Money Management | Vol. 34 No 18 | October 8, 2020

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 34 No 18 | October 8, 2020

18

ESG

The threat of greenwashing

ASSET ALLOCATION

28

Lessons from endowment funds

TOP FINANCIAL PLANNING GROUPS

Uses for convertibles

FSC flags significant IP changes by major insurers

BY MIKE TAYLOR

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The end of an era THE numbers of planners working at the biggest groups have continued to dwindle to its lowest levels in five years, underscoring the end of the banks’ dominance in wealth management, these were the finding of Money Management's 2020 TOP Financial Planning Groups research.

A gradual and long-lasting decomposition of the verticallyintegrated model coupled with banks’ internal governance issues, and their continued exit, which happened at the time when the industry was still recovering from the Hayne Royal Commission and struggling with new rigorous standards imposed by the Financial Adviser Standards and Ethics Authority (FASEA), has definitely accelerated a drop in adviser numbers working for the biggest groups to around 13,200 from 14,500 last year.

The single biggest financial planning group in Australia, AMP Financial Planning (AMP FP), which has managed to keep its title, saw a departure of 700 advisers over the span of five years, including around 250 planners who departed within the last 12 months.

On the other hand, the second-largest player by adviser numbers, IOOF, has been on the opposite end of spectrum, expanding its business with recently-announced ambitions to become the number one retail wealth manager by funds under management, administration and advice, estimated at $510 billion.

So, where did the planners go?

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Full feature on page 22

38

TOOLBOX

AUSTRALIA’S major life insurers have confirmed via the Financial Services Council (FSC) that they will be exiting many of their exiting income protection products as they bring new, more commercially-effective offerings to market next year.

The FSC has signalled the changes with its chief executive, Sally Loane suggesting that the choice for consumers will be to stay put within existing products and face the reality of likely premium increases or switch to what will be new, more affordable offerings.

The FSC sent the market signal at the same time as saying it supported a framework recently put forward by the Australian Prudential Regulation Authority

(APRA) and the Actuaries Institute.

The FSC is representative of all the major life insurers in Australia.

Putting forward the FSC’s position, Loane noted that a recent KPMG report on international comparisons of income protection products had suggested that Australia offers the most generous and comprehensive income protection policies of any developed market in the world.

She also noted that this was deemed to have exacerbated the recent increase in the incidence and duration of claims, including for mental health conditions.

“We know there’s a direct link between increasing claims costs and increasing premiums, which is why Australians have seen Continued on page 3

AMP to centralise business services for efficiency

BY JASSMYN GOH

AMP has announced it has made changes to its teams to centralise some business services within its investments and banking divisions across AMP and AMP Capital.

In a statement to Money Management, an AMP spokesperson said: “Our focus is on continuing to reshape the organisation to drive efficiency and support the delivery of AMP’s strategy to become a simpler, client-led organisation”.

While AMP could not confirm whether there would be any redundancies or when if any, it said it looked to be a more efficient organisation by bringing the human resource, legal function, and finance teams together to be a more centralised group.

AMP noted that it was looking at a range of opportunities to drive that efficiency and some of these opportunities would likely impact roles.

1/10/2020 10:32:11 AM

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October 8, 2020 Money Management | 3

News

FASEA highlights problem areas in August exam

BY CHRIS DASTOOR

THE Financial Advisers Standards and Ethics Authority (FASEA) has once again cited the areas advisers struggled with in the latest FASEA exam, with three of the Standards, ethical obligations, understanding client best interests and understanding the difference between types of advice as key areas.

FASEA released the results of the August exam on Wednesday which saw 82% pass, which was 2% lower than the average of 84%.

The exam tested three areas of knowledge: financial advice regulatory and legal requirements, financial advice construction, and applied ethical and professional reasoning and communication.

In financial advice regulatory and legal requirements, advisers struggled with: • Demonstrating an understanding of the difference between personal advice, general advice and factual information and how they apply to different client scenarios; • Assessing whether advice recommendations meet the client’s best interests; and

FSC flags significant IP changes by major insurers Continued from page 1 rising income protection premiums,” Loane said.

“To address this, the life insurance industry is committed to developing new, more affordable types of income protection cover to give Australians more choice.

“For people with existing cover, the choice is likely to come down to either keeping their existing generous type of cover with potentially increasing premiums, if they can afford to, or switching to more affordable income protection cover.”

“APRA has set out its roadmap.

The life insurance industry is ready to design a new generation of products,” Loane said.

“We expect the new generation of income protection products to be available in 2021.”

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• Assessing the impact conflicts of interest may have on advice recommendations.

In financial advice construction, advisers struggled with: • Identification of client biases and how they may influence clients’ financial decisions and/or investment choices; and • Understanding the context of client requests for advice and how this may impact advice construction.

In applied ethical and professional reasoning and communication, advisers struggled with: • Applying Standard’s Two, Four and 12 of the Code of Ethics to advice scenarios; and • Demonstrating an understanding of an adviser’s ethical obligations when advising on complex family structures.

It was the second time that FASEA had released details on the problem areas with exam, previously doing so after the June exam.

Registrations for the November exam, the final one of 2020, was open until 16 October.

FASEA previously announced six sitting dates for 2021, which would be held in 31 locations across the country.

Australia retains strong retirement security ranking

BY LAURA DEW

AUSTRALIA has been ranked among the top countries in the world for retirement security for the fourth consecutive year.

The Natixis Investment Managers Global Retirement Index (GRI) assessed 44 countries on retirement security including factors such as health, finances, environmental factors and gender equality.

New Zealand was in sixth place while Australia was in seventh with Iceland in first place.

Australia was helped by its high ranking for finances in retirement, where it placed third, due to the compulsory superannuation system.

However, this had been impacted by the COVID19 pandemic and market downturn which had negatively affected super balances and investment returns. Natixis IM said it was “too early” to assess the impact of the early access to super measures.

Damon Hambly, chief executive of Natixis IM Australia, said: “While Australians have benefited from mandatory superannuation, many retirees still had balances too low to sustain their lifestyle through retirement. Now, Australian retirees whose balance has been affected by market disruption throughout 2020 may have to reconsider what their retirement looks like.

“Australia has always ranked highly for

finances in retirement, thanks to our superannuation system, and it’s too early for the GRI to assess the impact of the early access scheme to future retirement outcomes. What we do know is that those who took up the offer, who were mainly younger and lower income workers, may be disproportionately affected due to the effect of compound earnings.”

Australia was also noted for its bushfire season at the beginning of 2020 as an indicator that climatechange risks were becoming more severe. There were almost $100 billion in direct damages caused by the Australian bushfires.

“As demonstrated by recent Australian wildfires, climate-related natural disasters are becoming more severe and more frequent, and they are leaving vulnerable retirees exposed to higher levels of physical and financial risk,” he said.

The ranking for interest rates fell to 10th place as the Reserve Bank of Australia cut rates to 0.25% but it remained higher than other countries where rates were negative. The problem with falling interest rates was it would force retirees to dip into their retirement savings at a faster rate and may outlive their savings.

The top five “critical retirement risks” identified

by Natixis IM were recession, lower interest rates, public debt, climate change and income inequality.

1/10/2020 10:32:25 AM

4 | Money Management October 8, 2020

Editorial

mike.taylor@moneymanagement.com.au

FE Money Management Pty Ltd Level 10

TIME TO LET THE FINANCIAL PLANNING INDUSTRY SUCCEED

4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814

The banks are out, scores of advisers are heading for the exits and it is time for Governments to stand back and let the financial planning industry succeed.

oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560

AS IT turns out, 2018 was the last year during which the big four banks were a major influence in financial planning.

2019 was the year in which the banks definitively headed for and used the wealth management exit doors and 2020 will be remembered as the year during which their exit became complete with National Australia Bank (NAB) finally managing to unload MLC Wealth to IOOF. The implications of the banks’ exit are now made clear in Money Management’s latest TOP Financial Planning Groups research which reveals an industry dominated by mid-scale players such as Centrepoint Alliance and Countplus with the only remaining large-scale players being AMP Limited and IOOF. And even then, AMP Limited has signalled to the market that it is still reflecting upon its future.

Importantly, with the exit of the major banks, the financial planning industry has also substantially waved goodbye to large-scale vertical integration notwithstanding the fact that AMP continues operate in the banking, funds management and superannuation space while IOOF has funds management, superannuation and, more recently, asset management interests.

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As well, groups such as Fiducian continue to operate a vertically-integrated structure, but on a basis much more modest than that which was pursued by the major banks.

But it is not just the financial planning businesses which have changed hands, a number of the major platforms are now out from under major bank control with the MLC platforms moving under the IOOF banner, while private equity outfit KKR has a hefty stake in the Colonial First State platforms and speculation is swirling around Westpac’s intentions with respect to the future of BT Panorama.

As our TOP Financial Planning groups coverage points out, all this is happening at the same time as thousands of financial advisers are exiting the industry motivated by a range of factors including changed remuneration structures, minimum degree-level education requirements, the Financial Adviser Standards and Ethics Authority regime and the Life Insurance Framework.

This tapestry of change is occurring at the same time as research from groups such as Investment Trends is telling the consistent story that demand for financial advice is growing and that it is likely to continue to grow with superannuation funds and robo-advice providers

playing an increasing role.

So, the question should be: what will the financial planning sector look like in five years’ time?

On the available evidence, the exodus of financial advisers is probably already close to reaching its peak and the resumption of growth in adviser numbers over the next halfdecade will be driven by two key factors – future regulatory approaches pursued by Federal Government and the success or failure of the commercial models put in place by the major licensees.

What is already certain is that financial planning is down but not out. It remains a highly competitive environment as evidenced by those still willing to make strategic investments and the manner in which licensees aggressively try to attract good advisers and good advice businesses.

But if there is one message the industry needs to send to Government it is that the financial planning industry now needs to be given room to succeed; and that success will be made unachievable under the dead weight of layer after layer of regulation and cost.

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Mike Taylor Managing Editor

30/09/2020 3:46:15 PM

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6 | Money Management October 8, 2020

News

Mega-superannuation fund outflows would have sunk many smaller industry super funds

BY MIKE TAYLOR

THE amount of funds which have flowed out of AustralianSuper is larger than the funds under management of many of Australia’s corporate superannuation funds and some smaller industry funds.

In short, just one fund has seen sufficient funds flow out of its coffers from early release as would have started a reasonablysized new fund.

The latest data from the Australian Prudential Regulation Authority (APRA) has revealed that AustralianSuper has seen outflows of over $4.6 billion which is close to or more than the total funds under management of small electricity industry fund, NESS and lawyer-focused fund, Legalsuper.

The APRA data show that $4,659,669,367 has flowed out of

AustralianSuper as a result of early release requests with the vast bulk of that money being taken as part of the first round of the Government’s initiative $3,212,767,202, with a further $1,446,902,165 having been taken in the second round.

There is now conjecture that

the Government will use the Budget to open up a third round starting in January, next year and the early release scheme has acted as an accelerator of further superannuation fund mergers.

But AustralianSuper has not been alone with hospitality

focused fund HostPlus closing in on $3 billion in total outflows alongside big retail industry fund REST which has broken through the $3 billion barrier.

Queensland-based Sunsuper has also cracked $3 billion with HESTA closing in on $2 billion.

Superannuation fund executives said that these numbers needed to be viewed in the context of the early release scheme being ongoing with a further surge in outflows expected in the run-up to Christmas as people sought to cover their costs.

According to APRA, the 10 funds with the highest number of applications received from the ATO have made 2.9 million payments worth a total of $21.9 billion.

It said the average payment from these funds was $7,608.

Superannuation should not be a political issue

BY CHRIS DASTOOR

SUPERANNUATION shouldn’t be a political issue and the Government is failing future retirees by delaying increases in the superannuation guarantee (SG).

Speaking at the Australian Council of Trade Unions (ACTU) Emergency Superannuation Summit, John Hewson, former LNP leader, said super should not be a political issue.

“It’s not about political expediency, it’s not about the COVID recovery or the need to exit the COVID recession,” Hewson said.

“It’s about longer-term strategic challenges, the important one being to adequately prepare workers to afford their retirement.

“It’s a challenge for good and responsible government; unfortunately, because the LNP have a pretty disappointing track record when it comes to compulsory super.”

Hewson noted the delays of what was legislated by the Gillard government which left the SG stuck at the current 9.5% rate.

“The debate today is whether we can go the next 0.5% in the middle of next year having

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seen that significant delay,” Hewson said.

“And the government is finding any argument not to do it, the wage impacts, weaker growth or job prospects.

“It’s never a good time for them to think about doing it because they don’t want to do it.”

When asked how employers would react if the legislation did not go ahead, Bill Kelty, former ACTU secretary and a founder of the superannuation system, said they had made those commitments on the basis of a political decision to increase the SG to 12%.

“That’s a breach of faith not only to the employees but to the employers who went out and made those decisions,” Kelty said.

Kelty said there was no argument against raising the SG and it was a commitment already made, and that a higher SG rate was good enough for Members of Parliament.

“The 12% was a commitment, people frame their expectations and their obligations around the 12%; companies went out and negotiated it in advance,” Kelty said.

“Not one candidate in this country said they opposed superannuation going to 12% and

certainly the government didn’t.

“But most important, it’s the extra dignity that is required in the generations ahead; it’s the extra two or three years of retirement.”

Hewson said the Government shouldn’t shy away from SG increases as they were now more important than ever as Australians needed to maintain higher superannuation balances.

“It’s not defensible to say current situations are tough… that’s not an argument, that’s an excuse,” Hewson said.

“We somehow dropped back to the idea that 12% is adequate when people are living longer and 15% may be the minimum that we should be considering.

“Do it in two stages: get to 12% then go to 15%; it’s a challenge for the government and it’s a litmus test to see whether this Treasurer and Prime Minister really understand the issue of superannuation and are prepared to lead on that issue.

“If you want to play the electoral game of short-term populist politics and say tough times during COVID so we can’t afford it, then that’s really an irresponsible attitude.”

30/09/2020 3:46:35 PM

October 8, 2020 Money Management | 7

News

Possible for FASEA exam re-mark to be successful

BY CHRIS DASTOOR

APPLYING for a re-mark for a failed Financial Adviser Standards and Ethics Authority (FASEA) exam has been a contentious issue for advisers and many are unsure if it will make a difference, but it is possible to achieve a pass from an exam re-mark.

However, when asked for the exact number of candidates that had asked for a re-mark and subsequently succeeded, a spokesperson for FASEA said it was not something they could disclose and “there isn’t enough data to determine the level of success at this stage.”

In a statement to Money Management, FASEA said: “The exam provides for unsuccessful candidates to seek a remark of their exam at a cost. The remarking process is rigorous and independent of the initial marking process and involves a double marking by approved expert markers. These scores are then reviewed and adjudicated by a chief marker. At each exam a small number of

candidates have sought and received a remark.”

Sitting the FASEA exam cost $540 plus GST, but applying for a re-mark for an unsuccessful attempt would incur a further fee of $198 plus GST. An adviser who had received a successful re-mark told Money Management he gave it a shot because it was his second failed attempt at the exam.

The adviser was told when they did a re-mark, it was given to two different markers and only the written questions would be re-marked.

“When I contacted FASEA for a re-mark, they sent this canned email basically saying ‘Yes, we offer a re-mark, but we actually mark this very, very well and basically you haven’t got a chance’,” the adviser said.

“Because I’m going to pay another $500 to re-sit the exam to stay in business, I might as well chuck in another [$198].

“When I first saw the re-mark result of a pass, I was actually rubbing my eyes because I had no expectation of it really, I just did it to cover my bases.”

The adviser joined the industry in 2017, switching careers after achieving a Diploma in Financial Planning.

However, that qualification alone was not enough to fulfil the education requirement which came in shortly after he had joined the industry.

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30/09/2020 3:46:56 PM

8 | Money Management October 8, 2020

News

APRA failing on sole purpose test says Andrew Bragg

BY MIKE TAYLOR

THE Australian Prudential Regulation Authority (APRA) is being accused of failing to adequately enforce the sole purpose test on some industry funds which are funding the publication of The New Daily.

NSW Liberal Senator, Andrew Bragg, has continued to point to the fact that The New Daily publication is being funded by industry funds and has suggested that the regulator’s failure to enforce the sole purpose test with respect to the funding is “a joke”.

He described The New Daily as a “boondoggle” and a “propaganda outfit” and something which represented a clear breach of the sole purpose test.

Bragg’s attack on The New Daily and its funding follow efforts by the chairman of the House of Representatives Standing Committee on Economics, Tim Wilson, to extract details of the manner in which The New Daily was funded.

However, Industry Super Holdings claimed the information was confidential and that the organisation contributed capital to The New Daily “as required”.

Magellan and Barclays back launch of new player – Barrenjoey

Superannuation is different and needs to be treated as such THE business models of superannuation funds are distinctly different to those of the banks and insurers and need to be recognised as such.

That is the view of the Association of Superannuation Funds of Australia (ASFA) which is urging the Government to be cognisant of these differences when seeking to impose new regulatory structures aimed at protecting critical infrastructure and systems of national significance.

ASFA is claiming that superannuation funds are already heavily regulated and that any new measures will need to be carefully calibrated to avoid duplication.

“ASFA would also like to highlight that the business model of superannuation funds is substantially different from that of banks and insurers with there being varying degrees of

18MM081020_01-16.indd 8

insourcing and outsourcing of its basic activities such as administration, investment management, insurance and claims management services, and custodial services,” it said.

“Any regime designed to bolster security and resilience would need to take account of these different models, the role of the various providers in the business models and the range of risks that are relevant,” the ASFA submission said.

It said that in these circumstances it would be beneficial to bring together representatives of the superannuation industry and the relevant regulators to discuss the particular features of the superannuation industry and existing regulation.

ASFA said it would be happy to organise such a meeting.

BOTH Magellan and Barclays have announced themselves as foundation investors in a new Australian-based full service financial services firm – Barrenjoey Capital Partners – which will be headed up by former Challenger boss, Brian Benari.

Magellan announced to the Australian Securities Exchange (ASX) that Barrenjoey would provide corporate and strategic advisory, equity and debt capital market underwritings, cash equities, research, prime brokerage as well as traditional fixed income services to Australian and international clients.

It said the company would be led by Guy Fowles as executive chair and Benari as chief executive with the other founding partners being John Cincotta, Matt Hanning and Chris Williams.

Barclays has been announced as a foundation investor and has entered into a co-operation agreement with Barrenjoey covering global product distribution, research, cross-border advisory and debt capital markets, as well as making available significant balance sheet capacity for Barrenjoey to support its clients.

Magellan said it had invested approximately 1.2 million Magellan shares and $90 million of cash to take a 40% economic ownership interest in Barrenjoey, with Barclays investment comprising $45 million with a 9.99% economic stake.

30/09/2020 3:47:29 PM

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10 | Money Management October 8, 2020

News

Great Southern comes back to haunt Bendigo and Adelaide

BY MIKE TAYLOR

THE Great Southern agriculture investment debacle has come back to haunt Bendigo and Adelaide Bank which has been forced to implement a remediation process.

The banking group announced that it had put the process in place as a result of action on the part of the Banking Code Compliance Committee (BCCC).

It said the remediation related to some customers within the Great Southern loan portfolio with the historical breaches relating to debt collection processes, with 81% of the issues identified relating to the 2015 and 2016 calendar years.

The bank has provisioned for $1 million in remediation.

Commenting on the move, Bendigo and Adelaide Bank managing director, Marnie Baker said: “We regret our actions and sincerely apologise for any negative impacts these

breaches have caused for our customers.

“We fell short of our own expectations and that of our customers and the community. These actions do not reflect who we are and what we stand for. We always strive to put our customers and communities first and these historic issues are not acceptable.

“The bank has addressed the operational issues to prevent this from happening again and has established a remediation program to provide payments to customers where we made mistakes that had an adverse customer impact.”

She said actions taken by the bank to address the operational issues in the Great Southern portfolio included: • The integration of the Great Southern team into the team responsible for financial difficulty assistance to ensure increased oversight and staffing capacity, and consistent application of all financial difficulty processes; • Strengthened call recording systems,

complaints management, training and processes; and • Strengthened oversight processes to regularly review all Great Southern collections and financial difficulty activities.

“We accept and have reflected deeply on the findings and we understand how the mistakes occurred. When we recommenced collections activity following the Supreme Court finding in our favour in December 2014, we experienced a large influx of complex enquiry from Great Southern borrowers.

“As cited in the BCCC’s notice of sanction, our Great Southern collections team was established and operated separately from the bank’s broader operations, was inadequately resourced, and our processes and systems were insufficient for these staff and the Great Southern customers.

Because of this, we made mistakes in how we communicated with and responded to some of these customers.”

Can global SMID funds compete with Aussie counterparts?

BY LAURA DEW

AS Fidelity launches a global version of its mid and small-cap Future Leaders fund, has it been better to be invested in Australian or global ones in recent years?

The firm said the attraction of launching a global version would expand the investment universe and identify global small and mid-cap companies at an early investment stage.

Looking at data from FE Analytics, it was a clear victory for the Australian small and mid-cap sector over both long and shortterm time periods.

The biggest difference was seen over a five-year time horizon with the Australian sector returning almost double the returns by the global sector. Over five years to 31 August, 2020, the Australian sector returned 73% while the global counterpart returned just 39%.

Over shorter time-periods, the Australian sector had also outperformed over both one and three years as well with returns of 7.8% over one year to 31 August and 32% over three years. The global sector achieved less than this with returns of 4.9% over one year and 25% over three years.

Performance of Australian small and mid-cap sector versus global small and mid-caps over five years to 31 August, 2020.

The best-performing fund in the Australian space over five years was Ophir Opportunities which had seen total returns of 170%. The concentrated small-cap fund was launched in 2012 and focused on high quality, emerging businesses which were exposed to structural growth opportunities.

“With a bias towards cashgenerative businesses with sound

balance sheets and highly capable management teams, the fund seeks to identify these opportunities early in a company’s life cycle, when it is typically under-researched and under-valued by the investment market,” the fund said.

Like Fidelity, Ophir launched a version of this fund last year, Ophir Global Opportunity.

As well as Ophir, there were 11 funds in the sector which had reported returns of over 100% over the five years which were SGH Emerging Companies, Macquarie

Small Companies, Macquarie Australian Small Companies, OC Micro-Cap, Cromwell Phoenix Opportunities, Pendal Microcap Opportunities, Australian Ethical Emerging Companies, Ausbil MicroCap, Fidelity Future Leaders, Hyperion Small Growth Companies and VanEck Vectors S&P/ASX MidCap ETF. In contrast, the highest performance in the global space came from Bell Global Emerging Companies which returned 60.9%, far less than in the Australian space.

Chart 1: Performance of best-performing Australian and global small and mid-cap funds over five years to 31 August 2020

Source: FE Analytics

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30/09/2020 5:31:37 PM

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Important information This information has been prepared by MLC Asset Management Pty Ltd (MLCAM) (ABN 44 106 427 472, AFSL 308953), a member of the National Australia Bank Limited (ABN 12 004 044 937) group of companies (NAB Group).

NAB does not guarantee or otherwise accept any liability in respect of any financial product referred to in this publication or MLCAM’s services. This publication is intended only for financial advisers and must not be distributed or communicated to “retail clients” as defined in the Corporations Act 2001 (Cth). This information may constitute general financial advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that a financial adviser and investor should, before acting on the advice, consider the appropriateness of the advice having regard to the investor’s personal objectives, financial situation and needs. MLC Managed Account Strategies are available via investment platforms that are listed on our website (www.mlcam.com.au). You should obtain a Product Disclosure Statement relating to the investment platform and consider it before making any decision relating to the MLC Managed Account Strategies. A157538-0920

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28/09/2020 9:39:15 AM

12 | Money Management October 8, 2020

News

JobKeeper generates most questions from financial advisers

BY JASSMYN GOH

THE biggest concerns and questions advisers had in the last quarter were about JobKeeper whether it was for clients or for their own businesses, according to BT. BT head of financial literacy and advocacy, Bryan Ashenden, told Money Management that there were a lot of queries recently about JobKeeper, rather than JobSeeker, on whether their clients qualified given their situation, especially those in industries that had been most impacted by the COVID-19 pandemic such as travel and hospitality.

“Some advisers are asking for themselves as they are running their own businesses and are equally interested from a personal perspective,” Ashenden said.

“These include things like what the JobKeeper allowance is, how much they have to pass onto employees, if they have to top up super guarantee payments, and so forth. Those questions have kept us busy.”

The second most popular concern from advisers was the early release of superannuation and whether clients qualified for the hardship scheme.

Advisers were also concerned about super contribution caps and whether it was necessary to notify the Australian Taxation Office (ATO) of a client’s eligibility or intention to take advantage of the new measure to carry forward unused concessional contributions from the previous financial year.

Ashenden noted the larger cap was calculated automatically by the ATO and there was no need to notify the tax office.

The fourth most asked question was regarding the impact of rollovers on the amount

of super a client could transfer and hold in tax-free retirement phase accounts.

Ashenden said advisers were also asking about how rollovers were treated under the government’s income and assets tests for entitlement to the Age Pension.

HomeBuilder was also another topic that had advisers asking questions regarding the eligibility criteria for the $25,000 grants for clients who were already considering undertaking major renovations or a new build, prior to the announcement of the policy.

Who’s focusing on long term opportunities?

Elston Third Page.indd 2

CountPlus’ member firm completes tuck-in acquisition

BY OKSANA PATRON

NEW South Wales-based CountPlus member firm AdviceCo, which provides accounting, tax and wealth management solutions, has completed a tuck-in acquisition of the accounting revenues of Arch Capital under the CountPlus ‘owner – driver, partner’ model.

The transaction, which was structured as a cash payment of

18MM081020_01-16.indd 12

$0.4 million, with 65% to be paid on completion and the balance dependent on recurring revenues spread over two 12-month periods post completion, was said to be in line with CountPlus’ continued focus on strategic growth.

“Whenever we review a potential acquisition, our due diligence goes beyond just financial performance. Cultural

fit is a vital component as we drive to ensure we match complementary, quality firms with a client-centric approach,” CountPlus chief executive, Matthew Rowe, said.

The acquisition would be expected to help broaden AdviceCo’s accounting fee base, adding additional scale to the firm’s client offering, the firm said.

30/09/2020 3:50:29 PM

October 8, 2020 Money Management | 13

News

Generation Development Group takes 37% of Lonsec

BY MIKE TAYLOR

GENERATION Development Group (GDG) has announced the acquisition of a 37% stake in research and ratings house Lonsec.

The company has announced to the Australian Securities Exchange (ASX) that it has picked up the holding in Lonsec allied to the development of a new annuity product.

Commenting on the transaction, GDG chair, Rob Coombe, said the firm was embarking on significant step in progressing its growth strategy through the combination of organic and inorganic growth initiatives.

“We have entered agreements that will result in GDG acquiring a 37% interest in Lonsec,” he said.

Coombe said that the investment in Lonsec would provide GDG with a highly strategic

foothold in an attractive market niche of the financial services and wealth management market.

“We believe Lonsec is well-positioned for future growth supported by strong industry and regulatory tailwinds and will provide access to resilient recurring revenue streams from its core research offering,” Coombes said.

The transaction involves a total up-front acquisition consideration of $20.1 million for a 37% stake in Lonsec.

Who else, but Elston.

Elston Group ACN: 130 771 523 EP Financial Services Pty Ltd ABN 52 130 772 495 AFSL: 325 252 © 2019

Don’t just take a manager’s word on ESG: panel

BY JASSMYN GOH

GREENWASHING arose from ‘woeful’ disclosure and investors need to look under the bonnet and not just take the word of the product or fund manager about their environmental, social, and governance (ESG) work, according to a panel.

Speaking at the Australian Institute of Superannuation Trustees (AIST) Superannuation Investment Week virtual conference, Aware Super head of responsible investments, Liza McDonald, said her advice to trustees and investors was to do their due diligence.

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“Lift the bonnet and don’t just take the word of the product or manager that are telling you they’re doing it. If funds report to say they are contributing to SDGs [UN Sustainable Development Goals] but can’t give you reporting or metrics of what they say they are solving then that’s a huge red flag,” she said.

DWS (US) global head systematic investment solutions, Fiona Bassett, said greenwashing arose from woeful levels of disclosure but there were a number of disclosure initiatives, especially in the EU, that were a huge step forward.

“One of the things to look at is the KPIs – it’s

23/9/20 8:52 pm

something we are focused on to measure our own progress with third party auditors,” she said. “And if you want to understand who is greenwashing and who is not you should look at a fund’s stewardship. Go look at their proxy voting records because this will tell you everything.”

Bassett said DWS also used multiple sources of data sets to help cross reference and validate the ESG data they were looking at.

After this, Bassett said her firm would then rank companies based on whether people were leaders or laggards and would integrate ESG into the portfolio around those metrics.

30/09/2020 3:50:33 PM

14 | Money Management October 8, 2020

News

WAM Capital bids for Contango’s Income Generator

BY OKSANA PATRON

WAM Capital has announced its conditional off-market takeover bid for Contango Income Generator Limited (CIE), offering shareholders an opportunity to exit as CIE failed to provide shareholder value.

WAM said in a statement, made to the Australian Securities Exchange (ASX), that CIE shareholders suffered a persistent and deepening share price discount to net tangible assets (NTA), poor investment portfolio, an illogical change in investment strategy and an increase in fees as well as dilution of shareholder value and poor corporate governance including the CIE’s board’s failure to present Wilson Asset Management’s alternative proposal.

The offer consideration which assumed one WAM share for every three CIE shares, would

represent a premium of 17.6% to CIE’s share price, 18.1% to CIE’s one-month volume-weighted average price (VWAP) and a premium to CIE’s reported pre-tax NTA, the firm said.

Also, WAM Capital said that, in making this offer, it would provide all CIE shareholders with the opportunity to exit their positions in CIE and, if the offer was successful, WAM would provide CIE shareholders with a choice to either remain a WAM shareholder or utilise WAM’s on-market liquidity to exit their position.

Acquiring WAM shares would provide access to Wilson Asset Management’s investment expertise and commitment to shareholder engagement while WAM also offered track record of investment portfolio outperformance, greater market capitalisation and on-market liquidity and lower management expense ratio, the firm said.

How Mercer is delivering industry fund intrafund advice

BY MIKE TAYLOR

KEY industry superannuation fund Care Super has confirmed that it dropped Industry Fund Services (IFS) advisers to move its comprehensive advice provision inhouse while handling the intrafund advice responsibility to its administrator, Mercer.

Care has outlined to a Parliamentary Committee the manner in which it transitioned from its financial advisers being employed and licensed through Industry Fund Services to being employed in-house, with the intrafund function being undertaken by its administrator.

What is more, it has confirmed that members of the superannuation fund are able to access comprehensive advice for $395 an hour with the services being “provided by fully-qualified financial planners who have no other interest than to act in the best interests of members”.

“Over the past five years CareSuper has expanded resourcing in this area from three advisers to six advisers who provide non-intrafund advice. During the past two years CareSuper has transitioned from the advisers being employed and licenced

18MM081020_01-16.indd 14

through Industry Fund Services and assigned to CareSuper, to being directly employed by CareSuper as Authorised Representatives of Industry Fund Services,” the superannuation fund said.

“Under both arrangements the advisers are paid salaries with no incentives such as commissions or bonuses. CareSuper’s general target remuneration position for employees is the median of the ‘all profit to members’ financial services sector. It undertakes periodic benchmarking to confirm its position.

“The main activities of the advisers who provide non-intrafund advice include providing both general and comprehensive advice to members and their spouse only, education sessions (for example, seminars and webinars), along with completing all training as set by their licensee, continuing professional development standard requirements as set by FASEA [Financial Adviser Standards and Ethics Authority], and the required training as a CareSuper employee (e.g. cyber security, AML/CTF).

“Financial advice is one of many services that the fund promotes and offers to its members, and the advice function is not a separate business to the superannuation fund.”

Where intrafund advice is concerned, Care said resourcing had expanded from two to four advices, but the advice was provided by “our administrator as part of the overall range of services it is contract to deliver and is not a separate or additional charge”.

“Intra fund advice is offered to members as part of their membership as it is reasonable that they can expect answers to questions directly related to their interest in the fund. These advisers do not generate revenue for CareSuper.

“These advisers are employed and licenced by our administrator. As this is an outsourced service arrangement, we have no oversight of or influence on the actual remuneration paid to these advisers,” it said.

“Over a year ago CareSuper transitioned intra-fund advice from the advisers being employed and licenced through Industry Fund Services, to advisers being provided through our administrator. Financial advisers employed

by CareSuper can, but generally do not, provide intrafund advice. A recent example of these advisers providing intrafund advice was to meet the significant increase in demand following COVID-19 outbreak. Otherwise the responsibility for intrafund advice rests with the administrator.”

30/09/2020 3:50:50 PM

Who’s looking beyond the short term to focus on long term opportunities?

Who else, but Elston.

Elston has been agile in the short term, moving swiftly from defensive assets and repositioning for post pandemic growth. We’re looking beyond what’s happening in the short term and focusing lon ong term opportunities. To learn more about our active investment approach and how our range of managed account solutions deliver tax-effective outcomes for clients, visit elston.com.au

This material has been prepared for general information purposes only and not as specific advice to any particular person. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. Prepared by EP Financial Services Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”).

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28/09/2020 4:07:23 PM

16 | Money Management October 8, 2020

InFocus

VOLUME REBATES ARE LONG GONE SO WHO GETS THE MONEY NOW? Mike Taylor writes that with the few remaining grandfathered remuneration arrangements coming to an end, a different regime has already evolved with the ultimate cost being carried by investors.

IT IS NOW approaching half a decade since the Future of Financial Advice (FoFA) changes saw “volume rebates� to financial advice firms and therefore to financial advisers banned as part of the broad lexicon of what is regarded as conflicted remuneration.

It was envisaged at the time that as well as removing the perceived conflicts of interest, the removal of the volume rebates paid by platforms and other product providers might actually lead to a lowering of the fees paid by financial advice clients.

But if that was the intention, then the outcome has fallen well short of the objective with financial advisers and, by definition their clients, perhaps paying less in platform fees but with fund managers paying more than they were five years’ ago and then passing the cost through to the client.

All of this has become the accepted norm in the financial services industry but the continued existence of platform fees paid by funds managers has given rise to questions being asked within key Parliamentary Committees about how the system is working and who have been the ultimate beneficiaries?

The level of interest on the part of Parliamentarians has risen because of the timings around the phasing out of

COVID-19 COMPLAINTS

BY PRODUCT

grandfathered remuneration arrangements on 1 January, 2021, albeit that the status of shelfspace fees is understood to not be part of a remit handed to the Australian Securities and Investments Commission (ASIC) to look at those arrangements.

What ASIC will find when it reviews the situation with respect to the grandfathered remuneration arrangements is that most of them have already been ended with a number of the larger players moving well ahead of the Government-imposed deadline.

But in the eyes of at least some politicians, the status of shelf-space fees remains nebulous and this is probably because the original FoFA

legislation was squarely aimed at financial advisers rather than the platforms or product providers.

As a result of FoFA, amendments were made to the Corporations Act which declared that a platform operator may not (subject to certain exclusions) accept a volume-based shelfspace fee from a funds manager and that an Australian Financial Services Licensee (AFSL), or its representative, who provides financial product advice to a retail client must not charge assetbased fees on borrowed amounts used to acquire financial products by, or on behalf of, the client.

In simple terms, financial advisers found themselves precluded from receiving any remuneration which could be

interpreted as having been derived from the distribution of a product while, in turn, platform providers were prohibited from receiving volume-based shelfspace fees from fund managers.

This meant it was never going to be difficult for the platform providers to adjust their arrangements with fund managers, with the result that the fund managers are continuing to pay substantial fees for space on the platform shelf, just not on the same basis as before the FoFA legislation and the issue of guidance by ASIC in 2017 and 2018.

The bottom line as the industry prepares to enter 2021 is that fund managers can expect to pay six figure sums to have their products on the major platforms with none of that money going anywhere near the remuneration of a financial adviser.

The costs vary from platform to platform but can involve the fund manager paying $7,000 a year for the privilege of being on the platform plus $10,000 for each fund then listed on the platform, while other platforms charge flat fees of anywhere between $10,000 and $25,000 per fund.

It represents an expensive exercise, especially for boutiques, and few fund managers would deny they build those costs into the price of investment of their funds, so the consumer still ultimately pays.

2,610

910

817

Travel insurance

Credit cards

Superannuation accounts

Source: Australian Financial Complaints Authority (AFCA), from between 3 March 2020 and 31 August 2020

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1/10/2020 10:33:05 AM

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28/09/2020 28/07/2020 9:49:53 5:05:53 AM PM

18 | Money Management October 8, 2020

ESG

LOOKING UNDER THE GREEN BONNET

Funds are unlikely to be deliberately guilty of greenwashing but nevertheless, writes Laura Dew, they need to have transparent processes in place to prevent investors feeling misled.

OUR CLIMATE HAS

A NEW ENEMY. THE INTERNET.

different versions among investors means firms can find themselves guilty of a process known as ‘greenwashing’.

Greenwashing refers to when a firm launches a fund to capitalise on market demand for environmental, social and governance products but fails to adhere to the stated ESG principles. This can lead to investors feeling misled when the fund fails to meet their objectives or align with their values.

According to the Responsible Investment Institute Australasia (RIAA) annual benchmark report into responsible investing, mistrust or greenwashing concerns was one

*Broadridge Market Analysis, 2020. Brand survey on independent asset managers amongst >850 European fund selectors

AS MORE AND more assets are added to funds focused on environmental, social and governance (ESG), it is unsurprising firms want to capitalise on this theme. But without a clear classification system in place, it can be difficult to distinguish whether a fund is actually providing a positive impact.

There are currently multiple different types of ESG funds such as ESG, ethical, environmental, responsible and sustainable versions across both active and passive funds.

However, the lack of understanding between these

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of the key deterrents restricting growth of assets into responsible funds in 2019, unchanged from 2018 at 19%.

However, there is a move for this classification confusion to be clarified as the CFA Institute has launched a consultation paper on the proposed scope, structure and design principles for ESG disclosure standards for investment products.

The Standard, as it is known, would help to reduce inconsistency and variation in ESG-related investment approaches and disclosures and a draft was due in May 2021.

CFA Institute chief executive, Margaret Franklin, said: “With growing interest in ESG investing,

support is widespread from the investment community for the development of a standard to reduce confusion and facilitate better alignment of investor objectives with investment products.

“Setting global industry standards to ensure transparency and safeguard trust is integral to our mission and will help consumers to make more informed decisions about investing in ESG products.”

HOW IS GREENWASHING MANIFESTED? The Australian ESG market is worth $1.15 trillion, up from $630 billion in December 2014, so there

The solution to CO2 emissions comes from more directions then you think.

Understand sustainable investing Go to www.understandingSI.com/AU THE NUMBER 1 IN SUSTAINABLE INVESTING * Important information This document is distributed in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (‘Robeco’) which is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission under the laws of Hong Kong and those laws may differ from Australian laws.

24/08/2020 16:08:00

29/09/2020 5:09:47 PM

October 8, 2020 Money Management | 19

ESG is a large market for firms to capture. However, just putting a label on a new fund or converting an existing strategy does not make a fund ESG aligned.

Carola van Lamoen, head of Robeco’s sustainable investing centre of expertise, said: “Greenwashing is a term that is becoming more common these days, and refers to the false pretence of the positive impact of financial products.

“Often, it turns that out that sustainability-marketed products only apply simple exclusions and are still labelled as being sustainable, while no other methods are applied.

Another commonality is a lack of transparency provided, and unclarity about what for example, exclusion lists exist or, how companies are measured on sustainability performance, and if positive and negative effects are properly measured.”

Whether a fund was guilty of greenwashing was a matter of personal perspective, however, as what was classed as ESG varied between people depending on their expectations.

Steven Glass, deputy portfolio manager at Pengana, said: “Greenwashing is in the eye of the beholder, firms don’t necessarily do it deliberately. They are usually working within a specification and genuinely believe they are doing the right thing but then the

investor disagrees.

“People aren’t evil, they aren’t lurking in corners and trying to rip people off. ESG is part of the market and if people are demanding it, then companies will try to create something to satisfy that demand. It doesn’t mean they aren’t trying to do the right thing, they are just trying to capitalise on a theme,” he said.

Referencing the idea that ESG was an in-demand buzzword for investments, the RIAA said the number of ‘self-declared responsible investors’ had risen from 120 in 2018 to 165 in 2019. “[There is] a resounding message from Australian consumers: most expect super funds, banks, financial advisers and other financial institutions to invest their money responsibly and ethically,” RIAA said.

“Investment managers’ increased appetite for pursuing responsible investment approaches – or at least for communicating to consumers that they are practising responsible investment – is evidenced by the fact that this report’s population of self-declared responsible investors has grown from 120 in 2018 to 165 in 2019.”

Glass highlighted two fund portfolios types that he had noted which could be viewed by some as greenwashing. The first one was utilised by passive funds where they held large US technology companies such as Facebook as they had a

“It doesn’t mean they aren’t trying to do the right thing, they are just trying to capitalise on a theme.”

– Steven Glass, Pengana deputy portfolio manager good ESG score or were held in an ESG benchmark. While the company met criteria such as lack of weapons, tobacco or alcohol production, certain actions by the company in recent years could be viewed as ‘morally dubious’ and often came scrutiny from responsible investors.

The second was when firms tried to “stuff their fund full of positive impact companies” such as renewable energy and biotechnology. While this was a noble aim, asset managers needed to remember ESG aims should not compromise financial performance.

“That’s wonderful,” Glass said.

“But it’s not being responsible, just because its positive impact does not mean they will perform as many of those stocks are very expensive nowadays. People focus on the ESG angle and then forget the investing part. People do still want to make money from their investment.”

There have been numerous studies over the years that have shown investing responsibly or with an ESG focus need not mean compromising in financial

Table 1: Responsible investment against mainstream funds

Australian share funds

1 year return

3 year return

5 year return

10 year return

Average responsible investment fund (between 17 and 48 funds sampled depending on time period)

24.7%

11.3%

10.1%

9.0%

S&P/ASX 300 Total Return

23.8%

10.3%

9.1%

7.8%

*Broadridge Market Analysis, 2020. Brand survey on independent asset managers amongst >850 European fund selectors

PLANET.

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WHAT CAN FIRMS DO TO AVOID GREENWASHING? One of the most important things for firms to remember if they want to ‘walk the talk’ on ESG is to have a transparent and rigorous process and framework which details their ESG goals and how these are going to be implemented.

This is one of the drawbacks of the United Nation’s Sustainable Development Goals (UN SDGs), a Continued on page 20

Source: RIAA and Morningstar

PROFIT WILL SAVE THE

performance, particularly as these type of funds gain longer track records to examine.

RIAA data found the average Australian share responsible fund has returned 24.7% over one year, 10.1% over the past five years and 9% over 10 years, beating the ASX 300 over all time periods.

Marion Poirier, managing director of MFS Investment Management for Australia and New Zealand, said: “There are a lot of things that ESG is not. For instance, it is not ‘irresponsible divestment’ whereby companies become targeted when they are not always the main culprits.

“Conversely, when it comes to opportunities, which is often an overlooked side of ESG research, it may not always be the ‘no-brainer’ companies which hold the most upside. It’s about integrating ESG into valuation and engagement and separating valuations from values.”

True sustainable investing puts long-term profits first.

Understand sustainable investing Go to www.understandingSI.com/AU THE NUMBER 1 IN SUSTAINABLE INVESTING * Important information This document is distributed in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (‘Robeco’) which is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission under the laws of Hong Kong and those laws may differ from Australian laws.

24/08/2020 15:53:42

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20 | Money Management October 8, 2020

ESG Continued from page 19 common measure for funds, as they are not meant for private investors so do not insist on reporting requirements or targets.

Newton Investment Management head of sustainable investment, Andrew Parry, said: “A lack of focus is a cause for concern when the goals are not integrated into business plans and not supported by the setting of measurable target outcomes.

“This lack of detail and commitment also puts into context the limitations of the mapping to SDGs in public equity or credit portfolios when the reporting and intention is so limited at a company level.”

Cris Parker, head of The Ethics Alliance, said: “If a firm is not fully transparent then it is hard to measure whereas if you disclose everything fully at the outset then investors know what they are getting so transparency is absolutely key.

“ESG principles should be applied across the whole company as if one element isn’t right then that is reflected elsewhere. Good intentions are not enough, there needs to be a consistent framework that shows what you are doing, how you are going to track it and how you intend to deal with any unintended consequences that arise.”

This was echoed by van Lamoen who said it was important that a company’s staff were knowledgeable and trained up on ESG so they were capable of integrating ESG information into the investment process to allow for sound decision-making.

For MFS, being an active manager meant taking an active and engaged approach when selecting a fund.

“We caution against an overreliance on narrow or blunt measurement tools, which cannot be expected to capture the nuance and range of ESG risks and opportunities faced by companies.

Knowing where we allocate client money is critical and we must then be a responsible owner on their behalf. This includes both proxy voting and engaging with them on E, S and G issues,” Poirier said.

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However, there is debate over the importance of engagement as Glass felt Pengana would rather be investing in a good company in the first place rather than one that requires ongoing engagement. This may depend on how big a company is and the resources available that they can dedicate to engagement.

“Investors want to see engagement, transparent reporting and degree of positive impact companies. This has changed over the years but sometimes I think people are over-emphasising the engagement part. We can’t spend all of our time engaging with our companies. For us, we would rather have companies which pass in the first place.”

HOW TO AVOID CHOOSING A GREENWASHING FUND The biggest responsibility on the part of investors is to do effective due diligence on a potential fund and ‘look under the bonnet’ of what a fund is holding. This includes looking at their full holdings, looking at company reports and looking at sustainability reports.

This is an area of improvement for Australian funds compared to their European counterparts as transparency of full holdings beyond the largest 10 is not always readily available. Of the 165 investment managers in the RIAA’s responsible investment research universe, only 36% disclosed their full holdings and a further 36% failed to disclose any of them.

HOW TO SELECT AN ESG FUND Melior’s director of investment management, Lucy Steed, shares questions investors should ask when selecting an ESG fund: • What is the definition of excluded industries? Some fund managers say they avoid fossil fuels but when you look at the definition, it only excludes thermal coal. What about gas and oil? What exclusion revenue thresholds are being applied? Is it 30% or 5%? Do the exclusions consider supply chains such as distribution or just manufacturing?

• What are some examples of how the fund has reacted to negative ESG events? Did they engage, did they exit? How did they form their views and demonstrate their ESG commitment?

• How is the fund manager aligned to ESG outcomes? Is the manager remunerated on financial performance alone or are they also aligned to ESG outcomes?

• Does the fund manager walk the talk? Do they for instance have a diverse investment team and have carbon neutral operations? How do they live the values?

Simon Webber, portfolio manager at Schroders, said: “There is some reporting being done but it takes openness on the part of companies. It is very patchy and could be improved a lot”.

Another reason for the deep dive is that it is not easy to rely on the fund’s label and assume all ESG funds are similar as they can vary significantly. This is particularly the case for passive funds which could be holding thousands of stocks to track an ESG benchmark – it is unlikely 100% of those companies would align meet investors’ objectives.

Van Lamoen added, for this reason, it could be valuable to examine third-party data of funds.

“Interpreting the wide range of sustainability integration methods, might not always be easy.

Therefore, you could look at external verification mechanisms ranging from assessment on product level by Morningstar, as reading the Principles for Responsible Investment assessment results,” she said.

“When reading through fund reports you can learn about how sustainable investment objectives are fulfilled.”

Parker said: “There is nothing worse than making a choice and then finding out there were hidden truths, that just makes them look like they aren’t a legitimate company and are covering up mistakes”.

29/09/2020 5:10:07 PM

For wholesale investors only

The global crisis continues to transform our society and economy. This means favouring innovative companies that take sustainability seriously should be every investor’s priority. It’s time to fight not just for recovery, but for one that lasts.

Go to www.understandingSI.com/AU THE NUMBER 1 IN SUSTAINABLE INVESTING *

*Broadridge Market Analysis, 2020. Brand survey on independent asset managers amongst >850 European fund selectors

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28/09/2020 11:02:57 AM 21-8-2020 15:36:51

22 | Money Management October 8, 2020

TOP Financial Planning Groups

THE END OF AN ERA Money Management’s 2020 TOP Financial Planning Groups research has confirmed the number of planners working at the biggest groups has dwindled to its lowest levels in years, underscoring the end of the banks’ dominance in wealth management, writes Oksana Patron.

MONEY MANAGEMENT ’S 2020 TOP Financial Planning Groups research has confirmed, what everyone has been expecting, that the overall number of advisers operating under the banners of the traditionallylargest groups in the country has continued to diminish, reaching the lowest levels in five years.

And this is happening at a time when the industry is still recovering from the Royal Commission into Misconduct in Banking, Superannuation and Financial Services and the implementation of more rigorous standards imposed by the Financial Adviser Standards and Ethics Authority (FASEA) is forcing older advisers to leave the industry but simultaneously making it more difficult for the new ones to enter. On top of this,

18MM081020_18-37.indd 22

businesses and global economies have been hit hard by the COVID19 pandemic and partial or full lockdowns.

Exactly five years ago Money Management reminded that domination of the banks in the financial planning industry was coming to an end. And it took less than five years for that to come to pass, as figures show.

A gradual and long-lasting decomposition of the verticallyintegrated model coupled with banks’ internal governance issues and their continued exit from the wealth management space has seen the cycle come to its end, with AMP and IOOF the only institutional players still playing the game.

A quick look at the adviser numbers this year has shown that the total number of advisers

operating under all the licenses of the TOP Financial Planning Groups slipped from 14,500 last year to around 13,200. By comparison, two years ago, the Money Management survey found that the total number of planners hired by the largest financial groups stood at 16,140, which means it had returned to levels first registered in 2012 and 2013.

This year also marks five years since the Australian Securities and Investments Commission (ASIC) first launched its Financial Adviser Register (FAR). According to the FAR there were between 21,500 and 22,500 of financial advisers in the country at that time, working across 1,200 Australian financial services licence (ASFL) holders.

What is even more interesting is that this number has not

drastically changed as of July, 2020 as there are still currently around 21,800 active advisers on the FAR’s books. However, this should not be read in separation from the data from 2018 which indicated a total number of all employees qualified to delivered financial advice in Australia standing at 25,000.

Further to that, Money Management reported in 2019 that aligned groups owned by the big four and AMP jointly saw a departure of up to 3,000 planners, a figure far higher than 2018 when only 800 planners had decided to leave these groups.

The second thing that has changed over the last five years was the total number of AFSL holders which has rapidly gone up to around 2,100 in 2020 (from 1,200 in 2015). At the same time,

1/10/2020 10:26:47 AM

October 8, 2020 Money Management | 23

TOP Financial Planning Groups

the percentage of groups that had between two and 10 active planners has grown to 51% against 46% in 2018 which partially confirms a further dispersion of advisers in the wake of the end of the collapse of the once-prevalent model.

So, where did the planners go?

AMP Financial Planning (AMP FP), which has been traditionally the largest group in Australia for years, alone saw a departure of 700 advisers over the span of five years, including around 250 planners who departed within the last 12 months.

Be it the controversial changes made to its Buyer of Last Resort (BOLR) policy in 2019, which earned the company a class action lawsuit filed against AMP FP, or a recently-announced culture revamp strategy triggered by poor handling of internal scandals, this year’s results have only confirmed that problemridden AMP saw the loss of another 500 advisers spread among its four planning groups (AMP FP, Charter Financial Planning, Hillross Financial Services and ipac Securities) counting year-on-year.

At the same time, the

second-largest player by adviser numbers, IOOF, has been on the opposite end of spectrum, consequentially growing its business, with a recentlyannounced acquisition of 100% of NAB’s MLC Wealth for $1,440 million, which according to its chief executive, Renato Mota, represented “a highly complementary business of the quality”.

But, IOOF stressed that, even though its doors would remain open, it would ultimately be up to MLC advisers to decide on their future fate and whether or not they wish to join one of the IOOF’s existing licenses, helping to create the new largest group in the wealth management sector in the country. In the meantime, it is

“The total number of advisers operating under all the licenses of the TOP Financial Planning Groups slipped from 14,500 last year to around 13,200.” worth remembering there were already a handful of other licensees, including those which are publicly listed, who had too attempted to lure in MLC’s advisers.

So where exactly would this move place the company on the advisers’ network map?

According to Money Management’s 2020 survey, there were almost 1,300 advisers (1,295) altogether operating under IOOF’s umbrella, a figure way lower when compared to the data

Table 1: IOOF-owned financial planning groups

Number of advisers (July, 2018)

Number of advisers (July, 2019)

Number of advisers (July, 2020)

Consultum Financial Advisers

209

214

192

Lonsdale Financial Group

198

196

185

Shadforth Financial Group

154

158

153

Bridges Financial Services

171

195

175

Ord Minnett

207

228

-

939

991

705

Ex-ANZ groups Millennium3 Financial Services

265

256

265

RI Advice

184

179

185

FSP (Financial Services Partners)

137

144

140

Elders Financial Planning

63

68

0

649

647

590

1,588

1,638

1,295

TOTAL Source: Money Management

18MM081020_18-37.indd 23

from a year ago (1,600 advisers) but still higher than in 2018 (940 advisers).

This could be explained by the fact that last year IOOF completed an acquisition of four ex-ANZ groups (RI Advice, Millennium3, Financial Services Partners and Elder Financial Planners) which translated into an intake of close to 650 new planners. However, a few things have changed at IOOF since then and even though the advisers’ numbers at this point in time were less impressive, IOOF’s aspirations are far reaching.

First of all, in 2019 the firm announced a wind-up of Elders FP (around 70 advisers) business, due to difficulties with generating the income required to cover higher regulatory and insurance costs.

As of July, 2020, the four groups historically owned by IOOF (Consultum Financial Advisers, Lonsdale Financial Group, Shadforth Financial Group and Bridges Financial Services) had jointly around 700 advisers, which represented only a slight drop of 8% compared to the same period a year ago.

What has changed though was a departure of one of its key groups, Ord Minnett, which according to the ASIC’s FAR had around 240 planners, after IOOF had completed the sale of its 70% stake in the company in 2019.

At the same time, ex-ANZ RI Advice and Millennium3 had managed to slightly grow its advisers’ ranks by 3% and 4%, respectively. Following this, Financial Services Partners Continued on page 24

1/10/2020 9:51:32 AM

24 | Money Management October 8, 2020

TOP Financial Planning Groups

Continued from page 23 (FSP), with its 140 advisers, has been nominated by its current owner as one of the three licenses, next to Executive Wealth Management and Astute, to be soon closed down. Although it does not necessarily mean a complete departure of those advisers, since IOOF made it clear that all advisers licensed under any of these brands would be encouraged to join their preferred existing IOOF license, the firm made no secret that its renewed approach would most likely see more advisers but working under fewer licenses and brands.

The most important milestone for the new growing wealth management giant was its acquisition of the MLC wealth management business. In the announcement made to the Australian Securities Exchange (ASX) IOOF said it estimated MLC’s advice segment to have close to 540 advisers comprising aligned (including GWM Wealth Services, Apogee, Godfrey Pembroke) and direct advisers including MLC Advice.

At the same time, IOOF made it clear it was looking to become the number one retail wealth manager by funds under management, administration and advice (FUMA), estimated at $510 billion, and also the number one advice business in terms of adviser number with an estimated growth to close to 1,900.

As far as other banking groups were concerned, Commonwealth Bank of Australia, which last year declared it would close Financial Wisdom by June 2020 after announcing the sale of Count Financial to CountPlus for $2.5 million, has been left effectively with only one major financial planning group, out of four previously, which has now around 250 planners and saw a sharp decline of almost 50% compared to a year before.

Similarly, ANZ has only one group, ANZ Financial Planning, with 180 advisers on its books,

18MM081020_18-37.indd 24

down from almost 240 advisers two years ago.

Earlier this year, MLC Wealth announced the launch of TenFifty Financial Group, its new advice business which encompassed Garvan/GWM Wealth Services, Apogee and Meritum. According to the 2020 Money Management’s survey, all three groups represented a decline in adviser numbers compared to last year by 29%, 46% and 56%, respectively.

As of July, 2020, NAB also still owned NAB Financial Planning which had 131 advisers, down from 276 in 2019 and 449 in 2018.

TOP 10 FIRMS With a continued outflow of planners from institutionallyaligned groups, the 2020 survey saw yet another change in the mix-up of the top 10 groups, with Synchron now becoming the second largest planning group in Australia by adviser numbers, after AMP FP, if excluding SMSF Advisers Network.

While SMSF Advisers Network – a group owned by the National Tax and Accountants’ Association (NTAA) – has almost 850 advisers on its books, according to the 2020 survey, the group had no active authorised representatives

that were engaged as financial planners as their primary role and all advisers were accountants.

At the same time, both Commonwealth Financial Planning and AMP-owned Hillross, which slashed its numbers of planners from last year by almost a half to around 250 and a 20% to 233 planners, respectively, fell down the ranking and found themselves outside of the top 10.

On the other hand, Sequoiaowned Interprac Financial Planning climbed up the list after it successfully grew its advisers number year-on-year by 19% to more than 300 as of July 2020, becoming yet another non-aligned financial planning group which made it to the top 10.

Ex-CBA group Count Financial, which was sold last year to the ASX-listed CountPlus, also grew its adviser network by approximately 12% earning the 10th spot in the TOP Financial Planning Groups ranking.

The other two significant groups in the top 10 were Morgans Financial Limited and Merit Wealth which had around 500 and 326 advisers, respectively, however in case of

Table 2: Top 10 Financial Planning Licensees

Rank

Financial Planning Group Name

Number of advisers

1

AMP Financial Planning Pty Ltd

1,000

2

SMSF Advisers Network

847

3

Synchronised Business Services Pty Ltd

505

4

Charter Financial Planning

505

5

Morgans Financial Limited

500

6

Merit Wealth

326

7

InterPrac Financial Planning

308

8

GWM Adviser Services

276

9

Bell Potter Securities

271

10

Count Financial Limited

268

Source: Money Management

both companies these numbers did not necessarily mean their advisers, as according to ASIC’s definition, were all financial planners. Of approximately 500 of active authorised representatives at Morgans there were around 200 financial planners while the remaining 300 were investment and stockbroking advisers.

Following this, Easton-owned Merit Wealth reported that of its 326 registered advisers, 291 were actually accountants.

According to Money Management’s survey this year, Easton Investments had jointly almost 600 advisers (592) spread across its three licenses: Merit Wealth, GPS Wealth and The SMSF Expert which makes it the thirdbiggest group by adviser number in the country, after AMP and IOOF.

WHAT ELSE IS NEW? While eyes of everyone in the industry were firmly set on the final manoeuvres of banks exiting wealth management space, the last 12 months also saw a number of changes across mid-tier sized groups.

First, CountPlus’ chief executive, Matthew Rowe, announced by the end of 2019, that its associated group Total Financial Solutions, which accounted for over 60 authorised representatives (ARs) would cease its operations in 2020 while its advisers were offered the opportunity to join Count Financial.

In June, ASIC also cancelled the AFS licence for MyPlanner Professional Services, which had mid-2019 over 80 advisers as, according to the regulator, it “was no longer operating a financial business”. The move followed its earlier decision which had imposed additional conditions

1/10/2020 9:51:41 AM

October 8, 2020 Money Management | 25

TOP Financial Planning Groups

on MyPlanner’s licence due to the regulator’s concerns that MyPlanner’s representatives provided poor financial advice while the licence was unable to adequately monitor and supervise its representatives.

On the other hand, the recent months saw an ongoing consolidation among mid-tier groups, with the longest and most complex being the acquisition process of Madison Financial Group, which had around 90 advisers as of July, 2020, and which finally found its new home with Clime Investment Management in June.

The ASX-listed Sequoia Financial Group, which currently operates a number of AFSL licenses including Sequoia Wealth Management, Interprac and Libertas – collectively representing almost 400 planners – was also considered a potential bidder for Madison.

The firm, which was recently busy completing the acquisition of the financial planning elements of Yellow Brick Road, already made a few other purchases in the market. In June, the firm acquired

18MM081020_18-37.indd 25

the advice elements of Philip Capital Limited and in July it announced a purchase of assets agreement with Total Cover Australia (TCA), via the company’s wholly-owned subsidiary InterPrac, which was Sequoia’s fourth purchase of a retiring Interprac’s adviser portfolio over the last three years.

Following this, the firm said it would continue to look for similar opportunities given many ex-advisers of banks were on the lookout for new employment opportunities rather than considering a self-employed option.

In March, the market saw another boutique dealer group merger of Spark Financial Group and Aura Wealth Australia, with the latter having managed to grow its advisers number by 28% to over 50 compared to the prior year. Spark also has another license, Axies, which currently has 35 authorised representatives.

In May, Queensland-based financial advice business Highfield Group announced that Ausure Financial Services, which according

to the 2019 survey had around 50 advisers, had merged with Insight Investment Services, part of the Highfield Group which also owns Futuro Financial Services. It was announced that the merged group would trade as Insight with the merger being part of Highfield’s ongoing strategy to build scale and stay ahead of the market. As of July 2020, Futuro Financial Services and Insight Investment Service had jointly approximately 100 financial planners.

When asked about the changes in adviser numbers at both Futuro and Insight, Paul Kelly, managing director at Futuro, told Money Management: “We have largely moved away from simply licensing accountants for SMSF [selfmanaged superannuation funds] only so those left are usually business owners along with the FP advisers in their business. This saw less accountants in both number sets for the AFSL’s.

“The decrease was largely due to that and to a few moving to Insight but we did a lot of work in the last few years to help firms with succession so this happened.

“I think the industry has experienced a loss of good people due to FASEA and this was the case with some of these people. Some sold externally and a number sold internally causing larger firms.”

WHAT’S NEXT? With COVID-19 still in play and hard-hit economies coupled with higher market volatility, it is definitely not a good time to make any predictions, even though the majority of groups interviewed by Money Management said that the pandemic had not directly impacted their businesses.

Certainly, this year’s survey has provided hard evidence that the banks’ dominance in the wealth management sector is well and truly over and this era has come to its end. But, on a positive note, the market saw an intensified consolidation among mid-sized independent groups and many have continued to diversify their businesses and operate, or look to operate, more than just one licence.

Continued on page 26

1/10/2020 9:51:50 AM

26 | Money Management October 8, 2020

TOP Financial Planning Groups Rank 2020

1

AFSL Licence Financial planning group name No.

232706

AMP Financial Planning Pty Ltd

Total (planners) 13,175

Yearon-year change (%)

1,000

20

Major shareholders Number of other ARs

Head of financial planning group

Name

%

N/A

Brian George

AMP

100

$51,862

NTAA

100

N/A

2

430062

SMSF Advisers Network

847

15

847 (accountants)

Geoff Boxer/ Seamus Fennelly

3/4

243313

Synchronised Business Services Pty Ltd

505

0.4

-

Don Trapnell/ John Prossor

Don Trapnell

45

3/4

234665

Charter Financial Planning

505

22

John Prossor

Total FUA ($m)

%

45

$5,000

N/A

Chris Digby

AMP

100

$22,418

300 (investments advisers)

John Clifford

Morgans staff

100

approx. $56,000

Grahame Evans

Easton Investments Limited

100

$800

5

235410

Morgans Financial Limited

500

6

409361

Merit Wealth

326

19

291 (accountants)

7

246638

InterPrac Financial Planning

308

19

approx. 65%

Garry Crole

Sequoia Financial Group

100

approx.$3,000

8

230692

GWM Adviser Services

276

29

4 (accountants)

Brendan Johnson

MLC Ltd

100

$16,814 (as in 2019)

9

243480

Bell Potter Securities

271

22

Not disclosed

Jeremy Tyzack

Bell Financial Group

100

10

N/A

Name

227232

Count Financial Limited

268

12

101 (accountants)

Andrew Kennedy

CountPlus Limited

85

11

244252

Millennium3 Financial Services Pty Ltd

265

3

N/A

Helen Blackford

IOOF Holdings

100

$33,000 Count Member Firm Pty Ltd

15

$8,200 $5,000

12

223135

Capstone Financial Planning

261

20

-

Grant O'Riley

Grant O'Riley

-

13/14

229892

Lifespan Financial Planning

251

41

6 (limited authority)

Eugene Ardino

Ardino Family

100

Not disclosed

13/14

231139

Commonwealth Financial Planning

251

49

0

Michaela McGlinn

Capital 121 Pty Ltd

100

N/A

15

237121

Ord Minnett

243

6

Not disclosed

Karl Morris (CEO)

Private investors

100

Not disclosed

16

232705

Hillross Financial Services

233

22

N/A

Chris Digby

AMP

100

13,029

17

238430

State Super Financial Services Australia (Aware Super)

223

2

Not disclosed

Sarah Forman

Aware Super

100

$126,000 (Aware Super)

18

254544

GPS Wealth Ltd

222

22

87 (accountants)

Grahame Evans

Easton Investments Limited

100

19

357306

Fortnum Private Wealth Ltd

205

61

0

Neil Younger

Advisers

70

230323

Consultum Financial Advisers Pty Ltd

192

10

N/A

Peter Ornsby

IOOF Holdings Ltd

100

$9,800

237857

Affinia Financial Advisers Limited

185

23

15 (accountants)

Marcus O'Sullivan

TAL

100

$4,500

21/22/23

246934

Lonsdale Financial Group Limited

185

6

5 (SMSF only advisers)

Helen Blackford

IOOF Holdings Ltd

100

N/A

21/22/23

238429

RI Advice Group Pty Ltd

185

4

N/A

Peter Ornsby

IOOF Holdings

100

$7,300

24

234527

ANZ Financial Planning

181

4

Not disclosed

Mike Norfolk

ANZ PTY LTD

100

236523

Infocus Securities Australia Pty Ltd

179

16

0

Darren Steinhardt

Steinhardt Holdings

50.2

20 21/22/23

25

Warwick Hawkesworth

-

$8,700

$3,500 Directors

30

$16,000

Not disclosed Salo Holdings Pty Ltd atf the Hasib Family Trust

11.6

$7,321

26

240837

Bridges Financial Services

175

10

N/A

Nathan Stanton

IOOF Holdings Ltd

100

Not disclosed

27

234459

Australian Unity Personal Financial Services

172

7

8 (accountants)

Matt Brown

Australian Unity Limited

100

$7,200

28

449221

Alliance Wealth

170

44

1 (accountant)

Angus Benbow

Thorney Investment Group

Terry Dillon

IOOF Holdings

34.63

Alexander Beard

7.62

$373

29

318613

Shadforth Financial Group Limited

153

3

35 (operations, associates and paraplanners)

30

234951

Professional Investments Services

141

18

0

Angus Benbow

Thorney Investment Group

31

237590

Financial Services Partners Pty Ltd

140

3

N/A

Peter Ornsby

IOOF Holdings Ltd

100

$4,100

32

341162

JBWERE LTD

138

43

Not disclosed

Andrew Bird

NAB Group

100

$38,000

NAB

100

$28,173 (as in 2019)

100 34.63

Not disclosed Alexander Beard

7.62

$1,108

33

230686

NAB Financial Planning

131

53

N/A

Andrew Gregory/Sandhya Maini

34/35

476223

Viridian Advisory

120

3

0

Glenn Calder

Not disclosed

34/35

239052

Canaccord Genuity Financial Limited

120

Not disclosed

-

Canaccord Financial Group

100

Not disclosed

36

238256

Matrix Planning Solutions Pty Ltd

119

18

6 (accountants)

Allison Dummett

ClearView Wealth Limited

100

$6,271

37

243253

Findex Advice Services

116

21

0

Spiro Paule(CEO)/Julian Maloney

Findex Group Ltd

100

$9,944

38

227748

Sentry Advice

108

26

Not disclosed

David Newman

Privately held

Not disclosed

Gavin Powell (managing director)

-

39

N/A

-

$7,000

Not disclosed

245421

E.L & C. Baillieu Limited

106

40

331367

ClearView Financial Advice Pty Ltd

105

17

5 (accountants)

Allison Dummett

ClearView Wealth Limited

100

$5,515

41/42

340289

Wealth Today Pty Ltd

104

1

33 (full advisers ARs)

Keith Cullen

WT Financial Group Limited

100

approx. $1,100

41/42

247429

Fitzpatricks Private Wealth

104

29

0

Matthew Fogarty

Privately Owned

100

N/A

43

240938

The FinancialLink Group

103

11 (accountants)

-

Genesis Financial Inc

100

Not disclosed

44

363407

Craigs Investment Partners

99

5

Not disclosed

-

Craigs shareholders

100

Not disclosed

45

246679

Madison Financial Group

94

10

Not disclosed

Jaime Johns

Clime Investment Management

-

approx. $3,000

46

237502

Macquarie Bank Limited

90

Not disclosed

Justin Crawford /Rob Hayward

Macquarie Group

100

Not disclosed

47

232514

Industry Fund Services

88

10

0

Adrian Gervasoni/ Cath Bowtell (CEO)

Industry Super Holdings

100

N/A

48

230690

Godfrey Pembroke Limted

85

24

0

Mark Fisher

MLC Ltd

100

$5,513

49

253125

Politis Investment Strategies Pty Ltd

84

17

Not disclosed

Gregory Politis

The Politis Family

100

Not disclosed

50

236643

Perpetual Trustee Company Ltd

78

32

0

Mark Smith

ASX listed

18MM081020_18-37.indd 26

N/A

-

N/A

N/A

Not disclosed

-

$14,400

1/10/2020 1:36:23 PM

October 8, 2020 Money Management | 27

TOP Financial Planning Groups Rank 2020

AFSL Licence Financial planning group name No.

Total (planners) 13,175

Yearon-year change (%)

Major shareholders Number of other ARs

Head of financial planning group

Name

%

Total FUA ($m)

Name

%

Bob Fowler Pty Ltd

21.87

51

297276

Paragem

76

31

6 (accountants)

Nathan Jacobsen

HUB24

52

224543

FYG Planners Pty Ltd

75

6

8 (accountants)

Peter Mancell

Mancell Holdings Pty Ltd

53/54

231103

Fiducian Financial Services Pty Ltd

74

12

5 (accountants)

Robby Southall

Fiducian Group Limited

53/54

235907

UniSuper

74

42

Not disclosed

Graham Eggins

-

-

55/56

385845

Neo Financial Solutions

72

14

Not disclosed

Mark Edman

PictureWealth

-

55/56

238375

Wilson HTM

72

19

Not disclosed

Brad Gale (CEO)

Craigs Investment Partners

-

46

N/A

Cassandra Hinze

AMP

100

$5,975

5

0

Duncan McPherson

Link Group

100

N/A

0

David Harris

Adviser owned

100

$3,000

Nerida Cole

MLC

100 28

57/58

234656

ipac financial planning

68

57/58

258145

Link Advice

68

59

342880

Advice Evolution

67

60

231143

Dixon Advisory & Superannuation Services

66

N/A 30

Majority are investment advisers

61

230689

Apogee Financial Planning

62

46

3

Brendan Johnson

100 48.24

$4,300

100

$3,100 $3,080 Not disclosed Not disclosed

Wilsons Staff Company Limited

Not disclosed

-

Not disclosed $4,148 (as in 2019)

62

322056

Akambo Financial Group

59

34

Not disclosed

Anthony Kapetanovic

Anthony Kapetanovic

63/64

422409

Shartru Wealth Management

58

9

Not disclosed

Robert Coyte (CEO)

-

63/64

439065

Bombora Advice

58

6

Not disclosed

Wayne Handley

Private Ownership

-

Not disclosed

65

227867

Sunsuper Financial Services

56

8

Not disclosed

-

Sunsuper Pty Ltd

100

Not disclosed

66/67

429718

Libertas Financial

55

2

approx. 25%

Garry Crole

Sequoia Financial Group Limited

100

approx. $700

66/67

452996

Nextplan Financial

55

N/A

Not disclosed

David Corridon (CEO)

Advisers

100

Not disclosed

-

100

Chris Willaton

15

-

68

238274

Qinvest Limited

53

Not disclosed

Kim Hughes

Qsuper Fund

69/70

238478

Futuro Financial Services

52

35

1 (accountant)

Paul Kelly

Dennis Bashford

-

69/70

411846

Bluewater Financial Advisors

52

8

Not disclosed

-

-

-

71

380552

Aura Wealth Pty Ltd

51

28

7 (accountants)

Arthur Kallos

Kallos Enterprises

4

75

$1,050 Not disclosed

Not disclosed Paul Kelly/Manoj Pillai

-

approx. $1,534 Not disclosed

Aura Group

25

$567 (Spark Financial)

72

384713

PGW Financial Services

50

Not disclosed

Kym Peters

Privately owned

73/74

309996

Insight Investment Service Pty ltd

49

N/A

1 (accountant)

Jeff Jaydn

-

approx. $1,352

73/74

482234

Oreana Financial Services

49

N/A

Not disclosed

Jonathan Christie

Oreana Group

Not disclosed

46

75

411766

Mercer Financial Advice (Australia) Pty Ltd

76/77/78/79

278423

SIRA Group Pty Ltd

44

76/77/78/79

445113

The SMSF Expert

44

76/77/78/79

230052

Hartleys

44

76/77/78/79

325252

EP Financial Services

44

Not disclosed

Susie Peterson

100

Not disclosed

7 (accountants)

David Bannister

Privately owned

100

$2,000

23

44 (accountants)

Grahame Evans

Easton Investments Limited

100

N/A

2

Not disclosed

Andrew Gribble

Employees

100

Not disclosed

47

Not disclosed

Darren Withers

Privately held

-

Not disclosed

Not disclosed

Justin Crawford /Rob Hayward

Macquarie Group

100

Not disclosed

16 N/A

237504

Macquarie Equities Limited

43

81/82

420367

Guideway Financial Services

41

9

0

Alexander Aracas

Aracas Investment Trust

81/82

225962

Hunter Green

41

21

1 (accountant)

Greg Hunter

Hunter Family Trust

83/84

437518

AvalonFS

40

11

6 (accountants)

Neal Hornsby

Not disclosed

422854

FinChoice Pty Limited

40

85

278937

The Advice Exchange

38

86/87

339384

Axies Pty Ltd

36

86/87

326450

WealthSure Financial Services

36

Not disclosed

Marsh and McLennan Companies

80

83/84

-

N/A

N/A 17 N/A 39

Dean Thomas

Finconnect (Australia) Pty Ltd

Not disclosed

Andrew Doquile

-

1 (accountant)

Arthur Kallos

Kallos Enterprises

Not disclosed

David Newman

Privately owned

0

Glenn Calder

Not disclosed

Brendan Johnson

MLC Ltd

Not measured $1,150

16.49

approx. $1,500 HSBC Custody Nominees (AUS)

11.83

75 -

1100 (Mortgage Choice) Not disclosed

Aura Group

15

$597 (Spark Financial) Not disclosed

88

515762

Viridian Select

35

90

245569

Meritum Financial Planning

30

56

0

91

286786

Sentry Financial Services

34

60

Not disclosed

David Newman

Privately held

92

225216

HNW Planning Pty Ltd

33

21

5 (accountants)

Robert Cumming

HNW Group Holdings

92

$597

244310

Australian Central Credit Union

25

0

Steve Laidlaw

Member Owned

100

$1,720

93

18MM081020_18-37.indd 27

N/A

0

100

N/A

$7,000 100

$1,843 (as in 2019)

-

Not disclosed

1/10/2020 1:36:43 PM

28 | Money Management October 8, 2020

Asset allocation

LEARNING FROM ENDOWMENT FUNDS Lawrence Lam explores how leading sovereign wealth and university endowment funds are positioning their portfolio and what retail investors can learn from them.

WHY DO SOME sports teams remain perennial title favourites, while others seem to consistently languish for decades? If you’re one of the poor souls who finds themselves rooting for the frequent losers, you’ll know the answer isn’t simply ‘our players aren’t up to scratch’.

On the other end of the spectrum, the best teams always seem to have an ability to combine mediocre players into a

18MM081020_18-37.indd 28

high-performance unit. They seem to be one step ahead of the competition, playing a long game that presciently fills the gaps in their rosters, drafts the best rookies before others spot them, and adapts their capabilities to the evolution of the sport. This is where the behind-the-scenes manoeuvres of the front office management team lead to longterm dominance. These imperceptible strategic

decisions go beyond the coach and players, they are macro decisions that create long-term franchises.

In investment parlance, asset allocation is exactly those frontoffice decisions you need to make correctly to ensure longterm success. In this article, we’ll take a deep dive into how two of the world’s best are manoeuvring their portfolio for the future.

29/09/2020 5:11:37 PM

October 8, 2020 Money Management | 29

Asset allocation

Chart 1: Future Fund’s cash allocation

AUSTRALIA’S FUTURE FUND – ANTICIPATE, DON’T EMULATE A few weeks ago, Australia’s sovereign wealth fund Future Fund reported its asset allocation on 30 June, 2020, (see Chart 1). Interestingly, it has been cashing in its investments across the board. The allocation to global equities remains the dominant piece at 27%, but almost all asset classes have decreased across the board. The last time the Future Fund held this level of cash was in September 2017.

Yes, this does have a little to do with the pandemic, but notice many of the changes were in relation to unlisted assets which take some time to turn over – in other words, many of these liquidations were pre-meditated and only just came to fruition last quarter. This was far from a spur-of-the-moment reaction to the pandemic.

But just because your crosstown rival makes a change to their team doesn’t mean you should too. Future Fund’s circumstances are far removed from a nimbler private investor and their investment objectives are vastly different. The best sporting teams never emulate the success of others, they create their own success based on independent evaluation. As I delved deeper, the question emerging in my mind was “What can I learn from the intentions of a $161 billion fund, so I can anticipate the next flow of capital, not copy it?”

THE BIGGER THEY ARE, THE SLOWER THEY MOVE Delving deeper to uncover the rationale, I found the Future Fund’s chief executive had spoken publicly about the portfolio, citing long-term falling interest rates as the cause of asset prices being bid up, which has subsequently led to their cautious view of the world. He went on to explain why he expected

18MM081020_18-37.indd 29

Source: Future Fund, Lumenary Analysis

headwinds going forward, summarising the year with: “This year we undertook a material rebalance of the private equity portfolio, reducing some of our exposure to international growth and buyout managers following a period of very strong performance. We also completed the sale of other unlisted assets including Gatwick Airport. We deployed some of that capital into new infrastructure themes including fibre and data centres, in Australia and offshore.”

Readers who only skimmed the negative headline would be tempted to cash in their chips and stash money under the pillows. Tempting as it is, I would caution against that.

Near-zero rates are fine to accept over the short-term, but a 1% return on cash will destroy wealth over the long-term.

Delving deeper still, Future Fund’s high levels of cash are a result of a recent sell-down of private equity and partial re-allocation to new infrastructure themes.

Enterprising investors can expect this capital to be recycled at some stage, especially as cash

returns continue to drag. You can expect Future Fund to redeploy this capital, but it will take time.

As it has already alluded, the capital will continue to flow into non-private equity opportunities over the coming quarters.

The opportunity now is for investors to move ahead of the pack, to anticipate where this money will land; if June 2020 is anything to go by, increasingly it will likely be in the form of exposures to telecommunications and associated technology infrastructure. If we move up the value chain, we can expect companies in programmable communications and internet infrastructure to create significant value over the longterm, especially when the adoption of 5G and the Internet of Things (IoT) products become mainstream with improved reliability.

As the game evolves, the best management teams recruit the players that will take them to the next level. They have an innate ability to anticipate the direction of others and make decisions ahead of time. Knowing global equities is Future Fund’s largest

Continued on page 30

30/09/2020 4:39:44 PM

30 | Money Management October 8, 2020

Asset allocation Continued from page 29 allocation piqued a broader question in my mind – who else, globally, has a formidable strategic long game?

LEARNING FROM BESTOF-BREED ENDOWMENTS I found particular US Ivy League endowments have done quite well over a long period of time.

In particular, Yale and Harvard are the standouts, returning 13.7% p.a. and 11.8% p.a. over the past 20 years. They have greater discretion, tend to be more flexible with their risk/ return requirements and don’t have the bureaucratic approach typically seen in sovereign funds (they aren’t accountable to the entire population, after all) – Ivy League endowments run a leaner, more agile operation.

Delving deeper into Yale’s approach, I found one quote which succinctly summarises their mindset: “Over the past three decades, Yale dramatically reduced the endowment’s dependence on domestic marketable securities by reallocating assets to non-traditional asset classes. In 1989, 65% of the endowment was targeted to US stocks and bonds.

“Today, target allocations call for 9.75% in domestic marketable securities and cash, while the diversifying assets of foreign equity, absolute return, real estate, natural resources, leveraged buyouts and venture capital dominate the endowment,

representing 90.25% of the target portfolio.

“The heavy allocation to non-traditional asset classes stems from their return potential and diversifying power. Today’s actual and target portfolios have significantly higher expected returns than the 1989 portfolio with similar volatility. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.”

From their latest annual report, the Yale asset allocation looks like this (see Table 1) This allocation is notably different to the Future Fund’s and [Singapore sovereign wealth

Table 1: Asset allocation

Absolute return

23%

Venture capital

21.5%

Leveraged buyouts

16.5%

Foreign equity

13.75%

Real estate

10%

Bonds and cash

7%

Natural resources

5.5%

Domestic equity

2.75%

Source: Yale annual report

18MM081020_18-37.indd 30

fund] Temasek’s of the world, and I would not suggest replicating this structure in entirety; Yale has a significant allocation to venture capital.

They have pioneered this space in the endowment world, and off the back of the tech boom have returned about 20% per annum just from venture capital investments. They have been able to achieve this by good alumni connections and have preferential deal access that most won’t have.

IT’S NOT THE STRONGEST, BUT THE MOST ADAPTIVE Instead of replicating Yale, investors can borrow some of the underlying principles to improve their existing framework. Notice how the top three allocations are foreign equity, venture capital and absolute return? Most investors have limited access to these asset classes. Coincidentally, or rather not so, they happen to overlap with Yale’s connections with industry. Even though Yale can source the world’s best nextgeneration investments from around the world, it doesn’t mean other investors can’t also win.

Just because other teams have a greater salary cap or more talent scouts, doesn’t mean they will assemble a franchise team.

29/09/2020 5:12:07 PM

October 8, 2020 Money Management | 31

Asset allocation

Investing is a game with more than one winner; it rewards resourcefulness and adaptability.

If the pundits are right, we’ll be heading into a low-return environment but if you borrow from Yale, investors can mitigate this by focusing on companies with a high growth trajectory – not the old-world companies, but the ones creating new markets never-before-seen in the world, even in a low-growth world, products that add value to our lives never go out of fashion.

Investors should be looking globally, not just sorting through our own backyard. The best-ofbreed have decades of growth ahead, so even if you miss the venture capital opportunity, plenty of opportunity still remains post-IPO.

IN CLOSING Adapting to change is how the best front offices build franchise teams. They combine the right mix of the tried-and-tested players but continue to inject new blood with rookies that fill the gaps for the future. Much is the same in investing; building a portfolio of the best companies now is equally as important as paying heed to future growth areas.

It’s not the biggest budgets and the highest-paid teams that win, it’s often the ones that have strategic foresight that don’t emulate others, they build their own strategy. Based on actions taken by Future Fund so far, investors have the chance to move ahead of the pack, particularly in global technologyrelated infrastructure companies.

“Just because your cross-town rival makes a change to their team doesn’t mean you should too.”

As the pace of reliability and adoption increases, capital will continue to flow heavily into companies that create new markets and products useful to our changing lives. In other words, build a team with solidperforming players, but keep your eye on rookies and anticipate where capital will next flow.

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

In your members’ moment of need, we’re here.

In 2019 alone, we paid $1.5 billion in claims.

Because we’re here for your members when they need it.

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29/09/2020 5:12:22 PM

32 | Money Management October 8, 2020

ESG

THE IMPACT OF THE COVID-19 PANDEMIC ON SUSTAINABLE INVESTING Nicholas Condeleon and Måns Carlsson question if the COVID-19 pandemic and associated risks has increased people’s interest in sustainable investment?

THE COVID-19 PANDEMIC and the market sell-down witnessed in the first half of 2020 underscores the risk dynamics that come with a fully realised environmental, social, and governance (ESG) approach.

During the pandemic, for example, there was a multitude of companies seeking capital to shore up their balance sheets.

When analysing potential opportunities, the discipline needed for ESG integration has helped us take a tighter and more demanding view on what capital raisings were genuine opportunities from a risk-return perspective.

This ESG filter has been invaluable for securing placements in only the most desirable issues and leaving the others for less risk-informed investors.

We witnessed a sharp focus on the simple issue of how companies treated their employees under these conditions and watched very closely the cultural and staffing practices of companies in the investment universe.

18MM081020_18-37.indd 32

In today’s fluid environment, we have also been keen to ensure companies are acting in good faith, and not using these pandemic conditions as a ruse for the poor treatment of workers, abuse of the environment, for lax governance, or to perpetuate poor and unsustainable business models.

The recent full-year reporting season saw increased focus on staff and customer safety during the pandemic. A focus of our ESG engagements has been on how companies are managing their workforces during the crisis.

In most cases, companies reported better safety performance during the half.

Many companies that had reported significant numbers of fatalities in the past were fatality free in this reporting period.

Companies are also looking to the future and considering continuing with flexible working conditions after the pandemic.

By contrast, to date, the crisis does not seem to have had any impact on companies’ previous climate change or other ESG commitments.

29/09/2020 3:24:40 PM

October 8, 2020 Money Management | 33

Strap ESG

DRIVING A MORE SUSTAINABLE APPROACH Now more than ever, investors are driving the move towards sustainable investing. There is something in all of us that craves a better future, and people are more active in allocating their wealth towards this goal.

Themes like decarbonisation and global warming are driving a growing energy thematic that will eventually tip the scales toward alternative energy.

COVID-19 has seen a drive towards renewables as a policy lever, and also as renewable energy costs fall in comparison to fossil fuels. There is a long ramp-up of opportunity here in

the long switch to more renewable energy sources for long-term investors.

Associated industries and technologies are also prime for investment in this space.

The need for clean and sustainable food sources, relieving increased urbanisation, and making technology, communications and education accessible to all are themes sustainable investors can believe in and capture.

COVID-19 has also accelerated changes in workfrom-home, transport, travel, education and shopping, with significant potential for sustainable investors.

CASE STUDY HOW SUSTAINABLE COMPANY NEXTDC (ASX: NXT) HAS THRIVED DURING THE PANDEMIC Ausbil had been following NXT closely, initiating coverage and investment last year as it offered access to a growth thematic in the migration to SaaS and cloud-based approaches to information technology.

With the onset of COVID-19, we have seen what we believe is a major step-shift upwards in the population’s usage of e-commerce and cloud-services, with the sudden impact of lockdown measures and the boom in work-from-home arrangements.

Today, NXT offers a high-quality company with exposure to what is now an accelerated technology thematic, with great sustainable attributes: a strong social purpose in the provision of safe data storage services, infrastructure-like future income streams, strong management, lowenvironmental impact, controlled risks, and low carbon impact, all within a sustainable business model.

In addition to the sustainable fundamentals of NXT, from the ESG perspective, the company has a strong profile with a majority independent board, and no structural corporate governance issues. The company also has good sustainability reporting.

We also value the company’s essential place in the technology infrastructure ecosystem which supports the greater diversity and workplace flexibility that has come with technological change, and has accelerated under these extraordinary COVID-19 times. The company also appears to have a strong focus on quality risk management, information security and staff engagement.

18MM081020_18-37.indd 33

In addition to this, there are a range of themes that are driving the expectations of investors, both institutional and retail, and include: • Decarbonisation of the economy; • Human rights and modern slavery in operations and supply chains; • Corporate governance; • Data security; • Culture and diversity; • Transparency and good corporate governance; • Environmental citizenship; and • Trust and fair work behaviour.

We have seen a number of issues in the financials, materials, services and consumer discretionary and staples sectors recently that highlight the critical importance from a brand, trust, operational and financial perspective.

Companies can no longer ignore their socially-implied licence to operate.

IMPROVING INVESTMENT OUTCOMES SUSTAINABLY We have seen from the results of our sustainable investment portfolio that a sustainable approach reduces the risks in a material way.It also improves outcomes, especially in downside markets where sustainable companies are rewarded for their lower overall risk profiles.

In Ausbil’s view, it is crude to approach sustainable investing from a pure returns focus, because the idea of sustainable investing is about risk-adjusted returns.

That risk adjustment comes from an extensive tail of data and analysis around ESG issues

“COVID-19 has seen a drive towards renewables as a policy lever, and also as renewable energy costs fall in comparison to fossil fuels.” across multiple themes, improving the odds for investors in terms of risk and rewards.

A key focus of our strategy is on company engagement.

Engagement means we maintain an ongoing conversation with the companies in our universe, even when they have un-investable ESG scores. We do this for three reasons: 1) We believe we can have a more positive impact on companies that are in dialogue with us, than if we actively exclude them as pariahs.

2) We want companies to become more sustainable in their journey and increase the universe of where we can invest.

3) We need to understand the full distribution of ESG outcomes and behaviours to get a full picture of both ends of the curve, those we would never invest in, and those we believe are exemplary on an ESG basis.

Nicholas Condoleon is portfolio manager and Måns Carlsson is head of ESG research at Ausbil.

29/09/2020 3:24:47 PM

34 | Money Management October 8, 2020

ETFs

LOOKING BEYOND EXPENSE RATIOS As Australia approaches 20 years of exchange traded funds, Duncan Burns questions how important fees are and if we’ll see a ‘zero-cost’ ETF in the future.

THE FIRST AUSTRALIAN exchange traded fund (ETF) was launched almost 20 years ago in 2001 and tracked the S&P/ ASX 200. That ETF came with a management expense ratio (MER) of 0.286% and was predominantly popular with institutional investors due to its liquidity and cost transparency.

Fast forward two decades and the industry has come on leaps and bounds. There are now over 200 ETFs listed on the Australian Securities Exchange (ASX) and market capitalisation for the industry, according to the ASX, is close to $70 billion as at 31 August, 2020.

Additionally, the proliferation of ETFs ranging from the broad market index ETFs that track the ASX 200/300 to the exotic, niche ETFs that focus on a specific sector, means that investors have a lot more choice. With choice

18MM081020_18-37.indd 34

comes competition and when coupled with lower direct costs, inevitably results in lower MERs. It is now possible to find not just one but several ETFs tracking the broad market indexes with 0.10% or less in MER.

COSTS MATTER, UP TO A POINT At Vanguard, we are very fond of reminding investors that costs matter. This philosophy is grounded in unequivocal research which shows that, on average, investments with a lower relative MER typically outperform those with higher MERs in the long run, in terms of performance after MER. For the most part, investors who have simply chosen the lowest-cost index ETF have benefited from this choice for decades. However, present day expense ratios for core exposures such as Australian shares have

compressed meaningfully and MER differences are now in the low single digits, thus becoming less of a differentiator.

While this broad-based downward shift in ETF MERs has undoubtedly resulted in better investment outcomes and savings for all ETF investors, it has also created a new dilemma. How does an investor select ETFs amid this new “everyone is a low fee provider” environment?

In a field of similarly priced ETFs tracking the same index, an investor might look at their options and decide to go for the lowest cost one. Is it safe to assume they are a commodity and will deliver the same performance after MER? To answer this question using a cooking analogy, it’s a bit like a home cook believing that following the steps of a restaurant chef’s recipe alone is the secret to

culinary success: slice and dice as the recipe dictates and a few hours later, you have a dish that rivals what you’d expect to be served at a restaurant.

But as many of us have discovered through our kitchen exploits during the pandemic, even when cooking alongside online masterclasses run by Michelin-starred chefs – there is always more to it than just following a recipe with precision.

Managing an index ETF is not too dissimilar. Asset managers tracking similar indices can produce different results relative to their benchmarks despite facing the same opportunity set when it comes to managing your money. This is because resources, index expertise, investment sophistication, securities lending and other factors can provide an edge.

Investors should not merely pick

29/09/2020 4:57:45 PM

October 8, 2020 Money Management | 35

ETFs

Table 1: Comparing fees and performance

the lowest MER index ETF because, as with cooking, both the quality of your ingredients and the skills of the chef matter.

So if fees are no longer the differentiator they once were, what other metrics of value can investors apply to sort through their ETF choices? Well, if you know what to look for in a low-cost index ETF provider, you can increase your chances of achieving superior after-fee performance vis-à-vis your target benchmark.

When searching for and selecting between core index ETF investment options today, investors should use a decisionmaking framework that takes into account a range of factors, including expenses, portfolio management capabilities, securities lending programs, spread costs and scale in more equal weights than in the past.

PAST PERFORMANCE DOES MATTER As responsible financial institutions, we are legally obliged to provide risk warnings along the lines of “past performance is not a guarantee of future performance”, to make sure that investors are cognisant of the risks involved in any investment. That certainly holds true for equity index ETFs today, as some indexes and benchmarks can swing wildly in the short to medium term. That said, past performance of an index ETF relative to its benchmark can be a good indicator of the manager’s portfolio management quality, skill and expertise.

Investors should look closely at the historical track records of each ETF and how it tracks against the benchmark and its performance after fees. There is little value in paying lower MER fees per annum if the lower MER funds underperform against the index by a significantly larger margin, essentially costing you in

18MM081020_18-37.indd 35

expected after MER returns.

Conversely, a fund with a higher fee that tracks closely against the index or even positively as compared to the index, would deliver you better after MER returns.

Table 1 illustrates this point by comparing the fees and periodic performance of three hypothetical ETFs tracking a made-up benchmark termed X. Looking at the one year performance of ETFs A, B and C respectively, the thing that jumps out most is that ETF A broke even with the benchmark after fees, essentially earning the investor the entire expected benchmark return of 7.5%.

On the other hand, ETF B cost the investor 0.06% in fees, despite the ETF tracking precisely with the benchmark. Finally, ETF C cost the investor a perceived 0.13% loss after fees because it underperformed the benchmark by 0.05%, before a further 0.08% fees.

While the numbers are all hypothetical, it emphasises the need for investors to look carefully at both performance after fees and the cost of the ETF, before deciding on the best one to invest in.

Great index ETF managers can track the benchmark tightly and add incremental value to cover some, and on occasion all of your management fees. When the latter can be accomplished, it essentially means the investor is holding a zero-cost ETF. So how do good index managers do it and how can you tell them apart?

BIGGER CAN BE BETTER Scale is a key differentiator, and one that is increasingly difficult for new entrants to achieve.

Scale enables ETF managers to lower fixed trading costs like commissions or ticket charges, track or ‘replicate’ benchmarks with greater precision and strengthen relationships with trading partners, benefiting the end investor.

ETFs

Benchmark X

ETF A

ETF B

ETF C

n/a

-10 bps

-6 bps

-8 bps

+7.50%

+7.60%

+7.50%

+7.45%

Management Fee 1 yr perf (before fees) Source: Vanguard

SECURITIES LENDING Does your index ETF manager do it and do investors in the ETF get the full benefit? Securities lending is a widely used value-adding investment strategy involving the loan of portfolio securities to financial institutions that have a need to borrow such securities.

The ETF manager receives either cash or collateral to protect against the borrower failing to return the securities. While this basic framework exists across the globe, the approach or lending philosophy can vary significantly from manager to manager.

ETF investors should be appropriately compensated for assuming the risk associated with securities lending. However, this is yet another area where various index managers differ. The managers that deliver the most value are those who pass on the full securities lending revenues to investors, while some managers don’t do it at all or may keep a significant portion of the proceeds for their own benefit.

SPREADS COUNT AS COSTS TOO While we often discuss the broad issue of costs in terms of ETF management expenses, it should be noted that costs come in other forms too.

Investors should assess the total cost of ownership in any investment. When it comes to ETFs, transaction costs – better known as bid/offer spreads – are also an important factor.

Spreads are paid each time an investor enters or exits a fund and covers the costs incurred in the transaction. There is no financial advantage in picking a low expense ratio ETF if it comes with

significant spread costs, as the spreads, like management fees, eat away at your overall investment returns. So cast your eye on liquidity and spreads of your ETFs and compare before clicking buy.

MANAGING AN ETF IS HARDER THAN IT LOOKS In today’s capital markets, index ETF managers should increasingly be expected to produce returns that are, on average, approximately equal to their benchmark index minus their ETF’s expense ratio.

This concept applies broadly across markets, while the costs – and the consequent performance drag – range from minimal in developed markets to modest in emerging markets. For sophisticated index ETF managers, opportunities exist to save and add value through more thoughtful daily management of the portfolio. Successfully taking advantage of these opportunities can in some cases effectively offset the MER and increase index ETF investor returns.

In the US, there has been a lot of press recently around the launch of ‘zero-cost ETFs’. While we have not had any truly free, zero MER ETFs launched in Australia yet, if you look closely at an index ETF’s performance after MER, there are a number of Australian ETFs already worthy of that title.

Ultimately, not all index ETF managers are the same so it really pays to do your homework when choosing the right ETF for your portfolio.

Duncan Burns is head of equity indexing at Vanguard Asia-Pacific.

29/09/2020 4:57:52 PM

36 | Money Management October 8, 2020

Advice

THE SUSTAINABILITY CHALLENGE IN ADVICE The focus on sustainable investments, from investors and regulators, has reached a tipping point.

This provides both challenges and opportunities for financial advisers, writes Nigel Stewart.

THE GROWING APPETITE among people globally for ethical and sustainable investment and the increasing focus by regulators on these issues are highlighting the need for financial advisers to educate themselves on the choices available to their clients.

Even amid the pandemic, client interest in sustainable investment has surged in the past year, fuelled by news of devastating bushfires in Australia, California and elsewhere, record global temperatures, disappearing polar icecaps, coastal flooding and dying reefs.

But with clients often overwhelmed by sustainable investing jargon or by issues such as cost, transparency and the impact on investment returns, there are both challenges and opportunities for advisers in educating and steering their clients to effective solutions.

Later, we will look at the strategies available to advisers in dealing with the rising demand for sustainable investment solutions, but first some background:

INCREASING DEMAND You do not have to look far to find compelling evidence of the growing global appetite for sustainable investment, both among individual and institutional investors.

A 2019 study by research firm Cerulli Associates found that

18MM081020_18-37.indd 36

56% of US retirement plans surveyed showed a preference for investing in companies that are environmentally and socially responsible. That percentage rose to 63% among participants aged under 40.

Within Asia Pacific, a separate Cerulli study found varying levels of interest in sustainable investing, with Australia and Japan ahead of the rest of the region. As with the US study, this survey showed the greatest interest is coming from millennials.

Looking specifically at Australia, Cerulli estimated mutual fund assets in sustainable investments rose 23% year-on-year to $66.8 billion in 2019, a trend the study attributed to increasing awareness of climate change among Australians.

Morningstar data show that 35 new sustainability investment retail mutual funds were launched in Australia in 2019, with environmental, social and governance (ESG) integration being the dominant strategy But the demand is not just at the individual level. Surveys reveal a growing number of asset managers are paying greater attention to how companies in the portfolios they manage attend to material ESG risks.

Between January and April 2020, consultancy firm Greenwich Associates interviewed more than 500 institutional investors and found an increasing focus on ESG

1/10/2020 10:58:01 AM

October 8, 2020 Money Management | 37

Strap Advice

considerations, with governance still at the forefront, but with social issues rising since the pandemic began.

REGULATORY FOCUS Pressures are also coming at the regulatory level, both in Australia and overseas.

Locally, the Council of Financial Regulators – comprising the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury – has established a working group on climate change to ensure mounting climate risks are effectively managed by financial institutions.

“Climate change will have a broad-based impact on Australian financial institutions and therefore clearly poses risks that are systemic in nature,” the RBA said in its financial stability review in October 2019.

Separately, the new Code of Ethics for financial advisers introduced this year by the Financial Advice Standards and Ethics Authority (FASEA) has focused attention on advisers’ responsibilities in relation to recommending ESG investments.

Standard six of the code requires advisers to actively consider each client’s broader long-term interests and likely circumstances, which some experts have taken to mean that clients should be questioned about their investment preferences around sustainability and ethical issues.

WHAT THIS MEANS FOR ADVICE For advisers themselves, this can be a particularly challenging and

18MM081020_18-37.indd 37

complex issue. But equally, it offers enormous opportunity for those prepared to get up to speed on the considerations so that as fiduciaries they can serve their clients better.

If anything, investors are more interested in sustainability than their advisers. A Morgan Stanley survey found that while nearly 80% of individual investors had expressed a strong interest in sustainable investment, more than 60% of advisers had shown little or no interest.

Of course, this contrast may reflect the fact that advisers generally are older on average than the wider population and tend to be more conservative. But given the evidence above that demand is being led by those under 40 and given the pending intergenerational wealth transfer, advisers who ignore this trend do so at their peril.

In fact, it is hard to downplay the size of this opportunity. WealthX’s 2019 report ‘A Generation Shift: Family Wealth Transfers’ estimated that by 2030 about US$15.4 trillion ($21.74 trillion) of global wealth owned by those with US$5 million or more will have been transferred to the next generation.

KEEPING IT PRACTICAL Against that background, a pathway for advisers is a practical one – offering clients a framework for thinking about sustainability.

For instance, are the clients primarily concerned about social and environmental outcomes, with financial objectives secondary, or are financial outcomes their priority, with the social/green issues secondary?

This preferences framework can be a good entry point for discussion around the frequently

“While nearly 80% of individual investors had expressed a strong interest in sustainable investment, more than 60% of advisers had shown little or no interest.” cited main concern about sustainability, which is the now-rejected notion that adopting such a strategy must involve compromising long-term returns.

Extensive research from the academic community and Dimensional’s own empirical studies on this topic have not found any compelling evidence that companies with lower greenhouse gas emissions have either higher or lower expected returns than companies with higher emissions (this is once you control for exposure to known drivers of expected returns – such as size, relative price and profitability in equities and forward rates in fixed interest).

The message for clients from this is that there does not have to be a trade-off between sustainability issues and returns.

In fact, an approach that thoughtfully integrates ESG while maintaining a focus on robust drivers of expected returns within a broadly diversified investment strategy can offer similar expected returns to an equivalent strategy without an ESG focus.

Of course, clients who want to invest sustainably can normally talk at some length about why they want to do so. But the ‘how’ this can be done is where the adviser’s expertise comes in and can be seen by clients as a real source of value as they navigate the ESG maze.

For instance, the client may favour a strategy that invests only in those companies believed to have a strongly positive impact on ESG issues. In this case, the

adviser could point out that such an approach can sacrifice diversification and introduce idiosyncratic risks that reduce the reliability of investment outcomes.

Ultimately, the message from the adviser should be that pursuing ESG goals does not have to be at the expense of sound investment principles.

MAKING IT EASIER Even if sustainability options are not core to an adviser’s offering, it still makes sense to include them among the available options and to showcase the firm’s expertise with a position paper. The important point in your offering is to show clients that they have choices and to demonstrate the trade-offs involved at each stage.

From a communication standpoint, advisers can do well if they adopt a story-based approach that minimises data, avoids overly gloomy scenarios or overtly political language, sets achievable goals, highlights transparency and demystifies jargon.

The big picture goal should be to make sustainable investing easier for clients and to show them how best to connect their social and environmental values to their investment goals.

The demand is there, the solutions are available and advisers have a key role to play.

Nigel Stewart is a founding director of DFA Australia and chair of wealth management firm Stewart Partners.

29/09/2020 3:23:22 PM

38 | Money Management October 8, 2020

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SEEKING STABILITY IN VOLATILITY In a world of both extreme volatility and low interest rates, investors are struggling to find a defensive place to put their assets, writes Arnaud Brillois.

TODAY’S INVESTOR IS faced with minimal fixed income returns, late-stage equity valuations, and the prospect of growing market volatility. But now they may have somewhere to turn: convertible bonds.

Convertible bonds are corporate bonds issued with a call option that gives the holder the right to convert the bond to equity shares, bringing together equity and fixed income properties in a unique combination.

The call option allows fixed income investors to access to alternative sources of return in markets where returns of any sort are increasingly hard to come by.

For stock investors, the bond component is designed to act as a ‘floor’ underneath equity risk as markets become more volatile. For multi-asset investors, converts can add a bond-like stability to an equity tilt, and stock-like potential to a fixed income tilt.

And because of the unique nature of the convertible universe, they can act as a diversifier across a range of portfolios.

For those investors concerned that geopolitical uncertainties are mounting and the global economy may be slowing, now would seem to be an especially opportune moment for converts, in our view.

HISTORICAL BEGINNINGS Originating in the US railroad boom of the 19th century, convertible bonds were used by entrepreneurs eager to preserve capital to invest in laying down track, by issuing the hybrid instruments as a way to save on interest expense and avoid

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depleting their balance sheets when principal repayment came due. That fundamental objective, conserving liquidity, hasn’t changed.

If conserving liquidity sums up convert issuers’ overriding objective, then converting the bond’s call option into equity shares describes their ulterior motive.

Aside from achieving issuers’ capital and liquidity objectives by repaying bondholders in shares instead of cash, conversion into shares deepens the market for their equity. This mindset contrasts to the frequent circumstance in conventional bonds, where bondholder concern for protection of principal can collide with issuer plans for growth.

Currently, convert issuance is dominated by small and mid-cap companies who are seeking to finance their expansions. However, the majority of small and mid-cap convert issuers are untested in the credit markets, meaning that much convert issuance doesn’t meet the exacting standards of an investment grade rating. In fact, well over half of convert issuers forgo an agency rating altogether to save on the expense of obtaining one.

However, convert issuers typically do not carry any other form of unsecured debt on their books.

According to a November 2019 Bloomberg review, more than four-out-of-five outstanding converts rank as senior unsecured debt, falling in right behind secured loans on the corporate capital stack.

Further, since many convert issuers refrain from issuing other forms of debt, they tend to have cleaner balance sheets than high yield and even investment grade issuers, as measured by risk ratios like free cashflow to debt and debt to earnings before interest, taxes, depreciation, and remuneration.

ACCESS TO GLOBAL CONVERTS The geography of convertible issuance and the character of convertible issuers have shifted over the years. As of July 2020, the lion’s share of activity – more than 68% – takes place in the US. The proceeds go largely to fund companies in the most dynamic sectors of the economy: information technology, biotechnology, and telecommunications.

Asia accounts for another 15% of the market. China has recently displaced Japan as the regional leader, and most of the region’s issuance, as in the US, comes out of the more dynamic economic sectors from companies whose American depositary receipts (ADRs) list on US markets.

Europe makes up the rest of the market, with an emphasis on consumer discretionary and industrial issuers. With prevailing eurozone credit yields treading perilously close to zero, and in some cases even below, European issuers have resorted to convertibles to entice fixed income investors with the opportunity for enhanced returns.

European credit quality thus tilts more heavily toward investment grade than in the US and Asia.

This gives investors access to

Continued on page 40

29/09/2020 3:16:00 PM

40 | Money Management October 8, 2020

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Continued from page 39 a much wider pool of investment opportunities across exciting sectors that they may not currently have access to. It also allows for diversification of their portfolios – again, a good option for where markets are currently.

FINDING VALUE IN VOLATILITY

Chart 1: Convertible bond performance

(1) Performance period from 31 December 2019 to 31 August 2020.

The indices shown are unmanaged and have no fees. One cannot invest directly in an index.

Source: Lazard, Bloomberg, MSCI, Thomson Reuters

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In our view, the structure of convertible bonds favours investors – the potential for gain exceeds the potential risk of loss because of a differentiated payoff when the bond’s return profile falls in what we call the ‘mixed zone’. The mixed zone, where a convertible manifests its dual qualities, defines its sweet spot.

The properties of convertibles make them one of the few investments capable of thriving in volatile markets.

The dual nature of the investment gives them an advantage over conventional investments. They typically have short durations compared to other fixed income asset classes, which makes them relatively less sensitive to changing interest rates – issuers, as a rule, seek to cap their call exposure by issuing converts with short maturities.

Rising rates, which undermine bond markets, usually accompany rising equity markets, which tend to lift the value of call options.

So the short duration supports the bond floor, while the call option affords an opportunity to participate in the upside. And just as greater convexity may generate more gain on the way up, it can deliver bond floor protection more swiftly on the way down.

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October 8, 2020 Money Management | 41

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

Convertibles’ ability to withstand and even to profit from volatility has historically served long-term investors well.

From the Global Financial Crisis (GFC) through the long subsequent recovery in markets, the convertible index held up better through the crash and kept pace in the rally.

Convertibles’ resiliency enabled them to realise equitylike returns over the long run with fewer and less bumps along the way. Their diversifying qualities and the presence of upside equity potential with a fixed income cushion make converts a prudent allocation in a strategic portfolio.

MARKETS IN 2020 The volatility in markets in 2020 has been a positive for the convertible bond market. This is an asset class that thrives in volatile markets and 2020 has been no different. As you can see on Chart 1, performance has been strong in 2020.

During the first part of the year, until the end of February, convertible bonds captured the upside in global equity markets, even outperforming the MSCI All Country World Index (ACWI) countries. As the sell-off started from end of February to mid-March, convertible bonds became more and more defensive, and increased this outperformance relative to equities. When the rebound started in late March, convertible bonds quickly became more sensitive to equity prices and captured the rebound, maintaining a considerable outperformance relative to global equities. The

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net result has been a strong period of outperformance for the asset class.

The other interesting aspect of 2020 has been the primary market where convertible bonds are issued. It has been an open and active primary market.

Since March 2020, the number of new issues is two times the same period in 2019.

This active primary market gives us new companies to invest in and importantly increases the overall convexity of the market. It also allows us to have access to sector at different stages of the recovery and articulate our positioning.

We currently have issuers that are pure recovery, still very much undervalued, like airlines, energy or tourism related companies. We also have issuers that have already started to recover, like semiconductors or payment processors. And finally, we have a lot of issuers in our market that are direct beneficiaries of the crisis – many companies in e-commerce, cybersecurity, cloud or even telemedicine.

In our view convertible bonds should be considered in an asset allocation framework in 2021, because they offer diversification, little overlap versus existing fixed income and can perform well during periods of volatility. The current conditions are excellent for the asset class, with a dynamic primary market and a market that is still quite attractive on a valuation basis.

Arnaud Brillois is managing director and portfolio manager at Lazard Asset Management.

1. Often referred to as ‘converts’, a convertible bond is: a) T he amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off b) A fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares c) A fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental) d) A short-term obligation, usually fewer than 90 days, that provides a return in the form of interest payments 2. What geographic region has the largest issuance of convertible bonds? a) U nited States b) Europe c) Asia ex-Japan d) J apan 3. Why does convert issuance often not meet an investment grade rating? a) A large number of convert issuers do not incorporate ESG strategies into their business model b) Many convert issuers have a low risk of defaulting on their debt repayments c) Rating agencies do not provide ratings on convert issuers d) T he majority of convert issuers are small and mid-cap companies, which are untested in credit markets 4. How many convertible bonds are in the convertible bond universe? a) 6 0 b) 75 c) 500 d) 9 00 5. Which of the following statements about convertible bonds is incorrect? a) T he properties of convertibles make them one of the few investments incapable of thriving in volatile markets b) The call option can give fixed income investors access to alternative sources of return in markets where returns of any sort are increasingly hard to come by c) For stock investors, the bond component is designed to act as a floor underneath equity risk as markets become more volatile d) F or multi-asset investors, converts can extend a portfolio’s efficient frontier, adding bond-like stability to an equity tilt and stock-like potential to a fixed income tilt

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/seeking-stability-volatility

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

29/09/2020 3:16:19 PM

42 | Money Management October 8, 2020

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

Appointments

Move of the WEEK Melanie McQuire Chief operating officer Maple-Brown Abbott

Boutique investment firm Maple-Brown Abbott (MBA) has appointed Melanie McQuire as chief operating officer (COO), responsible for the operating, technology strategy and platform of the business.

Reporting to chief executive and managing director Sophia Rahmani, she would also oversee product and

Westpac has appointed Michael Hawker to the board, effective from November 2020, as an independent non-executive director and he will become a member of the board’s legal, regulatory and compliance committee, as well as the technology committee.

Hawker was currently a nonexecutive director of other boards including the BUPA global board UK, BUPA ANZ group, Macquarie Bank and Macquarie Group which he would retire from upon commencement at Westpac.

He was formerly chief executive and managing director of Insurance Australia Group (IAG) from 2001 to 2008.

Prior to IAG, he held executive roles with Westpac between 1998 to 2001, as well as executive roles at Citibank International in Europe and as deputy managing director of Citibank Australia.

He had also been president of the Insurance Council of Australia and chair of the Australian Financial Markets Association.

Alison Deans would also retire form the board at the conclusion of the 2020 annual general meeting. Deans joined the board in 2014 and had served on the risk, remuneration, nominations and technology committees.

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platform management across MBA’s Australian managed investment schemes, the undertakings for the collective investment in transferable securities platform, and institutional and high net worth mandates.

McQuire joined from Lazard Asset Management, where she spent eight

Cbus Super has internally promoted Nancy Day as its chief operating officer, investments, to drive the internationalisation of the fund’s investment model.

Day had been the superannuation fund’s head of investment operations since August 2018 and had 20 years of experience in the funds management and super industries in operations, finance, risk management, and compliance.

Prior to Cbus, Day led the operations, compliance, risk management and governance functions at JCP Investment Partners, an Australian equities fund manager.

Research and ratings firm Lonsec has appointed Peter Green as sector manager for Australian equities, responsible for leading Lonsec’s coverage of Australian equity managed fund products.

Green would also retain his current position as head of listed product products which covered the firm’s range of exchange traded funds (ETFs) and other listed products.

He had 12 years’ experience at Lonsec working across managed funds, listed products and direct equities research.

Lonsec had also appointed Chad

years, most recently as COO Asia Pacific.

She was also a product manager for listed equities for seven years with Macquarie Asset Management, and had worked with ING Investment Management where she focused on separately managed account relationships.

Troja as head of equities; he had been a member of Lonsec’s direct equities team since 2017 and had over 15 years’ experience in equities research and funds management.

Asha Rahman had also joined as associate investment analyst and Rish Chaudhuri would commence as an investment analyst in October.

Global investment firm T. Rowe Price has promoted Jonathon Ross to head of intermediary Australia and New Zealand, to lead the firm’s continued growth in the intermediary channel.

Sydney-based Ross joined the firm in 2015 as a relationship manager and had been acting head of intermediary since May 2020.

Ross also held business development positions at NAB Asset Management and MLC. He had officially took over his current remit on 1 September from Darren Hall who was promoted as head of distribution for Australian and New Zealand on 28 August.

Superannuation and wealth management recruiting firm Super Recruiters has appointed Cathy Doyle as chair.

Doyle would advise Super Recruiters’ knowledge and

consulting work that assisted human resources (HR) leaders of wealth managers and super funds refine their recruiting and people management.

She had previously held senior leadership roles in HR for the Commonwealth Bank of Australia, BNP Paribas, Perpetual and Rabobank.

Doyle also held board governance roles and was a former director for the International Women’s Forum Australia (where she was a founding board and membership director), Odyssey House McGrath Foundation and Mason Stevens.

Succession Plus has announced the appointment of Amreeta Abbott as a shareholder and board member, following the sale of her NowInfinity business for $25 million to Class.

Abbott and her colleague Vitalii Symon, former chief technology officer, both departed the cloud solutions provider to “pursue other projects” following the integration of the business into Class, which was first announced in January.

Abbott would be bringing her experience in financial technology and scaling professional service businesses while Symon would join the IT team.

30/09/2020 3:51:24 PM

SUPER

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28/09/2020 3:03:17 PM

OUTSIDER OUT

44 | Money Management Management October April 2, 2015 8, 2020

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

It ain’t no spoof, JP Morgan has trumped Westpac in the penalty stakes OUTSIDER reckons the guys over at Westpac can relax a little over the record penalty they paid as a result of the bank’s AUSTRAC infringements because JP Morgan Chase and Co has managed to make the Westpac penalty look like small change.

You see, JP Morgan Chase has admitted wrongdoing and agreed to pay more than $US920 million ($1.29 billion) to resolve US authorities’ claims of market manipulation in the bank’s trading of metals futures and Treasury securities over an eight-year period.

Hardly surprisingly, this is reported to be the largest sanction ever tied to the illegal practice known as “spoofing”.

Apparently, JP Morgan Chase will pay the biggest monetary penalty ever imposed by the Commodities Futures Trading Commission, including a US$436.4 million fine, US$311.7 million in restitution and more than US$172 million in disgorgement.

Now until reading about this massive penalty, Outsider had never heard of ‘spoofing’ but it reportedly involves flooding derivatives markets with orders that traders don’t intend to execute to trick others into moving prices in a desired direction.

Sounds like an average week in Australian politics to Outsider and it is probably best that this week’s Budget is not subjected to scrutiny on the grounds of potential ‘spoofing’.

No one goes hungry on the 2020 hungry mile

OUTSIDER has been heartened to hear the news that NSW Premier, Gladys Berejiklian wants people back in their offices in the Sydney central business district as soon as possible.

He imagines that it is only going to be a matter of months before the Victorian Premier, Daniel Andrews, offers similar encouragement to the habitues of Melbourne’s office towers and he imagines that in the COVID-19 free capitals of Queensland, Western Australia and South Australia no-one ever really needed to leave their desks.

But the real question on Outsider’s mind is whether Sydney’s Barangaroo financial quarter will ever be the same

again given that the last time he ambled through the precinct he saw more tumbleweeds than people and many of the better eateries along the waterfront appeared to have closed.

Of course, at least some of the problems for those with offices in Barangaroo is that they are within exceedingly tall structures and social distancing means you can’t fit more than four people in most lifts which means that getting people up to their desks is going to be a challenge before you even start worrying about how they’re going to get them down again for lunch.

It should serve as a reminder that before it was Barangaroo, the plush office precinct was a gritty workplace for waterside workers loading and unloading ships and taking shifts where they could find them.

In those days it was aptly named the “Hungry Mile” but Outsider feels sure that the chaps and chapettes at the likes of KPMG and Mercer will order in UberEats before they go hungry.

A grounded experience for high-flyers turned feather dusters OUTSIDER knows one or two financial services high-flyers who are normally more than ready to flaunt their triple platinum frequent flyer status but are currently having to endure the more grounded experience of we mere mortals.

Life is tough when you can’t jump the queue and quaff the champers in seat 1A. Not that Outsider is feeling particularly sorry for these high-flying corporate eagles who COVID-19 has turned into hens and roosters, but he

OUT OF CONTEXT

would like to point out that at least one airline is acknowledging their pain and is offering the in-flight eating experience to these corporate nomads without them actually having to leave the ground.

It might seem like an oxymoron to some, but Singapore Airlines has turned one of its grounded Airbus A380 aircraft into a “fine dining restaurant” where you can apparently sit up in first and business class and work your way through the in-flight menu.

Outsider presumes that

"This isn't going to be fixed by the prime minister dressing up like Bob the Builder in his tradie fluros."

"To some in the Government and big business, superannuation is a solution to every problem except retirement."

- Tanya Plibersek on apprenticeships

- Michele O'Neil, ACTU president

www.moneymanagement.com.au

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such mastication is carried out utilising proper crockery and cutlery rather than the plastic and tinfoil that predominates on the flights he takes these days.

Now Outsider acknowledges that there was a time when he got to sit up the front of the aircraft on international flights but these days he sits further towards the toilets up the back and with due respect to the usually polite cabin crew he, for one, is not signing up to sample a Qantas or Virgin snack while grounded.

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1/10/2020 9:49:35 AM