Money Management | Vol. 35 No 17 | September 23, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 17 | September 23, 2021

12

INFOCUS

Common ownership

EMERGING MARKETS

22

Companies of tomorrow

TOP FINANCIAL PLANNING GROUPS

Life insurance

Common ownership inquiry a ‘conspiracy theory’: ASFA says

BY CHRIS DASTOOR

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Adviser numbers reach new lows THE Money Management 2021 TOP Financial Planning Groups survey has confirmed, what was long expected, that the number of advisers operating for the largest financial planning groups has significantly dropped, reaching the new lows of around 11,500.

By comparison, 10 years ago this number amounted to above 16,000 and even reached 16,853 in 2012. In the following years, the numbers of advisers working for the key groups remained above 15,000 but plunged to below that level in 2017. In 2019, this number slipped further to around 14,500 and stood at around 13,200 a year ago.

Despite a temporary fall to second position at the start of the year, AMP Financial Planning managed to regain its top spot as the single largest group in terms of adviser numbers.

At the same time, the market continued to see a number of mergers and acquisitions as a result of the ongoing consolidation across the mid-tier groups.

The past 12 months saw Easton Investment having completed an acquisition of Paragem while Centrepoint Alliance confirmed the acquisition of ClearView’s financial advice arm.

Following this, another Australian Securities Exchange-listed entity WT Financial Group, the parent group of financial advisory dealer group Wealth Today, announced it had bought Sentry Group.

On top of that, IOOF announced in May that it had received the green light to acquire MLC Wealth.

One thing is for sure, the coming year will prove how many advisers will be eventually turned away by regulatory burden and the ever-growing requirements and costs.

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Full feature on page 14

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TOOLBOX

IN a heated debate during the Parliamentary inquiry of common ownership of markets in Australia, the Association of Superannuation Funds of Australia (ASFA) has accused the committee of dealing in “conspiracy theories”.

Dr Martin Fahy, ASFA chief executive, said the state of evidence was far less emphatic than the commentary would suggest.

“The studies that have fuelled policy maker concerns are fraught with empirical challenges, specifically with determining any relationship between market concentration and ownership and economic outcomes,” Fahy said.

“The question of market dynamics and concentration of [funds under management] FUM across a smaller number of super funds is accepted wisdom.

“What is not acknowledged and

not proven and we need to be clear about this, neither ASIC [the Australian Securities and Investments Commission], APRA [Australian Prudential Regulation Authority] or ACCC [Australian Competition and Consumer Commission] suggest there is any evidence of any harm arising of concentration of capital of common ownership.”

Wilson said the regulators had “spectacularly failed” on several fronts to look at forwardlooking issues.

“Including identifying corruption in parts of the super sector… Just because they can’t find an issue doesn’t mean it doesn’t exist or doesn’t address the fundamental challenges,” Wilson said.

“Do you think there is justification to look into these issues or is it all just fantasy?”

Continued on page 3

Advisers need to price their intangible value

BY JASSMYN GOH

ADVISER fee pricing is multi-factored and advice practices should put a price on their intangible value, according to a financial advice consulting firm.

Peloton Partners chief executive, Rob Jones said adviser fees came in three layers – intangible value, services and advice, and structural complexity and additional value-add.

Jones said intangible value was the investment the client was making for their future and it was about identifying goals, and elevating those things to give them their version of financial success but that it needed to be distilled into a price.

“I’d charge the client the whole fee on this if it was that important Continued on page 3

16/09/2021 3:45:22 PM

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September 23, 2021 Money Management | 3

News

Ex-EISS CEO calls resignation result of ‘smear campaign’

BY JASSMYN GOH

EISS former chief executive, Alex Hutchison, says it was the “right time” for him to resign from the energy industry superannuation fund but that it was a result of a “calculated smear campaign”.

Hutchison resigned from the role after nine years which some media reports said followed an investigation into excessive sponsorship and bullying complaints.

“It was the right time for me to resign from EISS Super but regrettably my decision was brought forward by a calculated smear campaign, which was targeting me and my family. The pressure on my family had become unbearable,” he said.

“My family, like many Australian families, has always been involved with communitylevel organisations and it has been implied that their community involvement and service in some way led to a conflict of interest with

sponsorships undertaken by EISS Super.

“This is untrue. All sponsorships and marketing activities were undertaken in a proper manner during my time as CEO. “I am proud of my record at EISS Super and

Common ownership inquiry a ‘conspiracy theory’

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Advisers need to price their intangible value Continued from page 1

Continued from page 1 Fahy said there were public policy issues of greater importance that needed to be addressed.

“I prefer to trade in facts and evidence, I think trading in conspiracy theories and more importantly legislating for conspiracy theories is not something a Parliament should engage in,” Fahy said.

“Nobody suggests there is any causation between common ownership and consumer harm, [which] means that this is not an issue that should concern us in terms of regulation and legislation” “Respected academics have said the evidence does not exist… what we have is correlation and that cannot be attached to any causation.”

Fahy said the history of conspiracy theories has not ended well which led to Coalition MP, Jason Falinski to ask what examples he was referring to.

“The views that have been held forth who control all the financial systems have been toxic and distasteful,” he said.

Falinski said: “Are you referring to Jewish conspiracies and things of that nature?” to which Fahy nodded ‘yes’.

Wilson took offence to this notion.

“So far we’ve had a press

I remain a committed member of the fund.”

Hutchison said as part of the transformation of the fund after it became public offer, he recommended and the board approved a marketing strategy designed to raise brand awareness, from a low base, to retain EISS members and to attract new members.

“The strategy was multi-faceted. In addition to higher profile initiatives (such as our involvement with the NRL), we also, like many funds, supported local sports and community organisations in the areas where our current and prospective members live and work,” he said.

“I remain proud of the fact that in my time at EISS Super member fees did not rise, our funds under management doubled in size and we were on track to merge with another industry fund, which would further reduce costs to members while retaining the high-touch service model. When I left a memorandum of understanding had been signed.”

statement welcoming the inquiry in the form of a tantrum and statements to the committee which frankly give nothing of any value apart from to attack the committee,” Wilson said.

Wilson said Fahy had not answered the question or whether increased common ownership and capital concentration could have downflow consequences for competition.

“If we saw entities using that leverage to do things like collude or engage in cartel like behaviour and I think its contestable given we spoke to the ACCC about around unlisted assets and multiple super funds collaborating together and with state governments in diminishing competition,” Wilson said.

“You don’t see there’s potential for these problems… it’s merely ‘conspiracy theories’.”

Fahy said this was the case in the absence of factual evidence that met the burden of sound academic research and evidence from regulators.

“The idea that we would regulate for the possibility of what you’re saying, which is a conspiracy to act in joint enterprise to damage consumers is to trade in conspiracy theories,” Fahy said.

for them and whatever the other services as this is important,” Jones said.

“The second batch, of course, is those physical things – the moving parts relatively easy for us to be able to price in a pricing framework. But every single firm is different because their costs and their client profiles are different.”

The third area to price, Jones said, was the structural complexity and additional value-add areas which were things that clients did not need all the time such as estate planning.

“To be able to view a client through a matrix like this allows you to remain in step with clients and allows pricing to remain in step with the challenges of your business as well,” he said.

When asked whether it was ethical for a more experienced planner to charge a client more for their service compared to a what a junior planner would charge for the same service, Jones said that would only be the case if they had a special level of expertise.

“The short answer is there is no difference. It’s the firm providing the advice, and whatever the value is, it’s going to the client. That value can be quantified and so be it and we don’t just separate it out,” he said.

“However, there is an example of one individual’s expertise around executive share option schemes and it’s deep. All we’ve done in that particular case is that we’ve allowed a higher fee relating to that specialisation. They are the only one in the organisation that’s particularly strong in that area because of experience, but that’s about it.

“Otherwise, ethics is not part of it. It’s value, services, expense, training of advisers, profit margin, it’s turning the lights on, it’s everything else that is impacted, and a client should be no more or no less than what their circumstances define.”

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4 | Money Management September 23, 2021

Editorial

jassmyn.goh@moneymanagement.com.au

IS THE GOVERNMENT’S INQUIRY INTO CAPITAL CONCENTRATION A RESULT OF THEIR OWN DOING?

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000

While the Government has called the inquiry “urgent”, what is perhaps more urgent is handling the advice industry given droves of advisers are leaving the industry due to the mounds of regulation.

THE GOVERNMENT’s latest target for the financial services industry is its inquiry into common ownership and capital concentration, however a question has to be asked about whether their concerns are a result of the regulatory change it has imposed on the industry.

When announcing the inquiry, chair of the committee, Liberal backbencher Tim Wilson said the inquiry was “urgent” as there was “already a high concentration of ownership of ASX-listed companies by an increasingly small number of mega funds”.

Since then, the inquiry has been labelled as “pointless” and an “act of political theatre” by the Association of Superannuation Funds of Australia.

It is important to note that some of the Government’s most recent regulatory changes could actually be a push for greater common ownership and capital concentration.

This includes the Your Future, Your Super performance test that could lead funds to index hugging just to satisfy the test.

The Government has also pushed smaller superannuation funds to merge with larger funds

Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Features Editor: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au News Editor: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au ADVERTISING Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au

and thus creating ‘mega funds’.

Also, as the Stockbrokers and Financial Adviser Association (SAFAA) has pointed out, the fact that financial advisers are leaving in droves due to the amount of red tape, regulatory changes, and compliance the Government has piled onto the industry could lead to further capital concentration.

The association rightly said that the shrinking pool of advisers would impact the availability and affordability of advice on equity market investment.

Retail investors would then be left with the choice of DIY trading with no advice, or advice from a planner who had minimal direct expertise in listed investments and markets.

While the Government has considered this inquiry as

“urgent”, what is perhaps more “urgent” is the number of advisers that will be left in the industry by the end of the year and the beginning months of 2022 coupled with the fact that the unmet advice gap for those who really need advice grows bigger by the day.

As Money Management’s 2021 TOP Financial Planning Groups survey, which you can find in this edition, has already found is that the number of advisers from the largest planning groups has fallen to 11,500.

The Government’s Quality of Advice Review can’t come soon enough and one would hope they view that as “urgent” too.

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Giving advice on managed accounts

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September 23, 2021 Money Management | 5

News

DDO changes to remove nil complaint requirement

BY JASSMYN GOH

FINANCIAL advisers will not have to report nil complaints to product issuers under the upcoming design and distribution obligation (DDO) regime as the Government looks to include the change as part of a raft of amendments.

Under the original DDO requirements, advisers and licensees were required to report complaints to product issuers in writing during the reporting period. This included submitting a ‘nil complaints’ report even if no complaints were received.

Treasury issued updated amendments to the DDO regime which is set to begin on 5 October, 2021, after receiving feedback from stakeholders.

On nil complaints, it said proposed changes would seek to: “[Remove] the requirement for distributors to report whether they have received a complaint or acquired information requested by the issuer, including where there

are nil complaints or nil information.

“Distributors will still be required to report to issuers, complaints and other requested information that they receive, assisting issuers to assess whether their product governance arrangements are appropriate and their products are meeting the needs of consumers.”

Commenting, Association of Financial Advisers (AFA) general manager for policy and professionalism, Phil Anderson, said the association was pleased to see that nil reports were no longer required.

“In the absence of this relief, financial advice licensees would have been faced with substantial reporting requirements on a regular basis. Given the vast majority of these reports would have had no content, they would have been of no value to the product issuer,” he said.

“Whilst we remain very concerned about the complexity and additional administrative workload that will come with the

MEETS

commencement of DDO on 5 October, 2021, this relief will make a big difference.

“The apparent need to capture information on clients who are outside the target market determination and the reporting of ‘significant dealings’ for clients who are outside the target market determination remain areas of particularly concern.”

Treasury noted the Australian Securities Investments Commission (ASIC) would consider making short-term interim changes consistent with the Government’s policy intentions by using its modification and exemption powers of the Corporations Act to provide certainty of the amendments.

“This will allow the Government time to make these changes permanent and will avoid industry needing to implement product governance arrangements, ahead of commencement, for products that are ultimately not intended to be caught by these reforms,” it said.

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15/09/2021 3:23:11 PM

6 | Money Management September 23, 2021

News

Business acquirers on lookout for financial advice practices to buy

Sharp increase in ESG integration expected

BY LAURA DEW

BY LIAM CORMICAN

THERE has “never been so much cash floating around” but it is hard to find good opportunities for acquisition, especially in the financial sector, according to HLB Mann Judd.

The amount on company balance sheets had risen as companies hoarded cash during the pandemic but firms were now looking to put it to use, particularly as shareholders were becoming more vocal.

According to the firm’s annual M&A report, there were 1,207 deals completed in FY21 compared to 1,191 in FY20 but the transaction value decreased from $113.2 million to $88.6 million.

Speaking to Money Management, Simon James, partner at HLB Mann Judd, said: “I have never seen so much cash floating around, more than in the dotcom boom. There is no shortage of cash from corporates and private entities and they need to spend it”.

However, it was harder in the financial services space, particularly as the pandemic uncertainty made it difficult to

ONE-IN-FIVE Australian investors believe environmental, social, and governance (ESG) will become a necessity to almost everything they do in two years’ time, according to a BNP Paribas survey.

BNP Paribas conducted a global survey of 356 asset owners and managers with an estimated $15.4 trillion in assets under management about their attitudes to ESG compared to two years ago and found an increased sophistication in ESG implementation.

Globally, four-in-10 survey participants said ESG would become integral to their investment process in the next two years, compared to only 8% in 2019.

Head of investment solutions at BNP Paribas Securities Services Asia Pacific, Nadim Jouhid, said investors were changing focus from relying on negative screening to wider ESG integration into their investment process and risk management decisions.

But the survey also showed 68% of Australian investors were concerned about conflicting ESG ratings or indices, in line with the global average.

The survey showed 38% of APAC participants were exploring net zero investment options and 21% had a company-wide commitment, which put APAC on the forefront of carbon neutrality ambitions compared to the global average.

Australia was slightly behind APAC in signing up to net zero ambitions by 2050, but 40% of those who had signed up wanted to achieve net zero 20 years earlier than expected.

China and Singapore cited reputation as the strongest driver of ESG integration, making up 91% and 76% of their respective lists.

However, in Australia, external stakeholder requirements led with 68% of investors while reputation ranked fourth.

When asset classes were broken down, investors in Australia showed a stronger propensity to use ESG within real estate with retail making up more than half of ESG assets compared to the global average of 35%.

forecast future earnings based on historic ones which were skewed by Government stimulus. The financial sector saw fewer transaction deals in FY21 than in FY20.

“It has been harder to see what is going on in financial services, people are exiting the industry due to the increase in regulation and scrutiny which is making it harder on planners so firms are looking to fold into big firms,” James said.

“But we are finding there are fewer good opportunities [to acquire a financial firm] out there.”

As to whether it was a good time to sell a financial advice business at the moment, James

said people had been nervous but the pandemic had less of a negative impact than people expected.

“It is always a good time if you have a buyer who can see the value in your business. There is always a deal to be done. This is a good time to consider your succession planning,” James said.

“I would be suggesting that now is not a bad time as there are definitely people who are looking to acquire a business. So long as they maintain confidentiality and find the right people to guide them through the process then now is not a bad time to get out of the industry.”

Managed account FUM could double in three years

BY CHRIS DASTOOR

MANAGED account funds under management (FUM) has surpassed $100 billion for the first time and could hit the $200 billion mark in the next three years, according to the Institute of Managed Account Professionals (IMAP).

As of 30 June, 2021, FUM in managed accounts stood at $111 billion, an increase of $15.8 billion in the last six months.

In a briefing on its latest IMAP Managed Account census done in conjunction with Milliman, IMAP chair, Toby Potter, said the last three years had shown an accumulative average growth rate of over 20%.

“If that growth rate keeps up, inside three years managed accounts will be a $200 billion part of the advice market,” Potter said.

“Trend extrapolations are always a threat but I see no particular reason why this 20% growth rate shouldn’t be maintained over the next two to three years.

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“Managed accounts are now firmly embedded part of the way in which advice is implemented.”

The census included 48 companies, which covered separately managed accounts (SMAs) and managed discretionary accounts (MDAs).

“Both parts of the managed account world – SMAs and MDAs – have shown continuing growth and they’re both level pegging at around $50 billion,” Potter said.

Potter said the growth of the sector was positive news and reassuring for investors, given the disruption created by the COVID-19 pandemic.

“The significance is not just that managed accounts have now been used by advisers for 24 plus years, but that in the past five years alone the value of clients’ investment advised through managed accounts has increased by $80 billion,” Potter said.

“We can remain confident that the managed accounts advice and investment sector is contributing strongly to wealth management of Australians of all ages.”

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September 23, 2021 Money Management | 7

News

Advice regulatory burden to impact capital concentration

BY JASSMYN GOH

THE regulatory burden around giving financial advice will have an inevitably impact on capital concentration and common ownership rather than investment by Australian superannuation funds, according to the Stockbrokers and Financial Advisers Association (SAFAA).

Its submission into the inquiry of common ownership and capital concentration said investment by super funds was not the problem but the regulatory framework governing access to investment advice and capital raising. “…Ensuring access to affordable investment advice through reforming the regulatory framework applicable to financial advisers and access to capital raisings will ensure that retail investors continue to have access to participation in capital markets and investment opportunities,” SAFAA said. “…Consideration of common ownership and capital concentration in Australia must take into account the regulatory framework surrounding

the provision of personal advice to retail clients and retail investor access to capital raisings.

“Not to take into account the impact of current public policy settings on these two matters will inevitably lead to diminished access by retail clients to affordable investment advice and access to investment opportunities, which will be to the detriment of retail investors. This will inevitably impact on capital concentration and common ownership.”

It said the Financial Adviser Standards and Ethics Authority (FASEA) regime led to a “one-size-fits-all” approach to financial advice which disenfranchised retail investors. It noted that due to the FASEA regime, “top graduate talent” was being deterred from entering the stockbroking and investment advice profession.

“This shrinking pool of available advisers impacts on the availability and affordability of advice in investment in equity markets,” it said.

“This will result in detriment to retail investors, who will increasingly be left with the choice of either DIY trading online with no advice or advice

from a financial planner who has minimal direct expertise in listed investments and markets.”

SAFAA said new investors would have only experienced the current bull market but when a market correction occurred they would need access to experienced investment advice to ensure retail investors made good decisions.

The lack of engagement by investment banks with non-institutional shareholders, also left retail, high net worth, and self-managed super fund (SMSF) members disadvantaged.

“Not only are their shareholdings in Australian Securities Exchange (ASX) listed entities diluted, but they miss the opportunity to buy shares at prices that are often a hefty discount to the market price. Those gains go to a few institutional investors, frequently domiciled overseas,” it said.

“This is a result of those facilitating capital raisings typically not offering retail and SMSF investors a proportionate opportunity to participate in discounted capital raisings, instead relying on domestic and international institutional clients.”

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15/09/2021 10:37:00 AM

8 | Money Management September 23, 2021

News

Litigation still on the cards for corporate watchdog

BY JASSMYN GOH

THE corporate regulator has highlighted to a parliamentary committee that it would remain an active litigator despite it not placing as much public emphasis on the ‘why not litigate’ mantra.

The Australian Securities and Investments Commission (ASIC) chair, Joe Longo, said in response to recent media claims, there would not be any let up or lack of commitment to litigation and its commitment to “credible active law enforcement” was not going to change.

“I think the critical question is that we litigate the right matters and that we take full advantage of the full range of enforcement and regulatory tools that are available to us under the law. So, I’m personally not concerned at all in ASIC’s commitment to

enforcement,” he said.

When asked whether the regulator would take a binary or cooperative approach with companies Longo said it would not be binary.

“We’re here to help businesses comply with the law and we will

try to issue guidance and information sheets and the matters of that nature to help businesses comply with the law.

Our operating assumption is that if people want to cooperate with us and comply with the requirements then that’s what we

60% of self-licenced financial advisers more profitable: survey

BY LIAM CORMICAN

ABOUT 58% of self-licensed financial advisers say they are more profitable now than two years ago despite increasing compliance costs, according to a survey.

A survey by self-licence network My Dealer Services (MDS) found most principals of self-licenced practices were optimistic about the future.

MDS director, Alex Euvard, said the survey also affirmed industry challenges included the exit of experienced practitioners and a compliance regime that required practices to devote up to 30% of their time and resources to.

Though, he said the rising cost of compliance was “unsustainable in the long run” and needed to be addressed as an industry priority.

According to Euvard, the survey showed owning an Australian financial services licence (AFSL) allowed advisers to be more entrepreneurial and operate better client-centric business models.

However, increases in staff costs

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and public liability insurance premiums (some as high as 50%) were further expenditures negatively impacting business profitability.

Survey respondents viewed the growth in consumers needing professional advice as another industry issue that would deteriorate further as more advisers exited the sector in anticipation of the academic qualification deadline.

Although a negative on one side, the exodus of advisers was regarded as an opportunity for some, with 42% of advisers confirming they were considering acquiring other businesses’ books to facilitate growth.

Euvard noted that even though many mature age advisers were leaving, the uplift in education standards and qualification requirements was viewed overwhelmingly as a positive for the industry.

The survey also found that 98% of advisers believed technology would play a bigger role in the future to reduce costs, improve operational efficiency, and enhance the client experience.

would prefer,” he said.

“But we have a strong enforcement function as well, because as we know, there are individuals and companies that don’t always comply with the law.

We are equally committed to ensuring that consumers and investors who were exposed to the wrongdoing or breaches of the law and dealt with so it’s certainly not binary.

“Between the commissioners and our senior staff continuous interactions with industry bodies, the banks, consumer groups, we all have a view to ensure that engagement contributes to us being an effective, informed, and in touch regulator.”

Longo noted that ASIC was also working towards a digital strategy aimed at investing in its technology.

Monash Investors sees success in move to active ETF from LIC

BY LAURA DEW

MONASH Investors has said the structural change of its listed investment company into an actively-managed exchange traded fund (ETF) has been “much better” for investors.

In the first update since the strategy changed structure, manager Simon Shields said the Monash Absolute Active Trust was now “very appealing” in this new format.

Reasons included it was a better structure for investors, had better transparency, better dividend experience and was one of only a few Australian equity long/short managed ETFs. “The big issue we had was trading at a discount and now it trades at NAV [net asset value], and with liquidity – now the market makers provide liquidity,” Shields said.

“Another issue that people miss a lot is we are now regulated as an investment product rather than a company so we don’t have the issue of conflicting shareholdings and all the regulatory issues that brings.

“Because we aren’t making tax payments to the ATO [Australian Taxation Office], that means we can also hold onto our cash for longer until we have to distribute it which means more reliable and regular distributions.

“It is very appealing for investors, much better than when it was an LIC.” Since inception as an active ETF on 28 May, 2021, it had returned 10.3% and had an average cash weighting of 21.3%.

The original Monash Absolute Investment Company LIC was launched in 2016 but was transitioned earlier this year after encountering a persistent discount.

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10 | Money Management September 23, 2021

News

Superannuation mergers lead to unintended common ownership issues

BY CHRIS DASTOOR

AS the Government pushed the superannuation sector to merge and consolidate, a likely consequence will see fewer industry players controlling the majority of capital, putting it at odds with the capital concentration and common ownership in Australia enquiry.

During hearings on the enquiry, Coalition MP Tim Wilson asked the Australian Prudential Regulation Authority (APRA) if this was indeed a potential consequence.

“In light of the fact we have a clear direction of Government policy which is at least leading in part to consolidation of superannuation funds… you accept there’s serious potential this could be a risk into the future?” Wilson said.

“We know from historical example, when you get significant concentration of capital in the hands of a small number of parties… it gives an incredible amount of power, you would accept that?”

APRA chair, Wayne Byres, confirmed this was indeed a likely consequence of the merger regime.

“Increased concentration

through superannuation is the likely outcome – the implications of that is an open question,” Byres said.

“All of these things are questions of degree, the general proposition I’m not disagreeing with.”

Data from APRA showed APRA-regulated super funds held assets valued at $2.3 trillion, with $500 billion in Australian listed equities.

Although that $500 billion was a fraction of its total assets, it was roughly 20% of the market cap of the Australian Securities Exchange (ASX), according to its data.

“This percentage share has not shifted materially over the past five years, although given the consolidation of the

superannuation sector the holdings are held in a smaller number of (on average, larger) funds,” Byres said.

“As the size of the superannuation industry continues to grow, both in absolute terms as well as relative to Australian gross domestic product (GDP), and an increasing number of large superannuation funds emerge from ongoing industry consolidation, the importance of superannuation funds as investors in all types of assets will likely grow.”

Byres highlighted the importance of the super industry raising capital during market downturns and the potential repercussions if this capital could not be accessed during tough economic periods.

ASIC chair probed on governance review of regulator

BY JASSMYN GOH

THE corporate regulator’s new chair, Joe Longo, has revealed that he has not read the unredacted version of the Dr Vivienne Thom report of the regulator’s governance.

The Australian Securities and Investments Commission (ASIC) chair was probed by Labor’s Dr Andrew Leigh during a parliamentary hearing who asked how many versions of the report Longo had read.

Longo said he had read the version that was publicly available.

“So, a report was done about problems in ASIC and you haven’t read the full version on it?” Leigh asked.

Longo said: “Well, I’ve read enough from what was available, and obviously been very close to dealing with the recommendations that came out of that report. So that to me, is sufficient for present purposes.

“As part of my preparing for undertaking the

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role. It did not appear necessary for me to read any more than was publicly available, given the issues that were raised and the steps that would need to be taken to address those issues.

“I have not called for the unredacted version to be given to me nor was it suggested that I needed to see the unredacted version.”

The public version of the report was released in January, following the governance issues surrounded expenses of ASIC’s previous chair, James Shipton, and its previous deputy chair, Daniel Crennan.

The report recommended for significant improvements to ASIC’s internal practices, systems, and processes and in particular: • The proper use and management of public resources; • Systems of risk oversight and management; • Systems of internal control; and • Co-operation between ASIC officials.

Pandemic causes ‘she-cession’ as gender pay gap widens

BY LAURA DEW

IT will take over 100 years to achieve gender financial equality after the pandemic had a negative impact on the gender pay gap and hours worked for women.

According to the Financy Women’s Index, the pace of progress was slower in the June quarter than in March and rose by 0.9% compared to 1.06%.

The number of monthly hours worked by women fell by 2.3%, almost five times that of men, while the gender pay gap widened to 14.2% from 13.4%.

The pandemic had been a cause of concern as many industries which were dominated by female employees such as retail and accommodation had been adversely hit by the lockdowns. They were also more likely to have been the parent who take time out of the workforce to home-school children.

“While the long-term trend for women’s economic progress is still one of improvement, as we continue to combat the pandemic, women remain particularly vulnerable to lockdowns and the disruptions from public health and social distancing orders,” Financy chief executive, Bianca HartgeHazelman, said.

“The concern is that the longer the pandemic continues, unpaid work seems to rise and the harder it is for many women to participate in the workforce to their full potential.”

The trend was identified as a ‘shecession’ or ‘pink collar recession’ by Deloitte who highlighted women had been disproportionately affectced.

“Interestingly, this release of the Financy Women’s Index shows a big improvement in the gender underemployment gap,” Deloitte Access Economics partner, Simone Cheung, said.

“But digging a little deeper, there were less women in part-time work who preferred more hours. This means women are not only impacted by economic cycles, but they are also more likely to willingly opt out of the workforce or reduce work hours due to non-economic reasons.”

16/09/2021 12:38:45 PM

September 23, 2021 Money Management | 11

News

Three largest adviser groups have lost 52% of advisers

BY OKSANA PATRON

NET adviser losses at the three largest advice groups – IOOF, AMP and NTAA Group –account for 52% year to date, which is disproportionate to their size, according to Wealth Data.

The number of adviser roles at the start of 2021 at those three groups accounted for 20% of all roles and decreased since to 17.5% of all current adviser roles. This meant the net decline per group stood at -20.33%.

By comparison, after excluding these three groups, adviser roles from the rest of the sector dropped only by 4.71%, from 16,732 to 15,944 since the start of the year.

Numbers from Wealth Data said IOOF, AMP Group and NTAA jointly slashed 861 adviser roles, since the start of the year. Individually, the groups saw a departure of 401, 297 and 181 roles,

respectively.

The second week of September saw 50 new appointments and 56 resignations, resulting in a net loss of six roles.

At the same time, 28 licensee owners had net gains for 39 roles and 30 licensee owners had net losses of 45 roles.

As far as the growth in adviser net movement was concerned, at the licensee owner level, Capstone posted a net growth of four advisers.

Two were from Crown

Wealth, one from MIQ Private Wealth, and another adviser returned to advice after leaving three years ago.

Also, two new licensee owners commenced with three advisers each.

Easton Group saw a departure of five roles, and was followed by IOOF and AMP Group which lost four and three roles during the same week.

The number of actual advisers decreased to 19,030 while the number of adviser roles dropped to 19,319.

Market downturn could ‘burn’ first-time investors

BY LAURA DEW

THE wave of retail investors accessing the stockmarket for the first time is encouraging for financial literacy and engagement but they could be put off for good if there is a market downturn, according to Airlie Funds Management.

Over 435,000 people placed their first trade in 2020 and the Australian Securities and Investments Commission (ASIC) warned they should be aware of their risk exposure and wary of trading strategies, especially as 49% were under-40.

Speaking to Money Management, Emma Fisher, portfolio manager on the Airlie Australian Share fund said it depended on the time horizon that people were looking to make money. She also cautioned on the long-term effect on the boom in the event of a market downturn.

“I’m a fan of people being emboldened to invest, so long as it is money they don’t need to get back, and it improves their financial literacy,” Fisher said.

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“It’s good that people are getting engaged with finance. If people are happy to tie up their money for a decade then that is fine, even if they are investing at the peak, but if they are looking to make money in six months then I would be less confident. The saying is if your dentist is asking for stock tips, that is the time to get out.

“I’m worried that if there is a sharp downturn then people might get burnt and be put off investing in the stockmarket ever again which would be a shame as it is an excellent tool for value creation.”

She gave the example of the US dotcom bubble which later fuelled the housing crisis which precipitated the Global Financial Crisis as investors were moving their speculative trading activity away from equities and into property.

“It was the same type of risk behaviour but just in a different asset,” she said.

The Airlie Australian Share fund had returned 37% over one year to 31 August, 2021, versus returns of 30.7% by the Australian equity sector within the Australian Core Strategies universe.

Why investors should ignore ‘hysterical’ China regulatory fears

THE fears of Chinese regulatory activity are “hysterical” and could actually present a buying opportunity for investors seeking exposure to China.

Writing in its monthly update, both the Platinum Asia and Platinum International funds highlighted the regulation could not be compared to Western markets and was less problematic than people feared.

Among regulations proposed were limits to time teenagers could spend playing video games, tighter restrictions on its digital economy, scrutiny of private tutoring businesses, regulation of online insurance companies and anti-monopoly investigations.

Platinum Asia fund managers, Cameron Robertson and Andrew Clifford, said: “Recent coverage of policy reforms in China has bordered on hysterical at times. This is unhelpful for investors. China has a very different form of Government which many in the West see as ‘undemocratic’.

“We would gently remind those commentators that this is not unusual in Asia and not at all equivalent to poor social or economic outcomes – see for example Singapore, and to a lesser extent South Korea and Japan.

“One simply cannot expect the same regulation and culture of corporate governance to apply globally. China has a different system to the anglophone West – this should hardly be a shock to seasoned investors. Moreover, it is the second-largest equity market in the world and among its cheapest.”

The Platinum Asia fund had a 44.3% weighting to China including stocks such as Tencent and Alibaba, at 3.5% and 3.6% respectively, which were likely to be affected by the increased regulation.

“Regulations limiting property speculation, tech market abuses and time spent gaming are far from senseless nor incompatible with the functioning of markets, in our view,” Platinum said.

Meanwhile, the global Platinum International fund had 19.8% allocated to China including three of its top 10 largest holdings with its largest holding being ZTO Express Cayman at 3.1%.

It acknowledged it had experienced “nearterm, mark-to-market losses on Chinese stocks” during August over the regulatory fears but said that it considered it to be a buying opportunity as it considered the regulation was “ongoing and considered”.

This was in contrary to Munro Partners and Magellan Financial Group who had both either exited or significantly reduced their Chinese holdings.

16/09/2021 10:41:34 AM

12 | Money Management September 23, 2021

InFocus

COMMON OWNERSHIP: GENUINE RISK OR PARTISAN WEDGE ISSUE? Although seemingly having good intentions for the public, Chris Dastoor writes, political battle lines have taken priority in the common ownership inquiry.

AS THE HOUSE of Representatives Economics Committee inquiry investigates the impact of common ownership in Australian markets, there is division across political lines over whether the root cause are index funds or the superannuation industry.

The committee is currently investigating common ownership, described as when a fund or collaborative fund owned shares in competing firms, and whether it presented a threat to competition.

It aimed to examine ownership of the Australian Securities Exchange (ASX) and the so-called ‘mega funds’ which were taking a greater share of the market.

Led by committee chair, Tim Wilson, Coalition MPs had taken issue with the power of super funds, particularly industry super funds. Data released this month for the end of June 2021 showed $3.35 trillion of the $4.32 trillion held in managed funds was invested in the super industry.

Dr Martin Fahy, Association of Superannuation Funds of Australia (ASFA) chief executive, said all evidence presented to the committee showed there was no correlation between common

THE EMERGING AFFLUENT IN AUSTRALIA

ownership and consumer harm.

Meanwhile Labor, led by the committee’s deputy chair Dr Andrew Leigh, placed concern on the major exchange traded fund (ETF) providers – with BlackRock and Vanguard coming under scrutiny for their large holdings in the big four banks.

In testimony to Parliament from Westpac and NAB, it was revealed that Vanguard and BlackRock were the largest investors in each bank – both held around 5% to 6% of each bank.

The Australian Competition and Consumer Commission (ACCC) said it had not found any research to back up the idea that concentration of capital would have an impact on the market – whether from super funds or index-tracking funds – although it noted it could be an issue in concentrated sectors such as airlines or retail banking.

However, this failed to prevent super funds, which were starting to lean towards in-house management, from separately banding together to gain majority control to drive direction of these entities.

But this was not a concern for Westpac CEO, Peter King, who said industry funds did not necessarily have aligned views.

INDEX INVESTING In a statement to Money Management, a spokesperson for BlackRock said: “Index funds have democratised access to diversified investment for millions of savers planning for long-term goals like retirement.

“Asset managers serve as stewards of these savers’ assets by monitoring governance standards, engaging with company managers and directors, and casting informed votes on management and shareholder proposals to advocate for long-term shareholder interests.

“Asset managers remain predominantly minority shareholders in public companies. While we provide important representation for shareholders, each is but one voice among many.

“It is ultimately the responsibility of the board and management to consider the interests of all stakeholders – including long-term shareholders.”

Alex Vynokur, BetaShares chief executive, said the duty for index-investing firms was not just to deliver returns but to promote responsible investment practices.

“I would absolutely agree with the observation that [index-tracking

funds] don’t have uniformity in the industry as to what people do and how they do it,” Vynokur said.

“Industry super funds are in a slightly different boat and some of the comments from members of Parliament have sought to treat super funds as a single entity which are voting in unison.

“I would make the observation again the boards of trustees of various superannuation funds have fiduciary duties to their own members and I would not for a second assume those duties are being ignored in the pursuit of some ulterior motive.”

Vynokur said in a hypothetical situation where index funds controlled 80% of the market would create a “phenomenal opportunity” for active managers to add alpha.

“There is a self-correcting element in free markets and frankly the rise of ETFs and index investing is self-correcting on the other side,” Vynokur said.

“We’re currently in the situation where 90% plus of assets are actively-managed, yet 75% of active managers are underperforming the benchmark.

“Clearly the growth in the ETF industry is reflective of the fact investors are saying ‘we’re getting bad value for money’.”

37

1.5m

$2.2t

Average age

Total population

Total wealth

Source: Netwealth 2021 AdviceTech Report

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14/09/2021 11:34:46 AM

14 | Money Management September 23, 2021

TOP Financial Planning Groups

ADVISER NUMBERS REACH NEW LOWS

Money Management’s 2021 TOP Financial Planning Groups survey has confirmed that the number of financial advisers operating under the umbrellas of the largest groups has dropped to new lows, Oksana Patron writes.

THIS YEAR’S DATA from Money Management’s TOP Financial Planning Groups research has proved this has undoubtedly been yet another challenging year for financial planners, with the number of advisers reaching new lows.

Planners continue to struggle with ever-increasing regulatory burden and higher education requirements, on top of rising costs of advice delivery.

This has led many of them to

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flee the industry and, as a result, the collective number of those working for the top groups in the country has dwindled once again to around 11,500 from over 13,000 a year before.

The figures were far from the levels registered in 2019 and 2018, with 14,500 and 16,140 advisers operating at the largest groups, respectively.

What is more, the overall number of current advisers, as listed by the Australian Securities

and Investments Commission’s (ASIC’s) Financial Adviser Register (FAR), slipped below the 20,000 threshold this year.

By contrast, over the five years to 2020, these figures were much higher and ranged between 21,500 and 22,500.

SO, WHAT’S NEW? The past 12 months have confirmed that many experienced advisers continued to feel discouraged by new Financial

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September 23, 2021 Money Management | 15

TOP Financial Planning Groups

Adviser Standards and Ethics Authority (FASEA) education standards and the necessity to sit the exam.

It has also become obvious for a growing number of financial groups that the industry has failed to attract younger talent to fill this gap.

Additionally, the shrinking numbers had further driven up the costs of advice for consumers, making it even harder to obtain for less-affluent clients. The shortage of advisers is coinciding with the time of the long-expected intergenerational wealth transfer which is set to be one of the largest.

In November last year, the advice affordability problem was finally noted by ASIC, which acknowledged the difficulties around finding the affordable personal advice of good quality and, in response to that, it launched the consultation process around making the advice more affordable.

On top of this, advisers have been haunted by higher operational costs, ongoing regulation changes, and between July to October this year advisers are subject to five new compliance requirements such as the design and distribution obligation (DDO) regime.

Also, the end of grandfathered commissions forced many to quickly adopt new fee structures and, subsequently, changed the current business models of many licensees.

THE BIGGEST LICENSEE OWNERS Despite a temporary fall to the second position at the start of the year, AMP Financial Planning (AMP FP) has overall managed to

17MM230921_14-27.indd 15

regain its position as the single largest financial planning group in Australia.

When AMP FP dropped to 799 financial planners operating under its banner in March it was briefly overtaken by the National Tax and Accountants’ Associations (NTAA)-owned SMSF Advisers Network.

However, the network had no active authorised representatives (ARs) that were financial planners as their primary role as all of its advisers were accountants.

Since then, both groups have seen a further significant portion of their advisers depart.

The SMSF Advisers Network, which is one of the largest groups by adviser numbers right next to bigger players such as AMP and IOOF, continuously lost advisers over the last few months, in line with expectations as accounting firms accounted for the highest drops of advisers from ASIC’s register.

In May, the SMSF Advisers Network said the key reason given by its ARs for the departure was the ASIC industry funding levy.

After the removal of the accountants’ exemptions on 1 July, 2016, the levy would see the group’s advisers who offered limited scope advice being charged the same amount as advisers running a financial planning practice.

AMP reported it had jointly around 1,350 advisers on their books, at the start of July, and ran four Australian financial services licenses (AFSLs), including AMP FP, Charter Financial Planning, Hillross Financial Services, and ipac Securities.

The group, which is still recovering from the Royal Commission and saw six of its companies sued by ASIC for fees-for-no-service at the end of July, had earlier announced changes to its fee model for its aligned advice. This assumed the release of institutional ownership of clients from AMP FP to advisers, and the ability to transfer clients out of the AMP network, amongst others.

In a statement sent to Money Management, AMP said the group had already been through major changes and that it believed in a strong future of financial advice in Australia, following a period of significant structural change for the industry.

AMP’s director of advice, Matt Lawler, said: “At AMP we have worked hard to change and adapt our advice business to be a contemporary professional services provider.

“This has required a number of difficult decisions and resulted in a number of financial adviser departures over recent years. We now have a core group of high quality and professional advice practices that need our support and we are changing the way we do business to create a new era in financial advice.”

At the same time, IOOF also saw a number of significant changes in its business including its acquisition of MLC Wealth in May 2021. IOOF is one of the largest groups in Australia by adviser numbers and has been racing with AMP over the last few months.

In May, 2020, MLC Wealth simplified its advice model by retiring the Garvan, Apogee and Meritum brands and rebranded them as the TenFifty community,

Continued on page 16

16/09/2021 10:40:35 AM

16 | Money Management September 23, 2021

TOP Financial Planning Groups

Continued from page 15 with an aim to become a businessto-business (B2B) brand.

The firm said Apogee and Meritum advisers remained in their respective AFSLs, while Garvan advisers remained on GWM Adviser Services (GWMAS).

Following this, MLC Advice became the new brand for NAB Financial Planning under the GWMAS AFSL as MLC Wealth transited into a standalone business outside of National Australia Bank (NAB).

After IOOF acquired MLC Wealth, it said the acquisition combined with the first phase of its Advice 2.0 strategy, resulted in the effective closure of Financial Services Partners (FSP) with all businesses having transitioned off the licence by 30 June, 2021.

According to Money Management’s 2020 TOP Financial Planning Groups survey, FSP had around 140 advisers on its books as of July, 2020.

Another change at IOOF saw MLC Advice advisers being now licensed under Bridges Financial Services while TenFifty advisers were licensed under Consultum Financial Advisers.

The last change was a transformation of Bridges Financial Services into a fullyemployed network, with all selfemployed advisers having transitioned off the licence by 30 June, 2021.

THE CONSOLIDATION OF MID-TIER GROUPS Money Management’s 2021 survey found that mid-tier financial planning groups were

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continuing to race to fill the void left by the banks’ exit, with some bigger groups bringing in more advisers, while others were focused on acquisitions and further consolidation.

In October last year, platform provider HUB24 announced its plans to sell Paragem to the Australian Securities Exchange (ASX) listed Easton Investment Limited, which at the time had three other licensees operating under its banner.

This included Merit Wealth and The SMSF Expert which together had between 250 and 300 advisers who were all accountants.

On top of this, Easton currently owned GPS Wealth with 134 financial planners and 50 planners who are accountants

and Paragem, with 76 financial planners. The acquisition of Paragem was expected to enhance Easton’s wealth solutions business by adding scale and supporting technology efficiencies.

Also, the expansion helped ensure Easton maintained its position as the fourth largest financial licensee owner in the country, among the independent groups.

However, the recentlyannounced acquisition of ClearView’s financial advice business by Centrepoint Alliance has added some pressure to the race across this groups’ segment.

According to the data, ClearView’s two licensees, Matrix Planning Solutions and ClearView Financial Advice, had

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September 23, 2021 Money Management | 17

TOP Financial Planning Groups

close to 180 financial planners combined at the end of the first half of the year.

Meanwhile, Centrepoint’s Alliance Wealth and Professional Investment Services (PIS) had over 300 planners. The combined entity is expected to become the fifth largest group in the country and the second largest independent group, excluding IOOF, AMP and NTAA. Another ASX-listed entity WT Financial Group, the parent company of financial advisory dealer group Wealth Today, also made an acquisition earlier this year.

WT Financial Group bought Sentry Group resulting from its earlier transformational restructure which looks to reduce the firm’s focus on business-to-consumer (B2C) financial services market and re-positioning itself as a B2B enterprise.

The merged group would have 275 advisers, across over 200 practices in Australia, with further appetite for growth over the next few years to expand by more than double its current size, measured by adviser numbers.

The owner of InterPrac Financial Planning, Sequoia Financial Group, was another example of an independent group showing interest in further consolidation across the advice market and clearly communicated its intention to expand through acquisitions.

The group confirmed its plans to continue acquiring mid-tier licensee service businesses that

17MM230921_14-27.indd 17

had between 10 to 100 advisers and hoped to provide services to 1,000 advisers by 2025.

Sequoia’s chief executive, Garry Crole, said there were opportunities for acquisitions of groups with 50 to 100 advisers who struggled to be profitable and provide their service to advisers in a cost-effective manner.

Finally, in November last year Ord Minnett acquired independent private wealth firm E.L. and C. Baillieu.

In 2019, Ord Minnett went through an ownership restructure following IOOF’s planned divestment of its 70% stake in Ord to a consortium of Australian private investors.

Ord said its acquisition was strategic as it would provide the scale benefits and help expand its position in the financial advice sector, given E.L. and C. Baillieu’s private stockbroking businesses and adviser network.

Including E.L. and C. Baillieu’s figures, Ord Minnett managed over $59 billion in funds under advice (FUA) and $13 billion in funds under management (FUM) as of January, 2021.

TOP TEN All the changes in adviser numbers and moves between licensees have been reflected in the composition of the TOP 10 largest financial planning groups in the ranking.

This year’s data from the survey marked the arrival of a number of independent groups which managed to consistently grow their ranks and

successfully lure in advisers looking for new homes.

At the same time, a number of groups, particularly those with a high percentage of accountants, slipped down the ranking.

Easton-owned Merit Wealth, which last year occupied sixth place among the largest groups, this year reported it had only 217 ARs who were accountants and 31 active ARs who were engaged as financial planners as their primary role.

However, the 2021 TOP Financial Planning Group’s ranking saw an arrival of two independent groups which managed to climb up the ranks.

This included family-owned business, Lifespan Financial Planning, and Capstone Financial Planning which entered the TOP 10 for the first time.

By contrast, in the Money Management’s TOP 100 Financial Planning Survey in 2012 both groups were ranked at 37th and 53rd with 122 and 70 advisers, respectively.

As a result of the ongoing restructure of the business, IOOF-owned Consultum Financial Advisers has posted one of the highest jumps in the ranking. It catapulted from 20th place with 192 advisers last year to the sixth position this year, after growing its number of advisers to 380 advisers as of July, 2021.

Similarly, once-ANZ owned RI Advice, which currently operates under the IOOF banner, has seen a jump in adviser numbers from 185 to 253 this year.

The full ranking of the groups is available overleaf.

Continued on page 18

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18 | Money Management September 23, 2021

TOP Financial Planning Groups

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September 23, 2021 Money Management | 19

TOP Financial Planning Groups

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22/09/2021 5:00:21 PM

20 | Money Management September 23, 2021

ESG

DEBUNKING COMMON ESG MYTHS There remains confusion on the difference between ESG and responsible investment, writes Tom King, and advisers may need to debunk some common myths for their clients.

NEW OBLIGATIONS UNDER the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics introduced in 2020 require advisers to meet new ‘ethical and responsible investment obligations’ to their clients. Standard 6 of the code requires advisers to actively consider each client’s broader longterm interests and likely circumstances, which means that clients should be questioned about their investment preferences around environmental, social and governance (ESG) and responsible investing including ethical issues.

However, the market is dominated by different terminology that can be confusing. Product names are often misleading and current approaches to investment ratings fall short in distinguishing between the various features sought by clients.

We demystify four common

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misconceptions in ESG and responsible investing, providing greater clarity around terminology and the distinct investment approaches. By better understanding the different approaches and how to assess them, advisers can be better prepared to meet their obligations and be in position to have more meaningful discussions with their clients and to provide solutions that better meet their clients’ needs.

Myth 1: ESG and responsible investment are the same thing ESG investment and responsible investment are used interchangeably within the investment community, and are often, but not always, intended to mean the same thing.

The term ESG is widely used in many contexts and it means different things to different

people. In reality, ESG is simply an acronym that specifically refers to environmental, social and governance factors.

Until recently, ‘ESG investment’ typically referred to an investment approach that prioritised companies with better environmental, social practices and governance – a logical approach that has been shown to reduce potential risk and potentially improve returns. Nowadays the term is often used as a catch-all term to describe a broader set of investment approaches that involve consideration of environmental, social and governance factors or deliver specific outcomes of a responsible or ethical nature., better described as responsible investment.

Responsible investment refers to a set of approaches that deliver outcomes of a responsible nature.

Myth 2: ESG and responsible investment strategies are all alike Responsible investment strategies (or, as many still say, ESG strategies) are not all alike. They incorporate a variety of different approaches and techniques intended to deliver specific outcomes. Here we identify six distinct strategies which all fall under the banner of ‘responsible investment’: 1) Traditional ESG strategies typically seek to reduce investment risk through focusing on companies with better ‘E’, ‘S’ and ‘G’ practices.

However, other ESG strategies may focus on different outcomes – indeed, looking for companies that are improving their ESG practices is an equally valid approach and may provide better potential returns; 2) Ethical strategies aim to avoid or reduce investments in areas of

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September 23, 2021 Money Management | 21

ESG ethical concern, such as gambling or tobacco. The scope of their exclusions and related materiality thresholds may vary considerably; 3) Low carbon strategies seek to deliver lower carbon emissions or carbon intensity, typically through investments in companies with inherently lower emissions, but not necessarily in companies that are directly contributing to global decarbonisation; 4) Directly contributing to achieve a desired outcome is more the remit of sustainably-themed strategies. As the name suggests, these strategies are focused on investing in companies that are in some way ‘sustainable’ and often aligned with sustainability objectives such as the United Nations’ 17 Sustainable Development Goals; 5) Impact strategies should provide intentional and measurable environmental or social outcomes. This has historically been possible only through direct or private investments, although the term is now being widely used by more mainstream listed sustainably-themed funds; and 6) Engagement strategies seek to achieve better ESG outcomes through stewardship activities such as engagement with boards and management teams and targeted voting.

It is important to note that these strategies are not mutually exclusive. Many ESG or responsible investment products align with two or more of these approaches.

A sustainably-themed strategy can also be ethical, but it may not be low carbon or high ESG scoring. A strategy whose ESG outcomes are delivered via engagement may be most effective if invested in companies with poor sustainability or governance, or environmental laggards requiring improvement.

What is appropriate depends on what each strategy is seeking to achieve, and no ESG strategy will be able to do all things well.

Additionally, the way in which the strategies are implemented will result in significantly different

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“Many funds bear names that include words like ‘sustainability’ that infer certain expectations for their approach and holdings.”

– Tom King portfolios. Approaches such as negative screening, positive screening, best-in-class, or quantitative scoring will all results in different holdings. A passive ‘sustainability’ strategy that reduces or eliminates holdings in poor sustainability performers will provide a very different portfolio to an active ‘sustainability’ strategy which invests only in companies that meet high sustainability thresholds.

Each approach outlined above will lead to different underlying holdings and different outcomes for investors, both in terms of performance and ESG or responsible attributes.

Myth 3: ESG ratings provide a good assessment of ESG products ESG and responsible investment encompasses a range of approaches so no single score can adequately measure the quality of a single product across all these approaches.

Many research houses are now providing ESG or sustainability scores, most notably Morningstar whose Sustainability Score (which is actually an ESG risk rating rather than a measure of ‘sustainability’) is widely referenced by advisers.

Unfortunately, in many cases these scores do not provide a good measure of whether an ESG or responsible investment product is delivering what it should.

This is easy to understand when considering individual companies: • A company like Mastercard may have good ESG practices and a high ESG score, and be low carbon, but will not necessarily provide strong sustainability related outcomes; • A company like Phillip Morris may also have strong ESG practices and a high ESG score, and be low carbon, but is unlikely to be considered ethical by many; and

• Vice versa, companies like Tesla or Waste Management may provide strong contributions towards environmental outcomes but will not necessarily have low carbon emissions relative to banks or technology companies, and may not score well on traditional ESG metrics.

What should be obvious is that separate measures are required to assess a fund’s performance in each aspect of ESG or responsible investment.

Some researchers have started to develop targeted measures, such as Lonsec’s 5 Bees Sustainability Scores, but, as with traditional ESG scores, there are not yet standardised measures of sustainability or ethicalness and such measures can still differ depending on providers.

In the future it is likely we will see greater standardisation of terminology and the emergence of better measures of sustainability, impact, ‘ethicalness’, and low carbon alignment to complement the more widely available measures of ESG best practice.

Similarly, for now, there is no standardisation of product naming.

Many funds bear names that include words like ‘sustainability’ that infer certain expectations for their approach and holdings.

In the meantime, the best advice for advisers is to truly understand what clients are seeking and then consider whether the portfolio holdings and the manager’s stewardship activities align with those expectations.

Myth 4: A good ESG product is a good investment There seems to be a growing belief that a product that is good from an ESG perspective is likely to deliver good investment outcomes.

TOM KING

It should be clear that ESG or Sustainability Ratings are assessments of only those aspects of a product, not the product’s potential to meet investment objectives or its suitability within a client portfolio.

Companies within responsible investment funds might be less likely to be involved in environmental disasters, human rights issues and corporate scandals that could negatively affect their investment performance. Companies involved in providing sustainable technologies may benefit from strong growth in these areas and this has already been reflected in the strong investment performance of many of these companies.

However, the old adage – past performance is no indication of future performance – remains true, and the increasing interest and investment in ESG and sustainability leaders today may end up detracting from future performance.

We continue to focus on actively generating returns from investments in a universe of listed equities exposed to the broad themes of environmental sustainability and resource efficiency, and looking beyond the most prominent names for opportunities with better return potential.

Advisers need to balance appropriately the responsible objectives with their investment goals and find products that are able to deliver the right balance between the two.

Tom King is chief investment officer at Nanuk Asset Management.

14/09/2021 3:26:10 PM

22 | Money Management September 23, 2021

Emerging markets

WHAT SHOULD INVESTORS LOOK FOR IN AN EMERGING MARKETS COMPANY? Under the backdrop of the Fourth Industrial Revolution, writes Rohit Chopra, investors have the opportunity to seek companies which will be tomorrow’s multi-national businesses.

IN A COMPLEX and fast-changing developing world, under the backdrop of the Fourth Industrial Revolution, investors are for the first time in centuries looking to the emerging markets (EMs) for a peek into the playbook of innovation.

We believe that investors will increasingly adjust their approach to the asset class that represents the majority of humanity.

Looking back, we at Lazard, have been fortunate to have had a firstrow seat in emerging market investing over the past 20 years, from the Tequila crisis in Mexico to China’s integration into the world economy, and we believe there is a now a fundamental shift underway in how investors will need to approach these markets.

We believe that it means thinking beyond traditional sector and country groups, constructing portfolios based on the company’s specific runway and durable competitive advantage. In addition, one needs to understand the local macroeconomic and political dynamic in which companies operate. We believe the opportunity is appreciating that EMs are not a monolithic asset class and that traditional sector classifications don’t fully capture the nuance and diversity that exits.

Back in the 1990s and early 2000s, EM business models were following the developed world business models. Companies were less complex and investor returns were driven by tangible asset growth. Predominantly, investors could choose amongst traditional

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banks, energy and telecoms companies. At that time, value was driven by a company’s ability to access capital and grow investor value through its asset base. Capital was the key determinant in a company’s ability to grow as it drove down competition and gave the business scale, allowing it to generate high levels of financial productivity, which translated into shareholder value.

Fast forward to today, capital is still important, but it is no longer the primary determinant of a company’s ability to generate shareholder returns. Value is increasingly being driven through intangible factors, amongst which management skill is a key determinant. Today’s EM companies need management that can drive businesses to innovate and adapt because these markets are now much more economically complex.

In many industries, EM is at the forefront of change and innovation, which means that disruption, technological or otherwise, is happening there before their developed market peers. This requires management that is able to identify and manage through drastic change without any precedent. The fact that there are many industries, ranging from fintech to e-commerce, where EM companies are writing the script is a testament to how much things have changed.

Demographics across EMs are changing and that brings shifting consumer preferences and expectations. Growing middle classes in EMs are now demanding

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September 23, 2021 Money Management | 23

Emerging markets

sophisticated products and services, ranging from ridesharing to luxury goods, and management must be responsive to scale up their businesses to meet these shifting consumer expectations.

Through our ownership mindset to the companies that we consider in our investment portfolio, we concentrate our questions around three key focal points – valuation, return on capital, and runway of opportunity. Valuation is how much we are willing to pay for a business.

Return on capital is the company’s ability to achieve a return above its cost of capital and continue to deploy incremental capital at scale.

Runway is the magnitude a company is able grow its business through its customer value proposition.

ASSESSING THE RISKS There are, of course, risks that need to be considered when investing in these companies as there is never a dull moment in EMs. They are always changing. Investors, therefore, need to be conscious of other factors, such as macroeconomic, political, and environmental, social and governance (ESG) themes, that could impact a company.

A good example that illustrates this relationship is a company’s cost of capital. The cost of capital differs across EM countries and Brazil’s is higher than China’s. This is because China, among other things, has a relatively higher savings rate and a higher domestic funding capital base compared with Brazil. Cost of capital is important as it affects the cost of projects and net present value of those investments.

Other factors we assess include political uncertainty – high in countries like Turkey – as well as a country’s legal system, central bank independence and

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the ease of doing business.

It is also important to understand geopolitical risks particularly as elections can impact businesses. Some stateowned enterprises are more aligned to stimulating economic activity on government directives as opposed to generating profitability for shareholders.

There is always a risk of corporate fraud but thankfully now we have seen a significant improvement in accounting standards in EMs particularly as some of these companies are now seeking to list on global stock exchanges which require greater transparency and disclosure.

Therefore, it is important to take a holistic approach to assessing an EM business.

Investors also need to be aware of the concentration risk of traditional benchmarks used in EMs. For example, the MSCI Emerging Markets index includes five companies that today represent 25% of the benchmark.

Investors are not getting the diversification benefits from investing in portfolios that track these benchmarks.

HOLISTIC ESG APPROACH The other key focus in assessing an EM company is understanding their ESG credentials.

Under this framework, we assess the company’s policies on areas such as the environment including the relationship it has with society at large. Governance is also important. Some of these markets tend to be governed by wealthy controlling families that can influence a way a company does business. We have seen voting rights being influenced in multinational companies by minority shareholders.

Governments can also influence companies, shifting their focus away from delivering long-term shareholder returns.

In fact, we have continued to increase our focus on ESG over these last 20 years as we have seen a shift towards deeper thinking around social and governance issues. We see the integration of human and natural capital assessment as the bedrock for sustainable investment.

For example, Bank Central Asia is one of our stock holdings.

The bank plays an important part in driving financial inclusion in Indonesia. But we also look at other factors such as how the bank incentivises employees, management’s approach to risk management, and its lending practices to environmentally vulnerable sectors.

We have been increasingly sensitive to lending practices in the palm oil industry. The assessment of these types of human and natural capital factors forms the foundation of our ESG framework.

TREMENDOUS OPPORTUNITIES Despite the risks, we continue to see tremendous opportunities in EMs particularly as the Fourth Industrial Revolution drives the world economy.

We remember visiting China for the first time soon after China joined the World Trade Organisation in 2001. The companies in Guangdong Province were producing basic products such as footwear and consumer textiles.

Today, in the same part of China there are leading technology companies. Guangdong is now home to Tencent, one of the most innovative companies on the planet.

“In many industries, EM is at the forefront of change and innovation, which means that disruption is happening there before their developed market peers.”

– Rohit Chopra In Korea, there are businesses like NC Soft which is taking gaming to another level and is now a leading gaming publisher in the world. Its business model is attractive because it is highly scalable driving solid revenue.

In India, Reliance Industries has evolved from a petrochemical business to a multinational business that now includes e-commerce and cloud computing. The company has a real opportunity to become the Amazon of India. Even in financial services there is opportunity. HDFC Bank is a major beneficiary of having access to low costs deposits. The bank has healthy net interest margin and one of the lowest costs of capital amongst the Indian banks. In China, JD.COM is investing in technology to drive retail and new runways through its logistics infrastructure.

We feel very fortunate to be an investor in EMs. It is a part of the market that really incentivises and drives an investor’s curiosity.

Importantly, there is now real scope to be investing in businesses that are going to become top multinational companies one day which provides great opportunities for proactive investors.

Rohit Chopra is managing director and portfolio manager at Lazard Asset Management.

15/09/2021 3:25:42 PM

24 | Money Management September 23, 2021

Alternatives

MAKE ALTERNATIVE ASSUMPTIONS AT YOUR PERIL

Assuming ‘alternatives’ will help asset allocation could be a mistake as there are distinct differences in the performance and behaviour of funds in this asset class, writes Rowan Stewart.

ALTERNATIVE ASSETS ARE a very diverse category, and, unlike equity and bond funds, there are substantial differences in the performance and behaviour of funds within each investment style.

It is important to assess what the fund holds and the way in which it invests, because the investment style of a fund can bring in unintended exposures into your portfolio.

We’ve removed the dedicated trend following manager from our diversified multi-asset portfolios (conservative through to high growth) and introduced an absolute return equity fund with good historical returns but very low exposure to equity markets, sectors or traditional equity styles like value or quality. This reduces the portfolio’s equity exposure and should provide steadier returns while protecting the portfolio from valuation or growth shocks.

GOALS FOR ALTERNATIVES When selecting the asset allocation and investment solutions that are suitable for each investor, an adviser has a number of goals: • Ensure the investment strategy

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fits the required strategic asset allocation. The vast majority of advisers work within a framework where the overall asset allocation range is determined by a committee or consultant based on long term asset class risk and return assumptions; • Adapt the allocation to the current market conditions.

While some advisers use “set and forget” strategies and never change allocations, most make adjustments to strategic asset class weightings or investment mix within each asset class that reflect their views on the current risks and opportunities across markets; and • Select investments to achieve the desired allocation. This stage involves balancing many factors: suitability of investments for their role in the portfolio, historical performance, qualitative and quantitative assessment of each investment, external research ratings, fees and other costs, liquidity and capacity.

Given that equities and bonds are both at high valuations we have

been increasing our allocations to alternatives, and within alternatives we are looking for investments that can deliver reasonable returns but are not strongly correlated to equities and bonds.

Unlike equities and bonds, there are a broad range of differences in the performance, investment style and behaviour of alternative assets. Therefore, it is crucial to assess what the fund holds to avoid any unintended consequences.

For example, a long-short hedge fund that invests in value stocks and shorts quality stocks can be correlated with equities even if its net equity exposure is zero, because its investment style is correlated with equities. In fact, most of the Eurekahedge Hedge Fund indices are correlated with equities, even if the net exposure to equities of the underlying funds are low or nil.

Selecting funds with hidden correlations not only raises the risk of the portfolio, it could violate the assumptions that underlie the strategic asset allocation (SAA): if the SAA assumes that alternative assets have a low correlation with equities but the actual investments selected have a high correlation

with equities, the overall portfolio risk could be outside the investor’s risk tolerance, leaving the adviser open to compensation claims from their clients after a severe equity market drawdown.

We divide the alternatives universe into a number of categories, but of these only absolute return equity and trend following – often referred to as commodity trading advisers (CTAs) or managed futures funds – have a majority of funds with low equity exposure.

This article will outline the main points of our review of these two subsets of the diversified alternatives universe. We focus on the managers that are already available on the main investment platforms that our clients (advisers) use. For this article we’ve replaced the names of the investments with generic names.

FUND SELECTION In our diversified multi-asset portfolios (conservative through to high growth), the bulk of the investments are through managed funds or exchange traded funds (ETFs). We divide the portfolio into asset classes and sub-asset

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September 23, 2021 Money Management | 25

Alternatives Chart 1: Cumulative returns

Chart 2: Drawdowns

Source: Aequitas

classes, each of which has a SAA weight that we vary dynamically as markets change.

For most sub-asset classes, we use managed funds (or ETFs) to gain exposure. When selecting a fund, we face a problem: there are thousands of funds operating in the marketplace, often with very similar sounding processes and philosophies. Almost every fund say they invest in “higher quality” assets than the market at lowerthan-average prices, so how do we determine which fund managers are most likely to give us the exposures we want in the portfolio?

Research ratings are helpful in determining a short list of managers that are well regarded and have appropriate systems and processes. But we don’t find research ratings very useful for working out which manager is the best one to implement our views or how much to allocate to each fund. The most effective tool that we have to answer those questions is style regressions.

When combined with holdings analysis and traditional review of funds, these allow us not only to identify the managers who have been consistent with their stated style and process but also how much of that style they bring into the

portfolio. And, unlike the marketing collateral, we can see substantial differences between funds when we look through this lens.

ABSOLUTE RETURN EQUITIES Looking at the returns over the last five years (Chart 1) we can immediately see differences in the return profiles and the correlation of the investments with equity benchmarks and long/short equity benchmarks (both Australian and international).

Remember that we’re specifically trying to reduce our equity market exposure. Fund A is around 80% long equities, on average, so despite the fund’s excellent historical performance including it in the portfolio will not help us reduce the overall equity risk that we hold. The other funds have low net equity exposure.

Turning our attention to the equity style factor exposures of the funds, we use style analysis to assess whether fund managers are “true to label” and, just as importantly, how strongly their investment style influences their returns. This allows us to contrast different managers and construct portfolios with the exposures we want.

Table 1: Australian equity style regressions, Fama-French factors Alpha

Market

Quality

Small

Value

Momentum

Fund B

0.9%

0.64 ***

0.96 **

0.41 *

-0.45 ***

-0.02

Fund C

9.0% *

-0.19 *

-0.02

0.10

0.03

0.01

Fund D

7.9% ***

0.02

-0.01

-0.05 ~

0.07 .

-0.06 ~

Fund E

0.8%

0.19 ~

0.31 ~

0.62 ***

0.41 *

-0.01

Fund C and Fund D have very low style exposures, with their returns being almost entirely attributed to alpha in the below framework (Table 1). The other funds have substantial style exposures (a loading of +/-0.30 or more would be considered a large exposure to the Fama-French factors that we’ve used here).

These factor loadings are a reflection of the funds’ underlying investment processes. Reviewing Fund C’s investment process, the manager explained that they actively manage sector allocations: the portfolio managers divide the universe of investment into groups of companies with similar drivers and goes long those stocks with positive characteristics and short those that are less attractive, while seeking to keep the fund’s overall exposure to any one theme or sector low.

Fund D is similar, but the other funds deliberately take long positions in themes or sectors that are attractive to the fund managers and go short themes or sectors that they find unattractive.

The consequence of this is despite all funds having low net exposure to equities through their histories, their risk profiles are very different.

Fund C and Fund D have never had a drawdown greater than about 3%, while the others have often experienced drawdowns of 10% or more when their high conviction positions have turned against them.

For our alternatives allocation goals, the risk-controlled equity market neutral funds are a better

choice than the high conviction funds (Chart 2).

TREND FOLLOWING MANAGERS Although momentum is a wellrecognised premium across many markets, returns for the trend following style have been poor for the best part of a decade.

Looking into the exposures of the trend following managers, they have been broadly long bonds for most of the last 10 years as interest rates have fallen.

Given that we’re anticipating higher rates in the future, and we are concerned about reversals in other markets due to high prices across equities and commodities, we have decided to remove dedicated trend following managers from our portfolios for the time being.

CONCLUSION Like many investors, given high equity market valuations and expectations of higher interest rates, we’ve reduced our allocation to equities and bonds and increased our allocation to alternatives.

But to deliver outcomes required by investors we need to understand how their investment processes and positioning influences the risk profile of the funds and the overall portfolio.

Assuming that all funds in a category will support the strategic asset allocation could be a mistake.

Dr Rowan Stewart is co-chief investment officer at Aequitas Investment Partners.

Source: Aequitas. Significance key: *** = 0.1%, ** = 1%, * = 5%, . = 10%, ~ = 33%

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14/09/2021 3:24:01 PM

26 | Money Management September 23, 2021

Alternatives

THE FRACTIONALISATION OF INVESTMENTS Tech platforms have opened up a wider range of asset classes, writes Nick Raphaely, and investors can access institutional-quality opportunities by digitally dividing their assets.

THE IDEA OF carving up large assets into fractional investment units is gathering momentum.

From investing in small parcels of shares through platforms like Stake, to property crowdfunding solutions like DomaCom or BrickX, fractionalisation has opened the door to new opportunities.

And this has significant implications for strategic asset allocation. Advances in automation, artificial intelligence and the internet of things are opening up access to what were traditionally considered ‘private market’ investments.

For investors, allocating funds to private debt as an asset class means you are effectively acting as the bank. Like any lender, they get return on capital in the form of monthly interest payments made by borrowers.

ALTERNATIVE TO PROPERTY FUNDS With expectations Australia’s residential property prices will lift as much as 18.5% in 2021, pent-up domestic investment demand has fuelled a red-hot property market.

And property has long been seen as a “safe as houses” investment in Australia, underpinning 51% of household wealth, according to 2018 Australian Bureau of Statistics data.

But there are downsides to investing directly in property. It’s capital-intensive, and hard to diversify your asset allocation across retail, commercial and residential assets to mitigate the

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impact of property cycles. It can also be hard to get a decent rental yield in a heated market, as purchase price growth outstrips rent rises – in July 2021, gross rent yields were just 3.4% nationwide.

And of course it’s also not the most liquid of assets – if investors need to release cash quickly, settlement alone can take at least six weeks and you’ll incur high transaction costs in the process.

Fractional investments in property can address some of this issues – but until recently, real estate investment trusts (REITs) and property funds were the only real options to do this.

REITs have certainly proven a popular option for investors searching for yield in a low interest rate market. Inflows into unlisted Australian property funds increased 28% in the first three months of 2021, compared to the previous quarter. With over $676 million in net inflows, it’s clear the yield differential over other forms of fixed income or cash has made a compelling argument.

However, investing in private real-estate debt can provide a similar advantage – with the potential for attractive returns.

For example, a new growth fund tapping into rental yields from residential properties is targeting returns of between 3% and 4.45% per annum. AltX investors, while not participating in capital appreciation, receive stable returns of between 4% and 8%.

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September 23, 2021 Money Management | 27

Alternatives Strap

Private debt investors get the benefit of an investment backed by real estate security, with a predictable monthly return. They can start with a single investment or build a diversified portfolio based on available capital and risk profile.

DEMOCRATISING ACCESS TO INSTO-SIZED INVESTMENTS Tech platforms have changed the game in two ways: fractionalisation and distribution.

It was not that long ago that private investing began and ended with the stockmarket. Investors could quite easily buy a diversified portfolio of listed equities, but not much more. Unlisted investment opportunities were reserved for a privileged few – primarily institutional investors with large cheque books and multi-billion dollar investment portfolios.

At the smaller end of town, access to private syndicated investments was based on networks and by invitation only. This meant both sides of the market were missing out: demand for capital was inefficiently matched to limited pockets of supply – think ultra-high net worths and family offices. At the same time, investors with capital to put to work were lost on how to access quality opportunities.

Access to fractional investing is disrupting that traditional status quo by harnessing the power of digital platforms for distribution. By breaking unlisted investments up into smaller bundles, a much larger universe of investors suddenly has the cheque size to play. And, by seamlessly distributing offerings via platform to thousands of investors at the same time, everyone can participate on an equal footing.

Previously, a private offering

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might have been taken up by a small number of private investors who personally knew the primary deal sponsor. A private club, if you like.

Now bite-sized chunks are open to an infinitely larger investing universe. A farmer in Wagga or a retiree on the Sunshine Coast – they all now have the same access to opportunities as the networked set in Sydney and Melbourne.

This larger pool of investors will continue to grow when our platform is able to open up to retail investors, beyond its existing pool of wholesale investors.

A new generation of investors is already attracted by the accessibility and affordability of fractional investments. BrickX, for example, operates as a ‘stock exchange’ for fractional residential real estate investment, with a minimum investment of just $250 in units (or ‘bricks’) and the BrickX property trust. Most of its investors are aged under 35. And fintechs like Stake, which enables Wall St share trading in minutes on a mobile app, are meeting the needs of this next generation of investors. Australianowned Stake recently announced self-managed superannuation fund (SMSF) set-up and administration services, and has already launched in New Zealand, the UK and Brazil.

MORE CHOICE FOR FINANCIAL ADVICE For financial advisers, this democratisation of investment may seem like a double-edged sword – it gives their client direct access to an ever-increasing range of opportunities.

However, it’s also a significant opportunity to help clients make smarter decisions, reallocate funds for improved portfolio diversification, and access

real-time reporting to help clients understand exactly what they’re investing in.

With the 10-year yield on Australian Government Bonds just 1.57%, and the official cash rate inching closer to negative returns, private real estate debt rates of 4% to 8% look pretty attractive. And as the deals are typically short-term – on average 12 to 18 months – they make a solid alternative for investors who cannot achieve target income with fixed income investments, including SMSFs. These returns also make private debt more attractive to older clients who prioritise a reliable income stream in retirement.

Age, it seems, is no barrier to fintech adoption. A sizable portion of our investor base are retirees who access the tech platform daily to invest in property-backed deals.

This generation of investors is more comfortable than you may think about using a platform to access investments, and this is tremendously encouraging – it shows the path to investing via platforms is becoming mainstream.

For financial advisers, it’s another sign that client expectations have shifted – demanding greater transparency, accessibility and control. Instead of seeing that as a threat, it can become an advantage.

Because the real beauty of this model is the way it connects investors with opportunities they might otherwise not have known existed. And as it is secured by registered first mortgage, there is tangible asset backing.

“Access to fractional investing is disrupting that traditional status quo by harnessing the power of digital platforms for distribution.”

– Nick Raphaely

RE-THINKING THE ASSET ALLOCATION MIX

does to the target portfolio mix.

As a fractional owner, investors have a smaller capital outlay, improved diversification and the benefit of detailed due-diligence. For example, at AltX, we get a 360-degree view of the true valuation of the asset underpinning a private debt deal. Clients tells us they look at the LVR (Loan to Value Ratio) to assess risk. They appreciate the transparency – they know exactly where their investment is going, where the underlying security asset is, and who they are dealing with.

If you are new to private debt investing, there are a few things to consider. Check how the risk is isolated for example, AltX uses separate special purpose vehicles (SPVs), so deals are ringfenced from each other. Make sure you have access to the underlying documentation, and know your rights in the event of a default. And check the interests of the people managing the loan align with yours – are they also willing to invest on the same terms?

As technology continues to advance, investors will have access to more options than ever before.

However, the fundamentals of investing remain the same: know your risk profile, do your homework on who’s behind the deal, and diversify your portfolio to mitigate downside risks.

Fractional investments change the game in terms of risk and return, so it’s worth thinking about what this

Nick Raphaely is co-founder and co-chief executive at AltX.

15/09/2021 3:24:51 PM

28 | Money Management September 23, 2021

Toolbox

BREAKING UP IS HARD TO DO

When it comes to divorce and separation, Alex Koodrin examines why it is important to talk with clients about the implications for life insurance sooner rather than later.

SEPARATION AND DIVORCE can have a negative financial impact on many clients. In these situations, advisers often play a critical role by assisting with the practical aspects of splitting assets and cash, and can further demonstrate the value of personal advice in the area of life insurance.

Some may consider raising the topic of life insurance during the beginning of a marriage breakdown as bad timing; however, it’s an important conversation to have earlier rather than later.

According to the Australian Bureau of Statistics (ABS), the median duration from marriage to separation is 8.5 years; and from marriage to divorce, 12.2

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years. Often, a considerable period passes between separation and divorce, so your client’s financial situation and needs are likely to change far ahead of a divorce being formalised.

For example, they may need to enter or return to the workforce, or give up work to look after young children.

Furthermore, a divorce can result in both parents taking on more debt, due to the sale/ purchase of property/ies. This creates greater financial exposure if either parent becomes disabled or dies.

This article offers some tips for advisers who are taking clients through how to best protect themselves and their

families during an emotional and stressful time.

1. DON’T DELAY WITH ESTATE PLANNING Advisers providing full-service advice (similar to solicitors and other professional advisers) have an obligation to consider estate planning issues if they become aware of a client separating from their partner. Failing to meet this obligation can have serious consequences. Advisers may be exposed to negligence claims from clients and, should the client die while a family law matter is ongoing, potentially the intended beneficiaries too.

It’s important to make clients aware of the need to review their will upon separation and review

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September 23, 2021 Money Management | 29

Toolbox

joint ownership of assets, as well as death benefit nominations made under superannuation and non-super life insurance policies.

When reviewing a client’s financial situation, advisers should also be mindful of Standards 2 and 6 of Financial Adviser Standards and Ethics Authority (FASEA) code of ethics: to act with integrity and in the best interests of each client, and “actively consider the client’s broader long-term interests and likely circumstances”.

Case study Peta and Pedro separated in 2019. As they had not yet applied for divorce, they were still legally married when Peta passed away last year.

Peta had a term life policy outside super, where she named Pedro as her sole beneficiary.

Peta had also provided a non-lapsing death benefit nomination to her super fund trustee in favour of Pedro. She had not updated her will since 2010, in which she named Pedro as the sole beneficiary of her estate. Her full-service financial adviser, Elena, after learning of Peta and Pedro’s separation, had not advised Peta about the importance of reviewing her will.

Further, she neglected to advise Peta about reviewing her death benefit nominations and the possibility of severing the joint ownership of the couple’s family home, upon separation.

Peta passed away in 2020 while the family law proceedings were ongoing in relation to their separation.

It was clear that Peta’s intention was to forge her own future without being involved in Pedro’s financial affairs; however, as she had not changed her will, Pedro received the death benefit from Peta’s non-super term life policy as well as from the super fund. Pedro also assumed full ownership of the couple’s jointlyowned family home, by right of

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survivorship.

Peta’s intended but disappointed beneficiaries were her adult children from a previous relationship. Taking into account the life policy, super benefit and the value of the family home, the initial economic loss suffered by the adult children was substantial.

Potentially, the client’s children may make a negligence claim against Elena. This may then have an impact on Elena’s professional indemnity insurance and even on her personal assets.

Note that the children may be entitled to make an application under the family provision legislation in their state, however their financial outcome would have been much better if Peta had changed her death benefit nominations, joint ownership of the family home and her will.

Therefore, any changes to the income of either parent may affect the mandated child support payments.

In regard to how much IP cover should be recommended in these situations, for the child support-paying parent, cover could be provided up to when mandated payments would normally cease – generally at age 18. The required level of cover may decrease at this point.

However, the maximum amount of IP cover (up to 85%) may be chosen, as any excess can be used at their discretion. It would also be common for the main caregiver’s income (if applicable) to be insured up to the maximum level possible or to have a monthly benefit under a home duties income protection policy.

2. UPDATE INCOME PROTECTION POLICY

3. LIVING INSURANCE CAN HELP COVER MEDICAL COSTS

While dealing with a marriage breakdown is always going to be difficult, eliminating financial exposure or instability will help your client focus on what matters most, especially if they have young children.

Currently, through income protection (IP) insurance, your client and/or their former spouse can cover up to 85% of their monthly income, which can help to maintain the children’s lifestyle and wellbeing, in the event of a disability.

Child support is an important factor when calculating how much IP cover a client should have. The amount of child support payable can be determined through an informal or formal agreement between both parents. However, if this is not feasible, the amount will be calculated by a Services Australia assessor, based on the amount of adjusted taxable income derived by each parent, the individual percentage of care that they provide to their children, the number of children, and the children’s ages.

Living insurance (also known as trauma insurance) can provide a lump sum payment for people suffering from one of a range of specified medical events. Such a payment can assist with medical and accommodation expenses, and also be used to reduce debt to allow more flexibility with work; eg, where a parent wants to work part-time or change careers after the illness or injury.

In addition, trauma payments could be used to replace income.

If the child support-paying parent chooses to take leave from work after suffering from a specified medical event, their adjusted taxable income will reduce and their required payments to their former spouse may also reduce.

However, parents who are focussed on the best interests of their children can use trauma proceeds to continue the financial support that would otherwise be provided by child support payments.

For the main carer, trauma payments could be used to replace their income (if applicable) and/or to pay for

Continued on page 30

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30 | Money Management September 23, 2021

Toolbox

CPD QUIZ Continued from page 29 professional help with domestic duties, allowing time away from these responsibilities in order to regain their health.

4. REVIEW HOW TPD DEFINITIONS APPLY

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. According to 2019 ABS statistics, what is the median duration from marriage to separation in Australia?

In more serious circumstances, total and permanent disability (TPD) insurance can pay a lump sum benefit if your client becomes totally and permanently disabled as defined under the policy.

There are two main types of occupation-based TPD insurance – ‘own occupation’ and ‘any occupation’. Own occupation TPD insurance benefits are payable if your client is permanently unable to work in their current or most recent occupation. Any occupation TPD insurance benefits are payable if they are permanently unable to work in an occupation that they would be suited to by their education, training and experience. Some policies will also pay a benefit if your client is able to work, but in a severely reduced capacity. Again, while mandatory child support payments may reduce, allowing for lost income in the TPD sum insured will allow the contributing parent to continue to financially support their children.

Home duties TPD policies are also available for homemakers who are severely disabled and unable to perform normal household duties.

a) 1.2 years

5. BENEFITS OF TERM LIFE INSURANCE

3. Which of the following insurance policies would be suitable for

Term life insurance pays a lump sum benefit if the insured dies or suffers a terminal illness. For example, if your client is deemed to have less than 24 months to live, an advanced payment can be made for terminal illness – though it’s important to note that some policies have shorter time frames.

The non-residing parent can provide for their children’s future, by allowing for their portion of lost income and education expenses in the term life sum insured. A term life payment could also ensure that property is passed onto their children debt-free, if the mortgage is fully covered.

Claim proceeds from a policy owned by the main carer can be used to eliminate the mortgage on their home, and allow the children to remain there, where suitable. Cover can also be for the remaining portion of lost income and education expenses, as well as any final expenses.

CONCLUSION The breakdown of a marriage can have wide-ranging financial impacts. Your client may experience a significant lifestyle change, and if so, their insurance needs are likely to change. A review of their current insurance portfolio is paramount, with an assessment of whether existing definitions and level of cover are still suitable.

In addition, as part of estate planning, it is imperative to review the beneficiaries named in a client’s will, super fund and insurance policies, as well as any joint ownership of assets, as soon as practicable when they separate from their partner.

While holding an advice conversation during an emotionally difficult time for a client can be challenging, your careful consideration of their changing circumstances can be a powerful demonstration of the value of personal advice. Full-service financial advisers should also keep in mind that they are obligated to hold such a conversation, and can be left legally exposed if they fail to do so.

Alex Koodrin is senior product manager – advised, life insurance at BT.

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b) 3.7 years c) 8.5 years d) 12.2 years 2. The case study states that financial adviser Elena failed to advise Peta on reviewing which important estate planning issue? a) Peta’s will b) Peta’s super and non-super term life death benefit nominations c) Peta’s joint ownership of the family home d) All of the above

a full-time homemaker? a) Own occupation income protection b) Salary continuance insurance c) Home duties income protection insurance d) Business expenses insurance 4. What is another name for living insurance? a) Trauma insurance b) Total and permanent disability insurance c) Terminal illness insurance d) Income protection insurance 5. What are the two main TPD definitions for working clients? a) Own and any occupation TPD b) Own occupation and home duties TPD c) Any occupation and home duties TPD d) None of the above

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/breaking-hard-do

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

14/09/2021 3:21:03 PM

September 23, 2021 Money Management | 31

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

Appointments

Move of the WEEK Daniel Shrimski Managing director Vanguard Australia

Vanguard Australia appointed Daniel Shrimski as managing director, as Frank Kolimago will become global head of talent management for Vanguard Group in Philadelphia, US. Shrimski joined Vanguard’s Australian business in 2011 as the company’s chief financial officer (CFO)

Easton Investments has appointed Tara Ross as head of GPS Wealth and she will start in the role on 13 September, 2021.

Ross was Wilsons Advisory’s general manager for private wealth and her appointment aimed to strengthen the Easton leadership team and take the wealth solutions division to its next period of growth.

Former Macquarie Group chief executive Nicholas Moore has been appointed inaugural chair of the Financial Regulator Assessment Authority (FRAA).

Gina Cass-Gottlieb, partner within the Competition and Regulation Group of Australia law firm Gilbert and Tobin, and Craig Drummond, former NAB group executive finance and strategy, had also been appointed.

The FRAA was established in response to recommendations 6.13 and 6.14 of the Hayne Royal Commission was tasked with reviewing and reporting on the effectiveness and capability of Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

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and moved to the US in January 2017 to become the divisional CFO of the US retail investor group. The group comprised over US$2 trillion ($2.71 trillion) in assets under management and more than seven million retail investors.

Most recently, he was CFO for

In its first year, the FRAA would be responsible for assessing the effectiveness and capability of the ASIC to assist recently appointed ASIC chair, Joe Longo, in ensuring ASIC was operating effectively and consistently with the Government’s Statement of Expectations.

Treasurer Josh Frydenberg said: “Together, the inaugural members have an in-depth understanding of Australia’s regulatory framework and firsthand experience working with ASIC and APRA over many years”.

Global infrastructure investor, H.R.L. Morrison and Co has appointed Perry Offutt as its new head of North America, effective mid-October.

Perry, who has over 20 years of extensive infrastructure investment and industry experience, particularly in deal origination and execution, with a strong track record of success, joined from UBS Asset Management, where he most recently held the role of managing director, head of infrastructure Americas.

Prior to this, he worked

Vanguard’s international business and a member of the international leadership team.

Prior to Vanguard he spent 11 years at GE across Australia, US and The Netherlands, including being a finance director within GE Capital Australia’s consumer finance division.

at Macquarie Infrastructure and Real Assets where he was managing director on the North American investment team and at Morgan Stanley, where he was head of infrastructure banking for the Americas.

Investors Mutual (IML) has appointed Damon Hambly as chief executive, allowing founder Anton Tagliaferro to focus on the investment side of the business.

Hambly previously worked at Natixis Investment Managers (Natixis IM) as chief executive for Australia, which was a shareholder in IML. He had also been a director at the firm for the past four years.

The CEO role was a new position for IML, the firm said, to allow founder Tagliaferro to focus on the investment side of the business in his role as investment director.

A spokesperson for IML said: “Damon has a thorough understanding of IML’s business, having been a director for the past four years, and since January 2020, he’s been an executive in the business working with Anton Tagliaferro and the senior staff”.

Natixis IM has appointed Louise Watson as its country head of Australia and New Zealand.

Watson, who had worked at Natixis IM since August 2018, was previously managing director and head of distribution for Australia and New Zealand at the firm.

Prior to that, she worked at firms including CQS, Challenger and Aberdeen Asset Management.

Praemium has added business strategy responsibilities to its chief commercial officer, Mat Walker, as part of its growth strategy following the appointment of ex-Powerwrap chair Anthony Wamsteker as chief executive in August.

Praemium’s head of distribution, Martin Morris, was promoted to the executive team as chief distribution officer, taking full responsibility for sales.

Wamsteker said Praemium was well positioned to deliver continued growth and capitalise on the strong momentum it built after acquiring Powerwrap and investing in sales and operations over the last two years.

14/09/2021 3:20:48 PM

OUTSIDER OUT

ManagementSeptember April 2, 2015 32 | Money Management 23, 2021

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

Lessons in playing the market

A brutalist WA quarantine

HAVING lived through several financial crises – without disclosing how many as it would be rude to bring age into the equation – Outsider has seen his fair share of market mistakes over the years.

Following the herd, attempting to time the market, and buying at peak are the ones that spring to mind.

So, Outsider could not pretend to be surprised at Airlie portfolio manager Emma Fisher’s comments on how she is concerned the rising number of first-time investors to the market will end up ‘burnt’ if there is a market collapse.

Some 435,000 investors traded for the first time in 2020, many of them in the younger demographic.

While the so-called ‘lucky country’ has been less affected than other major markets such as the US and UK when it comes to a financial crash, this means younger investors may have the impression that ‘the market can only go up’.

OUTSIDER felt a number of feelings he had never felt before while watching a recent Parliamentary hearing – fear, dread, and slight panic.

For you see, it was not to do with the less-than-usual grilling of ASIC that day but rather the location of one certain committee member.

As Outsider was diligently covering the hearing, he noticed Western Australian Liberal MP Celia Hammond was in a rather peculiar place. It was dark, a bit grimy, and looked like she was in a basement.

Outsider’s heart began to race as he feared Hammond may have been kidnapped and was still being forced to appear during the hearing to give off a pretence that she was fine.

However, Outsider fears were allayed when committee chair, fellow Liberal MP Tim Wilson asked: “Ms Hammond.

Do you have brutalist architecture in your home? I’m very impressed, based on the ceiling at least”.

Hammond replied: “It’s called quarantining in the garage of my house”.

“Okay, I’m less impressed. You shouldn’t have demystified it for me,” Wilson said.

As Outsider sighed an air of relief, he suddenly remembered that Hammond may well have been kidnapped after all given she was living in Western Australia and destined to be cut off from the rest of the world until Premier Mark McGowan eventually loosens WA’s border rules.

Understandably then, they will learn a sharp lesson if there is a crash.

For your humble Outsider, he would not pretend to know everything about investing but he can claim to have picked up a tip or two from the very pages of Money Management and is hopeful this knowledge will lead to a solid retirement for him and Mrs O (eventually).

Lost connections NO one saw the COVID-19 pandemic – and our reliance on telecommuting – coming but after having the chance years ago to build a high-speed internet network, Outsider has become frustrated at seeing Coalition MPs laugh off the common dropouts of the system.

On this such occasion, the dropout struck during the ASX’s portion of a Parliamentary hearing, rather poetic for the exchange that has gained recent notoriety for its own dropout.

Senator Andrew Bragg quipped “The NBN isn’t working… which would be unusual because the NBN has held up extremely well during the pandemic”.

As Coalition members smugly chuckled over the

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policy train wreck of their former communications minister and Prime Minister, Malcolm Turnbull, Outsider was quick to remember it was them who decided to scale back the effectiveness of the network.

And thus, Outsider’s laughter at those Coalition members internet misfortunes quickly turned to bitterness as he realised there was no self-awareness over the situation.

These dropouts and connections have been common during Outsider’s coverage of Parliament, not to mention his own general day-to-day office doings.

Now, working from home during the pandemic lockdown in Sydney, let’s hope Outsider can file this story lest his own internet drops out once again.

"Make sure you watch that hearing and bring popcorn."

"It's clearly not anonymous money – it's got blocktrack technology behind it!"

– Coalition MP Tim Wilson on potential future AUSTRAC hearing

– Coalition MP Jason Falinski on the safety of crypto

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16/09/2021 10:39:51 AM