies Research Centre (MRC), explained that oftentimes the litigation funders who had presence in Australia were foreign entities.

“All we ask for is that litigation funders are a subject to some of the same regulatory and reporting requirements as Australian companies,” he said.

The MRC’s report also stressed that at present, any company or individual, domestic or foreign, could provide litigation funding without any meaningful regulation or oversight and that there was no legitimate reason why these arrangements should not be subject to regulation like every other financial product.

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26

TOOLBOX

Full feature on page 14

ADVICE practices willing to invest in technology could be adding up to 20% to their bottom lines, according to a new report from Netwealth.

The adoption of advice technology is paying significant dividends for advice practices, with the latest Netwealth Advice Tech Report revealing that it can generate an up to 20% advantage for the firms that do.

The report, released to Money Management, reveals that advice firms which could be regarded as “Advicetech Stars” had a significant advantage heading into and managing the lockdown environment of COVID-19.

It found that more than two-thirds (67.9%) of them generated revenue of $2 million or more, and on average, revenue was up by more than 85% in the year ended June 30, 2019.

“More importantly, more than eight in 10 (81.8%) of them generate earnings before interest, tax,

depreciation and amortisation (EBITDA) of 20% or more of revenue,” the Netwealth report said. “No other segment comes close in generating such healthy margins.”

“Well over half (57.1%) of AdviceTech Stars employ more than 10 staff. Despite the greater employment costs, their healthier profit margins mean they’re more scalable businesses, underlining one of the key benefits of AdviceTech employed intelligently,” it said.

The report analysis pointed to the COVID-19 shutdowns as having been an exemplar of AdviceTech adoption in action, with “businesses that had little or no experience of supporting a distributed workforce receiving a crash course in how to make it work”.

“AdviceTech Stars are businesses we can all take lessons from and at Netwealth we believe that COVID19 will be the catalyst for many advice practices to bring forward their technology investment plans.

We have heard many stories recently Continued on page 3

New report: COVID-19 opens opportunities for advisers

NEW research has confirmed that the COVID-19 pandemic has accelerated the take-up of digital advice but the good news for financial planners is that clients have rarely been more aware of the importance of good advice.

The research, conducted by KPMG, has found that while many people regard financial advice as a discretionary spend for which they are not prepared to pay much, those that use financial advisers see them as essential.

It found that more than 70% were satisfied with their financial planner – compared to 59% of respondents who were satisfied with Continued on page 3

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July 16, 2020 Money Management | 3

News

Iress integrates FE Analytics into Xplan

BY MIKE TAYLOR

IN what represents a breakthrough for the company’s presence as a key service provider to the Australian financial planning industry, FE fundinfo has had its FE Analytics investment research and data tool integrated into Iress’ Xplan software.

The integration has been confirmed by Iress which described FE Analytics as being an awardwinning tool for investment research, portfolio construction and due diligence, allowing advisers to compare and build portfolios as well as monitor performance.

It said the integration with FE Analytics meant that data could be seamlessly shared between Xplan and the FE Analytics platform without the need for duplicating data or altering business processes.

Commenting on the move, Iress general manager for sales and account management, Glenn Boyes, said advisers used a multitude of systems to provide advice, and the challenge had always been in ensuring that they work together seamlessly and efficiently.

“Iress has taken the lead in ensuring that this happens, and continues to integrate with leading technology and systems,” he said.

FE fundinfo managing director, Mika-John Southworth, said: “I’m delighted that Xplan and FE Analytics have been able to integrate and make our customers’ lives a bit easier; putting portfolio modelling and research firmly in their advice process”.

Money Management is owned by FE fundinfo.

Advicetech adoption driving advice practice dividends Continued from page 1 to support this, such as businesses having to abruptly prioritise IT infrastructure and back office administration technologies,” it said, “We suspect that practices will prioritise AdviceTech investment in the parts of the advice process believed most likely to be affected by technology in the next five years, including: • Preparing financial plans and statements of advice (SOAs); • Complying with the Australian Securities and Investments Commission (ASIC) and other regulatory requirements; • Defining the initial scope of client engagement, and • The client review process.

The report also pointed to its so-called AdviceTech Stars being more likely to have broken away from a focus on investment and insurance to offer more holistic services, encompassing a broader range of elements including accounting, tax banking and even philanthropy, healthcare and aged care.

“As advice firms respond to changing client demands for advisers to be more like financial coaches than the traditional salesperson, they will have to fundamentally Chart 1: Does your business use cashflow, budgeting and account aggregation tools for client advice?

rethink their service proposition,” it said.

“Learning from AdviceTech Stars could be the key. They are more likely to offer accounting services (28.6% versus 7.9% for the rest of the industry), aged care services (53.6% versus 38.4%), business advice (35.7% versus 19.7%), cash-flow management (71.4% versus 58.6%), and more.

The Netwealth report also noted that in 2020 almost a third of AdviceTech Stars used scaled advice technologies for the provision of advice including production of SOAs and records of advice (ROAs) and a further 52.6% were looking to use them in the next 24 months.

Chart 2: Agree – My business offers the following types of services to our clients

New report: COVID-19 opens opportunities for advisers Continued from page 1 their superannuation funds.

It said that while more clients had been reviewing the services provided by advisers, there had also been greater engagement than with respect to insurance or super, and planners had been more pro-active in contacting customers.

“More flexibility in both the services and products they provide and in how they engage – with two-thirds of consumers keen to keep this wholly online – were also clear findings,” the KPMG research said.

Commenting on the findings, KPMG’s insurance and wealth strategy lead, Tim Thomas, said that despite the financial pressures many people faced, there was much from the research that financial planners could take heart from.

“Australians who have been impacted by the crisis see financial advice and planning as essential and general awareness of the importance of advice is growing due to the crisis,” he said. “The challenge for planners is turn that underlying potential into services that consumers are willing to pay for.

“Personal relationship with advisers is often as important as the funds invested in, so regular engagement is critical, and this must be through a variety of channels, given that two-thirds now want to go wholly online,” Thomas said.

“With such a community focus on improving the affordability and accessibility of financial advice the big opportunity for advice organisations is to respond to customers’ shift in mindset to engage financial planners through a hybrid of face to face and digital interactions, which should go some part to reducing the cost of advice delivery without compromising on its quality.”

Source: Advicetech

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9/07/2020 10:34:42 AM

4 | Money Management July 16, 2020

Editorial

mike.taylor@moneymanagement.com.au

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron

PARLIAMENTARY COMMITTEE OVERSIGHT OF FASEA A GOOD THING

Tel: 0439 137 814

Regular Parliamentary Committee scrutiny of the Financial Adviser Standards and Ethics Authority may have helped win the adviser support it so badly needs.

chris.dastoor@moneymanagement.com.au

oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518

Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com

The chair of the House of Representatives Standing Committee on Economics, Tim Wilson is right. The Financial Adviser Standards and Ethics Authority (FASEA) should be the subject of regular oversight by a Parliamentary committee, probably his.

Indeed, it says something about the way FASEA was created under the watch of the former Minister for Financial Services, Kelly O’Dwyer, that the authority has not been subject to closer Parliamentary scrutiny beyond its occasional appearances before Senate Estimates because FASEA remains problematic.

And, right now, FASEA is problematic for the Government not just because it has failed to win the confidence of the broader financial planning industry but because the exit of the major banks means its funding mechanism has expired and the Treasurer, Josh Frydenberg, must look to other funding sources.

The most-likely primary source of funding will be a levy on the very financial planners who have evidenced so little faith in FASEA. That is, of course, unless the Government looks to the option of folding the authority into the single disciplinary body as

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recommended by the Royal Commission and which will be responsible for monitoring adherence to the FASEA code of ethics.

FASEA should, by now, have earned the unquestioning support of financial planners as an integral part of the professionalisation of their industry – the respected overseer of educational pathways and processes and, perhaps more importantly, the originator of a code of ethics to which planners can adhere and be proud.

The reality, of course, is that FASEA has fallen well short of gaining anything like planner support. From the outset it became mired in questions as its first chief executive, Deen Sanders, walked away and then even more questions as the timetable around some of the key educational deliverables began to erode and then even more issues as it failed to deliver sufficient transparency around the code of ethics.

As documents recently obtained under Freedom of Information have revealed, even the closely-consulted Australian Securities and Investments Commission (ASIC) held concerns about FASEA’s approach and made those concerns abundantly clear.

FASEA claims it consulted widely on the development of the code of ethics but, in the absence of the authority making all the relevant submissions public including those of ASIC, we only have their word for that and few advisers seem willing to take the word of FASEA on trust.

Of course, all of this could probably have been avoided if, from the outset, FASEA had been made regularly answerable to a Parliamentary Committee. It is a pretty fair bet that members of that committee would have been insisting on seeing all the submissions pertaining to the code of ethics and other issues being dealt with by FASEA and it is a pretty fair bet that they would have insisted that not just the chief executive but the chair of the authority make an appearance.

It remains to be seen how the Government chooses to deal with the future funding of FASEA and, indeed, the future of the authority itself. It is certainly fulfilling a necessary role in the professionalising of the financial planning industry but its chequered history to date seems to speak to the need for change.

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Mike Taylor Managing Editor

7/07/2020 2:13:06 PM

July 16, 2020 Money Management | 5

News

Pure relative value tops inflation linked bonds

BY CHRIS DASTOOR

PURE relative value investing wins out in the inflation linked bonds sector as strategies that avoid macro-economic effects offer better defensive protection during the COVID-19 pandemic.

According to FE Analytics, within the Australian Core Strategies universe, the fixed interest inflation linked bonds sector had an average return of 1.67% over the 12 months to 31 May, 2020.

The best-performing fund in the sector was the Ardea Real Outcome fund, which returned 5.94%, followed closely by Mercer’s Australian Inflation Plus fund (4.45%).

Rounding out the top five was Morningstar Global Inflation Linked Securities (2.26%), BlackRock iShares Government Inflation ETF (0.74%) and Vanguard Australian Inflation Linked Bond (0.46%).

Gopi Karunakaren, Ardea portfolio manager, said the firm specialised in pure relative value investing where the level of yield was not relevant.

“We don’t try to predict which way interest rates are going, whether economies are doing well or badly or what the market environment is – none of that is relevant,” Karunakaren said.

“That’s one of the main reasons why the fund has been doing so well, because they’re not being affected by low yields and all of the macrotypes of uncertainty.”

Karunakaren said in this type of approach it was completely independent of macro effects.

“Our fundamental approach to investing is that we can’t predict which way economies are going to go so we don’t even try to,” Karunakaren said.

“We don’t know if inflation is going to be high or low in the future and I could sit here and make a compelling argument why inflation should stay low forever and then I could turn around an make an equally compelling argument for why inflation will rise.

“What is clear to us is many markets, including inflation linked bond markets, are currently pricing in a scenario in which inflation remains low very far into the future.”

The strategy of the fund was to prioritise

capital preservation by only investing in ‘high quality’ government bonds, related derivatives and cash-like investments.

“If you look at the pricing of inflation linked bonds right now – the prices in that market are basically are implying that inflation is going to remain very low, not just for the next year, but for the next 10, 20, 30 years,” Karunakaren said.

“It’s very easy to see why inflation could remain low in the near term because of economic weakness, that’s fairly obvious.

“But it’s much less obvious to us that inflation can remain that low for in 10-30 years in the future, at a time when you’ve got huge monetary and fiscal stimulus being announced everywhere.”

The fund was split between state (62%) and national (38%) government bonds, with 65% being in Australasia.

“If you were to get some kind of inflation surprise coming out over the next two to five years, markets aren’t prepared for that at all so you could see pretty violent price reaction across fixed income markets and inflation linked bond markets,” Karunakaren said.

MOMENTUM

MLC welcomes new independent Chairman Rob Coombe’s recent appointment as independent non-executive Chairman^ marks an important milestone for the new MLC. On his appointment Rob said: “This is a critical time for MLC and its clients.

It’s a privilege to participate in the exciting next chapter of this highly regarded Australian business. I look forward to working with Geoff Lloyd and his highly experienced executive team leading the separation of MLC Wealth.”

For more on the MLC leadership team, visit mlc.com.au

^ Independent non-executive Chairman of MLC Wealth Limited. MLC Wealth Limited (ABN 97 071 514 264), 105 Miller Street, North Sydney NSW 2060, a wholly owned, non-guaranteed member of the National Australia Bank Limited (‘NAB’) Group of Companies (‘NAB Group’). An investment with us is not a deposit with or liability of, and is not guaranteed by, NAB or other members of the NAB Group.

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8/07/2020 2:29:05 PM

6 | Money Management July 16, 2020

News

APRA predicts second tranche early superannuation release surge

BY MIKE TAYLOR

IT is now official. The numbers of people seeking and obtaining hardship early release of superannuation did not diminish as they approached the end of the financial year.

The official data released by the Australian Prudential Regulation Authority (APRA) for the period ended 28 June showed that there was no slowing down in applications and, just as importantly, APRA is predicting high volumes around the start of the 1 July second tranche.

“High volumes of applications are expected for the start of the second tranche of the COVID-19 Early Release Scheme in early July,” the regulator said. “This may impact the processing time for payments being made by funds.”

APRA revealed that, over the week to 28 June, superannuation funds made payments to 129,000 members, bringing the total number of payments to approxi-

BY JASSMYN GOH

mately 2.4 million since inception.

“The total value of payments during the week was $1.2 billion, with $18.1 billion paid since inception. The average payment made over the period since inception is $7,503.”

The APRA data also confirmed that just 10 funds

were responsible for nearly 67% of the early draw-down payments, paying $11.87 billion of the total $18.1 billion paid since the scheme started.

Those 10 big funds were AustralianSuper, REST, Hostplus, Cbus, Sunsuper, BT, HESTA, MLC, CFS and AMP.

Resolution Life looks for Australian growth beyond AMP Life AMP Life may have new owner but the brand will continue for the foreseeable future, as will the company’s interactions with life/risk advisers.

Barely a week into the company being owned and controlled by Resolution Life, AMP Life chief executive, Megan Beer, said that the existing branding would continue in the interests of continuity and maintaining confidence amongst the company’s clients and their advisers.

And while AMP Life will be administratively operating under Resolution Life Australia on the basis of it being an in-force business, Beer signalled that did not mean its Australian customer-base would not grow.

While declining to give specifics, Beer said the company was positioned for growth in Australia in circumstances where it had substantial resources and the scale to make investments.

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Super funds end 2019/20 in negative territory

“I can’t talk about what might be possible but if you look at the market in Australia and the challenges some insurers are facing then you see the opportunity for growth,” she said.

Such suggestions will further fuel recent speculation that the Westpac Life Insurance business may be on the Resolution Life shopping list.

However, where bedding down the AMP Life acquisition is concerned, the company signalled it would also be maintaining existing staffing and resources as it seeks to adjust to the changed ownership arrangements.

According to Beer, some of the earliest signs of AMP Life’s new ownership arrangements will be the launch of a new website which is currently under development and significant investment in technological capability.

“These are exciting times,” she said.

THE median balanced option lost 1.2% over the past 12 months based on funds returning 0.8% in June, according to SuperRatings.

SuperRatings noted that while the financial year result would be negative it was a relatively “mild drop” compared to previous years in which super had taken a hit.

SuperRatings executive director, Kirby Rappell, said: “Super funds made a strong comeback in the June quarter, but the market remains challenging due to the degree of uncertainty surrounding the COVID-19 pandemic.

“While markets have shown signs of stabilising, which is good news for members, although we don’t want to get ahead of ourselves. Members want to see a sustainable recovery in their balance, rather than a rapid rebound followed by another dip.

Slow and steady is the way to rebuild.”

The research house also found that since the start of 2020, the median balanced option has fallen 5.1%, while the median growth option is down 6.7%. The capital stable option, which includes more defensive assets like bonds and cash, has fared relatively better, falling only 1.6%.

The median balanced pension option down 0.8%, over the financial year, compared to a fall of 1.4% in the median growth option and 0.5% in the capital stable option.

“For members, it means they will need to be prepared for some more ups and downs. However, a patient approach has paid off for members over the long term with the median balanced style,” Rappell said.

7/07/2020 5:08:23 PM

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7/07/2020 2:20:05 PM

8 | Money Management July 16, 2020

News

AFCA bans paid representative from lodging complaints

BY CHRIS DASTOOR

THE Australian Financial Complaints Authority (AFCA) has banned paid representative MCR Partners from lodging complaints on behalf of consumers and small businesses, the first invocation of AFCA Rule 2.2.

Under Rule 2.2g, AFCA may use its discretion to exclude a complaint if the complainant was represented or assistant by an agent who may receive remuneration for this service and AFCA considered that: • The agent was engaging in inappropriate conduct which was not in the best interest of the complainant; or • The complaint was not accompanied by information required by AFCA. MCR Partners’ directors, employees and agents were excluded from lodging complaints for 15 months, up to 30 September, 2021.

David Locke, AFCA chief executive and chief ombudsman, said it was important that consumers know they do not need to pay someone to lodge a complaint with AFCA and

were an independent ombudsman service free to consumers.

“AFCA is very clear about its expectations of agents who lodge complaints on behalf of consumers,” Locke said.

“We expect that agents act in a manner compatible with our rules and purpose.

“Dispute resolution can be a stressful experience for the people involved. We will continue

Keep super compulsory – says new white paper

BY MIKE TAYLOR

“COMPULSORY superannuation has unambiguously improved the asset diversification of Australian households’ balance sheets, particularly for lowincome earners,” according to the Association of Superannuation Funds of Australia (ASFA) in a major defence of the compulsory superannuation guarantee.

ASFA has issued a white paper in which it has claimed that the compulsory nature of superannuation means that Australians today have an extra $500 billion in savings that they would not otherwise have.

Importantly, the ASFA research said that of that $500 billion, around $35 billion is additional savings of people in the bottom 20% by income (the lowest income quintile).

“Today, through superannuation, households outside the wealthiest 10% have exposure to equities, bonds, commercial property and nation-building infrastructure. Better asset diversification has improved the prospects for higher risk-adjusted, long-term returns for households,” it said.

“That compulsory superannuation can counteract individuals’ behavioural

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biases to under-save, and so acts to enhance their long-term welfare, is a key public policy rationale to maintain and strengthen the compulsory superannuation system,” the ASFA white paper said.

“Compulsory superannuation will continue to lead to improved retirement outcomes as the compulsory system matures – that is, as workers receive compulsory contributions at higher rates for longer periods of time compared with earlier cohorts of workers.

“Assuming that the compulsory contribution rate increases to 12%, as legislated, ASFA estimates that around 50% of retirees will be able to afford expenditure in retirement at or above the ASFA Comfortable Retirement Standard by 2050, compared to around 20% currently,” it said.

The release of the ASFA white paper comes against the background of a group of Government backbenchers who have been arguing for superannuation to be no longer compulsory and for a further pause in the superannuation guarantee increase timetable.

It also comes against the background of the impending release of the recommendations of the Government’s Retirement Income Review committee.

to work with the complainants involved to minimise any impact caused by this decision.”

While AFCA would no longer deal with MCR on any new or existing complaints, it would continue to process complaints currently in the system, either dealing directly with consumers or a replacement representative.

AFCA said it had contacted those who currently had a complaint lodged.

Parliamentary committee oversight canvassed for FASEA THE chairman of a key Parliamentary Committee has suggested that the Financial Adviser Standards and Ethics Authority (FASEA) should be subject to oversight by a Parliamentary Committee.

The chairman of the House of Representatives Standing Committee on Economics, Tim Wilson asked the FASEA chief executive, Stephen Glenfield, whether the authority was answerable to any Parliamentary Committee.

Glenfield answered that FASEA had appeared before Senate Estimates, with Wilson responding that that was very different to being subject to the oversight of a specific committee.

Wilson asked Glenfield whether he had any objection to FASEA being oversighted by a parliamentary committee and answered that he would have no objection.

Wilson had earlier told Glenfield that he had received many complaints about FASEA and questioned whether the authority amounted to “a regulator running amok”.

Glenfield defended the performance of FASEA and reinforced that it had been led by the legislation which governed its operations.

7/07/2020 5:08:51 PM

July 16, 2020 Money Management | 9

News

Financial advisers question FASEA’s two-thirds discount

BY MIKE TAYLOR

A number of financial advisers have questioned an assertion by Financial Adviser Standards and Ethics Authority (FASEA) chief executive, Stephen Glenfield, that FASEA is “offering a two-thirds discount for experience” when it comes to advisers reaching Bachelor degree recognised status.

Glenfield made the claim in an opening address to the House of Representatives Standing Committee on Economics but advisers are claiming that such an assertion is disingenuous.

One adviser told Money Management that the two-thirds discount claim did not reflect the reality that he had passed the FASEA exam and his ethics unit and now had seven more units to complete inside the prescribed five-year time-frame.

Other advisers pointed to the fact that the New

Entrant (Career Changer) – Postgraduate pathway was described by FASEA itself as “ typically consisting of eight courses or more offered by a Tertiary Education Quality and Standards Agency (TEQSA) Registered Provider and contains the FASEA Financial Adviser Curriculum as a core part of the program”.

“On that basis, where is the reality of the twothird discount?” one asked.

In his opening statement to the Parliamentary Committee, Glenfield said: “FASEA recognises the past experience and learning from existing advisers who do not hold an approved degree. In recognition of their practical experience current advisers who do not hold an approved degree are required, at a maximum, to complete an eight course Graduate Diploma rather than a 24 course Bachelor degree.

“In effect this is a two-thirds discount for experience. With a transition period to 1 January, 2026, this means an existing adviser with no bachelor or higher or equivalent level of study will, at most, be required to complete approximately one subject per year to meet their education requirement.

“Advisers who have completed relevant degrees or other forms of equivalent study are required to do less than this through FASEA’s recognition of relevant degrees and prior learning,” Glenfield said.

“For example, a stockbroker who has not completed an approved degree at bachelor level but has completed the historical Securities Institute Graduate Diploma of Applied Finance and Investments will only be required to complete an ethics bridging course to meet the education requirement.”

IPL enters agreement with adviser Wealth Today

BY LAURA DEW

MANAGED discretionary account provider Implemented Portfolios Limited (IPL) has entered into agreement with adviser group Wealth Today.

The agreement would see the firm provide Wealth Today’s advisers with individual managed accounts (IMAs).

This reflected the demand from investors for bespoke, personalised investment solutions and from advisers who wanted to spend more time with clients and run more efficient advice practices.

Chief executive of corporate development at IPL, Santi Burridge, said: “Forward thinking dealer groups are increasingly seeing the necessity for an investment service solution like ours that truly partners with advisers to put the client first.

“On top of that, the efficiencies gained from utilising our IMA service really do free up advisers’ time – allowing them to step deeper into the role they were designed to do – helping their clients live their best lives.”

Jack Standing, national head of advice at Wealth Today, said the use of IMAs would help the firm to assist with advisers’ compliance requirements and ensure they were acting in clients’ best interests.

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Zenith takes Chant West RESEARCH and ratings house, Zenith Investment Partners has completed its acquisition of publicly-listed superannuation research house, Chant West Holdings Limited.

Zenith chief executive, David Wright, said that while there had been a recent delay in completion of the transaction, Zenith retained its confidence in the Chant West team.

The transaction follows prolonged negotiations between Zenith and Chant West.

He said that with extensive expertise across the managed funds, managed accounts,

superannuation and pension sectors, the combined business will have an expanded suite of services and tools to better serve the information requirements of Australia’s personal wealth industry.

Wright said the group employed 70 staff across offices in both Sydney and Melbourne, enabling it to be closer to more of its clients which includes a number of Australia’s largest super, pension and advice companies, along with many smaller, boutique providers located across the country.

7/07/2020 5:09:15 PM

10 | Money Management July 16, 2020

News

Rest restructures employer and industry engagement group

BY JASSMYN GOH

A number of Rest employees within its employer and industry engagement division have been made redundant as a result of a restructure.

Confirming to Money Management, the industry superannuation fund said the restructure was aimed at expanding its education and advice capabilities and deepening the work it was doing with employers.

“The changes will enable us to deliver our strategic goals. They are aimed at reaching more members in need of financial advice, and growing and retaining our employer base,” Rest said in a statement.

“The new group structure will consolidate the relationship management and service functions, and include additional

BY OKSANA PATRON

business development and advice delivery roles.

“New positions have been created as a result of this change, and some positions have been made redundant. The net effect is

that the total number of positions remains unchanged.”

Rest did not disclose how many roles were made redundant but said recruitment for new roles was underway.

Restrictions for financial services licensees in intermediary authorisation agreements AUSTRALIAN financial services (AFS) licensees with an agreement with an unlicensed product provider cannot deal in a financial product unless they are issuing, varying, or disposing for the product issuer, according to The Fold Legal.

In an analysis, the firm’s solicitor director, Jamie Lumsden, said such an agreement would give an “intermediary authorisation” for a product issuer to provide products to retail clients without an AFS licence.

However, under the intermediary authorisation a product issuer cannot deal directly with customers under any circumstance, Lumsden said.

The analysis said: “The AFS licensee cannot deal in a financial product unless they’re issuing, varying or disposing for the product issuer. This means you can’t: • Make a market for the financial product; • Operate a registered scheme; • Provide a custodial or depository service; or • Provide a crowd-funding service.

This means the exemption can never be used by: • The trustee of a registered scheme (including peer-to-peer lenders); • The trustee of an unregistered scheme that has the custodial and depository services authorisation. In

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ASIC cancels AFS licence of MyPlanner THE Australian Securities and Investments Commission (ASIC) has cancelled the Australian financial services (AFS) licence for MyPlanner Professional Services.

ASIC said it cancelled the licence because MyPlanner Professional was no longer operating a financial services business and is in liquidation.

In 2017, the regulator imposed additional conditions on MyPlanner Professional’s licence because ASIC was concerned that MyPlanner Professional’s representatives were providing poor financial advice and the licensee was not adequately monitoring and supervising its representatives.

Following this, on 12 February, 2020, ASIC suspended MyPlanner Professional’s licence for 10 weeks due to continued compliance concerns.

this arrangement, the only option available to the trustee is to hold its own AFS licence. But it can be used by the trustee of an unregistered scheme that does not hold any financial products in custody, like a property scheme which only holds real property, provided the trustee only deals with investors through the licensee; and • Non-cash payment providers that allow direct access to their services”.

Lumsden noted the agreement would only be valid if the arrangement included a written agreement that: • Authorises the AFS licensee to make offers to arrange for the product issuer to issue, vary or dispose of the financial products; • Specifies that the product issuer will actually issue, vary or dispose of the products in accordance with any offers made by the licensee; and • Only involves offers made by the licensee that are covered by the authorisations on that licensee’s AFS licence.

Such arrangements could be used by insurers who entered the Australian market by granting a binding authority to an agent or non-cash payment products as long as customers did not have direct access to their services.

7/07/2020 3:26:56 PM

July 16, 2020 Money Management | 11

News

Committee pursues claims of AMP charging $22,000 APL fee

BY MIKE TAYLOR

AMP Limited chief executive, Francesco De Ferrari has been challenged during a Parliamentary Committee hearing about whether AMP has been charging product providers as much as $22,000 to be on an AMP approved product list (APL).

The questioning came from the Labor Party deputy chair of the House of Representatives

Standing Committee on Economics, Andrew Leigh who posed the question to De Ferrari without getting a definitive answer.

However, in later questioning of Industry Fund Services (IFS), Leigh raised the issue again stating he had been told that AMP charged $22,000 for being on the company’s APL and asking what someone would have to pay to be on the IFS APL.

Asking IFS chief executive, Cath Bowell what her company would charge someone for being placed on the APL, Bowtell said there would be no charge.

“In fact, it is possible that the product manufacturer would not even know they had been included on the APL,” she said.

Bowtell also made clear that IFS had not lent its support to the industry’s push for legislation extending the Financial Adviser Standards and Ethics Authority (FASEA) exam timetable because the company’s advisers were already welladvanced in passing the exam.

She said that around 60% of the company’s licensed advisers had already passed the FASEA exam and were well on the path to pursing the relevant education pathways to meet the bachelor degree minimum requirement.

ATO approval of early release ‘no rubber stamp’ PEOPLE who obtained early access to their superannuation should make sure that they were actually eligible to have done so or risk hefty penalties, according to the Institute of Public Accountants (IPA).

IPA chief executive, Andrew Conway, has pointed out that the early release scheme has been based on member self-assessment and that those making use of the arrangements need to make sure that their actions will stand scrutiny.

“It is understandable that an individual or a small business owner may have cashed in a portion of their superannuation during these difficult COVID-19 pandemic times just to keep their head above water,” Conway said. “However, the Early Release Super Scheme relies on self-assessment.

“The fact that the scheme was designed to give speedy access to cash, means that the Australian Taxation Office (ATO) is limited in what it can do, to pre-assess individuals applying. Individuals who have accessed their super should not for a moment think that this means that the regulator has rubber stamped their eligibility. The checking mostly happens afterwards, and this is how the self-assessment process is meant to work.”

“Here lies the question: are the 2.1 million people who have accessed their superannuation eligible?”

Conway said.

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“The ATO is very clear on the eligibility rules and applicants under the scheme need to be fully aware of the penalties that may apply if the rules are breached.

The scheme was put in place at the height of the pandemic to help individuals access emergency cash to deal with the financial consequences associated with COVID-19. Whilst the regulators cannot control how the money was spent, they can control whether those who accessed their super genuinely met the eligibility criteria,” he said.

“The ATO has a transparent window into what individuals earn, especially under single touch payroll. It is therefore feasible that ‘please explain’ letters will start to flow to those who have accessed their future nest egg and may not be eligible.

“Failing the eligibility rules whether knowingly or in ignorance won’t count. The minimum penalty will include the cash withdrawn being part of the individual’s assessable income and paying tax at the respective marginal tax rate. Ordinarily, this amount would not have been taxed if received after preservation age.

“A total disregard of the rules will also mean a fine of up to $12,600 could be imposed. The IPA strongly advises individuals who think they may not have satisfied the eligibility rules to contact the ATO and voluntarily explain their situation. A voluntary disclosure may help to avoid or reduce the imposition of penalties,” Conway said.

AMP Life sale finally completes for $3 billion AMP Limited has completed the sale of its life insurance business to Resolution Life for $3 billion.

The company confirmed completion of the transaction to the Australian Securities Exchange (ASX) noting that the total sale proceeds comprised of $2.5 billion in cash and $500 million equity in Resolution Life Australia.

It said the final cash proceeds from the sale were subject to a number of post-completion adjustments, but that AMP expected the net proceeds to increase AMP’s capital in excess of target surplus by approximately $1.1 billion.

The ASX announcement said the separation of AMP Life would significantly simplify AMP’s group structure with the internal separation process including the transfer of approximately $55 billion of client funds via several successor fund transfers.

It said that in addition to its residual 20% holding in Resolution Life Australia, AMP would continue to provide technology and administrative services to AMP Life for a two-year period.

7/07/2020 3:27:15 PM

12 | Money Management July 16, 2020

InFocus

INDIVIDUAL ADVISER REGISTRATION – A STEP FORWARD ON AN EVOLUTIONARY ROAD The chair of licensee Synchron, Michael Harrison sees merit and advantages in a move towards individual adviser registration.

SENATOR JANE HUME has intimated that if it helps move the industry towards a profession, the Government is likely to support individual adviser registration. The Opposition has also flagged likely support.

I think we can safely assume that an individual adviser registration board would be modelled on registration boards in other professions, such as the legal profession, and its role would be similar. It would take over the registration of advisers from the Australian Securities and Investments Commission (ASIC), combine that function with code monitoring, have the ability to discipline practitioners when necessary and provide the most essential service of all, professional indemnity (PI) insurance.

Such a move is likely to reduce the regulatory burden on advisers – and we welcome any reduction in the regulatory burden on advisers. It will be good for the industry and more importantly, for consumers, because it will reduce costs and in the process make advice more accessible and affordable for everyday Australians.

At the moment, advisers are forced to pass on four levels of administrative/regulative costs to clients. These are the costs associated with ASIC, the Australian Financial Complaints Authority (AFCA), the Tax Practitioners Board (TPB) and the Financial Advisers Standards and Ethics Authority (FASEA).

If there’s an ASIC levy, which there is, the adviser has to pass it on – and ASIC has just suggested a 38% increase in the adviser levy for this year.

If there’s a TPB levy, which there is, the adviser has to pass it on.

Indirectly, the adviser is paying for AFCA because licensees have to be members of AFCA and pay fees which are passed to advisers and

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then to consumers. FASEA funding has dried up, because almost all the big companies that were funding it (i.e. the banks) have moved out of financial advice so presumably these costs will be borne by remaining licensees/advisers and again passed onto clients.

The beauty of a registration board that registers individual advisers and manages the code is that it should at least reduce the levels of regulation and therefore, the associated costs in maintaining them. So on that basis we think it’s an excellent idea.

The question is when should this happen?

Financial advice is evolving into a profession, but of course it didn’t start that way. In the beginning, education consisted mostly of some company training which tended, in those early days, to focus on product and sales training. There’s no question that’s changing, but we can’t expect it to change overnight.

FASEA has mapped out a course of two years for transition and five years for a Master’s. So, in fact, they have mapped out a seven-year plan, which we support, and we’d suggest a move towards an adviser registration board might be conducted over a similar timeframe.

The next question is who should be on this registration board and in my view, it should not be dominated by academics, as was the case with FASEA, but practitioners from a variety of disciplines, for example, a life insurance specialist, an aged care specialist, a superannuation specialist, an investment specialist and so on, because these are all separate parts of our industry that work hand in hand. What we don’t want is just another level of bureaucracy.

These practitioners would sit on the registration board and work in conjunction with an administrator and a consumer advocate, preferably one who is not

disgruntled or disenchanted with financial advice.

In our view, members of the registration board, with the exception perhaps of a paid administrator, would hold honorary positions, with no remuneration involved because that way you would only get people who were genuinely interested in the industry.

What we do not want to see is the Financial Planning Association (FPA), which has recently ramped up the individual adviser registration debate, hijack the agenda and ultimately take on the role of a registration board and code monitoring body, in a desperate quest to remain relevant – because that is what its enthusiastic championing of individual registration looks like from here.

While some organisations will need to search for ways to remain relevant, I don’t think licensees will have to struggle to the same extent – although we may have to find a new name, as we will no longer be in the business of authorising representatives of our licence.

The reason we won’t struggle to the same extent is that the role of the licensee is not going to be duplicated by a registration board.

If you look at existing models, registration boards typically don’t educate individual practitioners, monitor their compliance, help them build better practices, supervise new entrants in the industry, or give them a pathway to becoming a full practitioner.

These functions are handled by the firms to which practitioners belong – for example a law firm, in the case of the legal profession. As an interesting sidenote, major law firms in Australia can have many more partners than Synchron has advisers.

To be fair, the FPA has (belatedly) acknowledged, along with other commentators, that in a world whereby advisers are individually

registered, licensees will continue to play an important role, fulfilling the many necessary business functions that a registration board will not.

The functions I foresee that licensees will not perform, will be registering advisers (which they don’t technically do now anyway, ASIC does), monitoring the adviser’s behaviour in relation to the code (although they will still be responsible for ensuring compliance) and sourcing professional indemnity insurance (a welcome relief).

Licensees will also have to ensure that they remain relevant.

We will also have a larger role to play in helping to move the profession forward by offering advisers the kinds of services they need .

Advice businesses might be built around certain demographics, catering for people in various life stages – from the time they start work and start saving, up to the time when they need to go into an aged care facility.

Licensees might also help advice business to provide more, let’s call it automated advice at the lower levels, and more personalised at the other, as the needs become bigger.

Synchron believes a broad plan for the industry should involve doing what we collectively can to move the industry forward, working together towards anything that makes the consumer better off and reduces the cost of advice. But it is an evolution, not a revolution.

Michael Harrison is chair of Synchron.

8/07/2020 2:27:23 PM

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7/07/2020 2:21:07 PM

14 | Money Management July 16, 2020

Legal

JUSTICE OR PROFIT? Oksana Patron examines what the current regulations around Australia’s growing class action industry mean for litigation funders and lawyers and whether or not they serve to deliver justice over profits.

THE RECENT LAUNCH of an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding has brought about a heated debate around the current regulations on a growing class action industry in Australia and its potential outcome for plaintiffs.

When opening the inquiry, the committee said its key objective remained to ensure that the legal system in Australia would deliver justice to those who deserve it and “did not exist to benefit lawyers or others seeking to profit from it”.

However, since the committee first announced its decision to look at proposals allowing lawyers to enter into contingency fee arrangements, there has been a number of submissions being made by both sides.

The litigation funders and law firms argued their profits were often exaggerated and misunderstood while, at the same time, there was a number of submissions which strongly indicated that profit has become a key motivation for starting proceedings in many cases.

One of the most contentious issues has become the proposed stricter regulations and discussion

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around whether litigation funders and law firms seeking contingency fee commission should hold the Australian Financial Services (AFS) licence and the entire sector should be regulated through the Australian Securities and Investments Commission (ASIC).

At the same time, the report from the Liberal Party’s think tank Menzies Research Centre (MRC), found that returns available for those investing in litigation in Australia exceeded, by a considerable margin, the returns available in nearly every other alternative asset classes. The largest litigation funders operating in Australia reported a return on invested capital (ROICs) of over 150% with a high success rate of more than 80%.

“The numbers speak for themselves,” James Mathias, MRC’s chief of staff and co-author of the report, said. “What our report shows is the percentage actually paid out to successful plaintiffs has reduced significantly over the last three years. The returns are excessive when you think about [how] the returns they actually make are a percentage of the victims’ damages pool.”

“We feel that the litigation funders have too much of a say in the proceedings and we want to ensure that litigation funders do not have that so we certainly feel that there should be a prohibition for them exerting control over the proceedings.”

FAIR AND REASONABLE? However, Patrick Moloney, chief executive officer at Litigation Capital Management (LCM), said the quantum of any fees payable to a funder of a class action was already regulated by the court in the context of the approval of a settlement and it was the court which determined what was a fair and reasonable fee to be paid to the litigation funder.

“Therefore, in the context of class actions, a litigation funder’s fees are already the subject of regulation. And in terms of the balance of LCM’s business, we are dealing with sophisticated professionals, or corporations, who agree contractually to an acceptable fee,” Moloney said.

“There is no reason why a commercial arrangement between sophisticated parties should need to be regulated. The terms agreed to by commercially sophisticated

parties reflect the fact that litigation finance is non-recourse lending which is high risk for the funder.

“This is demonstrated by the fact that it is only litigation funders (and not any other financial institutions) who are willing to lend capital with the only recourse being the uncertain proceeds of litigation,” he said.

Mary Nemeth, Australian head of litigation and insolvency and principal lawyer at DWF, was of a similar opinion. According to her, most members of the public did not understand how class actions were run and funded.

“This is why we commonly advise clients on the risks associated with being part of a class, and what they may get from being involved in a class action funded by litigation funders.

“Over the last 20 years that litigation funding has become a common form of funding litigation in Australia, the courts have ensured that class members’ interests are paramount and that the funders’ remuneration is acceptable, considering the risks which the litigation funder takes on,” she said.

Before the Victorian parliament passed legislation that allowed for

7/07/2020 5:09:48 PM

July 16, 2020 Money Management | 15

Legal contingency fee arrangements, there had been a long history of lawyers in Australia who were only able to charge a fair and reasonable fee for their service. However, this all changed with the arrival of the litigation funders who began to charge a percentage of the damages.

According to Mathias, law firms see this as a great way for ensuring that their fees are guaranteed and will always be paid, meaning that the relationship that exists between plaintiff, lawyers and litigation funders is a commercial one.

“If it is a commercial agreement then the litigation funders should be subject to the same regulatory requirements of other commercial operations.

That’s just common sense and currently they are not,” he said.

The MRC report also found that many litigation funders in Australia were foreign entities with little or no local presence where, additionally, the enforcement of their clients’ rights will be difficult if not impossible unless the funding agreements are governed by Australian law.

Mathias said: “Some funders pay no tax here, and all the while this vehicle of justice for people has been seen as a vehicle for profits, at the expense of the very people they are meant to be representing. All we ask for is that litigation funders are subject to some of the same regulatory and reporting requirements as Australian companies”.

LICENCE OR NO LICENCE? One of the proposed recommendations around litigation funding was to look at it as any other financial product.

However, this would imply that litigation funders and the practices of any law firms seeking contingency fee commissions would need to be regulated by ASIC and the litigation funders would be required to act in the best interests of class members, placing the lawyers in the same regulatory boat as financial advisers.

The think tank pointed out to a decision made in 2013 by the Minister for Financial Services,

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Superannuation and Corporate Law, the Hon Chris Bowen, who exempted this industry from investment regulation and litigation funders were no longer required to hold an AFSL, something required of all other providers of financial products and services, as a starting point since when the litigation industry has begun to flourish.

According to the think tank, while the introduction of provisions allowing plaintiffs to litigate collectively in 1992 was well intended the system got “corrupted by predatory practices by legal companies backed by investors looking for a return on capital”.

“We touched on it a little bit in the report, but to say that class actions which were established in 1992 and within that set of frameworks that government’s class actions in 1992 could have never foreseen the advent of litigation financing,” Mathias noted.

Moloney said that LCM supports increased regulation of the industry and his firm has long supported the introduction of a relevant licensing regime as an added means of ensuring continued integrity within the industry.

“LCM already holds an AFSL and, as a publicly listed company, is subject to market regulation including financial reporting and continuous disclosure requirements,” he said.

Moloney said the licensing of litigation funding should be tailored to address the specific features of litigation funding otherwise the objectives of licensing such as greater transparency and ensuring that litigation funders hold and maintain the appropriate level of competence and organisational ability to provide these financial services, may not be met.

“LCM supports the regulation of the litigation funding industry by ASIC. Class actions are, however, already subject to detailed and close supervision by the courts, so the role of the regulator needs to be carefully considered so as to sit alongside this court supervision,” Moloney said.

However, he warned that the current proposal that class actions should be subject to the managed

“All we ask for is that litigation funders are subject to some of the same regulatory and reporting requirements as Australian companies.”

– James Mathias, MRC investment scheme (MIS) regulation “is not without problems”.

The current class actions regime is based on an ‘open class’ and ‘opt out’ system which is inconsistent with the notion of a MIS where participants are required to take a positive step in order to be involved.

This would mean, according to LCM’s chief executive, that MIS have particular features such the ‘operator’ of the scheme who holds and controls the ‘scheme property’.

“This does not sit comfortably with the concept of a funded class action where members do not contribute any actual property, other than the pooling of their claim, and a funder does not control the claim, rather a class action is controlled by the representative plaintiff,” he said.

“It is not yet clear whether law firms seeking contingency fees will be required to hold an AFSL or whether class actions being run on the basis of contingency fees will be required to be registered as a managed investment scheme. There is a problem with this; lawyers are prohibited from promoting or operating managed investment schemes.”

According to Nemeth, most serious litigation funders will not find the requirements restrictive and will already have the capacity to comply with further requirements.

“Law firms who seek contingency fee commissions or an uplift fee are already heavily regulated by professional body rules in the way they conduct themselves. Adding further licensing requirements will add to the cost of their compliance and may make them think twice about taking a matter on based on a contingency fee.

“This is, however, still playing out in the market with legislation to lift the cap on what contingency fees can be charged, now having

passed in the Victorian parliament,” she said.

IMPACT ON ECONOMY Andrew Saker, chief executive of Omni Bridgeway (which also includes IMF Bentham following their merger in 2019), said opponents of the litigation funding often suggested there would be a negative impact on the economy without necessarily articulating the reasons why.

“There have been some suggestions that litigation funding and class actions require boards to focus more on disclosure obligations versus running the business, that is it is a drain on directors and insurers, discouraged some people from being directors, that the cost of directors and officers insurance has increased,” he said.

“The counter-position, which is our position, is that class actions and litigation funding improve the economy by acting as a private enforcement tool to complement public enforcement, which improves the quality of the information available to shareholders and reduces the cost of capital.

“The focus on disclosure obligations is a positive, not a negative, the drain on insurers and directors does not reflect the cost and damage done to investors who have been misled and damage to the integrity to the market for those companies that do fulfil their obligations.”

With the committee’s final report expected in early December, Mathias said: “I hope certainly that by the end of the year after the committee reports, we will have a clear set of recommendations for parliament to intervene, and to put the required regulatory frameworks around litigation funding in this country.

7/07/2020 5:09:54 PM

16 | Money Management July 16, 2020

Fixed Income

A DIFFERENT BALL GAME Fixed income is known for its reliable defensive characters, Chris Dastoor writes, but is it still the best option during the COVID19 economic recovery as equities rebound?

FIXED INCOME HAS never been the exciting asset class, but its defensive characteristics have made it the Dennis Rodman (two-time National Basketball Association defensive player of the year) of portfolios, compared to equities that build the basis of your offense, like Michael Jordan and Scottie Pippen.

Some days your scorers will struggle and it helps to rely on your defensive pieces to keep you in the game, like Rodman often did for the Chicago Bulls.

Which brings us to March, the toughest sell-off since the late 1980s (before Rodman had even won his first defensive player of the year award) – this was the time for fixed income to show its defensive sturdiness, and it did, but coming out from the rebound was a different ball game.

But as portfolio managers try to reconfigure their starting lineup, they have had to weigh up the risk of more market volatility and either go for more defensive protection with fixed income or take more chances and aim to score more points with equities.

Either way, it’s no easy slam dunk.

Gopi Karunakaren, Ardea portfolio manager, said, to put it bluntly, the argument for conventional fixed income right now was pretty weak.

“If you think about the way conventional fixed income works and the role it’s supposed to play in a broader multi-asset portfolio, the

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very low-rate/low-yield environment we’re currently in makes it very challenging for conventional fixed income investments to deliver to those expectations,” Karunakaren said.

“If you think about why people have fixed income in a portfolio, it’s usually some combination of wanting a stable source of income and diversification against equity risk.

“The way that conventional bonds work is that yield for that interest income you’re getting from those bonds is really the primary driver of being able to meet those expectations for fixed income.

“Problem is yield, in most places, is extraordinarily low – near zero if you look at government bonds, for example.”

Darryl Trunnel, Principal Global Investors portfolio manager, said fixed income was still an attractive option as there were concerns for company earnings in equities.

“As you look at the global economy, there’s a lot of uncertainty on the heels of the COVID-19 pandemic and how long it will take for economic activity to return to the levels it was before,” Trunnel said.

“The risk/reward may not be what it once was, so as you look at fixed income markets around the world, although yields are low, there’s some attractive opportunities to earn some income and to have an enhanced risk profile if you diversify into fixed income.”

Trunnel said many equities had rallied back since the middle

7/07/2020 1:34:45 PM

T

July 16, 2020 Money Management | 17

Fixed Income Strap

of March to levels that suggested earnings were not going to be lessened, but that would not be the case.

“January to March only had one month of a downturn factored into them, there will be more of that reflected in the upcoming earnings that are going to get started in July,” Trunnel said. “I think right now, ahead of that would be an opportunity to switch more into fixed income.”

Erik Keller, Robeco client portfolio manager global credits, echoed the sentiment that although equities had recovered strongly, earnings were still going to be under pressure.

“Those earnings were already weakening going into 2020 [pre-COVID], but with the recession you will see a strong earnings decline,” Keller said.

“It doesn’t bode well for a lot of equities in Australia because markets have priced in quite an optimistic scenario.”

Nathan Sheets, chief economist at PGIM Fixed Income, said the appropriateness of an increased allocation to fixed income was still dependent on the investment horizon or risk appetite.

“We are living in a world of sustained low inflation and that was true before the virus,” Sheets said.

“Low inflation reflects ageing demographics, rising debt levels, restrained inflation expectations as a result of slow growth.

“All of those things are going to be very much with us and that’s going to translate into a lower trajectory of rates going forward.”

RECOVERY Analysts have been debating whether the economic recovery would be V-shaped or U-shaped, the former being a faster recovery, while the latter being a drawn-out process.

Trunnel said a lot of equities had already seen a V-shaped recovery, but the actual economy itself would not be a ‘V’ at all.

“It’ll be a long drawn out ‘U’, getting back to the levels before

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COVID-19 will take at least through to end of next year, if not longer,” Trunnel said.

Jay Sivapalan, Janus Henderson head of Australian fixed interest and one of the inaugural Money Management Alpha Managers, said the firm had a pragmatic and realistic view of how the economic recovery would occur, which would be a U-shaped recovery – but that this was one of the more generous ways to describe the economic recovery.

“Essentially, we expect 2019 year and economic gross domestic product [GDP] levels to be restored by the end of 2021, essentially two years of lost growth,” he said.

“The way the economy entered this crisis it will emerge from in a softer place – higher levels of unemployment [and] we still have a corporate and a small-to-medium enterprise [SME] default cycle to go through – so we’ll emerge from it from a softer place.

“That said, clearly policies are clearly working very strongly to get everyone across to the other side.”

In Sheets’ perception of a U-shaped recovery, he also expected it to take to 2021 to get back to the Q4 2019 level of GDP. “Could it be better than that?

Absolutely, I’d say that is possible and that’s where you get into the classes of V-shaped recoveries,” Sheets said.

“But it could also be worse, struggling with full-blown second waves of the virus.”

Keller said a potential second wave of the virus would impact the shape of the recovery and most likely delay it.

“Aside from the risk of a second wave or a long first wave like we’re seeing in the US, there’s also the US elections that will create additional volatility, and tensions between US and China,” Keller said.

“There’s a lot of additional risks that could result in a more cautious prediction here, so we don’t really see a V-shaped recovery.

“The optimistic scenario is that we will get this recovery by the end of 2021, back to pre-COVID prices.”

INTERESTING (RATES) Karunakaren said the combination of the economic disruptions that were created by the virus, led to central banks stepping in very aggressively to stimulate economies by cutting interest rates to very low levels.

“In a V-shaped strong economic recovery scenario you could see a bit of upward pressure on rates,” Karunakaren said.

“But probably not a lot because the system and economy is too fragile to handle a very big increase in interest rates.

“The only scenario in which it’s likely you could see a V-shaped recovery lead to significantly higher interest rates is if inflation makes a comeback.”

However, if inflation did not make a comeback, there was not a huge amount of pressure on central banks to start hiking rates.

“Knowing how fragile the system is and how fragile economies are right now, they’re probably not going to be in a big rush,” Karunakaren said.

“If we have a much weaker scenario, what is clear to us is that monetary policy is exhausted already.”

“Rates are already at zero or close to, central banks are already flooding the markets with liquidity and they’re buying lots of bonds through the quantitative easing (QE) program.”

Because monetary policy had been the dominant form of stimulus for the past decade, it had been exhausted as an option.

“If we get more severe prolonged weakness, it means that fiscal policy needs to step up,” Karunakaren said.

“That means much more Government spending on top of what’s been announced and what we’ve already seen, and much more government issuance coming to the market.”

Sheets said he expected the low rate environment to be the reality of the next decade, at the very least.

“Consistent with that, we’ll also

“We are living in a world of sustained low inflation and that was true before the virus.”

– Nathan Sheets, PGIM Fixed Income chief economist see credit spreads over the medium to long run grind tighter,” Sheets said.

“That can be across the board in various kinds of corporate bonds, structured products and certainly for investors with medium to long term horizons in emerging market debt.”

Sivapalan said the work the Reserve Bank of Australia (RBA) had done was to ensure normal market function and to provide liquidity, but other actions could be used to stimulate the economy.

“They haven’t really stepped in, in terms of stimulating the economy, and in the last 90 days if they had unveiled programs to stimulate the economy it may not have worked because we’re all locked down so we couldn’t exactly go out and spend money,” Sivapalan said.

Although the Australian Government had introduced JobKeeper and improved JobSeeker, Sivapalan expected future actions like the US Federal Reserve had recently done, which included direct support to SMEs and households.

“There will be some other programs unveiled to support banks, the SME sector, which is a bit different to the Global Financial Crisis (GFC) where the support went to Wall Street and not enough to Main Street,” Sivapalan said.

“This time around I think the lessons have been learned and they recognise that if you want to get unemployment down, you need to support SMEs.”

7/07/2020 12:00:42 PM

18 | Money Management July 16, 2020

Investment

SEARCHING FOR THE SOURCE OF ALPHA

The quest for alpha is an eternal part of equities investing, Lawrence Lam writes how founder-led companies can help in the search for outperformance.

WE ARE ALL baking cakes. The wealth cake. We search for the highest quality ingredients, we put those ingredients into a mixer, then the oven, and voila – here’s one we prepared earlier.

With the right recipe, some will end up with a creation that is magnificent, fluffy and moist, far superior to others. But those that get it wrong can end up with a sad puddle of mess. This is high stakes baking where the best result depends not only on having the best flour, freshest eggs, and best elements, but applying them in the right quantities, timing and method. If stock selection is akin

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to picking the ingredients, then we are only part way there in our quest for alpha. How we allocate also has a big contribution to the result. In this article I will outline how our fund captures alpha through stock selection, weighting and allocation.

OUTPERFORMANCE ORIGINATES FROM UNCONVENTIONAL MEANS You do not win a race by driving in the same lane. Remember, the source of alpha is, by definition, unconventional. It is common for stock analysts to focus on specific sectors or geographies but these

attributes are not advantages unique to any one company or investor.

One of the largest and most successful active managers in the US, Capital Group, failed several times to launch their Best Ideas fund which took the best single idea from each of their sector specialists. The Best Ideas fund was appealing in theory, but it underperformed because selecting the best companies from each sector is vastly different to simply selecting the best companies full stop. What they thought would be a source of alpha turned out to be a limitation in their stock selection.

HOW TO CATCH ALPHA THROUGH STOCK SELECTION In order to find the freshest ingredients, immerse in catchments where they are most likely found. The first source of alpha comes from either companyspecific or investor-specific attributes. Company-specific examples may include board or management characteristics, spin-offs, capital raisings and other corporate actions where unique opportunities flash by for those paying attention. Investorspecific examples include longterm ownership mindset, high

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July 16, 2020 Money Management | 19

Investment

Table 1: Investigate beyond the first tier of outperformance

concentration, or lower trading frequency.

The founder-led companies we invest in possess a source of outperformance tracing back to an aligned governance and decision-making structure at the core. We find this a profitable universe to play in – founder-led companies have achieved a 7% outperformance over other companies since 2006. The narrower the focus on the source, the better. As you would expect, the source of alpha is not wide.

This is a scenario where you would rather delve deep than go wide. Become a specialist rather than a generalist.

Once you have found your source of outperformance, the allocation plan can be built around that foundation by finetuning the focus even further.

HOW TO FINE-TUNE AN ADVANTAGE For instance, founder-led companies tend to outperform over the long-term. But this is not the end of the story, this is just the first tier of advantage. Investigate further to find secondary tiers, tilt the allocation towards these additional pockets of opportunity, and press the advantage further.

By way of example, contrary to popular belief, the saying “the first generation makes it, the second spends it, and the third blows it” is simply not correct. The data shows a different story altogether. The often (unfairly) maligned second generation is in fact the cohort that delivers the greatest source of performance for founder-led companies. The building of businesses takes time, becoming a dominant player takes years, and it is often the new ideas of the second generation that changes the game, as the foundations paved by the first generation are expanded and taken to new heights by the second.

As a second tier advantage, we find first and second generation founder-led companies particularly appealing.

If the source of your advantage

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Example: Tier 1 Founder-led companies

Cash

Example: Tier 2 1st and 2nd generation founder-led

‘Smaller’ founder-led‘

‘Larger’ founder-led‘

Cash

Source: Lumenary

comes from other origins, find the additional tiers that have the potential to generate the most alpha. Specialists in capital raisings might investigate further to determine whether rights issues, hybrids, or debt opportunities generate the greatest outperformance, for example.

IDENTIFYING MORE ADVANTAGES Identifying more secondary tiers will enhance the ability to allocate with a greater degree of conviction. Taking you back to our example, we have established one source of deeper advantage – first and second generation founderled companies.

Again we will turn to research to inform our investigation into other secondary tier advantages, guiding our approach to allocation. Longterm research found smaller companies (under USD $3 billion ($4.3 billion) market capitalisation) have greater propensity to compound. ‘Small’ in a global context, are founder-led companies under USD $3 billion in size.

Skewing a founder-led portfolio towards these up-and-comers boosts exposure to challengers who have the motivation to topple market leaders, and have the runway to execute.

To illustrate further, a specialist in capital raisings may sniff out certain uses of funding to have foretelling properties as to whether likely future success is imminent. The impact of COVID-19 has forced many companies to raise equity at dilutive prices; the use of these funds will determine the long-term success of these companies. Find the attribute and allocate heavily towards it.

HOW TO ALLOCATE USING A TIERED APPROACH Sensible investors will acknowledge that basing allocations on research which can be high-level, will provide general guidance, but is limited in its practical considerations which still need addressing when putting actual money to work. In the search for outperformance, how do we allocate with a balanced approach to risk management and concentration?

Simply because a company is run by the daughter of a founder and under $3 billion in size does not automatically guarantee it will outperform. As long-term investors will appreciate, the purpose of portfolio allocation is just as much to protect downside as it is to seek upside. A balanced diet approach is healthiest – everything in moderation. Skew towards the source of outperformance by all means – first and second generation founder-led companies and companies under USD $3 billion, but be mindful to hold cash according to the market climate, and in our case, we balance out the volatility with a blend of larger, more stable founder-led companies.

The all-weather founder-led portfolio is one dominated by first and second generation companies, companies under USD $3 billion in size, rounded out with a small proportion of larger, steady-state companies which act to temper volatility. Of course the level of cash is important and will depend on prevailing market conditions. In this current climate, there will be more attractive opportunities to come, especially

with the possibility of a second wave of COVID-19. As I have written previously, Lumenary has adopted a mindset of opportunism in this environment.

To summarise, the allocation strategy should go past the first level of alpha, but seek to identify secondary tiers, tilting even further within that set, which should be the predominant weighting of the portfolio (see Table 1). An appropriate level of cash and mixing in some companies less susceptible to large price fluctuations will balance the portfolio’s volatility.

CONCLUSION How you select from the universe of investment opportunities around the world and how you weight these investments has significant bearing on your returns over the long run.

The search for outperformance requires a bold conviction to do things differently to others, a high level of specialisation in overlooked areas of opportunity, and improvement on traditional approaches. Outperformance can be found in a wide variety of areas so remain vigilant for company-specific traits where you can cast your net.

Once you find the source of your advantage, keep the stock selection confined within that zone, examine closely and leverage tier two benefits by apportioning heavily into those areas. This is the process of progressively tipping the scales in your favour by concentrating your exposure in high potential areas.

Happy compounding.

Lawrence Lam is managing director and founder of Lumenary Investment Management.

7/07/2020 12:01:47 PM

20 | Money Management July 16, 2020

Private equity

WHY PRIVATE EQUITY, WHY NOW?

Private equity has grown substantially in scale and accessibility in recent years, writes Claire Smith, so why may now be a good time to be looking at opportunities in private equity?

PRIVATE EQUITY FALLS into the private assets basket – which are investments that are typically not publicly listed or traded. Because of this, they can have lower volatility than their public counterparts and can offer diversification benefits, often alongside returns uncorrelated with market indices.

As an alternative source of return, private assets can help to diversify investment portfolios and can offer a revenue stream or potential capital growth to help meet long-term goals.

Private assets take in a broad range of investment types and opportunities. These asset classes offer the potential for attractive income or capital growth but may be difficult to access through traditional approaches. Two wellknown private asset options are infrastructure financing and private

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equity, both of which typically cannot be accessed in the more traditional way of investing in listed markets.

Investing in private equity, in particular, opens up investment opportunities in a broader universe of companies than those listed on public stock exchanges.

Many early stage and growthorientated companies can only be accessed through private equity, given the high cost and governance requirements associated with public listings. Because of this, private equity investments may provide attractive returns and they generally have a low correlation to major stockmarkets.

STRATEGY SELECTION Private equity investment strategies are typically structured around one of four strategies: • Venture strategies focus on providing funding to start-up or

early stage companies. These are companies at the beginning of their journey, and the funding provided helps them to commercialise their products and services; • Growth strategies focus on investment in companies that are more advanced in the commercialisation of their products and services but that still require high levels of investment to achieve their full potential; • Buy-out strategies that implement a change in the ownership of an established company, usually to facilitate a change in management, a new strategic direction, a change in capital structure or to drive improved operational performance; or • A turnaround strategy involves investing in companies that

have run into operating difficulties, and usually aims to implement significant changes to management and corporate structure in order for the operations to become profitable.

There are a number of potential benefits to private equity investing. Firstly, private ownership – as opposed to public ownership – is usually accompanied by a board or even management position in the company, permitting a greater influence on management and the direction of a company to ensure investor objectives are met.

The long-term nature of investment also helps to ensure better alignment of interests between investors and management. Management are given the ability to focus on longterm goals, without being distracted

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July 16, 2020 Money Management | 21

Private equity by daily share price movements and quarterly reporting requirements, as they could be in a publicly listed environment. Private equity also offers the potential for increased investment returns over the longterm, which is an attractive tradeoff for investing in less liquid assets.

PRIVATE EQUITY OPPORTUNITY SET It is our view that the most compelling global private equity investments are focused on small-mid cap specialist opportunities across the US and Europe, as well as Asian growth companies. This segment has historically shown a very favourable risk/return profile because of lower entry prices for companies and lower levels of leverage employed relative to larger companies.

The current opportunity set in the private equity space takes in primary investments, secondary investments and co-investments, and they have differing outlooks in the current environment.

Primary investments may benefit from more favourable entry valuations due to the current COVID19 pandemic. There is also an opportunity in late primaries where experienced fund managers that have already begun investing require further capital and pockets of value may be found where managers have made initial investments that aren’t expected to be adversely affected by the pandemic.

The short-term opportunities in the secondary market may be limited, as we believe valuations do not yet reflect the full impact of COVID-19 and this may take multiple quarters to flow through to valuations. In the meantime, there will be opportunities to participate in select secondary transactions, as well as top-up funds and structured rescue financings that have some secondary-like characteristics.

The advantage of co-investment is that under the current crisis they may benefit from less competition for deals leading to more favourable entry valuations. We see direct/ co-investments as the most immediate opportunity in new market environment.

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WHY CONSIDER PRIVATE EQUITY NOW? Private equity investment can help to strengthen portfolios by providing greater diversification and lower volatility. In addition, private equity returns can outperform other markets because of the illiquidity premium found with private markets.

In the wake of COVID-19, private equity market valuations are currently lower than have been seen in recent years, which makes it potentially an attractive time to invest.

In addition, historically private equity has performed strongly after market downturns like the one we are experiencing now. Compared to listed investments, private equity is well positioned to deal with shocks for a number of reasons. Private equity vintages that follow times of stress have historically been the best performing vintages.

As well, there are a variety of ways to access private equity (including primary, secondaries and co-investment) which gives investment managers a higher degree of flexibility when selecting investments. Because private equity investors are active managers, this means private equity managers can intervene in the operations of their portfolio companies in times of crises, rather than being passive stakeholders.

Additionally, managers of private equity investments during economic turbulence are often more able to negotiate favourable terms. Finally, private equity allows for flexibility with regards to type and timing of company exits – which is not a feature of the public market.

A COVID-19 LENS In the wake of COVID-19 private equity investors are in uncharted territory, but history can offer some lessons that may prove a useful guide in deciding the most prudent next steps.

In addition to the humanitarian crisis, efforts to contain and mitigate the COVID-19 outbreak have resulted in a historic stock market correction and seem to be leading the world into a global recession. Implications for financial markets are wide ranging, and

variables numerous, so that many investors do not even know which questions to ask, let alone what the answers they need might be.

The first and second order effects and the timeline of the crisis remain highly uncertain. However, the experience of the two previous major financial crises – 2000-03 and 2008/09 – offers some insight on the risk and liquidity management issues investors may encounter in the coming months and can help them to navigate through this crisis.

When searching for historic events that resemble the current crisis, 2008/09 seems to be a closer comparison than 2000-03. Both now and in 2008/09, entire industries required a bailout.

Banks, auto manufacturing and insurance firms required government intervention in 2008/09. Travel, mobility and hospitality firms (amongst others) are vulnerable today and will rely on government interventions. In addition, fair market value accounting and mark-to-market rules (such as SFAS 157 in the US) were already largely in place for private equity during the 2008/09 crisis, but not yet in 2000-03.

Additionally, both in 2008 and in 2019, large buyout valuations and leverage levels were at high levels and fundraising was robust.

Private equity valuations will likely correct less than stockmarkets in the coming months for most private equity strategies. In 2008/09, private equity valuations overall experienced a value correction between two-thirds and half the level experienced by listed equities.

The tendency for buyout valuations to not fully track public valuations is because of valuation practices that tend to smooth valuations. These practices include using an average from a collection of relevant listed companies and comparable transactions (which are less affected by short term stock market volatility). In addition, it is not uncommon for the valuation of a buyout investment to utilise normalised EBITDA figures over several historical quarters to further smooth valuations and limit the downside impact.

In contrast, venture capital investments, in particular early stage investments, will have the tendency to rely on the valuation from the most recent financing round to base valuations, particularly if the company has not experienced a material degradation of its business prospects. This also contributes to a smoothing of valuations.

Furthermore, as early stage companies often have no or little revenues and can grow very strongly, often there is no direct impact on company financials from a degradation of general economic conditions.

Late stage and growth financings are expected to experience greater valuation volatility compared to early stage companies, as these companies tend to be valued on a multiple of revenue. In this risk-off environment, the momentum propelling late stage valuation metrics is expected to quickly contract yet with some of the same smoothing elements as for buyout investments, but with a revenue focus.

DIVERSIFICATION In a climate of lower interest rates and elevated valuations, you may be looking for a new way to generate returns for your clients, while providing diversification away from traditional listed equity and fixed income markets.

Private equity offers investors with a suitable risk tolerance the potential for enhanced overall returns and diversification to help meet longer-term investment goals.

It provides access to a broader universe of companies than those listed on public exchanges, including many early stage and growthorientated companies.

In addition, it may provide comparative stability during times of market turbulence versus some other asset classes, such as equities and fixed income. This makes private equity relatively well positioned for market shocks or downturns, and worth considering in the current environment.

Claire Smith is alternatives director, private assets at Schroders.

7/07/2020 3:24:41 PM

22 | Money Management July 16, 2020

Insurance

CLAIMS PREASSESSMENT & PREPARATION Submitting an insurance claims form requires preparation, writes Col Fullagar, and while this may take time, it will save time and be appreciated by clients in the long run.

MUCH IS TOUTED, and rightly so, about the importance of the initial risk insurance advice process: - Fact-find; - Analysis; - Research; and - Recommendation.

Only after all the above has occurred is the application submitted to the insurer. Yet, as crucial as initial advice is, arguably advice at the other end of the process i.e. claims advice, is more important with a simple but compelling logic applying: “If you get the initial advice wrong but the claim advice leads to a payment being made, the client may still be happy; however, if you get the initial advice right but the claim advice leads to the claim being denied, the client will be sad.”

Ideally good advice applies in both areas; however, the above highlights the point that, to the extent a robust initial advice process is required, the equivalent is also required when a claim is being considered.

What follows are 20 actions that might be undertaken prior to submitting a claim form to the insurer; noting, of course, that some may not apply, depending on the claim type and some should not apply if they would run contrary to an adviser’s fiduciary duty. (i) Initial point of contact When setting up an insurance portfolio and at each subsequent review, the client should be encouraged to make the adviser the initial point of contact

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particularly if there is the possibility of a claim being made.

Whilst the analogy is not perfect, it indicatively holds; if someone falls foul of the law, they would be wellserved to have a solicitor attend with them at any police interview.

A vital role undertaken by the adviser is to act as a conduit of communication and interpretation between the client and the insurer.

This has nothing to do with ‘hiding’ anything from the insurer; this is all about ensuring that the information flow occurs in a clear and unambiguous way such that misunderstandings and delays are minimised.

The adviser is also perfectly placed to question the insurer about the claim’s management process including the relevance of any claim requirements and explaining both to the client to allay any concerns. (ii) Single point of contact If agreeable to the client, the adviser would obtain, and later lodge, an authority to be the single point of contact (written and verbal) in regard to the claim. This again reduces the chance of miscommunication as well as streamlining the flow of information and questioning.

If a client’s insurance is with multiple insurers, the authority could extend to the adviser being the co-ordination point for each insurer; thus avoiding the duplication of requirements, for example, if more than one insurer wants a report from the treating specialist, one report can be obtained and shared as required.

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July 16, 2020 Money Management | 23

Insurance (iii) Claim fact find Not dissimilar to the initial advice fact find, the claim equivalent sets the scene: • Personal details – including a high-level statement of the client’s current position and where they want to be; • Client constraints – are there claim related constraints as distinct from work related ones; physical and/or psychological, mental incapacity, communication/language difficulties; time and geographical constraints, etc?

• Legal considerations – does clear title exist; beneficiaries, third party complications e.g. relatives, divorce, problem children; is a solicitor involved, should one be involved?

• Insurance portfolio – products under which claim might be made; premium position; policy terms that apply including upgrades; exclusions, pre-existing or otherwise; policy duration; possible impact of Insurance Contracts Act? • Claim details – what is the insured event; sickness or injury; chronic or acute; duration; pre-existing to policy; new or recurrent claim?

• Medical details – who, when and why attended; treatment; when was doctor first consulted, immediately or was there a delay; has medical attention been ‘regular’; is medical condition deteriorating, stable or improving?

• Occupation details – employed or self-employed; full-time, parttime, casual, unemployed; if unemployed, why; education/ training/experience; duties and restrictions to same; return to work plans; etc?

• Financial position – current earnings; earnings history increasing, stable or reducing; debts and otherwise encumbrances; are there financial urgencies or imperatives; should financial institutions be advised of pending claim?

• Third parties – how will claim impact on rest of the family; will life partner need to stop work; if self-employed or partnership,

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impact on the business; will business insurances be called upon, key person, loan protection; • Confidentiality – are there any issues with media; peer, business or industry reputation?

The list is potentially long with the above not necessarily being definitive. (iv) Check applications Obtain and check application(s) for insurance to see if anything might benefit from an explanation. This is more likely if the policy duration is short. Ask client to again confirm that the duty of disclosure was met. If there are any potential problems, undertake appropriate investigations and, if necessary seek advice, legal or otherwise. (v) Review policy schedule and policy terms Obtain and review copies of the original and, if applicable/ appropriate, details of any upgrades.

If different terms apply, which are most beneficial to the client.

Consider claim eligibility and likely/reasonable claim requirements and whether there is merit in including those available with the claim form when lodged.

Also consider the timing of the claim, for example, if a policy anniversary is imminent, is it possible to take advantage of the benefit amount indexation increase? Is indexation consumer price index (CPI) or does a minimum apply? (vi) Discuss claim with treating practitioner Is it worth the client booking an appointment with the treating medical practitioner in order to: • Review the medical claim form – if necessary, adviser might assist in interpretation/ completion whilst being careful to avoid inappropriate influence; • Discuss attitude of doctor to providing entire client file including clinical notes, if requested by the insurer; is there a preference to responding to specific and relevant questions by way of a report. If preference for the latter, consider advising insurer to this

effect; what is the likely turnaround time for reports; again consider advising insurer; • Discuss doctor’s role of objective, albeit supportive reporting rather than being client/patient advocate; and finally • Does the treating practitioner have any general advice based on previous experiences? (vii) Three-year Medicare/PBS report Consider obtaining and providing a three-year Medicare Report at time of claim lodgment.

Undertake and provide an analysis of claim-relevant consultations; provide context if any potential red flags, for example, has there been ‘regular medical attention’ or pre-application consultations. (viii) Claim form completion When completing the claim form with the client, provide information that is necessary and relevant to the claim rather than simply answering the questions. If a question is only partially relevant, consider amending it prior to answering.

If spatially challenged, use attachments. Ensure claim form is neat and easy to read. (ix) Additional medical information If it is believed additional medical information would assist to speed up a favourable claim assessment, consider providing it, for example, medical reports; details of treating practitioners, current and past; upcoming medical consultations and testing’s, etc.

If there are ‘many’ past and/or present treating practitioners, direct the insurer to the best source of relevant information, for example, is there one doctor coordinating the client’s overall treatment regime? (x) Own occupation If the description of own occupation is pivotal to the claim, do not simply entrust it to the claim form questions. An expanded document might include a description of the employer company, large/medium/ small; internal reporting line, is

client senior management; what are the important duties, what are the functions making up those duties and the skills required to perform those functions.

A document along the lines of the above can then form a direct link to the medical restrictions emanating from the medical practitioner reporting.

If the claim occupation differs from the application occupation, an explanation may assist to avoid confusion, suspicion and additional questioning. (xi) Proof of earnings If proof of earnings is relevant, provide requisite proofs, for example, tax return and/or employer letter detailing earned income and also confirming earned income is as per the policy definition. If tax returns are not yet available, advise when they will be available. If the client’s financial position is complex, commission a simplifying report from the accountant. (xii) Information, relevant (v) irrelevant Under Section 8.5 of the Life Insurance Code of Practice, an insurer is prevented from requesting information that is not relevant to the claim and the policy.

By proactively forming a view of what information might be relevant, requests for code-breaching information can be challenged. (xiii) Prudent precautions Pass on to the client advice of prudent precautions including: • Do not respond to ‘random’ assessor phone calls. If the adviser is the single point of contact, all communication should be via the adviser. Client calls should be booked ahead with prior advice of what topics are to be discussed; • Be aware the claim’s assessor will likely view the client’s online presence such as Facebook, LinkedIn or YouTube. Thus, the client should check if anything is in conflict with claim advice or has the possibility to be misconstrued. Consider merit of providing an explanation.

Continued on page 24

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24 | Money Management July 16, 2020

Insurance Continued from page 23 (xiv) Duty of disclosure A sound safety precaution is to advise the client of the claim equivalent to the application duty of disclosure i.e. in making a claim, there is a requirement to act in good faith. Ramifications of acting in a way deemed by the insurer to be ‘fraudulent’ can be severe, including cancellation of claim and policy. (xv) Declarations and authorities It is crucial that the client carefully and thoughtfully reads all declarations and authorities so that, if they are signed, this action is taken on an informed basis. To assist, the adviser might have a general understanding of their content and purpose so that guidance can be provided.

If the client is in any way uncomfortable with statements agreed to or authorities to be signed; discussion should be encouraged so that deletions and/or amendments might follow, for example, an openended medical authority might be deleted and replaced with a statement to the effect that, the provision of additional medical information will be agreed to subject to that information being relevant to the claim and the policy (refer xii, above). A specific authority can then be provided to the insurer on request.

Any delay arising out of not providing an open authority up-front can be reduced to ‘hours’ by the adviser facilitating speedy communication. (xvi) Corporate entities If numerous corporate entities exist, the client’s accountant might, by way of a letter, explain the purpose of each and confirm which are active (v) inactive and relevant (v) irrelevant to the claim, such that information is not sought by the insurer about the inactive and irrelevant. (xvii) Do not assume...

Advise the client ‘do not assume’ i.e. that the insurer will act with empathy, technical expertise, timeliness, and many other

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characteristics. This is not to denigrate the insurer or all who sail in her; it is simply a prudent precaution and sometimes reality.

If assumptions are made, and shortcomings become the reality, the claim might flounder. By acting net of assumptions, precautions can be taken such that the claim remains on course.

Examples include: • Ask for confirmation of receipt of documents sent; • Ensure all relevant and reasonable questions are the subject of an equivalent response; and • Record details of favourable and unfavourable insurer conduct so that, if necessary, appropriate, corrective or reporting actions may be taken without the need to trawl back over previous correspondence and file notes.

Ensure emails communicating more than one point, have each point numbered and, if necessary, titled. In this way, identification and subsequent follow-up of unanswered questions and referral back to matters raised, becomes easier. (xviii) Require timeframes, names or titles Make a note to the effect that, any action timeframe provided by the insurer must be capable of appearing on a calendar, for example, ‘as soon as possible’ and ‘in due course’ are out; ‘by the end of the week’ and ‘within a day or two’ pass the muster.

Any referral should be to a person with a name or a title, for example, ‘my senior’ and ‘internal stakeholders’ are out, ‘to Mary, my manager’ or ‘the claim review committee’ similarly pass the muster.

Any insinuation that the above borders on the pernickety, fails to recognize the impact of dehumanisation on the client when they are left without any clear idea of when decisions will be made or actions taken and, worse still, the sense that this critical time of their life is being controlled by entities rather than persons.

(xix) Customise Consider what possible additional actions might assist to facilitate a speedy and favourable claim assessment bearing in mind the client’s unique circumstances as revealed within the claim fact find.

And, most importantly, if in doubt about anything, seek advice and assistance. (xx) Client empowerment People involved in making a claim are either sick, injured or grieving and thus they may also be psychologically vulnerable. Not only can the above actions assist in speeding up the claim’s management process and better enabling a favourable claim assessment, but they could help the client to feel they have some control and understanding of the process.

At this time, client empowerment is a great gift for the adviser to give.

Whilst the suggestions made might be a far cry from ‘complete and submit the claim from as quickly as possible to get things moving’, the claim pre-assessment and preparation process does not need to take more than a few days. It is also likely that those days will be easily clawed back in assessment time savings and logically, an enhanced chance of a successful claim outcome and client appreciation and endorsement of adviser actions.

Yet another in the long list of adviser value-adds!

Col Fullagar is principal of Integrity Resolutions Pty.

7/07/2020 2:11:35 PM

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7/07/2020 2:27:52 PM

26 | Money Management July 16, 2020

Toolbox

ACCESSING HOME EQUITY TO GENERATE RETIREMENT INCOME As retirees consider other ways to generate income in a bear market, Yvonne Chu writes that accessing home equity could be a possible option.

RETIREE CLIENTS WITH minimal retirement savings and an unencumbered family home may see unlocking equity from their principle residence as the only way to generate additional income for a comfortable retirement. Common ways to access equity in the family home

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include selling the property or using an equity release product i.e. a reverse mortgage. However, a commercial reverse mortgage can have high costs including the interest rate, upfront/ongoing and exit fees. As an alternative to a commercial reverse mortgage, clients may wish to consider the

Pension Loan Scheme (PLS), the Government’s version of a reverse mortgage.

In this article we provide insight on how these two strategies compare – downsizing the home and using surplus proceeds to generate a retirement income stream via the superannuation

8/07/2020 10:40:49 AM

July 16, 2020 Money Management | 27

Toolbox

Table 1: Pension Loan Scheme versus downsizer and account-based pension

system versus retaining the home and generate income via the PLS.

STRATEGY ONE: DOWNSIZE TO A CHEAPER HOME AND MAKE A DOWNSIZER CONTRIBUTION A client aged 65 and over who meets the eligibility requirements can choose to make a downsizer contribution into their superannuation of up to $300,000 (for each member of a couple) from the proceeds of selling their home. To qualify a client or their spouse must have owned the property for more than 10 years and be able to claim at least a partial capital gains tax (CGT) main residence exemption on the disposal unless acquired pre-CGT – please refer to the ATO website for a detailed explanation of the eligibility rules.

Once downsizer contributions have been made clients can use the amount to commence an accountbased pension (ABP) provided it does not cause them to exceed the $1.6 million transfer balance cap.

An ABP is flexible and tax efficient as lump sums can generally be withdrawn from the product at any time and both the pension payments and earnings on assets supporting the income stream are tax free. One of the downsides of this product is that ABPs are means tested by Centrelink and likely to reduce a client’s Age Pension entitlement.

STRATEGY TWO: PENSION LOAN SCHEME Under the PLS, eligible pensioners can choose to top-up their fortnightly Centrelink pension by up to 1.5 times the maximum rate of Age Pension (including any relevant supplements) and can improve their standard of living. For example, a couple receiving the maximum rate of Age Pension (currently $37,013.60 p.a. as at 1 July, 2020) can increase their entitlement to $55,520.40 p.a. which is close to 90% of what a couple aged around 65 will require to live a comfortable

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PLS

Downsizer and ABPs

Value of family home

$2,769,432

$1,384,716

Outstanding debt owed under PLS

$799,359

n/a

Value of ABPs

n/a

$472,629

Net value to the estate

$1,970,073

$1,857,345

Results

PLS scenario delivers extra $112,728 net value to the estate after 20 years in comparison to the downsizer and ABP scenario.

Table 2: Pension Loan Scheme, downsizer and account-based pension scenarios

Growth rate on real property p.a.

Return on assets in ABP p.a.

Difference in net value to the estate after 10 years

Difference in net value to the estate after 20 years

2.5%

5%

$59,498 (better under downsize/ABP)

$229,366 (better under downsize/ABP)

3.5%

5%

$8,922 (better under PLS)

$35,055 (better under downsize/ABP)

3.5%

6%

$45,120 (better under downsize/ABP)

$118,487 (better under downsize/ABP)

4.5%

6%

$28,799 (better under PLS)

$112,728 (better under PLS)

Source: Aus Unity

retirement lifestyle according to the Association of Superannuation Funds of Australia (ASFA) Retirement Standard.

A big advantage of the PLS is that it is a relatively simple Government administered scheme providing additional fortnightly income. It can be stopped and adjusted at any time (subject to repayment of the outstanding loan) and the interest rate (currently 4.5% pa) is generally lower than interest rates offered on commercial reverse mortgage products.

The PLS can help clients avoid the need to sell property when market conditions are unfavorable and it can provide additional income for clients who receive a reduced rate of Age Pension; for example, clients living on a farm with acreage in excess of two hectares whereby the assessment of excess land reduces or eliminates their Age Pension entitlement.

The additional Age Pension amount accrues a debt due to the Commonwealth and is secured against a nominated property. The debt is subject to compound interest rate (4.5% p.a.

commencing from 1 January, 2020) applied fortnightly.

A maximum loan amount applies and when reached, PLS payments will cease and interest will continue to accrue until the loan is repaid.

The maximum loan amount is not fixed and is recalculated every 12 months in January or July, following a person’s birthday to adjust for the higher age component available.

The maximum loan amount is determined based on a set formula depending on various factors including the amount of equity held in the property and the age of the applicant. Refer to the Guide to Social Security Law 3.4.5.30 for formula and age component amounts.

All or part of the debt can be repaid at any time however this usually occurs after the property is sold.

CASE STUDY Adam and Amanda are both 70 years of age, their family home is worth $1.2 million and the only other assets they have are a term deposit of $50,000 and home contents of $10,000. They are

Continued on page 28

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28 | Money Management July 16, 2020

Toolbox

CPD QUIZ Continued from page 27 struggling financially as their only source of income is the full Age Pension (currently $37,013.60 p.a. as at 1 July 2020). They would like to access the equity in their home and seek to compare accessing the PLS at the maximum rate (1.5 times the maximum Age Pension) versus an equivalent income stream generated by making a downsizer contribution and commencing an ABP. Consider the following two strategies: 1) Utilising the PLS to increase their entitlement to 1.5 times the maximum Age Pension. They receive $55,052.40 of Age Pension in year one, meaning they effectively borrow $18,038.80 p.a. indexed in-line with Age Pension.

2) Downsizing to a smaller apartment and releasing $600,000 of equity.

They each make a $300,000 downsizer contribution into superannuation and commence an ABP. Under the Assets test, their Age Pension reduces by $20,163 in year one. They increase their ABP pension payment, ensuring they achieve $55,052.40 per annum of income.

To ensure a like-for-like comparison, we have kept the cashflow under both scenarios the same i.e. any reduction in the age pension is compensated by adjusting drawdowns from each person’s ABP. Table 1 shows a comparison of the two scenarios after 20 years.

A significant contributor to this outcome is the effect of the ABP reducing the Age Pension under the assets test if they were to utilise the downsizer and ABP strategy. In the first year alone, their Age Pension is reduced by $20,163 in comparison to the PLS scenario. Cumulatively, implementing the downsizer and ABP strategy results in a reduced Age Pension of $145,650 over 20 years.

Table 2 shows a summary of some simulations considered. Through these simulations, it’s worth noting that clients don’t need to achieve exuberant returns from their ABPs to get a better outcome than the PLS, unless the annual growth rate of real property is high.

WORDS OF CAUTION FOR PLS Like a commercial reverse mortgage, it is imperative for anyone considering the PLS to understand the effect of compound interest on the outstanding debt. The total accrued interest can be very substantial as the outstanding loan amount is generally repaid many years after commencement, usually on death of the client. For example, a single pensioner on the full Age Pension who borrows an additional 50% of the Age Pension (approx. $12,567 p.a. indexed to 4% p.a.) under the PLS will accrue a debt of approximately $178,916 after 10 years, $326,656 after 15 years and $530,230 after 20 years. This could have a significant impact on the amount of assets that is ultimately left to the estate of the client.

When accessing the PLS, clients should also note any impact for aged care purposes. While the fortnightly top-up amounts under the PLS are not assessable for aged care purposes, the accrued debt against real property used as security reduces available assets that can be used to pay accommodation or ongoing aged care costs. Where a resident is required to pay an agreed advertised price upon entering a residential aged care facility, the amount which has not been paid as a lump sum is used to calculate an ongoing accommodation cost payable by the resident based on the prevailing interest rate.

Yvonne Chu is head of technical services and professional development at Australian Unity.

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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.

1. Peter (75 years old) has recently sold his primary home that was owned since 1980. Which of the following exemptions must also apply on disposal for him to make a downsizer contribution? a) Main residence b) Small business c) Land tax d) Primary home 2. Once downsizer contributions have been made, a client can use their superannuation to commence an account-based pension (ABP) if it does not cause them to exceed: a) The concessional contributions cap Their total superannuation balance on 30 June b) c) The transfer balance cap d) The non-concessional contributions cap 3. Which of the following statements is correct regarding the social security assessment of account-based pensions? a) The pension payments and earnings on assets supporting the income stream are tax-free b) It is means tested for Centrelink c) It is exempt from means testing under the Assets test however is assessed under the Income test d) Lump sums can be withdrawn any time 4. The compound interest rate applicable to the Pension Loan Scheme effective from 1 January, 2020, is? a) 3.25% pa b) 4.50% pa c) 5.25% pa d) 5.75% pa 5. Which of the following statements is correct regarding the Pension Loan Scheme? a) You can apply for a Pension Loan Scheme at any age if they are eligible to receive a Centrelink income support payment b) The maximum amount an individual can borrow under the Pension Loan Scheme is set at 50% of the value of the property used as collateral c) Under the Pension Loan Scheme, the maximum amount an individual can borrow and draw as an income stream secured against a real property is up to 100% of the maximum Age Pension d) Under the Pension Loan Scheme, the maximum amount an individual can borrow and draw as an income stream secured against a real property is up to 150% of the maximum Age Pension

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/features/ tools-guides/ accessing-home-equity-generate-retirement-income

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

8/07/2020 1:20:01 PM

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30 | Money Management July 16, 2020

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Appointments

Move of the WEEK Esther Kerr-Smith Chief executive – wealth and capital markets Australian Unity

Australian Unity has appointed Esther Kerr-Smith as chief executive of its wealth and capital markets business, and Darren Mann as group executive – finance and strategy and chief financial officer (CFO).

Kerr-Smith’s appointment followed David Bryant’s resignation earlier this year and both appointments commenced on 13 July.

Kerr-Smith joined Australian Unity

BNY Mellon Investment Management has appointed Hanneke Smits as chief executive, following Mitchell Harris’ retirement, effective from 1 October, 2020.

BNY Mellon Investment Management included the wealth and investment management business, and Catherine Keating would continue her role as chief executive of BNY Mellon Wealth Management.

Smits had been chief executive of Newton Investment Management, a subsidiary of BNY Corporation since August 2016 and her career in financial services spanned three decades.

Smits and Keating would lead their respective part of the business with both reporting to Todd Gibbons, chief executive of BNY Mellon, and Smits would join the executive committee.

Industry superannuation fund, Rest has appointed Andrew Lill as its first chief investment officer

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in 2017 as group executive – finance and strategy where she led the group’s finance function and strategic objectives.

She also led the firm’s engagement with market stakeholders to advance its capital markets, community value and social infrastructure agendas.

Her previous experience covered financial services, infrastructure and human services design and delivery.

and will work with the fund’s investment managers and board investment committee.

Lill joined from Morningstar Investment Management where he was chief investment officer of their Americas mutual fund and managed operations since 2018 and was based in Chicago. He will return to Australia and start the role on 17 August.

Last year, Rest’s wholly owned investment arm, Super Investment Management, was integrated into the fund’s internal investments team to focus on Rest’s investment expertise in a single group and the CIO would manage this combined team.

The National Australia Bank (NAB) has appointed Andrew Irvine as group executive business and private banking, as part of the NAB executive leadership team.

Irvine had almost 25 years’ experience in financial services and joined NAB from the Bank of Montreal where he led the

She was a senior executive with the National Disability Insurance Agency, and held senior roles at Boston Consulting Group and within Macquarie Group’s infrastructure division.

Mann joined in 2020 and held numerous senior roles within the finance and strategy function, and in 2015 as group treasurer he oversaw the refinancing of the group listed debt.

Canadian business banking division.

Ross McEwan, NAB chief executive, said Irvine was an experienced banker and leader who would play a crucial role focussed on NAB’s strategic plans.

He would be based in Melbourne, starting from 1 September, subject to regulatory approvals.

Weston had over 20 years of experience in the Australian financial market and joined HESTA after 15 years at the Reserve Bank of Australia, as well as chief investment officer positions with AMP Life and Genworth Australia. She was also a member of Australian Super’s investment committee for five years.

HESTA has appointed Stephanie Weston in its newly-created role of head of portfolio design, part of the fund’s strategy to internalise asset management.

The fund said Weston would focus on the ‘top down’ aspects of HESTA’s portfolios, including construction and risk analysis, economic and market research, and strategic tilting.

She would also work with the investment execution team to manage and minimise execution risks while ensuring portfolios were responsive to market conditions and opportunities.

Swiss Re Life and Health Australia has appointed Jim Minto, current board member and chair of the audit committee, to replace the retiring Jillian Broadbent as chair of the board.

Melissa Babbage would also re-join the board of directors, join the risk and remuneration committees and become chair of the audit committee.

Prior to being appointed as a director of Swiss Re, Minto spent more than 26 years in managing director roles with the Tower Group (now TAL) and retired as chief executive of TAL in 2015.

8/07/2020 2:30:38 PM

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7/07/2020 2:24:28 PM

OUTSIDER OUT

ManagementJuly April16, 2, 2020 2015 32 | Money Management

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

Mix a Bad Egg with Rice and what do you get?

OUTSIDER has made it a rule never to attend either school or company reunions.

Why? Because he does not wish to rub shoulders with those who peaked in high school or those who could not find an exit from a job they claimed to dislike.

But he notes that tyro NSW Liberal Senator, Andrew Bragg, has no such hangups and has been slotted to appear at his old workplace, the Financial Services Council, to discuss/debate superannuation policy with Rice Warner founder, Michael Rice.

Now Outsider happens to have known both Bragg and Rice for quite a while and he is more than a little aware of their different debating styles, so he is betting that Bragg will promote the hell out of his book highly critical of the superannuation regime, Bad Egg, while Rice will draw on his actuarial background to counter some of the of the wilder Bragg assertions.

In the meantime, the reality for both will be that thousands of superannuation fund members will be seeking to make use of the Government’s hardship early access superannuation scheme, with the Australian Prudential Regulation Authority (APRA) predicting a surge prompted by the

opening of the second tranche on 1 July.

Outsider notes that when Bragg takes the lift up to the FSC headquarters at Sydney’s 44 Market Street he will at least feel a little at home with his erstwhile policy colleague Blake Briggs having returned from the banking world to become deputy chief executive.

Time for a temporary cross-border truce OUTSIDER has nothing but sympathy for his friends and colleagues in Victoria as they seek to deal with the surge in COVID-19 infections and so he is not going to make cheap jokes about the closure of the NSW/Victoria border.

Indeed, the closure of the border gave Outsider pause to consider just how many financial services companies are based in Melbourne and he hopes not too many of the denizens of IOOF, Netwealth, Synchron, Shadforth, Mercer, all the financial planning practices and, of course, Industry Fund Services and all the industry superannuation funds are suffering too much.

Lockdown is no easy thing for individuals let alone businesses and Outsider was impressed by how well financial advisers and others handled the first round of lockdowns which began in early March and continued almost up until the end of May. However, he knows that these latest Victorian lockdowns are tougher because they came just when businesses were starting to reopen their doors and as plans were being made to get things squarely back on track.

That said, Outsider cannot wait for the traditional interstate rivalry to resume safe in the knowledge that the “Emerald City” is vastly more attractive than the “Paris of the South” and the coffee ain’t bad either.

You can run, but can you really hide?

OUTSIDER has often contemplated owning a little pied a terre – somewhere to which he can retreat when the vicissitudes of life at Money Management Central become a little too much. Indeed, for some years he has had his aspirational eye on something around Nelson Bay. But, as Outsider has discovered, the ownership of such a hideaway does not come without cost and Mrs O has ever been one to keep a grip on the purse strings lest your correspondent does something thoroughly spontaneous, irrational and possibly enjoyable.

And, in any case, in these COVID-19 times it seems that Governments are inclined to apply rules to when a gentleperson can retreat to their summer palace and therefore risk placing pressure on provincial medical infrastructure which might not be able to cope.

OUT OF CONTEXT www.moneymanagement.com.au

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Why, even a NSW Government minister momentarily lost his job for being spotted in his beachside bungalow and so Outsider simply remains hunched over his laptop, dreaming of better days ahead.

He mentions this only because of reports that, in the face of an impending six-week lockdown those Melbournians who evidently can afford a beachside pied a terre, were seen heading south in droves to, it is assumed, endure their 42 days of inconvenience in a more relaxed setting.

On this basis, Outsider shall be paying close attention during any Zoom or telephone conferences with his contacts in Victoria to determine whether he can hear the crash of waves on the beach or, as seems more likely, the hubbub of children doing home schooling.

"Given the scale of the risks we currently face, it would be economic madness to increase the rate."

– David Murray, AMP chair, on increasing SG rate

"Please do not go to Victoria."

– Queensland Premier Annastacia Palaszczuk

Find us here:

9/07/2020 10:34:05 AM