FS Advice journal vol16 i01

Volume 16 Issue 01

Dealing with vulnerable clients Holley Nethercote

FASEA, values and ethics MyNextAdvice

NO SHAME IN DREAMING Victoria Devine, Zella Wealth

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Borrowing from others Core portfolio allocations Renting out the family home

Bees carry a lot of responsibility on their tiny thoraxes.

When they forage for nectar to feed their hives, they also spread the pollen needed to maintain the delicate balance of biodiversity across the world’s ecosystems.

At Fidelity, we take an equally balanced, responsible approach to sustainable investing.

We understand that every investment decision we make has consequences for client portfolios and society as a whole. That’s why we’ve embedded deep ESG analysis into our investment process to identify issues and actively engage with companies we invest in to help drive positive, sustainable outcomes.

We help build better futures for investors today and for generations to come.

Learn more at fidelity.com.au/sustainable-investing Issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. ©2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

Contents

www.fsadvice.com.au Volume 16 Issue 01 I 2021

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COVER STORY

NO SHAME IN DREAMING Victoria Devine, Zella Wealth

18 NEWS HIGHLIGHTS UNDERINSURANCE GAP WORSENS: RESEARCH

FEATURES 6

The underinsurance gap has broadened compared to three years ago, new Rice Warner research finds.

INDUSTRY FUND SEES 252% INCREASE IN ROBO-ADVICE

7

An industry superannuation fund has seen interactions with its online financial advice tool more than double year-on-year.

GOVERNMENT TO WIND UP FASEA

8

The Financial Adviser Standards and Ethics Authority will be made redundant as two government bodies take over its remit.

THE PENDULUM SWING OF ADVICE

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Last year saw the pendulum swing from face-to-face meetings, with a sudden switch to online only thanks to the COVID-19 pandemic. But now, as the dust seems to settle and the phrase “the new normal” is starting to actually feel a bit more “normal”, the advice industry has begun a new phase as well.

FS Advice

Welcome note Christopher Page

05 Whitepaper Challenging a Will based on mental capacity

25

For news updates like this follow us on social media

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Contents

www.fsadvice.com.au Volume 16 Issue 01 I 2021

06 Published by a Rainmaker Information company.

A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Elizabeth McArthur elizabeth.mcarthur@financialstandard.com.au Production Manager Samantha Sherry samantha.sherry@financialstandard.com.au Graphic Designer Jessica Beaver jessica.beaver@financialstandard.com.au

Advertising Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media and Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

FS Advice: The Australian Journal of Financial Planning ISSN 1833-1106 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Advice are not necessarily those of Financial Standard or Rainmaker Information.

Financial Standard is a Rainmaker Information company.

ABN 57 604 552 874

AFCA FORCED INTO RULE CHANGE UNI BOSS JUMPS TO WEALTH FIRM

w

07 08 10

Technical Services Roger Marshman roger.marshman@rainmaker.com.au

News

11 12 14

News

NEW CLAIMS HANDLING REGIME TRUE COST OF MENTAL HEALTH

News

UNIVERSITY DEBT WEIGHS ON INVESTORS RETIREES NEED BETTER STRATEGIES

News

THE STATE OF CHARITABLE GIVING ASIC TAKES ACTION AGAINST MISSING WOMAN

News

AMP OUT OF TOP SPOT AND 3000 ADVISERS GONE: 2020 IN NUMBERS

Opinion

THE RISE AND FALL OF MULTIPLE ADVICE REGULATORS

Opinion

THE TURNING POINT

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FS Advice

The first footprints The firstmoon… footprints on the on the moon…

will remain there will for aremain millionthere years. for a million years.

Curious?

Curious? So So are are we. we.

At First Sentier Investors curiosity is at the heart of all we do. It’s what shapes our investment philosophy and drives our active approach to investment management.

At First Sentier Investors curiosity is at the heart of all we do. It’s what shapes our investment philosophy and drives approachFor to investment management.

It also helpsour usactive tread carefully. more than 30 years, we have considered the long-term impact of our decisions onus our clients and the communities in which Today we manage more than A$215b* It also helps tread carefully.

For more than 30 years,we weinvest. have considered the long-term impact of our on behalf of globally, rely on us to consider theinvest. broader impact how wemore invest. decisions onclients our clients andwho the communities in which we Today we of manage than A$215b* on behalf of clients globally, who rely on us to consider the broader impact of how we invest.

Curious? Learn more at firstsentierinvestors.com Curious? Learn more at firstsentierinvestors.com

This material is issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017). It contains general information only and is not intended to provide you with financial product advice and does not take into account the objectives, financial situation or needs of any particular person.

This material is issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017). It contains general information only and is not © First Sentier Investors (Australia) Services Pty Limited (ABN 73 624 305 595) intended to provide you with financial product advice and does not take into account the objectives, financial situation or needs of any particular person. *as at 30 September 2020 © First Sentier Investors (Australia) Services Pty Limited (ABN 73 624 305 595) *as at 30 September 2020

4

Contents

WHITE PAPERS

www.fsadvice.com.au Volume 16 Issue 01 I 2021

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Taxation & Estate Planning

CHALLENGING A WILL BASED ON MENTAL CAPACITY

By April Kennedy, Attwood Marshall Lawyers

This paper explains the meaning of, and tests for, testamentary capacity in a legal context, highlights the types of evidence and standards of proof regarding associated claims, and discusses the complexities of challenging a Will based on mental capacity.

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Ethics & Governance

UNDERSTANDING FASEA CODE OF ETHICS VALUES

By Dr Ray McHale, MyNextAdvice

FASEA’s Code of Ethics comprises five ethical values which form the bedrock of its 12 standards. This paper provides pragmatic working definitions/interpretations of these values and suggests how advisers can use them to foster ethically sound practices and client relations.

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Ethics & Governance

THE DANGERS OF IGNORING CLIENT VULNERABILITY

By Jamie Munton and Paul Derham, Holley Nethercote

As financial products become more complicated, advisers have a heightened responsibility to ensure vulnerable clients are not disadvantaged and that their best interests are met. This dovetails with a growing need to recognise the different type of vulnerable clients and contributing situations.

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Applied Financial Planning

BORROWING FROM OTHERS

By Drew Browne, Sapience Financial

A joint mortgage may sound appealing, but it comes with a ‘sting in the tail’. Joint and several liability means a person effectively wears the consequences of a co-borrower defaulting.

Superannuation

EMPLOYEES WITH MULTIPLE EMPLOYERS

By Terri Bradford, Morgans Financial Limited People with multiple employers could breach their concessional contributions cap if they exceed the maximum contribution base.

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Insurance

INSURANCE ADVICE FOR BUSINESS CLIENTS

By Crissy Demanuele, BT

If a key person is unable to work in a business due to health reasons, the impact may be significant. This paper examines key person insurance for revenue versus capital purposes, outlines taxation considerations for various forms of cover, and discusses the pros and cons of associated policies.

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Retirement

IMPLICATIONS OF RENTING OUT THE FAMILY HOME

By Rahul Singh, Challenger

Centrelink’s assets and income tests have a bearing on renting out the family home when its owner moves into aged care. This paper examines concession and exemption eligibility, taxation implications, and Age Pension reductions in light of this situation.

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FS Advice

Welcome note

www.fsadvice.com.au Volume 16 Issue 01 I 2021

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Christopher Page managing director Financial Standard

New starts, new faces elcome to the first edition of FS Advice for W 2021. Last year was, of course, incredibly challenging – but, for the financial advice industry, it was also a year that presented some opportunities.

Certainly, the economic impact of the pandemic made us all think about money a little differently.

A report from the Commission for Financial Capability found that during the height of COVID-19’s impact on Australia, in the first half of 2020, 13% of households had lost a substantial part or all of their income. A further 25% of households experienced a reduction in income of less than a third.

The losses were after accounting for the government’s various stimulus measures, including the JobKeeper package.

The same research found that 40% of Australian households had little financial resilience and even a small drop in income would see them in financial difficulty. A further 34% of households were already in financial difficulty.

While Australia has been lucky in so many ways, there were a lot of people still doing it tough last year and they needed financial guidance more than ever. There are numerous stories in this edition that are testament to that.

On page six, research demonstrates how much the underinsurance problem has deepened recently. On page seven, an industry fund’s robo-advice offering saw a 252% uptick in members looking

for financial guidance. And, on page 10 read how SMSFs dumped $30 billion in shares as markets were rattled by COVID-19.

Unfortunately, those seeking professional financial advice for the first time in 2020 did not exactly find an industry ready to meet an upswing in demand. Instead, the number of financial advisers shrunk by about 3000 in 2020 (pg. 11).

Those of us in the industry know that difficult business conditions and regulatory overhaul have combined in recent years to make things tough for advisers too.

However, in 2020 there were bright spots. For example, advisers adapted to new technology and found new ways of connecting with their clients (pg. 8) and those clients were more grateful for the guidance than ever.

Our cover star this edition, Victoria Devine, has managed to capture both ends of the market. Her advice firm, Zella Wealth, services high net worth clients but She’s on the Money – the podcast and social media juggernaut she founded – speaks to those who the financial advice sector cannot service right now.

Devine says not everyone needs financial advice, but everyone deserves financial education. Her personal story is fascinating, and she has a fresh perspective on the industry. I am sure you will enjoy reading. fs

Devine says not everyone needs financial advice, but everyone deserves financial education.

Christopher Page managing director, Financial Standard

FS Advice

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News

www.fsadvice.com.au Volume 16 Issue 01 I 2021

Underinsurance gap worsens: Research Karren Vergara

T

Uni boss jumps to wealth firm Kanika Sood

The University of Sydney’s chief investment officer has joined a dealer group as chair of its investment committee.

Miles Collins began chairing the investment committee at Walker Lane from January 2021.

Collins joined The University of Sydney’s investment and capital management team in 2016.

Before this, he spent eight years as the head of investment at Myer Family Company.

“Miles brings a wealth of investment experience to Walker Lane and his appointment completes a core component of the Walker Lane Value Proposition,” Walker Lane director said Joshua Cratchley said.

“Miles’ expertise and proven track record in the investment space provides Walker Lane with a capability to help the business achieve its growth aspirations, and our advisers look forward to working with him.”

Walker Lane is a Sydney-based boutique financial advisory and investment management firm.

At Sydney University, Collins would have been responsible for a long term fund worth $1.6 billion and a medium term fund worth $95 million.

The university’s latest annual report shows the long term fund returned 12% for 2019 after external manager fees, with equities contributing most to the gains and a favourable currency positioning. fs

The quote

This has allowed us greater clarity than ever before around how many Australians are insured.

he underinsurance gap has broadened compared to three years ago, new Rice Warner research finds.

Over the last 18 months, a slew of government regulation as well as unforeseen circumstances have contributed to more Australians being underinsured.

This includes the Insurance in Super Voluntary Code of Practice, Life Insurance Framework reforms, Protecting Your Super (PYS)/ Putting Members’ Interests First (PMIF) legislation and COVID-19, according to the firm’s 2020 underinsurance report.

The PYS and PMIF legislation in particular have played key roles in attempting to remove duplicate accounts and unnecessary insurance through the ceasing of default insurance cover for young members, inactive accounts and low balance accounts.

“The impact of this has allowed us greater clarity than ever before around how many Australians are insured and the amount of insurance held compared to their needs,” Rice Warner said.

While there had been a significant increase in the amount of insurance

cover provided to the community through superannuation funds over the last 10 years, Rice Warner said, the current landscape has led to the underinsurance gap widening since 2017.

Retail advised insurance new business volumes sales have been reducing, due to a similar reduction in active insurance advisers.

The aggregate sum insured held via this distribution channel has been decreasing since the end of 2018. “Although we will see product innovation as insurers respond to APRA’s intervention on retail income protection products, it will be challenging to completely reverse this trend,” the report read.

Rice Warner recommends the life insurance industry raise greater awareness about this issue.

“The availability of Insurance Needs calculators for use by individuals to assess their unique circumstances has allowed individuals to better understand and tailor their insurance arrangements. Targeted marketing and improving the ease of accessing insurance via all distribution channels is also important,” Rice Warner said. fs

AFCA forced into rule change Elizabeth McArthur

The Australian Financial Complaints Authority has been forced into a rule change regarding its jurisdiction over authorised representatives after a court decision.

The NSW Supreme Court ruled in the case of DH Flinders v Australian Financial Complaints Authority that AFCA’s rules in regards to its jurisdiction over authorised representatives must be clearer.

The case related to AFCA’s jurisdiction to consider a complaint against a licensee in relation to the conduct of its corporate authorised representative, specifically where the conduct of the representative was without or outside authority.

AFCA has now updated its rules, at ASIC’s directions, to reflect the same statutory liability for

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

licensees regarding their authorised representatives as set out in the Corporations Act and the National Consumer Credit Protection Act. The new rules came into effect from 13 January 2021, but complaints received before that date are still being assessed under the old rules.

AFCA said it is reviewing a small number of complaints received before that date, but added that the vast majority of the complaints it handles on a day to day basis will not be impacted by this change.

“For the small number of complaints which may be outside AFCA’s rules, AFCA will be encouraging the financial firms involved to consent to AFCA considering the complaint to achieve an early resolution and avoid the prospect of potential court or other action by the complainant,” the authority said. fs

FS Advice

News

www.fsadvice.com.au Volume 16 Issue 01 I 2021

252% increase in digital advice use

True cost of mental health TAL has released new research on mental health conditions revealing the true cost and lack of support available to claimants.

TAL, which is the group insurer for some of Australia’s biggest super funds, produced a comprehensive white paper on mental health and life insurance in an effort to improve the industry’s support for those with mental health conditions.

One of the key findings of the research was that the prevalence of mental health disorders is not actually rising in Australia - what is rising is the number of people accessing services and support and openly discussing mental health.

Predicative factors for mental health conditions are not well understood, the report said. While high cholesterol is a known risk for heart attack, for example, medical professionals do not have similar metrics to predict mental health conditions.

This could have consequences for the life insurance industry. For example, financial hardship is a predictive factor for mental health conditions - so during economic slumps insurers could theoretically see an increase in claims.

However, there are comorbidities between mental health conditions and other illnesses - many of which are poorly understood.

Most alarmingly, circulatory conditions in men jump from 17.9% in all males to 27.3% in males with a mental health condition, and in women they jump from 18.6% to 26.3%.

Chances of having diabetes, back problems, cancer and even asthma also increase.

The way multiple mental health conditions are related to each other is also poorly understood. fs

FS Advice

7

Elizabeth McArthur

A

The quote

This is clear evidence that people who traditionally don’t engage with advice will do so if you make it convenient and accessible for them.

n industry superannuation fund has seen interactions with its online financial advice tool more than double year-on-year.

Rest Online Advice interactions increased by 252% in the 2019/2020 financial year compared to the previous year.

In total Rest Advice has 12,806 interactions and Rest Online Advice had 9790. There were a further 3016 Rest Advice interactions over the phone.

Younger members and female members, demographics traditionally less likely to access financial advice, were partly responsible for the dramatic increase.

Interactions with 22-29-year-old members nearly tripled and interactions with 30-39-year-old members more than doubled.

For women aged 22-29 there was a 226% increase in advice interactions and for women aged 30-39 a 153% increase in interactions.

“This level of increased engagement with financial advice simply wouldn’t have happened if our digital tools weren’t available. This is clear evidence

that people who traditionally don’t engage with advice will do so if you make it convenient and accessible for them,” Rest chief executive Vicki Doyle said.

“We believe all Australians should have access to advice, no matter what their financial circumstances are. This is especially the case with so many more people facing financial insecurity thanks to current economic conditions. Given the structural changes to the advice market, there is a very real concern that advice will become inaccessible to lower- and middle-income Australians.”

Doyle added that with ASIC and the industry looking to see how more Australians can benefit from financial advice, these results should prove there is appetite for a digital solution.

“Many of our members wouldn’t be able to access simple advice about their investment options or the ideal level of contributions if it wasn’t provided as part of their super at no additional cost,” Doyle said.

“Offering this advice digitally allows us to provide this to members at scale, and it allows members to take control of their super.” fs

ASIC prepares the industry for a new regime in claims handling Karren Vergara

The corporate regulator has released more information to help life insurers and financial advisers adapt to new regulation when handling insurance claims.

ASIC’s information sheet and consultation paper C12 Proof: Claims Handling and Settling Service Statement builds on the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020.

The new law, which was introduced in parliament on 12 November 2020, will force those providing claims handling and settling services to be covered by an AFSL. It also means that insurance-claims handling will be under the umbrella of “financial service”, meaning insurers must hold an AFSL to be involved in the claims process.

Life insurers, claims managers, brokers as well as financial advisers who handle claims on behalf of an insurer will be directly impacted.

ASIC is urging industry participants to apply for an AFSL or a variation to existing licences as soon as possible. For entities that already hold an AFSL, a variation to their licence so it covers the new financial service of claims handling and settling will be required.

To assist the industry in preparing for the new law, ASIC explains in the supplementary material how and when to apply for an AFSL or a variation to an existing AFSL. The information sheet also explains who needs to be authorised to provide claims handling and settling. fs

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New look at retirement

Government to wind up FASEA

Elizabeth McArthur

Karren Vergara

Traditional portfolio construction needs to change to provide for the needs of retiree clients, new research shows.

Fidelity International with the Financial Planning Association of Australia (FPA) and CoreData released a report Building Better Retirement Futures, which aims to equip advisers with solutions for retirees.

Fidelity International head of client solutions and retirement Richard Dinham said as the retiree client group grows it is essential advisers are equipped with the right tools.

“Financial planners are at the frontline of helping people make the most of their assets and achieve their best possible retirement,” he said.

“However, the strategies that suited clients in accumulation phase may no longer work in retirement, and advisers will need to develop new approaches specifically designed for their needs.”

Fidelity noted that not one single investment strategy is likely to suit all clients therefore advisers must be adaptable and offer different solutions.

“For instance, the paper outlines the different strategies that advisers can use with their retiree clients such as keeping the same strategy as in accumulation phase; transitioning to a more conservative asset allocation; simple bucketing; more complex bucketing; or income layering. It then looks at the pros and cons of each approach,” Dinham said.

For retirees keeping the same strategy, Fidelity said its effectiveness for many is highly debatable and comes at the cost of flexibility. fs

T

The quote

The government would like to acknowledge the important contribution made by the board and staff of FASEA.

he Financial Adviser Standards and Ethics Authority will be made redundant as two government bodies take over its remit.

Minister for superannuation, financial services and the digital economy, Senator Jane Hume announced on 9 December 2020 that the standardsetting aspect of FASEA will be swallowed up by Treasury.

Its remaining functions, such as exam administration, will be taken over by the Financial Services and Credit Panel (FSCP).

The operations of the FSCP will be expanded within ASIC, she said, noting that such reforms will further streamline the number of bodies involved in the oversight of financial advisers, resulting in FASEA being wound up.

“The government would like to acknowledge the important contribution made by the board and staff of FASEA towards improving the education, training and ethical standards in the financial advice sector,” Hume said.

“Treasury and ASIC will work

closely with FASEA to ensure an orderly transition to the new regulatory framework.”

The FSCP currently supports ASIC in conducting banning orders against individuals for misconduct.

Citing the Hayne Royal Commission’s recommendation 2.10, which calls for a single, central disciplinary body to be established for financial advisers, Hume said expanding the role of the FSCP will leverage its extensive expertise and existing governance structures, avoiding the need to establish a new body to perform this role.

Legislation implementing these reforms will be introduced into Parliament by June 2021.

Further, the much-anticipated advice disciplinary body has effectively been scrapped, with Hume flagging its January 2021 launch to mid-year.

The Financial Planning Association of Australia said it has continuously advocated for the reduction of regulatory bodies that are “adding unnecessary duplication, complexity and costs and for the establishment of a single disciplinary body”. fs

University debt weighs on personal investing Kanika Sood

A quarter of the participants in a new survey said their HECS-HELP debt was standing in their way to start investing outside of superannuation.

Futurity Investment Group surveyed 1000 Australians who went to university and found university debt impacted many facets of life including buying a house, changing careers and starting a business.

About 24% said their university debt had a “moderate to very large” impact on their ability to start personal investing outside of superannuation.

On home ownership, 50% said HECS-HEP debt impacted their ability to buy a house, with 18% labelling it as a “very large impact”.

About 41% said university debt has had some impact on their ability to buy a car.

A quarter said the debt has a moderate to very large impact on their ability to pursue a different career.

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“The average time to repay HECS-HELP debt is now approaching 10 years and it’s trending up,” Futurity chief executive Ross Higgins said.

“The majority of people who attend university (56%) are positive or neutral about the value of their university education despite, their HECS-HELP debt and the financial and social impacts.

“However, with the cost of a university education exceeding $50,000 in many instances, it’s essential people considering a tertiary education understand debt acquired at university can carry financial and social burdens later in life.”

Ross added it was crucial that Australians understand the value of having dedicated savings for university education to avoid large HECS-HELP debts that impact their financial wellbeing and their ability to meet their goals later in life, especially as the average time to repay the debt now amounts to a decade. fs

FS Advice

News

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The pendulum swing Eliza Bavin

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ast year saw the world change in ways no one had imagined, and the advice industry was turned on its head. At a time when people needed advice the most, it was also the time advisers had never been under such a huge amount of pressure – dealing with new business practices and staying on top of ever-changing compliance.

Last year saw the pendulum swing from only having faceto-face meetings, with a sudden switch to online only thanks to the impact of the COVID-19 pandemic. But now, as the dust seems to settle and the phrase “the new normal” is starting to actually feel a bit more “normal” the advice industry has begun a new phase as well.

Jonathan Scholes from Findex says the radical nature of change last year was helpful for the advice industry, forcing some of the laggards to catch up and modernise.

“We’re starting to find that happy medium. Human beings have a natural predilection to over correct things, and I think we saw that with everyone going digital because we didn’t have a choice to go and see clients,” Scholes said.

“Once, we’re able to get out there and see clients face-to-face and get out there a bit more I think we will find a happy-medium of around a 50/50 split.”

Scholes says several clients prefer digital engagement because they prefer being able to access advice from the comfort of their home.

“I like meeting people and talking to clients, I think it helps build that trust element. So, one of the harder things to figure out is how to build that trust digitally,” he says.

FS Advice

The quote

I think we probably had five years compressed into one year of businesses adopting technological advances.

Scholes says the future of advice will be more value-based. He believes there will be a higher importance placed on goals and objectives and advice will be less product focused.

“I think products can be an outcome of conversations around goals and objectives, and how you deliver that product through advice,” Scholes says.

“The reality is, I’ve been doing this job for 22 years and in that time a Statement of Advice (SOA) has not evolved greatly. They are still generally very lengthy and clients often find it difficult to understand without additional explanation.”

Scholes says one of his biggest priorities over this next 12 months or so is to really work on the advice document and hopefully be able to make the change so that SOAs are digital.

“It would be great for a client to be able to interact with that document online, so they can ask questions and highlight different sections they want to see,” Scholes explains.

“So, really being able to deliver that content, and deliver advice in a manner which allows the client to properly understand it rather than it being this static ‘point in time’ document.

It could become this genuine living, breathing thing you can update on a regular basis.”

Clark Morgan, vice chair and head of strategy development at Crestone Wealth Management, said the most important aspect of the advice business is creating depth, and last year that was made more difficult to achieve.

“The industry has faced a very difficult year. Advice is a relationship business, we build relationships with our clients and when you don’t have personal contact with them you don’t have the ability to meet with them individually, you lose a lot of the depth,” Morgan said.

“For us, it’s more than just investment. We build investment portfolios, but quite often our clients have a keen interest in being socially responsible or want to invest in interesting philan-

thropy, they might be looking at next generational issues.

“So, it’s always things that go beyond simple portfolio construction, when you can’t meet with them over a cup of coffee or in a more relaxed environment, it is sometimes difficult to cover off the depth that’s required in those particular topics.”

However, despite the challenges, Morgan says the advice industry faced those issues head on and has come out the other side generally unscathed.

“I think we probably had five years compressed into one year of businesses adopting technological advances,” he says.

Much like Scholes, Morgan also sees things like electronic signatures sticking around, but he is cautious of some issues that arise in adopting new technologies too quickly without considering the risks.

“You have to consider things like cyber security and ensuring that as you’re communicating electronically, with sensitive information, you’re doing so responsibly,” Morgan says.

“Even using Zoom, a platform that we hadn’t really explored in the office, we had to figure out how to use it so that the content is valuable to our clients.”

Morgan said that while Zoom is a helpful enabler, it’s up to advisers and practices to figure out how to use it in a way that keeps clients engaged.

“Keeping in mind that the relationship with our clients was becoming less personal because of the restrictions, we knew we had to keep them involved,” he explains.

“So, we started making investment webinars with Julie Bishop to talk about China relations and US foreign policy, and we have AFL executives talking to clients about how changes were being implemented within their organisation.

“So, we aimed to have a complete suite of opportunities to engage and bring a broader menu of topics to clients and take them beyond the four walls we were all restricted to.” fs

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SMSFs dump $30bn in shares

Mystery of missing woman

Annabelle Dickson

S

Elizabeth McArthur

ASIC has taken action against Maliver and its sole director, Melissa Caddick - who went missing in extremely mysterious circumstances - over concerns investor funds were misappropriated.

The Federal Court has made interim orders against Maliver and Caddick, who has been missing since 12 November 2020.

The interim orders prevent Caddick from removing assets (including funds held in bank accounts) from Australia, disposing of those assets, diminishing their value or incurring new liabilities.

Caddick, who has not been located, has also been prohibited under the orders from leaving Australia.

ASIC is investigating concerns that Maliver may have been providing financial services without an AFSL or may have used the AFSL of another company without authorisation.

The regulator is also concerned investor funds may have been unlawfully dealt with.

Caddick did not appear at the first case management hearing for this matter, which was scheduled for the very same day she disappeared.

ASIC says its investigation is ongoing and it encouraged any person who is concerned they invested with Caddick to contact the regulator.

Police were told that Caddick was last seen at her Dover Heights, NSW home after midnight on 12 November 2020. NSW Police believe she left her home at 5.30am in exercise clothes.

Anyone with information has been urged to contact Crime Stoppers. fs

The numbers

$728 bn

The value of listed shares held by SMSFs.

elf-managed superannuation funds have not been spared by the market impact of COVID-19, with members dumping their allocation to listed shares over the past year, new data shows.

The Australian Taxation Office quarterly statistical report for September 2020 shows allocation to listed shares has reduced by nearly $30 billion in the 12 months prior.

Despite this, listed shares remain the top asset in terms of value held by SMSFs, at 25% of $728 billion in total estimated assets.

Cash and term deposits decreased marginally from $154.4 billion to $153.3 billion and make up 21% of SMSF asset allocation.

Both non-residential real property and residential property remained steady at $75 billion and $40 billion, respectively.

Over the September quarter, 5607 SMSFs were established with just 77

windups, compared to nearly 5000 windups in the June quarter. There are currently 591,905 SMSFs with a total of 1,112,109 members.

From the member base, 53% are males and 47% are female; about 86% of members are 45 years old or older.

Over the year, there were $12 billion in member contributions.

There were a further $5 billion in employer contributions made to SMSFs and another $9 billion in outward transfers.

SMSF members paid a total of $3.7 billion in administration and operating expenses for their funds.

The majority of SMSFs are based in New South Wales and Victoria, with 32.8% and 30.9% respectively. A total of 17% are based in Queensland, while South Australia accounts for 6.8%.

Just 1.2% of SMSFs are based in Tasmania, 1.7% in the Australian Capital Territory and 0.2% in the Northern Territory. fs

The state of charitable giving in 2020 Kanika Sood

Equity Trustees’ annual giving report says donors made 3241 grants in the year, with natural disasters being key areas of focus.

In all, Equity Trustees made 3241 grants in 2020 (up from 3031 grants last year). There was an uptick in grants over $100,000 from 189 last year to 204.

Total grants in 2020 stood at $83.4 million across grants and bequests.

However, the largest discretionary grant made was $300,000 slimmer this year at $1.3 million.

The biggest area of focus for donors was medical research and health - 42% of the total grants and down slightly from 44% last year. In 2018, the segment received 36% of total grants.

“The for-purpose sector needed immediate support to keep the lights on and to keep vital services going, while also needing to work towards the resilience of the sector in the long term,” Equity Trustees chair Carol Schwartz said.

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“This year, that meant being faster, more flexible and more innovative than ever before in our funding adapting ourselves to what our partners told us they needed to support the community through these tough times.”

Equity Trustees managing director Mick O’Brien said a key focus for the business in 2020 had been establishing a responsive, flexible approach to supporting the community in the unusually tough times which were the hallmarks of 2020.

“This has been clearly demonstrated by the establishment of two Disaster Response Trusts after the summer bushfires, which are designed to support those impacted by the disaster, by providing our clients our employees and the business community impassioned by the crises, a means by which to help,” he said.

“We have contributed a huge pro-bono effort to establish the trusts and efforts to scale our ability to make rapid response grants to those in need, into the future.” fs

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AMP out of top spot and 3000 advisers gone: 2020 in numbers Elizabeth McArthur

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total of 3318 financial advisers departed the industry in 2020, with just 65 new advisers joining, according to Rainmaker analysis of the Financial Adviser Register.

AMP Financial Planning lost the most advisers of any AFSL this year, with 348 departing between January and December.

The Advisers’ Association Neil Macdonald said there are many reasons behind the exodus.

“From an AMP perspective, they changed the terms last year and terminated a number of practices,” Macdonald said.

“We knew there were about 250-300 firms they gave notice to that they were terminating, so it’s not a surprise that they would be the biggest. There was another smaller group that were allowed to go and join other licensees.”

He explained that the practices terminated by AMP were typically single-planner businesses with turnover of less than $300,000.

“I don’t think the majority of them were planning to leave the industry,” Macdonald said.

AMP finished 2020 by losing its spot as the AFSL with the most financial advisers in Australia in the final days of December.

The largest AFSL is now the SMSF Adviser Network which had 839 advisers on31 December 2020.

Between December 17 and December 31 alone, AMP lost 22 advisers.

It is the first time in years that AMP has not been the largest dealer group in the country. Several industry veterans said they could not remember a time when AMP was not in the top spot.

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AMP made the decision that they weren’t economically viable.

Macdonald said only a small portion of those AMP advisers who have left could go and join other licensees most were left with few options but to leave the industry entirely.

Approximately 300 of the advisers that left AMP ceased operating as financial advisers all together according to the ASIC FAR data.

“AMP made the decision that they weren’t economically viable,” Macdonald said.

AMP Financial Planning advisers filed a class action against the institution in July 2020 over its revaluing of Buyer of Last Resort agreements, the legal battle is ongoing.

Meanwhile, Synchron picked up the most AMP advisers of any licensee, with 21 joining in 2020.

Macdonald said this was likely because there are people working at Synchron who used to work at AMP, meaning many may have a connection to the dealer group.

Lifespan gained the next most, with 12 AMP Financial Planning advisers joining the licensee. A further 10 went to AMP-aligned Charter Financial Planning and eight went to IPAC Securities.

AMP-aligned dealer groups Charter and Hillross were also among the licensees to shed the most advisers, losing 123 and 51, respectively.

Demonstrating the exodus of the big banks from wealth management in the wake of the Royal Commission, National Australia Bank lost 245 advisers; ANZ Group lost 162 and Commonwealth Financial Planning lost 125.

Merit Wealth was down 55 advisers, PricewaterhouseCoopers Securities went from 56 to just two financial advisers during the year and Lonsdale also shed 44 advisers.

Meanwhile, Lifespan Financial Planning appears to have been the biggest winner of the many moves. The data shows it picked up 66 financial advisers.

GWM Adviser Services gained the next most, likely as a result of MLC’s advice transformation, followed by Interprac Financial Planning which grew by 38.

The growth numbers were much lower than the losses, demonstrating the contraction of the sector.

Sentry Advice managed to pick up 32 advisers, Nextplan grew by 28, Aware Financial Services gained 26 and Insight Investment Services doubled in size - going from 25 advisers to 50.

Capstone Financial Planning and Fortnum gained 22 advisers each while Sequoia picked up 20.

Macdonald thinks, looking forward to 2021, that the industry will continue to shrink - but not at the same rate, as the pressure to meet FASEA education requirements lifts moderately.

Association of Financial Advisers general manager, policy and professionalism Phil Anderson agreed that exits are likely to remain elevated through 2021.

“The decline in adviser number is due to two factors. There are virtually no new advisers coming into the profession at the moment, and there is a continuing stream of exits. It will take some time for the number of new advisers to grow as they complete the required study, pass the exam, and complete the professional year,” Anderson said.

“Normal attrition might be around 1000 to 1500 advisers per year. The actual exit rate is double this, which reflects the challenges the profession faces. We expect exits to exceed new entrants for some time to come.

“There has been a lot of disruption this year, with a number of licensees closing down or restructuring. Advisers who do not wish to meet the FASEA standards, or who were ready to retire, have continued to leave.”

He added that there are still over 10,000 financial advisers yet to have sat the FASEA exam. fs

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Opinion

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Phil Anderson general manager, policy and professionalism Association of Financial Advisers

The end of multiple advice regulators hat does the government’s W announcement this week, to create a single, central disciplinary body for financial advisers mean for advisers?

It should mean the beginning of the end of excessive complexity and duplication within the profession, which should better enable advisers to deliver affordable advice to everyday Australians.

At the start of 2014, the financial advice profession had just one ‘primary’ regulator - ASIC. The Tax Practitioners Board (TPB) was added in July 2014 and in 2017 FASEA emerged.

The Authorised Representatives Register already existed, however in early 2015 the Financial Adviser Register (FAR) came into play. By then we also had the TPB tax practitioner register.

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It is hard to believe that in a rational world it would be possible to build such a complex regulatory framework.

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The TPB had a Code of Professional Conduct and FASEA built the FASEA Code of Ethics.

The professional standards regime included the idea of code monitoring bodies incorporating another set of rules that would add another layer of complexity to this already complex world.

It is hard to believe that in a rational world it would be possible to build such a complex regulatory framework. The cost of financial advice was rapidly increasing and access and affordability for everyday Australians was being placed at great risk. This situation was unworkable and change was essential.

Questions about this model emerged soon afterwards, with the release of the Royal Commission Final Report in February 2019 and the recommendation for a single, central disciplinary body. In fact, Kenneth Hayne made reference to the appropriateness of Code Monitoring Bodies: “It may be that this new body is the most appropriate entity to perform the functions currently planned to be assigned to the code monitoring bodies under the Corporations Act.” This was the first sign of significant doubt about the ultra-complex regulatory model. It took another eight months, until October 2019, for the government to make the decision to discontinue the idea of code monitoring bodies.

At that same time, the Independent Review of the TPB and the Tax Agents Services Act (TASA) provided its final report to government.

Unlike the government’s response to the Hayne Royal Commission, which was issued within three days and involved support for 75 of the 76 recommendations, it took the government more than a year to release the TPB Review final report.

In that final report, there was a recommendation that there should be just one financial adviser register and one code of conduct.

The government response, released in November 2020, included an expression of support for a model whereby the TPB would no longer be a regulator for financial advice: “The government agrees that the regulatory overlap should be reduced”.

Change was inevitable, and this was confirmed in the announcement from the Treasurer this week. What is important is that this change delivers the level of rationalisation that is needed. What we need is an outcome that delivers a single regulator, a single set of rules, a single code, a single disciplinary system and a single affordable fee.

At the end of the day, to ensure that financial advice can be delivered to everyday Australians in an affordable manner, we need to significantly reduce the level of complexity and duplication.

The delivery of this outcome will be an important test for the government and the financial advice sector. It is critical that we get this right. fs

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High Court dismisses Westpac appeal on unlicensed advice Jamie Williamson

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he High Court has affirmed the Federal Court’s 2019 decision that two Westpac subsidiaries provided unlicensed personal financial advice.

In a decision handed down on 3 February 2021, the High Court of Australia dismissed Westpac’s appeal, determining the financial product advice Westpac gave to 14 members via two 2014 telephone campaigns related to super switching was personal advice, consistent with the definition outlined in section 766B(3)(b) of the Corporations Act. As a result of the campaigns, Westpac increased its funds under management by $650 million between January 2013 and September 2016.

Westpac won the original case in December 2018, with the Federal Court ruling that Westpac Securities Administration Limited (WSAL) and BT Funds Management (BTFM) had breached the Corporations Act when recommending customers rollover of superannuation accounts to Westpac/BT products.

At the time, the judge said ASIC failed to prove the phone calls constituted personal financial advice. Under their respective AFSLs, WSAL and BTFM are only licensed to provide general advice.

ASIC appealed this decision in 2019 in the Federal Court and won. It is this decision that Westpac appealed in the High Court, a move that was dismissed with costs.

Proceedings will now be remitted to the Federal Court for a hearing on penalties, with

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Westpac were actively conducting a sales campaign aimed at rolling cus­tomers into Westpac products under the banner of general advice.

ASIC saying it will seek orders for financial penalties.

“The High Court has provided clarity concerning the differences between personal advice and general advice. Westpac were actively conducting a sales campaign aimed at rolling customers into Westpac products under the banner of general advice,” ASIC commissioner Danielle Press said.

“By clarifying the distinction between tailored, quality, personal advice in the customer’s interest, and general advice given via a sales campaign, today’s judgment will provide clear guidance to those financial institutions that develop campaigns to sell financial products through direct approaches to retail clients.”

The appeal sought to find what a reasonable person might have expected; “that Westpac has in fact considered one or more of the member’s objectives, financial situation and needs and not whether the member might expect that Westpac should have considered these circumstances”.

The decision states that the judge in the 2019 determination was dissuaded from concluding Westpac had done the wrong thing because each phone call began with a disclaimer that the ensuing advice was general in nature and doesn’t consider personal circumstances; the advice was free of charge; and that the callers “revealed a lack of knowledge about the member’s financial situation that was inconsistent with a capacity to consider one or more of the member’s objective and financial situation”.

The documents state that the phone calls were a personal communication specifically related to the recipient’s financial situation as they were in regards to superannuation. It said the fact the advice was free of charge was “at best neutral in relation to the reasonable expectations of a member ap-

proached in this way”, and that “the circumstance that the Westpac callers at times revealed a lack of comprehensive knowledge of the members’ financial affairs was not inconsistent with an expectation that the members’ objectives were taken into account by Westpac in recommending acceptance of its roll-over service”.

Further to Westpac’s point on the advice being free of charge, the High Court said: “A reasonable person might expect that where Westpac is acting, in part, in its own interests, a fee for the provision of personal advice is less likely to be required.”

Westpac said the members’ objectives identified and discussed in the phone calls were “highly generic and... obviously correct” and therefore financial product advice that considered those factors did not give rise to an expectation that it was based on one or more of the personal objectives or needs of any members.

In response, the High Court said: “This argument seeks impermissibly to gloss the language of the statute.

Objectives do not cease to be personal objectives merely because those objectives are such as to be generally applicable to all or most persons in the position of the client as well as to the particular client.”

“It follows that advice which is personal advice within s 766B(3)(b) does not cease to be so because the content of that advice is such as to be generally applicable to all or most persons in the position of the client as well as to the particular client.”

It was argued that each member might reasonably have expected, given Westpac’s reputation and experience in financial services and matters such as super, that member objectives were taken into account when recommending the rollover service.

In a statement to the ASX, Westpac simply acknowledged the decision. fs

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Opinion

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Dante De Gori chief executive Financial Planning Association of Australia

2020 and the turning point F

inancial planners were helping Australians through stressful situations long before COVID-19. But the positive stories about financial planners were seldom told before 2020. Good news about the profession was inconsistent with the negative narrative that has plagued it for years. Thankfully, that narrative is now changing.

In 2020, professional advice practices across Australia have simply continued to service their clients as they have for many years.

Financial advice has not changed, but its value has clearly risen in the eyes of those facing significant challenges. In times of great uncertainty Australians have sought out financial advice.

A growing number of them are now discovering that financial planners can help them in more ways than one.

The bushfires of late 2019 and early 2020, followed almost immediately by the COVID-19 pandemic, created unprecedented demand for help in various forms.

Financial planners were there for the communities ravaged by the bushfires. They were there for their clients - old and new when they lost their jobs or had to consider accessing their superannuation to keep the lights on.

The quote

Advice will only become more valuable as we emerge from the COVID-19 pandemic seeking answers to the important questions about our own financial affairs.

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Over the past 12 months financial planners have helped Australians impacted by the bushfires get back on their feet; guided thousands of everyday Australians through the financial stress created by the COVID-19 pandemic; supported young Australians save for their first home; advised baby boom- ers on their retirement options and supported older Aussies considering aged care.

Financial planning clients may come from different backgrounds and require different solutions, but they are all provided one thing that is rarely recognised: Peace of mind.

The value of advice can be measured in many ways, but in 2020 it was serenity that became a critical benchmark for many of us. As any financial planning client will tell you, having a trusted professional guiding you through life’s difficulties is priceless.

A fresh foundation As we look towards 2021, it is important to recognise the achievements our profession has made over the past year.

Financial planners have stepped up to further support their communities in 2020, just as they have in previous years.

The dark cloud of the Royal Commission has finally passed, and clearer skies are finally allowing the positive stories of our profession to be heard.

Financial planners deserve their day in the sun.

2020 marked a crucial turning point for the profession and the FPA is confident that a fresh foundation had been laid for a bright future for financial planning in Australia.

Australians are experiencing the positive changes financial planners can make in their lives. In a year characterised by uncertainty and hardship, financial planners have offered hope and support.

The challenges of 2020 highlighted the value of advice. In 2021 it is imperative that we improve the accessibility of advice to ensure those who need it most can receive it.

The legacy of the Royal Commission and increased regulatory reform has been a rise in the cost of advice and a reduction in the number of financial planners in the profession.

These are two major barriers for Australians seeking help and they must be overcome if we are to continue providing support and guidance to our communities.

The FPA is committed to reducing the cost of advice by working with the government and key stakeholders to reduce unnecessary red tape and the duplication of regulation. These continue to stifle the growth of the profession and are detrimental to the financial wellbeing of Australians.

In an increasingly uncertain world, financial planning has never been more important.

Advice will only become more valuable as we emerge from the COVID-19 pandemic seeking answers to the important questions about our own financial affairs. fs

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Reference checks should expand

Jail time for tax adviser Elizabeth McArthur

Karren Vergara

The Federal Court has sentenced a tax adviser to seven and a half months in prison and fined him $640,000.

Brisbane-based Kent Scott Hacker spent Christmas 2020 behind bars after receiving the seven and a half months sentence.

He, and his related companies, were also fined over $640,000 for multiple offences under the Tax Agent Services Act 2009.

The Tax Practitioners Board (TPB) said it was a welcome outcome, and expressed concern that Hacker had continued to act illegally throughout the protracted investigation and litigation that has now seen him jailed.

The court granted the TPB’s request for permanent injunctions restraining Hacker and his companies, One Stop Global Staffing and Naleview, from further provision of unregistered tax agent services.

Hacker was also restrained from providing BAS services whilst unregistered.

The ATO first raided the One Stop Global Staffing offices in November 2018 and found evidence that Hacker had been preparing and lodging thousands of tax returns for customers while completely unregistered.

The TPB acted on the information and by February 2019 had launched a Federal Court action against Hacker and his two companies.

Hacker committed to the Federal Court that he would stop providing tax agent services to clients for a fee. However, the ATO found evidence that he continued his illegal actions providing tax services to clients while unregistered. fs

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The quote

The proposed process is laborious because it requires the new licensee to manually search.

eference checks should be extended to general advice and to anyone that has the ability to influence the financial advice process, according to the Financial Planning Association of Australia.

In its submission to ASIC for Consultation Paper 333 Implementing the Royal Commission recommendations: Reference checking and information sharing, the FPA is calling for the proposed laws to extend to directors, management and responsible managers and not just financial advisers.

The reforms emanate from the financial services Royal Commission, which recommends that AFS licensees should be required to comply with reference checking and informationsharing regulations like what the Australian Banking Association has in place (Recommendation 2.7).

It was also recommended that advisers are bound by the same obligations as mortgage brokers (Recommendation 1.6).

Commissioner Kenneth Hayne

slammed the advice industry for its poor background-checking practices, urging it to follow in the footsteps of the ABA. The inquiry found licensees frequently failed to respond adequately to requests for references on their previous employees, and when recruiting, many do not take the information provided to them by referees seriously.

FPA chief executive Dante De Gori said the association has been a strong supporter of the central referee register maintained by the ABA but is “confused” why ASIC would not create a central register.

“The proposed process is laborious because it requires the new licensee to manually search through multiple web pages as part of the reference checking process. It’s an inefficient regulation of a critical consumer protection policy,” he said.

Additionally, the FPA is recommending that advisers are protected if they raise a complaint to ASIC about a licensee providing false information or reports inappropriate behaviour. fs

Investors going in blind: Research Annabelle Dickson

Australians are entering the stockmarket guided only by word of mouth, independent research and social media posts, new research shows.

Online trading platform eToro surveyed over 1000 Australian investors to find out where they are getting their advice, where they are investing and to explore changing sentiments.

The research found that around 10% of investors in New South Wales are more likely to invest from what they have read on social media with 13% receiving advice from YouTube.

Victorian investors are watching news (22%), analysing charts (20%) or going with their gut (14%) when it comes to getting advice or knowing when to trade stocks.

Meanwhile, 35% of investors from Western Australia are getting investment advice from friends while 38% trust their families for advice.

South Australians and Queenslanders are independent when it comes to getting investment advice, preferring to do their own research (34%).

Interestingly, 35% of Victorians invest to earn more income, particularly for those on reduced salaries or JobKeeper, while 24% of West Australians don’t have other employment than investment income.

Nearly one third of investors in NSW are investing to supplement income while 20% want to use their investment earnings to buy a house. eToro saw a 480% increase in new Australian registered users in 2020 compared to the year prior.

This is consistent with the exchange-traded fund industry as the BetaShares Australian ETF Review for year end 2020 revealed the industry grew to $95.2 billion, up from $62 billion at the start of the year.

This is not only the highest annual change on record but shot the market capitalisation of the industry to an all-time high. fs

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The barriers to limited advice

The financial advice industry is failing to meet the demand among consumers for its services - and it all goes back to affordability. Many Australians are simply priced out of professional advice. So what can be done? Annabelle Dickson writes.

The increasing cost of delivering financial advice coupled with lack of guidance and strategy documents are the major barriers to limited advice, according to licensees.

The Australian Securities and Investments Commission’s (ASIC) latest consultation paper, Promoting access to affordable advice for consumers, is giving not only advisers but also licensees the chance to voice their opinions on the issues relating to the supply of good quality affordable advice and what steps can be taken for consumers to access it.

This latest consultation is part of ASIC’s Unmet Advice Needs project and acknowledges the changes the advice industry has undergone in recent years, highlighting the significant decrease in financial adviser numbers on the Financial Adviser Register.

There are now less than 20,000 financial advisers registered on the ASIC FAR, according to Rainmaker Information analysis.

ASIC commissioner Danielle Press says that good-quality affordable

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personal advice may help consumers make better financial decisions, especially during times of heightened vulnerability.

Commenting on the feedback requested, Press said: “It will help us determine what meaningful steps we can take to help industry better provide good-quality affordable advice that meets consumers’ needs.”

Where limited advice is provided, ASIC wants to know what topics are typically covered, the kind of arrangement such advice is provided under, the barriers to doing so and the limited advice services the licensee would like to provide in future.

The regulator also wants to know how the demand for scaled advice has changed over time, the barriers they experienced in building a scaled advice offering (if they have one) and the support they provide to advisers providing limited advice.

ASIC senior executive leader, financial advisers Kate Metz said at the Association of Financial Advisers Conference that ASIC has given

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guidance in the past that supports limited or scaled advice but are hearing from licensees that they don’t want their advisers in that space.

“We are open to suggestions but certainly we don’t want to continue with the status quo where people feel unable to provide limited advice or trapped into providing lengthy documents where, honestly, a consumer is never going to read,” she said.

ClearView Financial Advice and Matrix Planning Solutions chief executive Allison Dummett has embraced ASIC’s consultation paper saying it is “hugely positive” that the regulator is asking for feedback, not only for the 20,000 clients under the licence but also the industry.

However, she said the regulator should provide more guidance for advisers and licensees.

“The guidance could be updated to be more current more practical and particularly incorporating things such as FASEA obligations,” she said.

What makes advisers and licensees cautious, she said, is that scaled advice is open to interpretation under FASEA and ASIC’s own regulation and can be reinterpreted by the Australian Financial Complaints Authority.

“But any guidance that would give an adviser and the licensee more confidence that they can speak freely in a statement of advice, record of advice or a document, that’s actually a separate issue,” Dummett added.

Lifespan chief executive Eugene Ardino agreed: “If you want to increase accessibility you need a way to give advisers confidence that they can meet their legal obligation and still be able to arrive at the limited scope advice in a much simpler manner.”

It is not just the legal obligations that are complex for advisers, he said, but the ongoing costs involved with being an adviser and the amount of time that goes into delivering limited advice.

“It is not a short space of time for an adviser to collect all the data, analyse it, investigate a range of other strategies, formulate the advice and compile the statement of advice,” he said.

Centrepoint Alliance head of licensee standards Nicole Alexander, along with Dummett and Ardino, noted the most advised topics are retirement planning, superannuation and personal insurance.

However, Alexander agrees with Ardino believing scaled or limited advice, particularly in these topics, is not a different “type” of advice but rather it is simply that the level of complexity and time to deliver that advice that is different.

She acknowledged the increasing cost of advice but said ASIC needs to take a step back and recognise the factors that are going into that cost.

She asked: “What is it that advisers are needing to do or spending their time on? How are clients able to engage with those advisers and what is limiting them from getting advice, what is slowing down the advice process?”

The industry, she said, is built on personal advice and the process of giving a Statement of Advice and building a relationship with the client but the demand is in scaled or limited advice.

“The demand is from consumers who need it to be more accessible and affordable whereas high net worth clients perhaps already have access to comprehensive advice,” she said.

Alexander believes a way for ASIC to support advisers in mitigating these issues echo those of the Financial Services Council (FSC): introducing an entry level type of advice and strategic advice.

The FSC launched a report by Rice Warner, Future of Advice, that proposes all advice should fall under one of two categories - strategic advice and financial product advice.

Strategic advice is used to help an individual control their finances and set a financial plan with generic products whereas financial product

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advice would be required to implement any strategic advice but could be provided without it.

Simple personal advice is advice that deals with superannuation, life insurance, debt and budgeting and whereas complex personal advice specifically includes more complex and or risky products or topics.

Alexander said strategic advice, is one area that ASIC could give more support to advisers and how to deliver it.

“Even things like factual information and general advice has a greater role to play in improving the financial literacy of consumers and their access to advice, even if it is entry level and answering a simple question with simple advice and moving then more into that personal space,” she said.

While ASIC is asking licensees that do not allow their advisers to provide limited advice the reasons why, Dummett, Alexander and Ardino are all in support of advisers under their respective licences providing it.

The Association of Financial Advisers, in its submission, agreed that complexity is at the heart of the industry’s issues.

“It is our view that the regulatory regime is a key driver of increased costs and complexity in the financial advice sector, which is in large part responsible for the decline in accessibility and affordability. This is not to discount other contributory factors, but instead, to highlight that the regulatory regime is probably the most important factor,” the AFA said.

Its submission said the goal of improving access to financial advice for everyday Australians needs to be the joint goal of the industry and the regulator.

“There has been some recent public commentary about how licensees are being overly risk averse and unnecessarily conservative in the rules that they set for their advisers. We understand why licensees have been risk averse in the current context and in the aftermath of the Banking Royal Commission,” the association said.

“Whilst ASIC may be one of the contributing factors, AFCA and PI Insurance are also important drivers of this more conservative approach. It is clearly the case that this is a sub-optimal position that is counterproductive when it comes to the client experience and outcome.”

The consultation period wrapped up on January 18. ASIC now intends to host a series of industry roundtables to discuss the issues raised in submissions.

Minister for superannuation, financial services and the digital economy Jane Hume, is also an advocate for making high quality advice more affordable for Australians.

She announced the government’s plans to simplify the regulatory framework for advisers which in turn will reduce the complexity and cost of providing advice.

“The importance of access to financial advice was underlined for many during COVID-19. Good quality, affordable financial advice was also recognised in the Retirement Income Review as being an important way Australians could maximise their income in retirement,” Hume said.

The first step was winding up the Financial Adviser Standards and Ethics Authority with the standard-setting aspect being taken over by Treasury and its remaining functions taken over by Financial Services and Credit Panel (FSCP).

The operations of the FSCP will be expanded within ASIC and it will leverage its extensive expertise and existing governance structures, avoiding the need to establish a new body to perform this role.

“The government supports a well-regulated and vibrant financial advice sector that supports advisers seeking to help Australians make informed decisions about their personal finances and to make better use of their savings in retirement,” she said. fs

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NO SHAME IN DREAMING Victoria Devine, Zella Wealth The podcast She’s on the Money has become a personal finance juggernaut and catapulted its founder and Zella Wealth director Victoria Devine into the public eye.

But she doesn’t want to make it all about her, instead she’s focused on the power of money to change lives.

Elizabeth McArthur writes.

I

n 2019 She’s on the Money had 17,161 members on Facebook and 438 people following on Instagram.

Now, the Facebook group has 110,000 members and the Instagram has 70,000 followers.

In the crowded world of social media, it is extraordinary growth by any measure. It also shows the huge appetite for guidance on money matters that isn’t necessarily being met.

She’s on the Money’s founder, Zella Wealth director Victoria Devine, is the face of the podcast and has amassed a substantial social media following for herself – but she doesn’t want it to be all about her.

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Despite her followers’ obvious interest in her own life and finances, Devine is surprisingly reluctant to get too personal.

She is passionate when speaking about financial literacy and the stories the She’s on the Money community share with one another, but when conversation turns to her own money story, Devine is shy; she doesn’t want people to compare themselves to her.

She has achieved success at a young age. Success in finding her passion but also financial success. Devine recently purchased her first home and, in a video showing it to her followers, the camera caught a glimpse of an eyewatering collection of designer shoes.

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The foray into YouTube is another aspect of growing She’s on the Money that doesn’t necessarily come easily to Devine. But she’s found a reason to be more open to accepting the attention.

“I think at the very start I felt uncomfortable… Social media is so full of other people’s highlight reels that I really don’t want to be adding to people’s anxieties around money,” she says.

Devine is as attune to the downsides of social media as any millennial who grew up with a real life and an online life and a blurring of the two.

She admits to hesitating in how to share successes like buying her first home – concerned the achievement might make some of her audience feel like they are behind.

Devine also admits that criticism and harsh comments online can hurt her. However, she’s found a way to push aside her own insecurities in service of her greatest passion.

“The second I realised I was the vehicle for the bigger message, it made it a lot easier to be pragmatic about personal questions and being asked about my financial life,” Devine says.

That message is that young women (and young people in general) can take control of their finances, and in doing so they can find a sense of freedom that has a power that can spill over to every part of life.

Devine loves money, and not with the negative connotations that sentence might have for some people. She loves to learn about how money changes lives and how people think about money.

She says that her research has taught her that a person’s “money story” starts to develop by age seven.

The research Devine is referring to comes from a UK organisation

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called The Money Advice Service and was conducted by University of Cambridge researchers.

It explains that because children learn socially, through watching what others do and listening to what they say, they pick up a sense of money long before they know what the stock market is or how much their parent’s house is worth.

“At the age of seven you start to conceptualise that money is something that causes stress, or it’s something that creates freedom. You don’t think about it, but everyone has unconscious biases,” Devine says.

“Kids as young as seven will think, ‘I won’t ask mum for money to go on the excursion because that will stress her out’.”

Devine’s own money story has shaped much of what she does now.

Her father was an accountant and very prudent, but she didn’t really think about her own finances or take money seriously until she got herself into debt.

While studying psychology at university, Devine took out a personal loan to study in France for three months.

Of course, the experience of studying abroad was a lot of fun and she says she doesn’t regret it – but the loan is a bad choice she has remembered.

“I will never forget the anxiety that loan gave me,” Devine says.

As she finished up her studies in psychology, Devine couldn’t have known how much the way she thought about money was about to shift.

“If you told me 10 years ago that I was going to be a financial adviser, I would have thought you were lying,” she laughs.

“If you asked me at 18 what I thought of financial advisers, I would

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have said ‘that literally sounds like the most boring job I can think of’.”

A career in psychology was Devine’s dream. But, like so many young people, she found the reality of the career she had pictured for herself was miles away from the fantasy.

At the end of her third year of the psychological sciences degree, students were required to complete a practical placement – the experience made Devine see things differently.

“I think something that’s always been underlying for me is wanting to have an impact and trying really hard to have an impact and make other people’s lives better. That’s what attracted me to psychology,” she says.

“I genuinely believed that I could fix people – but that is not the case at all. I obviously fully didn’t understand at the beginning, but by the end it was clear to me that psychology is not always about changing things for people, sometimes it’s about just making them bearable.

“I kind of had the ‘end of degree crisis’ that a lot of students have.

I questioned whether I studied the right thing.”

That was when Devine had a stroke of very good luck. She was introduced to a mentor who worked in organisational psychology.

“I had never heard what that was. It turns out, it’s the science of people at work. And to me, that made more sense. I’ve always been really pragmatic, I like science, I like facts. I don’t like dealing in airy, fairy maybes,” she says.

“It felt like I could have more of a tangible impact working in psychology inside business so I pursued that and did an internship, then I did my honors year in organizational psychology.”

Devine found a graduate position working as a culture and engagement specialist, where she says she loved the work. In this role she would go into different companies – some large and some smaller – and consult with management on how the organisation’s culture and engagement could be enhanced.

“But I was young,” she says.

“I’ve always been young in my careers. My peers have always been 10 years older than me, minimum. I kept feeling really overwhelmed because during my degree I’d studied psychology... I didn’t actually study business but here I was thrown into the business world.”

Feeling in over her head, Devine researched what she needed to truly be successful and decided it was time to hit the books again.

She started an MBA when she was just 22 through RMIT university in Melbourne.

Meanwhile, at work, money matters were starting to take over.

“People kept asking me about money,” she says.

“I would go into engagement conversations and people would tell me they weren’t actually stressed about their job – their engagement was low because they were worried about their mortgage payments.

“People would say they’re stressed because they asked for a pay rise and didn’t get it and don’t know how to negotiate… I kept being in these situations where people I saw as more adult than me were telling me they were suffering financially.”

To Devine, as a 22-year-old hitting an early stride in her career, it didn’t make sense.

Devine admits at that point in her life, her understanding of personal finance matters was low. She had her personal loan and says she was making “pretty bad” money decisions herself. But she’d been fortunate to avoid any real financial stress.

Even though she wasn’t perfect herself, seeing that the financial ex-

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periences of people she considered senior to her and successful were not smooth sailing made Devine wake up to her own money habits.

“I organised an appointment with a financial adviser, and the summary of that delightful conversation was that I didn’t have enough money for him to bother with me,” Devine says.

“I was 22 and in a really good job, earning what a 35-year-old might be earning, but because I only had cash flow and not a huge amount of savings I wasn’t worth his time.”

Devine had done her own research online and knew that to secure herself financially the best thing she could do would be to start investing - but she had no clue where to start.

Her experience is somewhat of an indictment of the affordability and accessibility of financial advice in Australia – she didn’t even receive a reference from that adviser to someone else who might be willing to take her on. Despite her eagerness to do the right thing with money, the one industry that should be devoted to helping people do the right thing with their money turned its back on her.

“I never went back to see that adviser. I just felt so disheartened, so disengaged,” Devine says.

“I was young and so excited and thought I’d cracked the code on life – I thought getting financial advice was going to change my life. I did all my research and found a really great financial adviser.”

From the research she had done she didn’t have a deep understanding of what she had to do, but she knew about the magic of compound interest and she knew if she started young, she would be OK. In what seems like pure serendipity – one of Devine’s clients in her

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work as a culture and engagement specialist was a financial advice firm. It was through this happy accident that she met the financial adviser that would go on to be her mentor.

After Devine told this financial adviser (who prefers to stay out of the limelight and not be named) about her experience, he shared some hard truths with her.

“He told me that’s kind of how advice works. It’s the thing that differentiates the rich from the poor; the rich can afford good financial advice and they’re able to seize opportunities given to them because they have cashflow behind them,” she says.

“He wasn’t being rude, but he basically said: ‘the industry can’t cater to people like you, we want to give you the advice but we can’t’.

He ended up giving me the advice for free which is something that I’m forever grateful for. He explained the other adviser couldn’t take me on because I just wouldn’t make enough revenue for him.”

Devine kept working with this financial adviser, but when she would deliver her reports on engagement and culture to him, he kept asking her, ‘When are you going to jump? When do you want to be a financial adviser?’

Devine says she was initially incredulous – despite her interest in getting her own personal finances in order.

“I was like ‘look buddy, I haven’t spent six years at university so I can be a financial adviser and not a registered psychologist. You’ve got rocks in your head.’ I also thought it sounded like a terrible job because I had had such a bad experience with an adviser,” she says.

“I started to get interested in it as I kept working with him though, because he started telling me client stories and the impact he was having with clients. He worked in the ultra-high net worth space – so we’re not talking mums and dads, we’re talking a minimum investment of $10 million.”

One thing led to another and Devine ended up coming on board to work with, and be mentored by, this adviser. He trained her up as a financial adviser and she kept helping him with culture and engagement as well as taking on anything else that needed to get done around the office.

Showing exceptional negotiation skills at a young age, and an innate business savvy, Devine told him she was only interested in being a financial adviser if she could own the business eventually.

Her mentor supported her in starting her own start-up financial advice firm – and that is how Zella Wealth was born six years ago.

Devine says one thing she was struck by as she got to know the financial advice business was how powerful the information she was being exposed to was – but also how inaccessible it was to people like her and her friends.

“Imagine if as a 20-year-old you got this advice. You could make yourself into a millionaire with $500 a month – which on the average Australian salary is actually pretty achievable,” she says she found herself thinking.

“I’m someone who gets frustrated by injustice and frustrated by knowledge being inaccessible. I’m generous when it comes to sharing my knowledge. I’ll tell people exactly how I run my business. If you want to go set up the exact same business, you’re welcome to do that, but you’ll still have to put in the hard work and manage client relationships.”

She’s on the Money started as part of Devine’s journey in building her financial advice career and Zella as a business.

While it’s now best known as a podcast, She’s on the Money began

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as workshops – and as a way for Devine to meet potential new clients.

She had an idea of her ideal client in her head but started to realise this person wouldn’t materialise in her office without some work. So, Devine had the idea to go to law firms and other businesses and offer to run information sessions on money topics like how to start investing specifically for women.

“I was a young female professional, so it made sense to connect with other young female professionals. Like attracts like,” she says.

The workshops went well. The women who came along were engaged and wanted to learn more.

But Devine found that the people who had been to the workshops kept coming to her with the same questions, so she started the She’s on the Money Facebook group as a natural extension of the workshops. In this online space, Devine could answer the most common questions and share the resources everyone was asking for.

By keeping it a private group rather than a public page, there was a community feel; people started to engage in conversations about money matters they might have never spoken about before.

Devine says she couldn’t believe it when people she didn’t know, who hadn’t been to the workshops in real life, started joining the group.

“I remember when it tipped over 1000 people and I just thought ‘this is wild’ and that’s when I started posting free information weekly and asking people what they wanted,” she says.

“Then people started asking for video content, and I just wasn’t confident enough to jump in front of a camera. I asked them if they’d want a podcast instead and that’s where the She’s on the Money podcast started. We already had this super engaged group of women who wanted to know more about money.”

Devine put her money where her mouth is, investing in She’s on the Money. Zella was growing steadily so Devine didn’t feel pressure to make money out of the podcast, even though she was devoting a lot of time to it.

Last year, She’s on the Money made a profit – enabling Devine to grow the team behind the podcast and social media content.

“At times it is really hard to keep up with the growth. Growth demands resources and it’s about being dynamic and finding the right people to work with me who fit my community,” she says.

One thing is for sure; Devine has no plans to slow down. She has two more podcasts in the works, aiming to capitalise on the appetite for general advice on a range of money matters.

The Business Bible podcast will be co-hosted by Ryan John, a breakfast radio host on KIIS FM in Melbourne, and will focus on the financial side of starting and operating a small business. An area where Devine is more than qualified to offer insight.

There’s also Property Playbook, a podcast all about buying your first home and everything novices need to know about property. Rebecca Leonardi, a buyer’s advocate who helped Devine buy her first home, will co-host with Devine.

Saving up to buy a first home is the number one money goal the millennial women who listen to She’s on the Money express – it seems some things change but the Australian dream of home ownership remains.

Through the She’s on the Money community Devine, who admits herself that she has been sheltered from much financial hardship in her life, has met people with heartbreaking stories.

Many of the women who find She’s on the Money are in desperate

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I’ve never been shocked by the state of financial literacy, I’ve just been disappointed.

need of financial help. There are people in the community with six figure credit card debt and people who have been victims of financial abuse and control. There are single mums who struggle to pay their bills each month.

“I’ve never been shocked by the state of financial literacy, I’ve just been disappointed,” Devine says.

Again, Devine worries that she might add to the social media “highlight reel” and her followers who are doing it tough might compare themselves to her and feel bad, but that does not seem to be the case.

The YouTube video where Devine shares that she bought her first home, something she admitted to apprehension about sharing online, has nothing but support in the comment section.

It seems rather than adding to the highlight reel and giving people a sense of FOMO (fear of missing out), Devine has tapped into a space where she is at once inspirational but also accessible.

The financial tips she offers are explained in a way anyone can understand, and she’s careful to speak about saving and investing in a way that doesn’t alienate anyone - even those on very small incomes where it can be so hard to do anything but live pay cheque to pay cheque.

As She’s on the Money has grown, opportunities to partner with businesses and receive sponsorships have

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emerged. For example, a recent partnership saw She’s on the Money creating budget cheeseboards with Aldi products.

While something like a budget supermarket makes sense, Devine and her team have to be incredibly careful about paid partnerships.

“As gracious as the community are, they are also incredibly honest with feedback if they’re not happy with something I do. It is absolutely in my best interests to make sure that the partnerships we take on are aligned to the community and in their best interests,” Devine says.

“We say no to more sponsorships than we say yes to.”

Recently, an incident occurred where She’s on the Money accepted a partnership with a business credit card. The product was specifically for small businesses, but this was somewhat lost on some of the audience.

Devine doesn’t want to comment on the incident but it’s clear it was upsetting to her. The community had learnt through Devine how bad credit card debt and buy now, pay later services like Afterpay can be and now it looked like She’s on the Money was pushing these very products.

That wasn’t Devine’s intention and while she doesn’t want to get into the specifics, it’s clear that she took the criticism seriously.

It has often been said that the Australian public is prone to cutting down those they see as successful, in what is referred to as Tall Poppy Syndrome. As Devine’s podcasting career and business grows, she seems acutely aware – especially as someone young enough to have grown up on social media – that her actions are sometimes under a microscope.

But, as hard as that is, it all goes back to the purpose.

“I’m not shy about my goals. I want to change the financial literacy levels for an entire generation,” she says.

“There’s no shame in saying I want to change thousands of people’s lives and it’s for the better.

“There is a massive difference between financial advice and financial education. I think everyone deserves financial education but not everyone needs to be paying for financial advice.”

She doesn’t want anyone to experience the same disillusionment she did when she was turned away from the first financial adviser she met. So, Zella Wealth refers clients on when it can’t service them.

Devine says she wants to see financial advisers working together so that each advice business model can find its perfect clients.

And, she doesn’t have any plans to throw in the towel on being a day-to-day financial adviser to embrace a media career.

“I adore financial advice,” Devine says.

“I don’t want to be in the position where, as a financial adviser I have a podcast, but I can’t actually talk about being in the trenches and actually doing advice and understanding the stressors. I feel like that makes me better at creating content.” fs

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Challenging a Will based on mental capacity

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By April Kennedy, Attwood Marshall Lawyers

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper explains the meaning of, and tests for, testamentary capacity in a legal context, highlights the types of evidence and standards of proof regarding associated claims, and discusses the complexities of challenging a Will based on mental capacity.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Challenging a Will based on mental capacity

C April Kennedy

apacity can be an emotionally charged topic, especially in relation to dementia or Alzheimer’s disease and other degenerative conditions. This paper discusses how a Will might be challenged on the basis of mental capacity and why this is such an important issue.

What does capacity mean from a legal perspective?

There are different types and tests of capacity, including the capacity to: • make a Will • make power of attorney • enter into legal proceedings • enter into a marriage.

When discussing Wills, we are referring to ‘testamentary capacity’. There is an old English case, Banks v Goodfellow, from 1870 which is still good law today. This case sets out what the test for testamentary capacity is. When making a Will, a person must: 1. Understand the nature and effect of a Will—a person must understand the legal document they are preparing, and that it forms their wishes after they pass away.

2. Understand the nature and extent of their property—a person must have a good idea as to what they own, whether that be property, shares, or bank accounts (e.g. those who own a bank ac-

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count must know which financial institution they bank with, and the approximate account value).

3. Comprehend and appreciate the claims to which they ought to give effect—a person must be able to understand they have a moral obligation to provide for, and the effect of the gifts they are giving, in their Will. They must be able to appreciate that they have a moral obligation to provide for a dependent person, whether that be a spouse or a child, and they must understand how much they ought to provide them and whether that provision is considered ‘adequate’ for their proper maintenance, support and advancement in life.

4. Not be suffering from any disorder of the mind or insane delusion that would result in an unwanted disposition—this is old terminology, but a person must not be suffering from any condition that affects their mind and capacity to make decisions while taking into consideration the above factors. This arm of the test refers to conditions such as dementia, Alzheimer’s disease, etc.

Sometimes it is a difficult exercise to determine whether someone has the requisite testamentary capacity to provide instructions for a Will when they are suffering from dementia or some other injury-caused condition or illness (for instance, a head injury or stroke). In the 19th century English House of Lords case of Boyse v Rossborough (1857) 6 HL Cas 1 at 45, Lord Cranworth, who was also the Lord Chancellor, observed the difficulty in relation to this test:

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“There is no possibility of mistaking midnight for noon; but at what precise moment twilight becomes darkness is hard to determine.”

This case and comment were referred to and accepted by the same court in Banks v Goodfellow, some 13 years later and continue to be applied to this day by our state Supreme Courts and the High Court of Australia.

On what grounds can a Will be challenged based on capacity?

There are many ways a person can challenge a Will based on the capacity of the Will-maker (or lack thereof). It is a heated area of law. Sometimes when a person is unhappy with the contents of a person’s Will, and the Will-maker exhibits subtle symptoms that resemble dementia, such as forgetfulness, then they will use that as grounds to challenge the Will. It can be difficult to determine whether there are grounds to challenge a Will on this basis, so it is important to seek advice early on.

The most common types of claims when someone is challenging a Will based on capacity, include conditions such as: • dementia • Alzheimer’s disease • degenerative conditions or diseases, such as Parkinson’s disease or motor neurone disease • conditions that can affect speech and physical capabilities—these generally are considered when determining capacity in these types of claims.

People may not necessarily lack capacity, but they might display paranoid behaviour where they change their Will after believing things that may not necessarily be true. They may have a certain perspective that is skewed which can impact their decision-making.

Are there other ways a Will can be challenged based on someone’s mental state?

Yes. There are grounds to challenge a Will based on emotional or psychological pressure put upon the person writing the Will. For example, the Will-maker might be under duress or being unduly influenced by a third party.

The most common instance of this behaviour is when a family member or carer becomes part of the Will-maker’s life in a big way. That person accompanies the Will-maker to their solicitor to have their Will made during those later stages in their life. This can create a pressure environment where the Will-maker feels obligated to change their Will to include this person and cut out other family members who they may have been close to their entire life. The Will-maker may feel obliged to do this as a way of repaying someone for their companionship or friendship.

This is not a medical disorder, but it is a sense of obligation or pressure that otherwise influences the Will-maker.

This is prevalent in the elderly and considered elder abuse, especially because elderly people can be vulnerable and susceptible to psychological or emotional pressure. For

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this reason, it is necessary to determine whether the Will was prepared under ‘suspicious circumstances’.

Another challenge may be based on lack of knowledge and approval of the Will. These types of claims usually arise when there is a do-it-yourself (DIY) Will, or a handmade Will, especially if the person making the Will is either: • deaf • unable to speak • paralysed or unable to write • blind • illiterate.

In these cases, they may have had someone else sign the Will on their behalf because they were physically unable to do so themselves. A knowledge or approval claim is essentially someone contesting the Will on the basis that that person did not know what they were signing.

What evidence might be used in a Will contest on the grounds that the Will-maker had impaired capacity?

For these types of claims, the main types of evidence used are: • medical reports and clinical notes • specialist reports • witness statements from people who knew the deceased and knew the history of the relationship between the parties involved • telephone log history and bills • bank account statements • Facebook messages • social media posts and history • handwritten notes • photographs to show history of relationships between parties • digital notes on a person’s mobile or tablet device.

It can be very costly to challenge a Will on capacity, and evidence is critical to determining if a claim has merit.

What can people do to ensure there are no questions over the Willmaker’s capacity?

It is recommended to have a Will prepared by a solicitor, especially if there are going to be capacity issues or if there are any suspicions someone may make that claim down the track. Memory loss, early stages of dementia or any physical impairment that may leave a Will-maker open to someone making a capacity claim should be handled with care by an experienced solicitor who can mitigate these risks.

We have seen these reasons, and many more, result in Will contests.

Should someone obtain medical reports at the time of making a Will?

Yes—that is the first step we take in these situations, especially if we suspect a capacity issue could arise. Capacity can be a sensitive topic to talk about, especially with

April Kennedy, Attwood Marshall Lawyers April Kennedy is an estate litigation associate at Attwood Marshall Lawyers. She joined the firm in 2008 and during that time has been involved in a variety of estate planning, estate administration and litigation matters. April holds a Bachelor of Laws and a Graduate Diploma of Legal Practice.

In 2018, April was admitted as a lawyer in the Supreme Court of Queensland.

Prior to April’s admission, she had more than 10 years’ legal industry experience.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In terms of testamentary capacity, a person making a Will must understand: a) The Will’s nature and effect b) The nature and extent of the assets they own c) Their moral obligation to provide for dependants d) All of the above 2. Jo’s Will is contested by her daughter on the basis Jo did not know what she was signing. This is: a) Elder abuse b) Outside the realm of a claim because it is pure conjecture c) A knowledge or approval claim d) Only possible if Jo used a DIY Will 3. Evidence for impaired-capacity claims includes: a) Social media posts b) Handwritten notes c) Bank statements d) All of the above 4. Zac displays ‘odd’ behaviour and alters his Will, as he thinks his beneficiaries are exploiting him. Which of the following statements is most correct? a) This is a sign that Zac lacks capacity b) Zac may still have capacity c) Zac’s behaviour must be more pronounced for any challenge to proceed d) Zac’s condition is not degenerative, so a challenge cannot proceed

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the elderly. It is a hard topic to broach and it can be difficult to say to someone that we consider you may not have capacity, or we want to ensure that you do have capacity in order to write a Will. These questions can be demeaning to a person, and best handled professionally.

It might not necessarily be the Will-maker’s capacity which is a concern. It may be regarding a family member or third party who accompanies that person to their appointment and we can see they are making a dramatic change to their Will. In these instances, having a letter from their doctor will serve them down the track.

There are several cases that suggest the evidence provided by the solicitor who prepared the Will were preferred to medical reports.

The reason for this is that testamentary capacity is a legal test, not a medical test. Unfortunately, when it comes to DIY Wills, there is no evidence of this kind if someone was to contest on these grounds.

Therefore, those types of documents will often be contested.

What if someone has been diagnosed with early-stage dementia?

A diagnosis like this does not necessarily mean a person cannot make a Will. There are different stages of dementia, or degenerative conditions, and it does not automatically mean someone does not have capacity. There are certain stages even in later-stage dementia where a person can have lucid periods. An experienced estate lawyer will be able to help navigate these issues and concerns, and can help make a Will, ensuring appropriate notes are taken and all the evidence is documented.

The importance of acting early It is important to seek immediate advice if a person has concerns about the validity of a person’s Will. After that person passes away, there is usually a brief window of opportunity to take steps to ensure that the Will was properly made. Challenging the validity of a Will can be daunting, so it is important to seek advice from a lawyer who is knowledgeable and has experience in this complicated area of law. fs

5. T estamentary capacity is a legal and medical test. a) True b) False 6. An early-stage dementia diagnosis does not automatically preclude someone from making a Will. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Ethics & Governance:

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By Dr Ray McHale, MyNextAdvice

The dangers of ignoring client vulnerability

By Jamie Munton and Paul Derham, Holley Nethercote

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: FASEA’s Code of Ethics comprises five ethical values which form the bedrock of its 12 standards. This paper provides pragmatic working definitions/interpretations of these values and suggests how advisers can use them to foster ethically sound practices and client relations.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Understanding FASEA Code of Ethics values

T Dr Ray McHale

he Financial Adviser Standards and Ethics Authority (FASEA) Code of Ethics (Code) consists of the five ethical values of trustworthiness, competence, honesty, fairness, and diligence; and these underpin the prescribed 12 standards.

Often overlooked, the values are paramount and dictate how all ‘relevant providers’ (advisers) are required to behave from 1 January 2020. They must always act in a way that demonstrates, realises and promotes those values.

There has been an unmistakable focus on compliance outcomes, particularly since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). It is understandable why licensees and their authorised representatives are preoccupied with trying to interpret the practical meaning and implications of each of the 12 standards, although FASEA has clearly stated in its latest guide that “The standards are not a compliance checklist”.

To confirm, the ultimate test (as prescribed in the legislation), is whether each adviser has conducted themselves in a manner that demonstrates, realises and promotes the values. Therefore, licensees and advisers who approach compliance with the Code as a black letter law, box-ticking exercise around each of the standards in isolation are missing the point.

While there may be room for interpretation of the standards (the Code is principles based), the values are non-negotiable. All other

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provisions of the Code must be read and applied in a manner that promotes these values. So, the real challenge is to apply the values every day when undertaking professional activities with clients, consumers, colleagues and the public.

Individual advisers need to consider these values through their actual day-to-day behaviours and think, feel and act in a manner consistent with the values. According to FASEA, “Each must be ready to give an account of how they have interpreted and applied the Code in specific situations”.

It is both regrettable and ironic that a single regulatory body has yet to be established to oversee adviser compliance with the Code, although licensees have an obligation to report breaches to the Australian Securities and Investments Commission in the interim as it takes a ‘facilitative’ approach.

The federal government (government) has flagged its intent to legislatively enable a single disciplinary body by mid-2021, so the best the industry can hope for is greater certainty by then. This, however, does not absolve advisers from their legal obligation to comply from 1 January 2020. Advisers must be able to demonstrate, realise and promote the values from that date.

The objective of this paper is to provide a resource to help better understand each of the values in the Code and to offer some practical guidance about how to work towards achieving them.

Trustworthiness The government and relevant regulators have made it abundantly

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clear they are responding to the Royal Commission’s findings for the principal purpose of improving the level of trust and confidence the community has in the financial advice industry. These critical outcomes are closely intertwined—it is difficult to generate confidence in anything without first establishing a suitable level of trust.

So, one of the first and most critical issues a client wants to address in their relationship with an adviser is the issue of trust. Can you demonstrate that you are worthy of my trust? Will you act in my best interests at all times and place my personal and financial interests before your own?

If I cannot trust you, why should I do business with you?

A definition

Our definition of trust is the degree of confidence that a prospect or client has that their adviser can be relied on to fulfil their commitments, be fair, be transparent, and not take advantage of their vulnerability.

Information asymmetries will always exist between a client and their adviser because the adviser will usually have more information at their disposal, relative to the advice topic being addressed. So, a prospect or client anticipates that their adviser will not engage in unexpected behaviours, irrespective of their ability to monitor or control activities.

From FASEA’s perspective

“Acting to demonstrate, realise and promote the value of trustworthiness requires that you act in good faith in your relationships with other people. Trust is earned by good conduct. It is easily broken by unethical conduct.

“You earn trust by being reliable in your relationships with others, and by doing what you say you’ll do. Trust requires having the courage to do what is right, even though you may suffer personal detriment by doing so. It requires that you are loyal to each of your clients, and that you keep client personal information entrusted to you private and confidential.

It requires that you should not subordinate your duty to your client, or your client’s lawful interests, to your own interests and any obligation you may owe to a third party, including an employer or a financial services licensee.

“Trust requires you to act with integrity and honesty in all your professional dealings, and these values are interrelated.

“Acting ethically, with trustworthiness, promotes trust by consumers in the profession of financial advisers, promoting community confidence in accessing and utilising professional financial services.”

Note that trustworthiness is not a standalone value. It is informed by and interacts with other values such as integrity and honesty (the latter being one of the remaining four values underpinning the Code).

In the extensive research we have undertaken over many years, we have isolated a number of relationship variables that are responsible for more than 75% of the variance in the trust score.

As you will know from your own experience, trust can take quite a bit of time to develop, however, it can also be de-

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stroyed very quickly through unthinking actions or omissions. Everything you do in the conduct of your business needs to be seen in this context. Trust is earned over time through consistent good conduct, undertaking regular reviews of each client’s circumstances, educating them along the way and through ongoing quality communication.

In collecting data from clients of advice businesses for some time, we know for a fact that trust is highly correlated in a positive way to how much clients value their relationship, the extent to which they are prepared to forgive when things do not go to plan (and this will happen), whether they are likely to remain a client and whether they are prepared to refer you to their friends, family and work colleagues.

The implications are very significant. The higher the level of trust you can achieve with clients, the more likely they are to value you and your advice (think value for money), forgive you, stay with you and advocate for you—all highly positive outcomes for an adviser’s career and business.

According to the latest FASEA guidance, you will need to demonstrate the value of trustworthiness to meet the following standards: Standard 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9 Y 10 Y 11 Y 12 Y

Some practical suggestions

Start a checklist As you consider what can be done to comply with the Code, you should think about using a checklist of questions relevant to your dealings with prospects and clients and use the checklist to guide your practical actions.

Here are a few suggestions about what questions to include on your checklist: • Will I derive an inappropriate personal advantage if my client accepts my advice recommendation(s)?

• Have I disclosed any actual or potential conflicts of interest to my client during the advice process?

• Did I apply a high level of relevant knowledge and skills when advising my client?

• Will my advice put my client in a better financial position?

• Did I act in my client’s best interests at all times?

• Did I take reasonable steps to meet all my commitments to my client?

Dr Ray McHale, MyNextAdvice Dr Ray McHale is the founder and chief executive of MyNextAdvice Pty Ltd. He has more than 30 years’ experience working in the financial services industry in operational and executive roles and over 15 years providing consulting services with a focus on relationship management and client experience.

His company provides client experience management software for advice businesses, delivering a high-definition view of client relationships to improve growth, efficiency and compliance.

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• Was I open, honest and frank in all my dealings with my client?

• Did I keep client information private and confidential?

Take action It is also important that you take action to demonstrate your trustworthiness. Here are a few practical actions you could consider to improve the level of trustworthiness: • Think about how you treat colleagues and family because this is likely to be mirrored in your treatment of clients (the ‘golden rule’—do unto others as you would have them do unto you).

• Transparency in everything you do will establish or repair trust fast. Ask yourself if you are withholding information that should be shared with your client and why. Err on the side of disclosure.

Do not have hidden agendas and do not try to hide information.

• Communicate results. Do not just talk about what you are going to do for your clients, but make it happen and, importantly, communicate those results so they become tangible in the eyes of your clients—promises made versus promises delivered. Results give you instant credibility which leads to a strong bond of trust. Do what you say you are going to do and deliver on time. Do not overpromise and under-deliver.

Another important issue to consider is the need to establish clarity around your client’s expectations (what does their version of ‘success’ look like?) and temper that with your ability to deliver. You have to know what ‘success’ means to the client, what they will value from you and whether you can deliver.

Competence Each of your clients will be interested in the competence you can exercise (and demonstrate) while delivering professional services. Can I count on you to have the knowledge, skills and experience to assess and deliver the services I require? Can you put me in a better financial position and help me achieve my goals?

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“The value of competence requires your life-long commitment to developing and maintaining knowledge, skills and expertise at a level of currency required to benefit your clients in particular engagements, and in anticipation of other client engagements in the course of your professional career.

“It requires your regular self-reflection and the exercise of professional judgement to determine when to augment your knowledge, skills and experience with assistance from other professional financial advisers, or indeed other professionals with specialist expertise in the service of the client’s best interests.”

We argue that a big part of competence is being able to identify what ‘success’ looks like from the client’s perspective and then being able to self-assess if you have the relevant knowledge, skills and experience to deliver that outcome. Advisers need to be aware of the boundaries of their knowledge and communicate the limits of their competence to clients where necessary. Competence is also interlinked with the other values of diligence and fairness as it relates to the delivery of professional services.

We also know from our research that competence is positively correlated to client satisfaction and can contribute to the reduction of conflict in the adviser-client relationship.

According to the latest FASEA guidance, you will need to demonstrate the value of competence to meet the following standards: Standard 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9 Y

A definition

Our definition of competence is the degree to which your interactions with clients meet performance expectations through the exercise of knowledge, skills and experience. It typically comprises a combination of practical and theoretical knowledge, cognitive skills, behaviours and values. These are used in the course of evaluating individual needs and then delivering appropriate and relevant advice for the benefit of clients.

FASEA’s perspective

From FASEA’S perspective: “Acting to demonstrate, realise and promote the value of competence requires you to have regard to the knowledge, skills and experience necessary to perform your professional obligations to each of your clients. It requires you to assess the professional services required by each client with regard to their individual needs, priorities, circumstances and preferences, expressed or implicitly identified as the subject matter of the financial advisory engagement. Whilst it may be possible to supplement your professional competence by accessing the expertise of others, the duty of competence is ultimately personal and cannot be outsourced to others. If you don’t possess the particular competencies required to assist your client, in accordance with other ethical requirements in the Code, you must refer your client to another professional.

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10 Y 11 N 12 Y

Some practical suggestions

Start a checklist Here are a few suggestions about what questions to include on your checklist: • Did I explain the advice process in a way that my client could understand?

• Did I understand and take into account my client’s needs, priorities, circumstances and preferences?

• Did my advice and recommendations take into account my client’s broader long-term interests and likely circumstances?

• Was the advice I provided my client communicated in plain English and clear and simple?

• Did I take steps to help my client understand and consent to the advice I provided?

• Did I clearly explain the benefits, costs and risks associated with the advice/products I recommended to my client?

• Were the advice and recommendations I provided to my client appropriate to their circumstances?

• Did I apply a high level of knowledge and skills?

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Take action Here are a few practical actions you could consider: • Ask your client the right questions to clearly understand what their needs, priorities, circumstances and preferences are—use openended questions at the outset to build a broad-based understanding, then ask more specific questions to identify what ‘success’ looks like in their eyes.

• Prepare some open-ended questions in advance of your review meeting—here are some examples: • If we were meeting again three years from today, and you were looking back over those three years, what has to have happened in your life for you to feel happy with your progress?

• What are the biggest challenges you will have to face in order to achieve that progress?

• What are the biggest opportunities that you would need to focus on to achieve those things?

• What role would you like me to play during those three years?

• Do you feel as if you are currently reaching your goals? Why/ why not?

• What changes are you expecting to occur in the next six to 12 months?

• What are your most pressing financial concerns?

• Do you feel that I have fully understood your needs so far?

Be honest in your assessment of your competencies when deciding if you are well-positioned to perform your professional obligations.

Do I have the right mix of knowledge, skills and experience appropriate to the client’s advice requirements? If not, you are required by the Code to refer your client to another professional.

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Honesty No-one wants to do deal with a dishonest person, so your clients want to see evidence that you consistently conduct yourself in an honest manner. Can I count on you to be totally transparent, frank and fair in your dealings with me?

A definition

Our definition of honestly is that it is a key facet of moral character.

It embodies virtuous attributes such as integrity, transparency, and truthfulness; and involves being trustworthy, fair, and sincere.

FASEA’s perspective

From FASEA’s perspective: “Acting to demonstrate, realise and promote the value of honesty requires that you conduct yourself with integrity in all your professional dealings with your clients and with all others that you engage with in the professional setting. It requires transparency, frankness, and fairness to each of your clients even where this may cause your personal detriment. Being honest means more than just technically telling the truth, it may require you not to withhold information from your client that your client would want to know. Honesty also requires you to respect the rights (including personal and property rights) of others – especially when acting as their agent or managing their assets.”

You will note the reference to fairness which is another value underpinning the Code and also interrelated with trustworthiness.

An adviser may need to have difficult conversations with clients about the reality of achieving their goals and the implications of their financial decisions. Generally, there are fewer data points to be found in a professional setting for clients to form a view about their adviser’s

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honesty. So, the perception of honesty becomes very important when developing interpersonal relationships with clients, and communication is key.

According to the latest FASEA guidance, you will need to demonstrate the value of honesty to meet the following standards: Standard 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9 Y 10 Y 11 Y 12 Y

Some practical suggestions

Start a checklist Here are some suggestions about what questions to include on your checklist: • Did I provide my client with a clear and simple explanation of my proposed advice service before they formally engaged with me?

• Did my client understand and agree with the proposed advice service?

• Before they formally engaged with me, did I provide my client with a clear and simple explanation of all the fees, charges and other benefits I would receive?

• Did the client understand all the fees, charges and other benefits I would receive and freely provided their consent before the engagement commenced?

• Did the client understand what information would be kept by me, including privacy and confidentiality arrangements?

• Did the client decline to take up my recommendations due to concerns they had about a personal advantage I would receive?

• Did I disclose any actual or potential conflicts of interest to my client during the advice process?

• Did I act honestly, efficiently and fairly when recommending all advice and products to my client?

• Did I provide the required attention, skills and time to the client throughout the advice process?

• Do I believe my recommendations will put the client in a better financial position?

• Do I believe that I acted in my client’s best interests at all times?

• Did I take reasonable steps to meet all of my commitments to the client?

• Do I believe I was open, honest and frank in all my dealings with my client?

• Did I treat my client in a respectful and professional manner at all times?

Take action Here are a few practical actions you could consider: • Be honest and truthful with your clients, even it may seem un-

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comfortable to you. Honesty requires some personal vulnerability, and most of us have a hard time with that. If you cannot help your client with something, it is best to be honest from the outset. If you cannot deliver something by a client-driven deadline, make sure you communicate that before the deadline passes. Sometimes you need to set expectations about what is possible then work hard to exceed those expectations: • Do not make promises you know you cannot keep. Some people are great at making outrageous claims and promises, but few of them will last very long in an emerging profession like financial advice where the level of scrutiny will only intensify. Making promises you cannot keep will hurt you, your practice and licensee. Social media is a double-edged sword, and clients are more inclined these days to tell all their friends about their disappointments.

• Do not take any shortcuts. Advisers with integrity already know there are no shortcuts. Building a successful client portfolio takes time and a lot of hard work.

• Raise the bar in the industry. Operating with integrity does not just lift you up; it raises the bar for the whole industry (something that is needed right now). Other practices cannot compete with you if they do not operate with the same high level of integrity.

Fairness Clients want to know if you will provide them with advice that has been objectively formulated from available options, based on a clear understanding of their needs, and delivered in a competent manner. Can I count on you to thoroughly investigate, evaluate and diagnose my needs and only deliver the right services if you are competent to do so?

A definition

Our definition of fairness is the presence of a state of impartiality (without bias) when recommending financial products and services arising from a thorough investigation and proper identification of client needs, delivered in a competent manner.

FASEA’s perspective

From FASEA’S perspective: “Acting to demonstrate, realise and promote the value of fairness requires that you bring professional objectivity to the task of engaging clients professionally, and when recommending financial products and professional services. It requires you to properly investigate, evaluate and diagnose a client’s need for professional services, to self-reflect on the limits of your professional competency and on your capacity to deliver or access the necessary professional services required in the engagement in a manner that benefits your client.

“It requires your objective assessment of your own services (or your firm’s) and whether you can bring value to your client. It requires understanding your personal biases, and it may require you to act to mitigate the threat of your own or your client’s unconscious biases to your client’s decision making. Being fair requires that you look beyond your own interests and consider how others may judge or perceive your actions. Would your conduct stand public scrutiny by your professional peers and by the community?”

Note that the value of fairness is also linked to the values of competence and honesty.

In our research, we have identified that fairness is closely related to the concept of equity (the extent to which the distribution of outcomes is just and fair) which is positively correlated with a re-

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duction in conflict, together with improved trust and satisfaction.

According to the latest FASEA guidance, you will need to demonstrate the value of fairness to meet the following standards: Standard 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 N 9 Y 10 Y 11 N 12 N

Some practical suggestions

Start a checklist Here are some suggestions about what questions to include on your checklist: • Did I act honestly, efficiently and fairly when recommending all advice and products to my client?

• Did I provide the required attention, skills and time to the client throughout the advice process?

• Did I treat my client in a respectful and professional manner at all times?

Take action Here are a few practical actions you could consider: • Consider the scope of your licensee’s approved product list to ensure its breadth is sufficient to allow you to act with fairness.

• Only recommend financial products and professional services that are clearly required in order to meet the client’s needs and that you can deliver in a competent manner.

• Treat your clients the way you would like to be treated. Do no harm.

• Be honest in your assessment of your competencies when deciding if you are well-positioned to perform your professional obligations to your client.

Diligence Diligence is action oriented, so clients want to know if they can count on you to not only act in a manner that applies your knowledge to the development and implementation of advice, but also to deliver your services in a timely, efficient and cost-effective way.

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skill. It requires you to manage your time and resources to deliver professional services in a timely, efficient and cost-effective way to each client.

“It is about the way you go about your professional work, the commitment you bring, and the values you espouse and demonstrate in all your professional interactions with your clients and with others.

“It requires that you exercise due care and skill in the way you: • engage each client; • understand each client; • diagnose each client’s needs and issues; • scope or limit the professional services you will provide each client; • develop strategy solutions and recommendations for each client; • develop product and service solutions and recommendations for each client; • ensure the strategy and product solutions you provide to each client are fit for purpose and are intended to improve your client’s financial wellbeing; • make required disclosures to each client in your Financial Services Guide, Statement of Advice and Record of Advice and in providing Product Disclosure Statements and Investment Memoranda; • implement agreed recommendations; • engage each client to deliver on-going services (including reviews) if appropriate; • undertake record-keeping in respect of the professional services you provide each client; and • meet your obligations in the law in respect of the advice you provide to each client • including: • best interests’ duty; • appropriateness of advice; • prioritisation of client’s interests; • additional requirements for product replacement recommendations; and • Australian Taxation laws.

• It requires that you keep abreast of developments and options for clients.”

This suggests there is a linkage to the value of competence, requiring knowledge, skills, and experience. Based on our research and experience, the requirement to deliver services in a timely, efficient and cost-effective way indicates twin requirements to minimise client effort and maximise value for money.

According to the latest FASEA guidance, you will need to demonstrate the value of diligence to meet the following standards: Standard 1 Y 2 Y 3 Y 4 Y

A definition

5 Y

Our definition of diligence is that it represents the efficient delivery of a service in a timely and cost-effective manner using relevant knowledge, skills, determination and care.

6 Y 7 Y 8 Y 9 Y

FASEA’s perspective

From FASEA’s perspective: “Acting to demonstrate, realise and promote the value of diligence requires that you perform all professional engagements with due care and

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10 Y 11 Y 12 Y

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Some practical suggestions

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Elmer has recently qualified as a financial adviser.

What can he do to build client trust? a) Be low-key and avoid ‘broadcasting’ results b) Secure a few ‘quick victories’ to impress clients c) Use his newcomer status to gain client forgiveness if needed d) Be patient, as trust takes time to develop 2. What does the author highlight regarding honesty and adviser-client relations? a) Clients have fewer data points to gauge adviser honesty b) Clients have numerous data points to gauge adviser honesty c) Advisers tend to fixate on the weight clients assign to honesty d) Advisers often initiate difficult conversations with clients to demonstrate honesty 3. What does the author say about competence in the context of financial advice? a) Focusing on client ‘success’ can compromise ethical outcomes b) There is an onus on advisers to stay within their operational boundaries c) Its principal focus is on practical knowledge d) It may induce conflict for the ‘greater good’ 4. FASEA’s five values: a) Allow for situational interpretation b) Compartmentalise ethical behaviour c) Dictate adviser conduct d) Play a support role to FASEA’s 12 standards

Start a checklist Here are some suggestions about what questions to include on your checklist: • Did I take into account my client’s needs, priorities, circumstances, and preferences?

• Did I take into account my client’s broader, long-term interests and likely circumstances?

• Were my advice and recommendations fit for purpose and intended to improve my client’s financial wellbeing?

• Was I easy to work with?

• Were my fees and charges fair and reasonable and did they represent value for money?

Take action Here are a few practical actions you could consider: • Plan well and pace yourself to ensure the advice you provide clients is delivered according to promised timelines and using the most efficient processes possible, making it easy for clients to do business with you.

• Take full responsibility for the on-time delivery of relevant advice to a client, even though some aspects have been delegated to others on the team.

• Ensure that advice workflows and processes are designed in a way that eliminates the possibility of inefficiencies and delays.

Conclusion Each adviser will need to be able to give an account of their compliance with the Code from 1 January 2020, so we hope this paper will help you demonstrate, realise and promote the values the Code prescribes. fs Disclaimer This paper was first issued in January 2020 and has since been updated to reflect the contents of FASEA’s Financial Planners & Advisers Code of Ethics 2019 Guide (October 2020). It is point-in-time content originally based on the Financial Planners and Advisers Code of Ethics 2019 Legislative Determination, the accompanying Explanatory Statement and Guidance and Preliminary Response to Submissions, together with our proprietary research and intellectual property. It does not constitute legal advice. We encourage you to seek your own professional advice on how the FASEA Code of Ethics may apply to you. Suggestions in this paper are not exhaustive and are not intended to be binding on the author or related entities. Further guidance may be released by FASEA and may change the suggestions within this point-in-time paper.

About MyNextAdvice MyNextAdvice provides a software-as-a-service platform that delivers smarter customer experience management for advice businesses, enabling a high-definition view of client relationships to improve growth, efficiency, and compliance. It does this by leveraging the voice of clients and using proprietary tools developed over many years of research and practical application.

5. A common adviser misconception is associating diligence with: a) Minimising client effort b) Maximising value for money c) Efficiency of service d) None of the above 6. According to the commentary, fairness entails advisers: a) Acknowledging that genuine impartiality is unattainable b) Gauging whether their actions would stand up to public scrutiny c) Realising that fairness and equity are different concepts d) Being partisan when recommending financial products Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: As financial products become more complicated, advisers have a heightened responsibility to ensure vulnerable clients are not disadvantaged and that their best interests are met.

This dovetails with a growing need to recognise the different types of vulnerable clients and contributing situations.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

The dangers of ignoring client vulnerability

C

Jamie Munton and Paul Derham

hances are you are reading this paper on an electronic device. You may have used the same device to video-chat with others, message your team and create or send documents—in the last hour. Navigating the device and its various software tools can be complicated—really complicated.

Financial products are also becoming more complicated, and this creates a new problem: vulnerable clients. The Commissioner of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), Kenneth Hayne QC, considered that the complexity of financial services required by people to live in modern society put them at a disadvantage when dealing with financial service providers (Royal Commission Final Report, volume 1 p. 491).

Notably, the Commissioner considered this an issue not just for vulnerable clients, but also clients who because of their circumstances were in a more vulnerable situation (Royal Commission Final Report, volume 1 p. 89).

As professionals, we trade on being the most knowledgeable people in a room on a specific topic and sought out for our advice and assistance. This advice (be it personal or general) is normally required for people who do not fully understand our field or who are not able to conduct business without our guidance.

This reliance puts us in a position of power and trust. While this

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power can provide great benefit to us and our clients, misuse either deliberately or negligently can have significant impacts on clients, us, our business and ability to practice. These impacts can be both professional and financial.

So, as regulated entities, we need to look carefully at how we need to treaty vulnerable clients.

Where to look To get a steer on what to do about vulnerable clients, there are a number of sources: ASIC

The Australian Securities and Investments Commission (ASIC) has made it clear that licensees need to do something about vulnerable clients. In the ASIC Corporate Plan 2020-2024, the regulator noted that it is focusing enforcement activities on conduct that harms vulnerable consumers. There are plenty of examples, including ASIC: • using its product intervention power to target providers of continuing credit contracts (Consultation Paper 330 Using the product intervention power: Continuing credit contracts) • shifting its regulatory priorities in light of COVID-19 to protect “vulnerable consumers”.

FASEA

Vulnerable clients are also an issue in the financial planning context.

Providers of personal advice to retail clients in relation to relevant fi-

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Jamie Munton, Holley Nethercote Jamie is a lawyer at Holley Nethercote.

He has over 15 years’ experience in the financial services and banking industry, having worked across retail and corporate teams and in risk and capital management. He has also worked as a financial planner, mortgage broker, and with ASIC.

Paul Derham, Holley Nethercote Paul is a partner at Holley Nethercote.

He assists financial services businesses with licence acquisitions and governance systems. Paul works closely with financial planning dealer groups, automated investment advisers, global financial institutions and fintech startups.

nancial products must comply with the Financial Adviser Standards and Ethics Authority (FASEA) Code of Ethics (Corporations Act 2001 (Corporations Act) section 921E).

It is the Australian financial services (AFS) licensee’s responsibility to ensure that all advisers comply with the code (as per Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 amenmdents to sections 921J and 921K of the Corporations Act). The Code of Ethics requires advisers to: • act with integrity and in the best interests of each of their clients (FASEA Code of Ethics Standard 2) • not advise, refer or act in any other manner where they have a conflict of interest or duty (FASEA Code of Ethics Standard 3) • provide to a client any advice or financial product recommendations that are in the client’s best interest and appropriate to the client’s individual circumstances (FASEA Code of Ethics Standard 5) • be satisfied that the client understands the advice and the benefits, costs and risks of the financial products recommend (FASEA Code of Ethics Standard 5) • consider the broader effects arising from the client acting on the advice, and actively consider the client’s broader, long-term interests and likely future circumstances (FASEA Code of Ethics Standard 6).

Design and Distribution Obligations

The theme of vulnerability is embedded in the new Design and Distribution reforms enacted by the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. The requirement for product issuers to make a target market determination, necessitates the issuer considering the likely objectives, financial situation and needs of a retail client in the target market (Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (DDO & PIP Act) section 994B(8)).

Product issuers and distributors of a product for which a target market determination has been made are obligated to ensure that they take reasonable steps to ensure the product is reasonably likely to be distributed consistent with the target market determination (DDO & PIP Act section 994E(1)). ASIC in its draft Regulatory Guide 000 Product design and distribution obligations advises that it expects this to include provision of how a distributor would deal with vulnerable clients within the target market.

AFCA

In a media release of 27 May 2020, the Australian Financial Complaints Authority (AFCA) reported a spike in vulnerable-client related complaints due to COVD-19, and has released much guidance on the topic.

AFCA chair Helen Coonan, in a 2019 speech to the AFR Banking and Wealth Summit, said AFCA considered the timely and open treatment of complaints to financial services providers as a key focus area. Delays in responding to and dealing with complaints will be called

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out. This is of particular concern regarding vulnerable clients who may not be as proactive in driving their complaint, requiring more active monitoring by financial service providers.

AFCA’s The AFCA Approach to joint facilities and family violence report also raised a concern for financial services firms dealing with domestic or family violence situations to develop processes for ensuring the adequate protection of information about vulnerable clients. AFCA also noted that where two clients are interviewed together, vulnerable members of the partnership are unlikely to disclose accurate information in front of their abuser.

Who are vulnerable clients?

In order to define vulnerable clients for our Vulnerable Client Policy, we had to bolt together a number of different definitions. There is no single point of reference.

Client vulnerability can be caused by many things, including age and levels of stress. This can be permanent or just a point-in-time concern. The Australian banking Association’s Banking Code of Practice said that a vulnerable person can be someone: • elderly or suffering an age-related impairment • suffering any form of cognitive impairment • suffering from elder or financial abuse • experiencing family or domestic violence.

The ASIC Corporate Plan 2019–23 said that a vulnerable consumer can be anyone: • experiencing specific life events, including: • divorce • job loss • death of a close relative • accident or sudden illness • having a baby • suffering from mental or other forms of serious illness • suffering from any form of addiction • experiencing any other personal or financial circumstances causing significant detriment.

The Royal Commission’s Final Report (volume 1 p.89) said that vulnerability can also be indicated by factors, including clients: • living in rural or remote areas • whose first language is not English • who are unable to readily produce standard identification documents.

Dealing with vulnerable clients Having a vulnerable client does not always mean that you cannot provide services to them. Generally, when dealing with a vulnerable client, you should consider taking extra steps to ensure they are not disadvantaged.

According to FASEA’s Financial Planners and Advisers Code of Ethics 2019 Guidance, these could include: • allowing a longer time for the client to make a decision • providing more education tools before allowing the client to trade • encouraging the client to ask questions of the adviser

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• asking extra questions of the client to test the client’s level of understanding of the recommendations being made, and the basis for making them • ensuring as far as possible that the client feels equally free to reject the recommendation to reduce the risk that the client may be substituting trust in the adviser for rational decision-making • recommending the client undertakes education tailored to their capacity to understand • in personal advice situations: • encouraging the client to seek input from a trusted friend or family member with no conflicting interest in the outcome, and offering to meet and explain the recommendations to the family member • asking questions of the client to test their level of understanding of the recommendations being made, and the basis for making them • asking the client to explain back key elements of the advice to the adviser • presenting lower-risk options to the client in the advice to facilitate comparison and effective choice in the client’s decision-making.

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To ensure that you can show you have based your advice on the client’s relevant circumstances, the following practices should be undertaken: • Show that you had concerns with the vulnerability of the client, and the steps you took to address this. This may mean refusing to provide your services to the client.

• Consider if simpler or lower-risk products would be more appropriate to the level of the client’s understanding.

• Do not recommend products that require client control or intervention (e.g. self-managed superannuation funds (SMSFs)).

• If you are providing trading services, do not allow clients to trade using their SMSFs unless they can show a high degree of financial literacy.

• Embed vulnerable client behaviours into your key risk indicators (KRIs). Your monitoring and supervision program should identify KRIs unique to your business. When the KRIs are triggered, your monitoring and supervision program should delve deeper into the representative behaviours connected with that KRI. • Document every step and action taken.

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Conflicts of interest and vulnerable clients

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Sid’s existing client puts pressure on him to provide financial advice to a vulnerable client. Which of the following statements is correct? a) The issue of vulnerability has been flagged, so Sid can proceed with impunity b) Though unethical, this behaviour is in no way a conflict of interest c) It is may be a conflict of interest under the Corporations Act d) As per the Corporations Act, Sid must avoid all dealings with these two parties 2. As outlined by FASEA, what could an adviser do to help ensure a vulnerable client is not disadvantaged? a) Avoid testing their understanding through questions as this may cause distress b) Encourage them to seek input from a trusted friend who has no conflicting interest c) Use short decision-making timeframes so the client feels they’ve achieved a result d) Recommend education slightly above their comfort zone as a benevolent ‘push’

AFS licensees are required to manage conflicts of interest (Corporations Act section 912A(1)(aa)). Further, if you provide personal advice to a retail client, you must prioritise the interests of the client if a conflict exists (Corporations Act section 961J). When dealing with vulnerable clients, there may be other circumstances where a conflict may arise, including if: • you are pressured to provide advice for a vulnerable client by an existing client • you recognise that the client is vulnerable and proceed with the advice without taking the appropriate precautions • you provide advice to a couple and you are concerned one of them is a vulnerable client.

Key take outs As an AFS licence holder, it is important to: • have a clear policy in place for how vulnerable clients are to be identified and assisted • conduct training with staff on how to identify vulnerable clients, and the factors that may make a client vulnerable • monitor and supervise representatives using KRIs that consider client vulnerability • develop a clear process for identifying and servicing vulnerable clients, which may include refusing to provide certain services • ensure when dealing with vulnerable clients that all file notes and process are documented. fs

3. Which of the following situations does ASIC believe may render a client vulnerable? a) Addiction b) Job loss c) Having a baby d) All of the above 4. As per the commentary, which of the following actions show that an adviser has taken into account a vulnerable client’s relevant circumstances? a) Assume they have low financial literacy b) Recommend products that need client control c) Refuse to provide services if warranted d) Avoid any SMSF recommendations 5. A FCA research found that if two clients are interviewed together, vulnerable members of the partnership are more likely to disclose accurate information. a) True b) False 6. The Royal Commission found that the complexity of financial services today has disadvantaged vulnerable clients. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Applied Financial Planning:

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Borrowing from others: What is really at stake

By Drew Browne, Sapience Financial

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: A joint mortgage may sound appealing, but it comes with a ‘sting in the tail’. Joint and several liability means a person effectively wears the consequences of a co-borrower defaulting. Further, it can have a knock-on effect in terms of their credit score and future loans.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Borrowing from others What is really at stake?

G Drew Browne

et clear on what is at stake when you borrow with others.

Understanding 'joint and severally liability loans' and what it means for you

You might think when you take out a joint mortgage with someone else that you are only responsible for your ‘half’ or ‘share’ of the loan.

Think again because this is not the case.

By signing a mortgage contract with someone else, you are each agreeing to pay off the whole debt if the other cannot—or will not— pay it.

This is called joint and several liability, and you need to know what it means for you and how to protect yourself.

Buying a property together Buying a property with your partner is usually straightforward.

Combining savings into a single larger deposit can help you both get into a fast-moving property market or reduce (or remove) the need for hefty lenders mortgage insurance fees.

However, the complexity increases when you buy a property with a friend or with a sibling. It becomes even more complicated when you buy a property in a self-managed superannuation fund.

Buying a property and taking out a joint mortgage with your

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partner is usually straightforward because you have a common goal to live in the property.

However, when you are buying property with multiple people, such as a sibling, a parent or a friend (or a combination), you will all need to have a bigger conversation with everyone involved to agree on what happens when one of you wants (or needs) out.

Have the joint mortgage conversation Whenever you are about to become a co-borrower, you must first understand the legal position that you are getting yourself into and agree together on the practical details.

This frank conversation needs to cover the following issues: • Do you know whether either of you can afford to buy out the other(s) if need be?

• If you later decide to sell, how will you work out and distribute the fair value?

• How will you divide the sale proceeds to reflect the fair value of what was contributed upfront and along the way, or the initial deposit that made it possible in the first place?

• Who is responsible to keep the property insured and in good order?

• What is the ownership structure you will use to hold the property—tenants in common [i.e. each co-owner can have equal or unequal shares in a property, provided it adds up to 100%; and if one of the owners dies, their share remains part of their estate and does not automatically pass on to the other owners]

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or joint tenants [i.e. co-owners have equal shares in the property; and if one of the owners dies, the property is transferred automatically to the surviving owners]?

Will all the parties to the loan be jointly and severally liable?

If so, will you use joint and several insurance to protect each borrower from the full debt, or just their portion of the ownership?

What if you cannot sell later or cannot sell at the price you are hoping to achieve?

What if one of you loses a job or gets sick or injured (e.g. a car accident) and cannot work for a while?

What happens if one of the joint borrowers suffers a sickness or accident that requires expensive medical costs, or they need to move into aged care?

Make your decisions legal There are many different scenarios to discuss and you should try and talk about all of them.

Tip The following actions are recommended: • List what you have discussed and what you have agreed upon.

• Nominate to use a mediator in the future if required, just in case you reach an impasse and need to get the help of a third party to talk through a decision.

• Keep master copies of key documents filed with the lawyers.

We also suggest you make a signed legal agreement that records your commitment to ‘act in the best and fair interest of all parties’.

So, who is left carrying the joint mortgage?

The answer is everyone.

The joint mortgage contract will have a legal clause making all borrowers joint and severally liable.

Whenever you buy a property with another, your spouse or with a friend or relative, the mortgage contract you sign states all parties are joint and severally liable. Practically, this term means you are all personally, and jointly 100% responsible for the loan.

All parties are 100% responsible Because all borrowers are 100% joint and severally liable, if one of you cannot—or will not—pay their share, the bank expects the other person (or people) to pay for all of it. Moreover, if a default happens on your loan because of the other person’s actions, you still get the default listed on your credit file. Maybe this is unfair, but that is the reality of the joint mortgage you sign.

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What is the effect of a joint and several loan when buying a second property?

There is another consequence of this clause in your home mortgage. That is, if you later want to purchase an investment property, when you are calculating what you can afford, because you already have a joint and several mortgage liability, you are assumed to already be responsible for the entire 100% of the first mortgage, not just your portion.

This means co-ownership of a property with a mortgage can significantly reduce your own future borrowing power.

What happens if you break up?

If you break up with your partner, and you are still a cosignatory, guarantor or joint borrower to a mortgage, expect to be held liable for any debt with a joint and several clause in the loan agreement.

What happens if one person dies?

If your partner or a co-borrower dies, you will still be held personally liable for any or any debt that has a joint and several clause in the loan agreement.

How the ownership structure was initially set up now determines if the co-owner’s share of the value in the property goes to their estate (as per their Will) to be split up, or simply passes to the surviving joint owners and never falls into their estate to be challenged by others.

Drew Browne, Sapience Financial Drew Browne is owner and senior financial adviser at Sapience Financial. An award-winning writer, speaker, financial adviser, and professional mentor, he works with small business owners and their families to help them better manage life’s risks.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Joint and several liability means that when signing a mortgage contract with others: a) The non-earning party is granted relief from their share of the loan b) Each party is only responsible for their share of the loan c) The highest-earning party agrees to pay off the whole debt if the others do not pay d) Each party agrees to pay off the whole debt if the others do not pay 2. Insurance for joint and several debts in business partnerships: a) Allows each member to only insure their share of, not the total, debt b) Allows each member to completely insure a debt, not just their share c) Is a type of specialised general insurance d) Is capped using a sliding scale 3. What does the author recommend for those considering a co-borrower loan? a) Nominate to use a mediator if necessary b) List what is discussed and agreed upon c) Use a signed legal agreement to act in all parties’ best and fair interests d) All of the above 4. In the context of joint and several mortgage debt, the life insurance industry: a) Precludes cover for taking time off for home improvement work b) Applies a base rate of $2 million for mortgage insurance c) Has difficulty recognising the value a homemaker brings to a relationship d) None of the above

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The bottom line is that any joint debts mean joint responsibility and liability.

The Australian Securities and Investments Commission (ASIC) Moneysmart website has a useful factsheet titled ‘Love and loans’ about this issue.

How do you protect family borrowers from a joint and several mortgage debt?

So how do you protect the joint borrowers in a family, especially if one of them does not work?

The life insurance industry traditionally had a difficult time recognising the value a homemaker brings to a relationship and limited the amount of life insurance a homemaker (though not working by choice) could apply for to $1.5 million life insurance.

This creates potential problems for a typical two-parent household with two kids and a $2 million mortgage if one of the adults is a fulltime homemaker.

This can create a problem for partners doing extensive renovations on a property where one adult is not working but managing the renovation full-time, while their partner continues to work.

If the debt is a joint and several mortgage, both working and nonworking borrowers are still liable for the entire debt of $2 million.

The solution might be a specialised life insurance policy designed to recognise and insure joint and several liability mortgages debt on the family home.

This is where the total amount of the mortgage can be insured, regardless of the working status of the adults in the family.

How do you protect business owners and partnerships from a joint and several debt?

This speciality life insurance is also available to business partnerships.

A four-partner accounting firm may have a debt of $4 million and needs each partner to completely insure the entire debt, not just onequarter of it. A joint and several life insurance policy allows each of the four-partner business to completely insure the entire $4 million debt, not just traditionally one-quarter of the debt.

Conclusion Borrowing with others can increase your opportunity to get ahead, but can also increase your risks to manage. Therefore, make sure everyone knows what is at stake when co-borrowing. fs

5. C o-owning a property with a mortgage can impact future borrowing capacity. a) True b) False 6. If a default happens on your loan because of a coborrower’s actions, it is not listed on your credit file. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Insurance:

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Insurance advice for business clients

By Crissy Demanuele, BT

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: If a key person is unable to work in a business due to health reasons, the impact may be significant. This paper examines key person insurance for revenue versus capital purposes, outlines taxation considerations for various forms of cover, and discusses the pros and cons of associated policies.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Insurance advice for business clients

R Crissy Demanuele

unning a business means taking all sorts of risks, many of which can be difficult to control: economic ups and downs, increased competition and changing consumer behaviour, to name a few.

However, one type of risk a business can have a degree of control over is people risk. That is, the financial impact to a business if a key person dies, becomes temporarily or permanently disabled or suffers a specific medical condition.

To protect itself against the temporary or permanent loss of a key person, a business can use what is commonly known as ‘key person’ insurance. When insurance is used for this purpose, it is to assist with protecting the business as an ongoing entity.

Life can be risky, for instance, the prevalence of cardiovascular disease and cancer in Australia. Insurance can be used as a means of protecting against the financial implications of such risks. Key person insurance may include lump sum cover for revenue and capital purposes and key person income cover for temporary incapacity.

Businesses may also hold business overheads insurance to cover specific expenses of the business such as electricity bills and rental costs.

Who is a key person?

A key person is someone who is critical to the financial wellbeing of a business through their continued association. A key person may be someone who plays an important role in generating the revenue

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for the business. They may provide a loan to the business, or make it possible for the business to obtain loans.

A key person can include: • a director, managing director or CEO • a partner in a partnership • an employee with a unique skill or technical expertise • a senior sales manager.

There may also be occasions when an external supplier is considered a key person to a business.

Revenue or capital purpose If a key person is disabled or passes away, and can no longer work in the business, either temporarily or permanently, their absence from this business may impact either the revenue or the capital of the business, or both. Therefore, it is important to understand the difference between taking out the insurance for revenue purposes or for capital purposes.

Key person lump sum cover—revenue purpose The death or disablement of a key person could have a significant impact on the revenue of a business and therefore its ability to meet day-to-day expenses. This could occur, for example, where that person has a unique skill or has particular knowledge relevant to the business or has relationships with key clients.

If this happens, a business could consider replacing lost revenue by:

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• • • •

using existing cash reserves, if it has any drawing down from existing loan facilities selling some of the business assets weathering a period of reduced profit.

For many businesses, these options are sometimes simply not possible or too expensive. For these reasons, insurance cover often represents the only commercially viable solution.

Key person cover for revenue purposes provides a lump sum to the business for the replacement of the revenue lost in the months following the exit of the key person. It is normally established in the form of a term life, total and permanent disability (TPD) and/or trauma insurance policy.

Structure and taxation of key person revenue cover Insurance policies that cover a key person for the purpose of protecting the business against a fall in revenue or sales are generally owned by the business entity or, for more complex arrangements, a trust (with the business entity as one of the beneficiaries of the trust). Business ownership is often the simplest method of ownership. Where a trust is used, the policy will normally serve a number of business needs, including debt reduction and even buy/sell funding.

With regard to taxation, the purpose of the cover will determine whether the premiums are tax deductible and how the proceeds are taxed. As a general rule, where the purpose of insurance is to protect the revenue of the business, through replacement of lost sales or provision for increased expenses, the premiums will be tax deductible and the proceeds will be assessed as income.

In circumstances where the business is expected to cease on the exit of the key person, an insurance policy is not considered to have a revenue replacement purpose and is therefore not generally tax deductible (see Taxation Ruling IT 2434 Income tax :split dollar insurance arrangements). This would commonly be seen in sole trader or one-person incorporated businesses.

If a business needs to insure the same person for a capital purpose (for instance, for debt reduction), it could either establish a separate policy, or cover both needs with the same policy. By using a single policy, there can be greater flexibility when revenue and debt reduction needs fluctuate. However, only that portion of the premium which relates to revenue protection cover would be tax deductible. Where this approach is taken, appropriate records should be kept for tax auditing purposes. This approach can be cumbersome.

Many advisers therefore find it simpler to establish separate policies where both revenue and debt reduction needs exist. Depending on the policy features, the business may be able to increase the sum insured when revenue or debt reduction needs change, within certain limits but without additional underwriting.

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Key person income cover Traditionally, key person insurance cover in Australia has involved the use of lump sum insurance products, such as term life and TPD. Unfortunately, these policies do not typically address the risk of temporary disablement.

This is an important gap to acknowledge because a temporary disability is statistically more likely to occur than a permanent disability or death. The key person may also be more likely to qualify for payment, as the definition under key person income cover may be more generous than the definition under TPD or death cover.

The absence of a key person due to temporary disablement can place a business under the same significant stress that occurs in the event of death or permanent disablement. Often there is uncertainty as to when (or if) the key person will return. This makes it difficult for the business to make decisions about whether to hire and train a replacement, how to handle certain client relationships, and general business planning.

Key person income policies differ from the traditional business overheads policies in a number of important ways. Business overheads policies generally only provide cover for certain business expenses incurred during the period of disability. Key person income policies, on the other hand, can provide a monthly benefit which can be used not only for fixed business expenses, but also to cover lost revenue.

Crissy Demanuele, BT Crissy Demanuele is BT’s senior product manager, life insurance, and a member of the product team within the company’s life insurance business. Her areas of expertise are insurance, taxation, superannuation and SMSFs, social security, estate planning and aged care.

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Structure and taxation of key person income cover

Key person lump sum cover—capital protection

Generally, a key person income policy can only be owned by the business, and can be used to cover both key person owners and employees.

The policy may not be available to cover sole traders, however, it could be used to cover the key employees of a sole trader.

Because the purpose of key person income insurance is to protect the revenue of the business, the premiums are likely to be tax deductible and the proceeds will be assessed as income.

At some point, many businesses will borrow money from a financial institution or a director—this may be to provide a business with capital for a major purchase or improvement, or simply to provide a source of working capital.

Such loans may include: • a business overdraft • a secured loan from a bank • a loan from a director or business owner.

On death, permanent disablement, or a specified trauma event in respect of a key person, a business could experience financial difficulty and may find it hard to continue to meet all of its loan repayments—a default could result in a demand for a loan to be repaid in full. Alternatively, the lender may call in a loan if the key person was a guarantor, or was specified in the loan agreement.

The purpose of debt reduction insurance is therefore twofold: it is used to protect the business against its debts, but also to protect the guarantor and their estate against any claim over their personal assets.

Lump sum policies can also be used to protect the capital value of a business. For example, the loss of a key person could diminish the goodwill of the business or affect its credit rating. In the latter case, this could impact the ability of the business to secure credit lines or overdraft facilities. Key person insurance proceeds in these circumstances would give the business an alternative source of funding.

Business overheads cover Business overheads cover, also known as business expenses cover, allows a business to continue to pay its fixed expenses if one of the business owners becomes sick or injured.

This type of cover pays a monthly benefit to the business, in respect of its day-to-day fixed costs, generally for up to 12 months, if the insured person is disabled and is unable to work in the business at their full capacity.

Insurance policies to cover business overheads are usually owned by the business entity, sole traders or partners (in the case of a partnership).

The premiums for business overheads policies are generally tax deductible, and the proceeds treated as assessable income to the business.

How much insurance is needed?

For debt reduction policies, the appropriate amount of insurance will depend both on the business owner’s requirements, and the requirements of the lender. As a first step, it is important to understand the terms and conditions of the loan contract. For example, the lender may require a personal guarantee and on the death of the guarantor (if there is no substitute), the loan may need to be repaid in full.

The business owner will also need to consider the ability of the business to continue servicing the loan upon the death or incapacity of the key person. They will need to decide whether to cover the whole loan facility, or only the amount of the facility drawn.

The availability of insurance cover, from an underwriting perspective, will normally depend on a number of factors, including the size and type of the debt, and the credit rating of those debts. It will also depend on whether the borrowers/guarantors for the loan are jointly and severally liable for the debt, and the purpose of the loan.

For example, whether the loan was used to purchase a business or non-business asset.

Finally, capital gains tax (CGT) may be payable on insurance proceeds (see next section of this paper). In these circumstances, the business will need to consider grossing up the sum insured to account for this tax liability.

Structure and taxation of key person capital cover Where the purpose of the insurance is to protect the capital of the business, such as to pay out an outstanding loan, the premium will generally not be tax deductible and the proceeds will not be treated as assessable income. CGT may apply to the proceeds, depending on the ownership structure.

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CGT does not generally apply on term life proceeds, regardless of the ownership structure, unless ownership of the policy has previously changed and consideration was paid for that transfer (see Income Tax Assessment Act 1997 (ITAA 97) section 118-300).

CGT legislation applies differently to TPD and trauma insurance proceeds. The CGT exemption in ITAA 97 section 118-37 only exempts proceeds on such policies from CGT when those proceeds are paid to the life insured, a relative or a trust (where a beneficiary of the trust is the life insured or a relative).

A company is neither of these entities, so when a company owns and receives the proceeds from a TPD or trauma policy (and that policy is held for a capital purpose), CGT will generally apply.

To avoid this problem, it may be possible to have the TPD cover owned by the life insured themselves, and establish a legal agreement (called a debt reduction agreement), which requires the life insured to pay the proceeds of the policy to the lender on behalf of the company.

In this way, the CGT proceeds are not immediately subject to CGT, however, the arrangement is not without its potential complications.

Establishing a debt reduction arrangement can create a ‘right of contribution’, which entitles the insured to be reimbursed for the amount they have paid to the lender. Removing this right can itself create separate CGT consequences.

As a separate alternative, the insurance policy could be owned by a specifically drafted trust. In this arrangement, the insured would direct the trust to pay the lender on their behalf. While it may be possible to remove CGT consequences entirely by using such trusts, these arrangements can also give rise to negative outcomes. Therefore, thorough legal and taxation advice is recommended.

Underwriting considerations When assisting a client to apply for insurance to cover a key person for a business, underwriters will want to know the purpose of the cover, and why the amount of the insurance is required. The more information you can provide in the application, the better. There is a far greater chance that the underwriters will allow the insurance cover if they have the whole picture.

The details of the client’s business and why they want to insure a key person may be included in the statement of advice (SOA) which can then be provided to the underwriters. Otherwise, a detailed explanation will need to be provided in the financial questionnaire.

So, prior to completing the application for a client, it is best to spend some time understanding the client’s situation and their business. There needs to be an explanation as to why the cover is needed and why the insured person is, in fact, a key person.

If the insurance is for capital purpose to cover debt for instance, it may be more obvious as to why the cover is needed and how much cover is needed. If the insurance is to cover a key person for revenue purpose, the underwriters will want more information as to what role the person plays in the business, particularly if it is an employee they are looking to insure.

When considering applications, underwriters want to know the whole picture, so it may help to provide a detailed explanation which includes: • the type of business • whether the insurance is for the owner or partner of the business or an employee • what would happen to the business if the key person could no longer work in the business (either temporarily or permanently)

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. If the same key person needs to be insured for revenue and capital purposes: a) Their portion of the premium for revenue protection ceases to be tax deductible b) The business cannot increase the sum insured if revenue or debt reduction needs change c) Separate policies must be used d) A single policy can be used 2. A key person income policy: a) Can only be owned by the insured key person b) Can only be owned by the business c) Is not subject to tax on the proceeds d) Does not cover sole-trader key employees 3. According the author, key person cover in Australia typically does not address: a) Term life b) Total and permanent disablement c) Trauma d) Temporary disablement 4. Which of the following statements regarding taxation of key person capital cover is correct? a) If the cover is to protect business capital, the premium is generally not tax deductible b) A company is treated the same way as the life insured or a relative in terms of CGT on TPD or trauma proceeds c) Term life proceeds are always subject to CGT d) Trusts can be used to remove all CGT consequences 5. I nsuring against decreased goodwill is capital-purpose key person cover. a) True b) False 6. Insuring against increased expenses is revenue-purpose key person cover. a) True b) False

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• why the person is a key person (e.g. they have unique skills or relationships with clients) • how long would it take to replace the key person • how easy it would be to replace the key person.

It also helps to have a good relationship with the underwriters. Before applying for the cover, it can be beneficial to speak to an underwriter to explain the client’s situation. In more complex cases, the underwriting team should be able to let you know exactly what information they need to assess an application. If the right information is not provided, additional questionnaires may be required.

How much should a key person be insured for?

The amount of insurance required will be determined by a number of factors and will depend on each scenario. However, as a guide, key person revenue cover could be calculated as: • the cost and time associated with recruiting and training a replacement person • the loss of net profit while the replacement is working towards their predecessors’ previous capabilities • the key person’s income in proportion to the net worth and profit of the business, taking into account their age and current duties.

Alternatively, the amount could be calculated based on the remuneration of the key person. For example, this may be calculated as somewhere between five to 10 times their salary for the purposes of death and TPD cover, and three to five times their salary for trauma cover.

Where it is likely that a business loan would be partially (or totally) called in, or the business would suffer a capital loss due to the death, disablement, sickness or injury of an individual, key person capital protection may be calculated based on the amount owed or the amount of goodwill which would be affected by the absence of the key person. If there are several key people in the business, then the level of cover should be apportioned between them accordingly.

Conclusion There are a number of factors to consider when giving advice for key person insurance needs. When providing this type of insurance, it is best to know your client well and understand their business and their business needs. If you are new to providing this type of insurance advice, underwriters can assist you, so it is beneficial to have a good relationship with them. Advising clients with key person insurance needs can appear at first to be more difficult than advising on personal insurance, but it generally proves to be worthwhile. fs BT and its related body corporates do not take any responsibility for the content of this article and reliance should not be placed on any matter without further independent research and advice.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Retirement:

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Implications of renting out the family home

By Rahul Singh, Challenger

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Centrelink’s assets and income tests have a bearing on renting out the family home when its owner moves into aged care. This paper examines concession and exemption eligibility, taxation implications, and Age Pension reductions in light of this situation.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Implications of renting out the family home

W Rahul Singh

hen a client moves into aged care, given that for many, a significant proportion of wealth is tied up in the family home, it is important to understand the impacts on social security and aged care means testing where the home is kept and rented out.

While many clients appreciate that renting out the family home may assist with cash flow to fund ongoing aged care fees, there are many intertwined considerations such as social security and aged care means testing, tax and cash flow requirements.

This paper, through a case study, discusses some of the implications of renting out the family home, focusing on the means testing for social security and aged care and tax considerations. As there have been recent changes around the assessment of rental income from the family home, this paper is scoped for those who enter aged care for the first time on or after 1 January 2017.

Introducing Virushka Virushka, aged 83, is single and lives by herself at home. She has been managing with informal care from her family, however, recently her memory is starting to fail with early signs of diagnosed dementia.

The family agrees that with Virushka’s ‘round-the-clock’ care needs, she is best served by full-time care in an aged care facility.

Virushka’s main asset is her home, valued at $1 million, which she

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has lived in for the last five decades. She also has $50,000 saved up in a bank account and $10,000 in household contents.

She has entrusted her daughter, Olga, to be her enduring power of attorney. Olga seeks advice and guidance around issues relating to keeping and renting out the family home.

Before we get to the technical discussion

When it comes to retaining or selling the family home, based on many conversations with advisers, there are some common themes. It is apparent that many clients usually have their minds set firmly on a particular outcome. For example, some clients are specific on their instructions for which they want advice upon selling the home, whereas others want to understand the impact of keeping the home and make a subjective decision upon understanding the relevant issues.

Some of the common themes which often come to surface are examined in the following discussion.

Keeping the family home while the aged care client is alive Faced with a lifetime of memories in the family home, clients’ families often want to keep the home for as long as their parents are alive.

For many, leaving a property vacant for an extended period of time may not be palatable and, therefore, discussion often turns to renting out the family home while the parents are alive.

Appetite to be a landlord Some clients express that they do not wish to be a landlord, whereas

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others are perfectly accepting of renting out the family home. While many clients are happy to outsource the administrative aspects of being a landlord to property managers, there are those who see this as another layer of complexity in the quest for simplicity of affairs.

Recently, COVID-19 has brought about further complexity particularly relating to temporary rent-relief to tenants. For some, while leases may be secured for a fixed period of time, the potential prospect of having the property untenanted brings about further challenges. There may be an apprehension from some clients if they have never been a landlord during their lifetime, whereas those who have had experiences with renting out properties may be more accepting of renting out the family home.

Is the family home in a position to be rented out?

For many clients, especially when they have lived in the family home for a relatively long time, it may have been perfectly habitable for them while they were there. Some of the common issues which are usually up for discussion include: • Is the family home suitable to be rented out to tenants?

• Does the family home need renovations to make it attractive to tenants?

• If renovations to the family home are required, who will fund the renovations?

• Is there sufficient liquid assets to fund any improvements to the family home?

By unpacking these issues, clients start to show a specific preference in terms of keeping and renting out or selling the family home.

rity entitlements is a significant emotive and financial consideration in keeping or selling the family home. As discussed later in this paper, there is an assets test exemption for two years from a social security perspective for the family home upon vacating to move into aged care. Further, the net value of the family home, when not resided in by a protected person, is usually assessed but capped (currently $171,535) from an aged care perspective. These concessions can also a be a consideration in terms of keeping the family home.

Funding aged care fees Where most of the client’s wealth is tied up in the family home and they do not have sufficient assets to pay the advertised Refundable Accommodation Deposit (RAD), the client incurs the government-prescribed interest rate, Daily Accommodation Payment (DAP), on the unpaid RAD (currently 4.10%). Retaining the family home may come with the additional cost of having to pay the DAP, placing pressures on cash flow.

Virushka—base situation

Virushka’s family sources an aged care facility with which they are really happy. The facility has an advertised RAD of $500,000. Table 1 shows her cash flow position upon entering aged care.

Table 1. Base situation cash flow position Cash flow Age Pension Investment income

State of the property market Often, clients base their decision on keeping or selling the family home on their own view of the state of the property market—whether it is a good time to sell or worth waiting to pick the right time to do so.

Advisers may have constraints based on specific licensee guidelines around the framing of advice relating to retention or disposal of property.

Incidental expenses

Social security and aged care implications For many clients, retaining or maximising social secu-

Net cash flow

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$24,552 $500 ($2,600)

Total $22,452 Aged care fees Basic daily care fee

$19,071

Daily accommodation payment

$20,500

Means-tested care fee

$602

Total $40,173

Source: Challenger

($17,721)

Rahul Singh, Challenger Rahul Singh is a technical services manager at Challenger.

He has been in the industry since 2004, commencing his career with Clearview and working in technical services teams in AMP, ANZ and MLC prior to joining Challenger in 2019. Rahul is passionate about supporting advisers to deliver technical solutions to retail clients.

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As can be seen from Table 1, there is a cash flow deficit of $17,721.

While Virushka has $50,000 in her bank account, the deficit can be withdrawn from there. While the $50,000 in the bank account may be sufficient to cover the cash flow deficit for about two-and-a-half years, seeing a depleting bank account balance and having no other liquid assets presents a point of worry for Virushka.

There would need to be some consideration around how to pay for ongoing aged care fees should Virushka live for longer than twoand-a-half years. Some of the options for clients who have a significant cash flow deficit and a relatively low amount of liquid assets may include the Pensions Loans Scheme to unlock further cash flow by borrowing against the family home, financial support from family, keeping and renting or selling the home.

Renting out the former home—social security and aged care assessment Irrespective of whether the former home is rented out, it is exempt under the social security assets test for two years starting from when Virushka moved into aged care. During this period, Virushka is assessed as a homeowner. After the two-year period, the net value of the family home is assessed as an asset and she is deemed to be a non-homeowner.

Table 2. Assets test assessment of the former home

Income test

If the former home is rented out, the assessable income is the same from a social security and aged care perspective. However, the actual amount of assessed income depends on whether the client lodges a tax return.

Where the client lodges a tax return, usually the rental income is reduced by expenses incurred in deriving the income. Typically, expenses such as real estate agent fees, water and council rates, interest on borrowings and repair costs are allowable deductions. However, the following tax deductions are non-allowable from a social security and aged care perspective: • Capital depreciation • Special building write-off • Construction costs.

Where the client does not lodge a tax return, or has yet to lodge a tax return, one-third of the rental income is deemed to be an allowable deduction against the rental income. If the client has a loan on the property and the loan was taken out in relation to purchasing the property, interest expense is allowed as a further deduction from the two-thirds assessable amount.

If we assume a 3% net rental yield so that Virushka generates $30,000 p.a. from renting out the family home valued at $1 million, her cash flow comparison is shown in Table 3.

Table 3. Cash flow comparison upon renting out the family home

Aged care assessment

Social security assessment

Resided in by a spouse

Exempt

Exempt

Cash flow

Resided in by a protected person* such as an eligible carer or a close relative** other than a spouse

Exempt

Exempt for two years from when the aged care resident (for couples, the second spouse) moved out of the former home.

Resided in by a nonprotected person Assessed but capped (currently $171,535) Vacant

Sold

During the two-year period, the person is assessed as a homeowner.

After the two-year period, the net value of the former home is assessed as an asset and the person is assessed as a non-homeowner.

Proceeds assessed immediately depending on where they are invested.

For a couple where one spouse remains in the former home, sale proceeds intended to purchase new home could be exempt under assets test for a period of up to 12 months or extended up to 24 months upon meeting certain criteria.

Source: Challenger * A protected person is a: • spouse • carer who has lived in the home for at least the last two years and is receiving or eligible to receive an income support payment • close relative who has lived in the home for at least the last five years and is receiving or eligible to receive an income support payment, or • dependent child aged under 16 or a full-time student aged under 25. ** A close relative is defined as a parent, sibling, child or grandchild.

In Virushka’s case, the family home is neither resided in by a spouse nor a protected person. This means that for two years upon leaving the family home to move into aged care, from a social security perspective, the home is exempt under the assets test and she is assessed as a homeowner.

From an aged care perspective, as the family home is not resided in by a protected person, the home is assessed as an asset but capped (currently $171,535).

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Home not rented

Home rented

Age Pension

$24,552

$11,803

Rental income

–

$30,000

Investment income

$500

$500

Incidental expenses

($2,600)

($2,600)

Total

$22,452

$39,703

Basic daily fee

$19,071

$19,071

DAP

$20,500 $20,500

Means-tested care fee

$602

Total

Nil $2,511

Tax

Nil $2,511

Net cash flow

(17,721)

Aged care fees

$6,993

($9,372)

Source: Challenger

What is apparent from Table 3 is that despite receiving net rent of $30,000 p.a., her net cash flow deficit has only reduced by $8,349.

The remaining $21,651 has been consumed by reduced Age Pension ($12,749), increased means-tested care fee ($6,391) because of the rental income being assessed and increased tax liability of $2,511, resulting in a net cash flow gain of $8,349 compared to not renting out the family home.

When the family home is rented out, it may not mean that the entire rental income is retained to fund ongoing aged care fees—there may be a reduced Age Pension, increased means-tested care fee and increased tax liability.

We have not yet discussed a further leakage from the rental income—which is land tax. We will come to this point later in the paper.

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One dynamic we can gauge here is that when a person is incometest-sensitive prior to renting out the family home, each dollar of rental income will reduce the Age Pension by 50% and increase the means-tested care fee by 25%.

To test out this rule of thumb, let us assume that Virushka is receiving $5,000 p.a. of income from an overseas government pension. As $4,628 p.a. is the income-free area for a single Age Pension recipient, along with deeming on the $50,000 bank account balance and the $5,000 p.a. overseas pension, Virushka finds herself income-test-sensitive.

Upon receiving $30,000 p.a. rental income, her cash flow comparison in this circumstance is shown in Table 4.

As evident from Table 4, the Age Pension reduced by $15,000 ($24,303 – $9,303) and means-tested care fee increased by $7,519 ($8,245 – $726)—reduced Age Pension representing 50% of the rental income, and increased means-tested care fee representing 25% of the rental income.

It is more challenging to build a similar rule of thumb for clients who are either full Age Pension recipients or assets-test-sensitive prior to renting out the family home and who become income-testsensitive after renting out the home.

Table 4. Income-test-sensitive pre- and post-renting and cash flow comparison

Home not rented

Home rented

Age Pension

$24,303

$9,303

Rental income

–

$30,000

Overseas government pension

$5,000

$5,000

Investment income

$500

$500

Incidental expenses

($2,600)

($2,600)

Total

$27,203 $42,203

Cash flow

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low-income tax-offset from 1 July 2020, there is some uncertainty around the specific amount of the higher tax-free threshold from 2020/21 onwards. In time, the Australian Taxation Office is expected to provide guidance on the higher tax-free threshold for seniors.

Table 5 shows the higher tax-free threshold in 2019/20.

Table 5. Higher tax-free threshold for eligible seniors in 2019/20 Relationship status

Tax-free threshold when eligible for full senior Australian and pensioners tax offset

Single

$32,279

Couple (each)

$28,974

Couple separated by illness (each)

$31,279

Source: Challenger

Capital gains tax

While the main residence exemption has many nuances, two common questions which often arise are whether renting out the former home interferes with the capital gains tax (CGT) main residence exemption and whether there are any adverse issues for the estate or final beneficiaries.

Broadly, where the property is rented out, CGT rules allow an individual to be absent from the property for a period of up to six years and still benefit from the CGT main residence exemption. Despite the property being rented, if Virushka was to sell the property within six years of moving into aged care, she would usually be eligible for the CGT main residence exemption in full.

Another related question is what would happen if rather than Virushka selling the family home during her lifetime, it is disposed of by her estate or by a beneficiary who inherits the property? Generally, as long as the family home was considered to be a main residence of the deceased (that is, within the six-year absence period), the estate or beneficiary usually has two years to settle from date of death to benefit from the CGT main residence exemption in full.

Aged care fees Basic daily fee

$19,071

DAP

$20,500 $20,500

$19,071

Means-tested care fee

$726

Total

$40,297 $47,816

Tax

Nil $1,537

Net cash flow

($13,094)

$8,245

($7,150)

Source: Challenger

Renting out the former home—personal income tax and capital gains tax implications Personal income tax

As seen from Tables 3 and 4, upon renting out the former home, Virushka had a tax liability. Net rental income would usually form part of taxable income and as her overall income exceeded the tax-free threshold, taking into account applicable tax offsets, this resulted in a tax liability. It is interesting that many aged care residents, upon renting out the former home, find that they have to lodge a tax return and become taxpayers after many years of not paying tax.

Eligible seniors over Age Pension age are usually eligible for a higher tax-free threshold than the ordinary $18,200 tax-free threshold. Due to the legislated personal income tax cuts and increased

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Retirement

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. For what period is a person’s former home exempt under the social security assets test when they move into aged care? a) Two years b) One year c) Four years d) Three years 2. When a person is income-test-sensitive prior to renting out the family home, each rental income dollar will: a) Reduce the Age Pension 30% and increase the meanstested care fee 20% b) Reduce the Age Pension 25% and increase the meanstested care fee 50% c) Reduce the Age Pension 50% and increase the meanstested care fee 25% d) Reduce the Age Pension 20% and increase the meanstested care fee 30% 3. In terms of the CGT main residence exemption eligibility and renting out their former home, the owner: a) Forfeits all the exemption if they sell the property within four years of moving into aged care b) Can be absent from the property for up to seven years and still benefit c) Forfeits all the exemption if they sell the property within three years of moving into aged care d) Can be absent from the property for up to six years and still benefit 4. Land tax and renting out the former home in an aged care context: a) Is subject to relevant state and territory law b) Is subject to a possible exemption if rental income merely covers regular outgoings c) May be payable, depending on the value of the land d) All of the above 5. W hich of the following tax deductions are allowable from an aged care and social security perspective? a) Capital depreciation b) Special building write-off c) Construction costs d) None of the above 6. If a former home is rented out, assessed income depends on whether the client lodges a tax return. a) True b) False

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Note: the CGT main residence exemption may apply differently where: • the family home is rented out for more than six years during the lifetime of the aged care resident • the family home is retained for more than two years post-death of the aged care resident, or • the beneficiary who inherits the family home through the estate is a non-tax resident.

Renting out the former home—land tax

As discussed earlier, another consideration when considering renting out the former home are potential land tax implications. Land tax has specific jurisdiction-based rules depending on the relevant state or territory. As such, advice should be sought from the relevant government agency administering land tax (such as the State Revenue Office) or an appropriate professional.

Broadly, unless an exemption applies, land tax in the aged care context, may be payable if the owner of the property is no longer living in the property and the property is rented out for more than half of the year and where the value of the land exceeds the prescribed land tax threshold.

Some jurisdictions may have an exemption for aged care residents where the rental income from the former home is no more than is required to pay the cost of regular outgoings such as council, water and energy rates, and maintenance costs of the owner of the property.

Going back to Virushka’s situation, to highlight the land tax issues, had the property been situated either in New South Wales, Victoria or Queensland, using the respective calculators available on the relevant government’s website, the land tax liability based on the value of the land is shown in Table 6.

Table 6. Land tax liability depending on land value and specific location Value of land only

Land tax liability in New South Wales

Land tax liability in Victoria

Land tax liability in Queensland

$500,000

Nil

$775

Nil

$600,000

Nil

$975

$500

$700,000

Nil

$1,475

$1,500

$800,000

$1,156

$1,975

$2,500

Source: Challenger

If we go back to Table 3, renting out the family home for $30,000 p.a. without considering any land tax issues, provided a net cash flow boost of $8,349 compared with not renting—the remaining $21,651 had been consumed by reduced Age Pension, increased means-tested care fee and increased tax liability.

Accounting for land tax liability, depending on the value of the land, would introduce another leakage from the rental income so that the net cash flow boost may be lower. fs The information in this update is current as at December 2020 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670, the issuer of the Challenger annuities. The information in this update is general information only about our financial products. It is not intended to constitute financial product advice.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Superannuation:

58

Employees with multiple employers

By Terri Bradford, Morgans Financial Limited

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Superannuation

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: People with multiple employers could breach their concessional contributions cap if they exceed the maximum contribution base. However, they can apply to opt out of the Superannuation Guarantee (SG) for wages from certain employers. This also prevents an employer SG shortfall.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Employees with multiple employers

L Terri Bradford

egislation has passed allowing employees with multiple employers to opt out of receiving Superannuation Guarantee (SG) payments to avoid unintentionally breaching their concessional contributions cap. This paper examines how to avoid exceeding your annual concessional contributions cap.

Summary of the new rules The SG rules were established to ensure employees receive a minimum level of superannuation contributions in respect of their employment. Where an employer fails in their obligations to pay the SG, that employer will incur SG interest charges.

The SG rules include a ‘maximum contribution base’ beyond which an employer no longer needs to make superannuation contributions for an employee to avoid liability for the SG charge.

This operates as a ceiling, limiting the amount of superannuation support an employer is obliged to provide for an employee for a quarter. This means salary or wages that exceed the maximum contribution base can be excluded from the calculation of SG contributions.

The problem is that the maximum contribution base for an employee applies to each employer. If an employee has multiple employers, each employer must make superannuation contributions on the earnings they pay to the employee up to the maximum contri-

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bution base in order to avoid incurring an SG liability. This occurs even where the employee earns less than the maximum contribution base for each of their employers, but their income in total exceeds the maximum contribution base.

Accordingly, individuals with multiple employers may inadvertently exceed their annual concessional contributions cap. Where an individual’s total concessional contributions (including those made by their employer) exceed their annual concessional contributions cap (currently $25,000), the excess is their ‘excess concessional contributions’ for the financial year.

An individual’s excess concessional contributions are included in their assessable income for the year and taxed at marginal rates less a 15% tax offset (representing the tax paid in the superannuation fund). The individual is also subject to an interest charge, based on the shortfall interest rate to cover the resultant late payment of tax.

The amended rules will now allow the individual to nominate to opt out of the SG system in respect of their wages from certain employers. The opt-out means that eligible individuals can avoid breaching their annual concessional contributions cap as a result of multiple employers making contributions into superannuation on their behalf.

The amendments provide a framework for individuals to apply to the Commissioner of Taxation (Commissioner) for an employer shortfall exemption certificate, which prevents their employer from having a SG shortfall if they do not make superannuation contributions for a period.

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About the employer shortfall exemption certificate Where the Australian Taxation Office (ATO) issues a shortfall exemption certificate to an employer, the employer’s maximum contribution base for that employee becomes nil for that relevant quarter. The Explanatory Memorandum to the Treasury Laws Amendment (2018 Superannuation Measures No.1) Bill 2019 [now the Treasury Laws Amendment (2018 Superannuation Measures No.1) Act 2019] explains that the employer shortfall exemption certificate does not prevent an employer from making contributions into superannuation on behalf of the employee. Rather, the effect of the certificate is only to remove the consequences of failing to make any contributions for the quarter covered by the certificate.

This means an employer may choose to disregard a certificate and continue to make contributions if, for example, where an employee and employer do not reach agreement on the terms of an alternative remuneration package for the relevant quarter, or if there has not been enough time for an employer to adjust payroll or other business software to discontinue contributions for the employee.

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Conditions The ATO may issue an employer shortfall exemption certificate in relation to an individual who has made an application to the ATO (using the approved form) and their employer for a quarter if all of the following conditions are satisfied: • The person is likely to exceed their concessional contributions cap for the financial year that includes the relevant quarter if an exemption certificate is not issued.

• The Commissioner is satisfied after issuing the certificate, the employee will have at least one employer that would either have an individual SG shortfall in relation to the employee, and • The Commissioner considers that it is appropriate to issue the certificate in the circumstances.

The Commissioner can only issue an employer shortfall exemption certificate at the request of the person who is the employee to be covered by the certificate.

The Commissioner cannot issue an employer shortfall exemption certificate at the request of the individual’s employer or on the Commissioner’s own initiative.

Evidence is not required to prove “foregone contributions have been substituted for higher wages”. This is on the basis that employees with higher incomes (that is,

Terri Bradford, Morgans Financial Limited Terri Bradford is Morgans’ director of wealth management. She has worked in the stockbroking and financial planning industry since 1995 and is responsible for the development and distribution of wealth management resources to the Morgans’ network, and ensuring advisers (and their clients) understand the latest rules and regulations applying to all areas of wealth management, including self-managed superannuation.

Terri is an SMSF Association Specialist SMSF Adviser and an Associate member of the FPA.

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Superannuation

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In the case of an employee with multiple employers, the employee’s maximum contribution base applies: a) To each employer b) To only one employer c) To none of the employers d) At the Commissioner’s discretion 2. Where the ATO issues a shortfall exemption certificate to an employer in relation to a particular employee: a) It must be satisfied the employee will have at least two employers with an SG shortfall b) The employer’s maximum contribution base is halved for the relevant quarter c) The employer cannot disregard the certificate and still make contributions d) The employer’s maximum contribution base is nil for the relevant quarter 3. The ATO can only issue an employer shortfall exemption certificate if: a) Requested by the employee’s employer b) Requested by the employee to be covered c) The Commissioner does so on their own initiative d) Evidence is provided to prove “foregone contributions”

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those who are likely to breach their concessional contributions cap through employer contributions) are likely to be in a strong bargaining position with their employers and have voluntarily opted out of SG payments.

The employee must still be receiving contributions from at least one employer

Multiple certificates may be issued in relation to a single employee, with each certificate covering a different employer. However, at least one employer must still be required to make contributions for the benefit of the employee. This ensures that an employee will still receive a minimum level of contributions for the financial year.

An application for an exemption certificate may be refused

It may be appropriate for the Commissioner to deny an application for an employer shortfall exemption certificate where a person has applied for a certificate that would reduce their contributions by a substantially larger amount than is necessary, relative to another possible certificate or where the Commissioner has already issued a certificate for another quarter in the same financial year.

The Commissioner would also have regard to any circumstances in which an individual has engaged in behaviour that artificially enables them to apply for a certificate.

It should be noted that applications cannot be made for prospective employers.

Once accepted, the Commissioner will issue a notice in writing both to the employee who made the application, and to the employer covered by the certificate. If the application is refused, the Commissioner will notify the employee but not the employer.

The due date for lodging an application is 60 days before the first day of the quarter to which the application relates. fs Morgans is Australia’s largest national full-service stockbroking and wealth management network. It offers clients all the services and products they need to achieve their investment goals. Its services cover all aspects of financial advice, including financial planning and wealth management; with the goal of building wealth and creating financial security for clients

4. The purpose of an employer shortfall exemption certificate is to: a) R emove the consequences of not contributing for the relevant quarter b) Remove the consequences of not contributing for the relevant financial year c) Prevent an employer contributing on behalf of an employee d) None of the above 5. T he amended rules will allow employees to opt out of the SG system for wages from certain employers. a) True b) False 6. Only one certificate is issued to a single employee, to cover all their employers a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Investment:

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Core portfolio allocations

By Peter Harper, BetaShares

62

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Core portfolio exposures should match asset allocation objectives, show compelling value, and be robust in all market cycles. This paper explains the essential elements of core portfolio exposures and how ETFs can help counter a low-return fixed income environment.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Core portfolio allocations The three most important things

C Peter Harper

ore exposures form the foundation of an investor’s portfolio. Key attributes of these exposures are longevity, value and the ability to meet asset allocation objectives. Exchangetraded funds (ETFs) are compelling investment vehicles for core exposures, making it simple for advisers to construct a liquid, transparent and cost-effective foundation for client portfolios.

A critical decision for advisers is the choice of core exposures, which serve as the long-term foundation of client portfolios.

Three essential characteristics of core exposures are that they should: • be able to be held long-term, through all market cycles • meet asset class objectives while enhancing overall portfolio outcomes • demonstrate compelling value, net of fees.

ETFs are well suited for a portfolio’s core exposures, as their liquidity, transparency and cost-effectiveness make it simple for advisers to construct the foundation of client portfolios.

Ability to hold long-term through all market cycles As the foundation of a portfolio, the aim should generally be to hold core exposures for the long term. Reducing turnover helps to minimise transaction costs, and also reduces the number of capital gains tax events for a portfolio.

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To qualify as a long-term holding, an exposure should meet the criterion of being robust through all market cycles.

This of course does not mean that an exposure should be expected to produce positive returns through all market cycles. Rather, a core exposure will ideally have some defensive characteristics, and suffer relatively smaller drawdowns in periods of equity market weakness.

Example 1. global equities There are many options available for the international equities component of a portfolio, but one investment style that arguably is particularly well suited to a long-term perspective, is ‘quality’.

Quality businesses are those that demonstrate: • high return on equity—a key predictor of efficient use of capital and long-run returns according to academic literature • low debt—indicative of stability and durability through the cycle • strong cash flow generation—indicative of a company’s ability to pay its debts, reinvest in its business, and build reserves to deal with future financial challenges • stable earnings profiles—indicative of quality business models positioned to deliver through good times and bad.

Quality companies with durable business models and sustainable competitive advantages are potentially better suited to weather the

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economic cycle—and as we have seen during the recent COVID-19 crisis, when the ‘flight to quality’ occurs, investor focus has tended to return to current profitability rather than promises of future revenue growth.

In addition to the historical drawdowns tending to be less severe, the road to recovery has also tended to be shorter for these quality companies.

Figure 1 compares the monthly drawdown of an index of global quality shares with broad global shares from December 2002 to September 2020. The iSTOXX MUTB Global ex-Australia Quality Leaders 150 Index (Quality Index) selects quality companies, based on a combined screening and ranking of the four fundamental indicators outlined earlier.

The maximum drawdown during this period was 23.2% for the quality index compared with 42.2% for broad global shares.

Over the 10 years to 30 September 2020, the index of global quality shares returned 17.4% p.a., outperforming the MSCI World ex Australia Index by approximately 4.5% p.a. (Morningstar; past performance is not indicative of future of index or any ETF that aims to track the index).

Meet asset class objectives while enhancing overall portfolio outcomes Given the wide range of funds that provide exposure to any given asset class, it is essential to drill into the details of the various options, to determine which investments best meet clients’ overall portfolio objectives for risk profile and expected returns.

At the risk of stating the obvious, all funds under a given ‘umbrella’ are not necessarily created equal.

For instance, there are significant differences between funds that label themselves ‘ethical/responsible’, with varying standards of integrity and quality in the investment methodologies the funds employ.

Some funds apply stringent environmental, social and governance screens, with additional layers of oversight.

This gives investors confidence they will be investing in an ethically screened portfolio that aligns with their values. Others may not apply such rigorous standards, with screening processes that are less strict, and a reliance on off-the-shelf indices without any additional oversight.

Another area where a closer look under the bonnet is called for is a portfolio’s core fixed income exposures.

Example 2. fixed income Many fixed income managers use the Bloomberg AusBond Composite Index (AusBond Composite Index) as a benchmark.

However, the character of this index has changed in recent years due to an increase in government bond issuance (especially short-term bonds), in response to Federal Budget deficits. This trend is likely to continue as a result of extensive COVID-19 stimulus measures.

This poses two potential problems for investors using such indices: 1. Shorter-duration government bond exposures provide little offset of equity risk and pay little (if anything) over cash returns.

2. In the not too distant future, the Bloomberg AusBond Composite Index (‘composite’ implying it should provide

Figure 1. Drawdown analysis: Quality Index vs MSCI World ex Australia Index

Source: Morningstar Direct, BetaShares. Data as at 30 September 2020. You cannot invest directly in an index. Past performance is not an indicator of future performance of the index or any ETF that aims to track the index.

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Peter Harper, BetaShares As BetaShares’cohead of distribution, Peter is responsible for leading sales strategy and execution across all client segments. He also leads the firm’s capital markets activities.

Previously, Peter worked in equities and derivatives distribution roles with Macquarie Bank and ABN AMRO (now Royal bank of Scotland). He has also held roles in institutional/ corporate FX sales with ABN AMRO and fixed interest with UBS. Peter holds a Bachelor of Economics degree from the University of Sydney.

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Investment

exposure to a range of Government and corporate bonds) is likely to, for all intents and purposes, resemble a pure government bond exposure, with the ‘corporate’ component becoming an everdiminishing part of the ‘composite’ picture.

This leads to the next, and arguably most significant, inefficiency within the AusBond Composite Index currently.

How well can the AusBond Composite Index defend against equity risk in a multi-asset portfolio?

Reserve Bank of Australia (RBA) liquidity and yield curve control have effectively capped government bond yields in Australia out to three years at approximately 0.25% p.a., with the five-year yield not much higher, currently 0.38% p.a. (as at 29 October 2020).

With the AusBond Composite Index having an average duration of only about six years, this means that a significant proportion of the holdings of this index is earning 0.25% p.a. or less.

Putting aside the impact on income for bond holders, the real concern is that, unless the RBA is prepared to use policy to push rates deeply negative, in the event of another equity sell-off, the AusBond Composite Index would have very limited ability to diversify away equity risk in portfolios—not something many investors would have considered.

So, the inefficiency of broad fixed income benchmarks such as AusBond Composite Index is apparent, regarding: • lack of ability to provide any meaningful income above cash • diminishing ability to defend against equity losses in future sell-offs.

What are the fixed income options?

What approach can advisers take in this new low-rate era to ensure fixed income exposures meets their clients’ objectives? The answer will be driven primarily by the sophistication of the portfolio: • Portfolios requiring a simple approach may look to an active

www.fsadvice.com.au Volume 16 Issue 01 I 2021

manager to address the inefficiencies of broad composite indices.

• Portfolios requiring a more bespoke approach, or with more specific objectives in mind, may adopt a ‘building block’ approach.

Simple approach

Many portfolios will look to active management to try to manage the inefficiencies of broad composite benchmarks. While such an approach is valid, it relies heavily on the manager’s skill to deliver desired outcomes. Selection of a suitable fund is not made easy by the fact that, according to an S&P Indices versus Active (SPIVA) analysis of fund managers, 81.4% of active fixed income funds have underperformed the AusBond Composite Index benchmark (net of fees) over the last five years to 31 December 2019 (S&P Dow Jones Indices SPIVA scorecard data; past performance is not indicative of future performance).

Building block approach

Investors are increasingly building bespoke fixed income portfolios by blending ETFs targeting specific parts of the fixed income spectrum (credit, duration) together to achieve outcomes tailored to an investor’s specific needs or other specific portfolio objectives (for instance, targeting maximum offset of equity risk).

A good illustration of this would be to blend a long-duration government bond ETF, a corporate bond ETF and a floating-rate bond ETF to mimic the duration and segment profile (credit/govt etc.) of the AusBond Composite Index. Doing so can create, at similar cost to the AusBond Composite Index tracking funds, either: • a portfolio with similar yield to the AusBond Composite Index but greater equity diversification properties, or • a portfolio with similar equity diversification properties to the AusBond Composite Index but yielding substantially more.

A building block approach can avoid holding the inefficient parts of the AusBond Composite Index, for instance, short-duration government paper that yields little more than cash and provides minimal potential for equity diversification.

Figure 2. Relationship between management fees and investment returns

Source: Morningstar Direct, five years to 31 May 2020. Past performance is not indicative of future performance.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

FS Advice

www.fsadvice.com.au Volume 16 Issue 01 I 2021

Demonstrate compelling value (strong net-offee performance) Core exposures should demonstrate compelling value, usually evidenced by strong, long-run, net-of-fee performance.

Historical data has established beyond question that fees matter, with multiple studies documenting the inverse relationship between management fees and investment returns. Figure 2 on the preceding page illustrates this relationship for Equity Australia Large Blend funds.

Example 3. Australian equities SPIVA reports have consistently shown that the majority of active managers have underperformed their benchmark, and that active managers who have performed well typically have not reproduced

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The author highlights that core exposures: a) Serve as the medium-term foundation of client portfolios b) Must be robust through a selection of market cycles c) Demonstrate compelling value, net of fees d) None of the above

that outperformance into the future. Recent reports from SPIVA [scorecard data] highlighted that: • 79% of Australian equities active funds underperformed their benchmark in the five years to 31 Dec 2019 • of top-quartile actively managed funds for the year ending December 2015, none of the 107 Australian equities funds remained top quartile for each of the next four years, and fewer than 20% even remained in the top quartile the following year.

In addition to the chronic long-term underperformance of the average active manager, even in the March 2020 sell-off more than half the active funds underperformed the benchmark, according to the SPIVA Q1 2020 report, debunking the myth that active managers will shine in down markets.

Additionally, blending multiple active managers of different factors/styles may run the risk of ending up with a combined allocation that looks not dissimilar to the broad passive market but at much higher fees.

These findings all reinforce the importance of selecting cost-effective investments as a portfolio’s core exposures. Money saved on fees can compound returns left in the investor’s pocket. Low-cost options are not restricted to broad market cap-weighted funds.

There is a broader selection than ever of passive, rules-based and smart beta ETFs available on the ASX from a wide range of issuers, giving advisers many choices when it comes to selecting core exposures for their clients.

Summary Core exposures serve as the long-term foundation of client portfolios.

To properly fulfil this function, they need to match asset allocation objectives, demonstrate compelling value, and be robust through all market cycles.

ETFs make it simple for advisers to construct a liquid, transparent and cost-effective foundation for client portfolios. fs

2. In terms of creating bespoke fixed income ETF portfolios, the building block approach: a) Avoids the inefficient parts of the AusBond Composite Index, but at a higher cost b) Provides the means to target specific parts of the fixed income spectrum c) Provides higher yields than the AusBond Composite Index, but with less scope for diversification d) Relies too much on the manager’s skill to deliver desired outcomes 3. According the author, broad fixed income benchmarks: a) Show very limited ability to diversify away equity risk in portfolios b) Have diminishing ability to defend against equity losses in future sell-offs c) Lack the ability to provide any meaningful income above cash d) All of the above 4. As per data cited, active managers: a) Underperform in down markets b) Outperform in down markets c) Perform best in the long term d) Maintain parity with their benchmark 5. A ccording to the author, a ‘flight to quality’ usually means that investors focus on future profitability. a) True b) False 6. Historical data has established an inverse relationship between management fees and investment returns over time. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

This information has been prepared by BetaShares Capital Ltd (ACN 139 566 868 AFS Licence 341181) for a financial adviser audience. It is general information only and does not take into account any person’s particular circumstances. Before making an investment decision regarding any financial product, investors should consider the relevant PDS and their circumstances and obtain financial advice. The PDSs for BetaShares Funds are available at www.betashares.com.au.

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Finished reading?

Content from this journal is CPD accredited.

Go to FS Aspire CPD and search ‘FS Advice’ to start earning CPD hours.

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News

Whitepapers

AMP

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ASIC

7, 10, 13, 15

Australian Financial Complaints Authority (AFCA)

6

Australian Taxation Office

10

Equity Trustees

10

Financial Adviser Standards and Ethics Authority (FASEA)

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Fidelity Internationa

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Synchron TAL Tax Practitioners Board

11 7 15

University of Sydney

6

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Westpac

13

Taxation & Estate Planning Challenging a Will based on mental capacity

26

Ethics Understanding FASEA Code of Ethics values 30 The dangers of ignoring client vulnerability

37

Applied financial planning Borrowing from others: What is really at stake

42

Insurance Insurance advice for business clients 46 Retirement Implications of renting out the family home 52 Superannuation Employees with multiple employers

58

Investment Core portfolio allocations

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Franklin Templeton Investments Australia Limited (ABN 247) (Australian FinancialServices ServicesLicence LicenceHolder Holder No. No. 225328) 225328) issues this and notnot Franklin Templeton Investments Australia Limited (ABN 87 87 006006 972972 247) (Australian Financial this publication publicationfor forinformation informationpurposes purposesonly only and investment or financial product advice.

It expresses no views asthe to the suitability services othermatters mattersdescribed describedherein herein to to the the individual individual circumstances, or or needs investment or financial product advice.

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A Product Disclosure Statement (PDS) for any Franklin Templeton funds referred this documentisisavailable availablefrom fromFranklin Franklin Templeton Templeton at Victoria, 3000 decision.

A Product Disclosure Statement (PDS) for any Franklin Templeton funds referred to to in in this document at Level Level 19, 19,101 101Collins CollinsStreet, Street,Melbourne, Melbourne, Victoria, 3000 or www.franklintempleton.com.au by calling 1800 776. should considered beforemaking makingananinvestment investmentdecision. decision. Morningstar Morningstar Awards Reserved. or www.franklintempleton.com.au or byorcalling 1800 673673 776.

TheThe PDSPDS should be be considered before Awards 2020 2020©. ©.Morningstar, Morningstar,Inc. Inc.AllAllRights Rights Reserved.

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Important information: MLC Wrap Investments Series 2 and MLC Navigator Investment Plan Series 2 are Investor Directed Portfolio Services operated by Navigator Australia Limited ABN 45 006 302 987 AFSL 236466 (NAL). MLC Wrap Super Series 2 and MLC Navigator Retirement Plan Series 2 are superannuation products issued by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) through the MLC Superannuation Fund ABN 40 022 701 955. The information is a summary only and should not be relied on for decision making and is provided solely for the use of authorised financial advisers and is not intended for distribution to investors and potential clients. You should obtain and consider the relevant Product Disclosure Statement and the Financial Services Guide before deciding whether to acquire or continue to hold the product. Relevant disclosure documents for each product are available by calling 133 652 or from www.mlc.com.au. The information is correct as at 1 January 2021 but may change in the future. A160448-0121