The superannuation, advice and investing landscape is facing more game-changers than at any time since the introduction of compulsory superannuation in 1992. Cuffelinks will be covering these subjects regularly during 2013 and beyond, including:
- the Future of Financial Advice (FOFA) reforms, especially the ban on conflicted remuneration and the best interests test. The exemption for stockbrokers and licensing of accountants for self managed super funds (SMSFs) ensures significant competition for financial planners
- changing demographics, where an ageing population will be supported by fewer workers, leading to acute pressure on funding of health services, education and pensions, and perhaps future intergenerational conflict
- unprecedented margins above bill and swap rates paid by Australian banks as they switch billions of dollars of funding from fragile offshore bond markets to local deposits
- continuing growth of SMSFs, now approaching two spectacular milestones: one million members and $500 billion in funds under management
- the evolution of non-platform technology to manage investment portfolios, throwing out a serious challenge to the dominant platforms
- doubts about the health of many of the (formerly) best sovereign credits in the market. In Europe, the United States and Japan, governments have lived beyond their means, with no solutions to their debt woes in sight
- the loss of trust in active management and the move towards exchange-traded funds, index funds and self management of portfolios, removing the more lucrative fees from many parts of the industry
- the introduction of MySuper, available from 1 July 2013, where default super payments will be paid into a simple, low fee, diversified fund
- rationalising of many parts of the industry, including mergers of industry funds and acquisitions of financial planning groups by major institutions
- the losses in equity markets prior to the recent rally, which prompted a significant switch into defensive investments. Lower rates on bank term deposits are now encouraging a recycling back to equities, particularly high dividend-paying stocks
- the possibility of further changes in superannuation regulations, including taxes on withdrawals, and the impact such moves will have on the confidence of people saving to fund their own retirement.
The medium to long term consequences for the wealth management industry will be immense, and are already playing out. In September 2012, the $46 billion AustralianSuper became the latest major industry fund to announce plans to build an internal team to manage Australian equities, to reduce its costs. Their study of about 100 external equity managers showed only five had added value over a benchmark in the last decade.
Many fund managers are struggling in the face of declining fees and rising costs. Boutique manager Lodestar Capital closed on 1 July 2012, returning $100 million to investors. The previously high-flying GMO shut its Australian equity business in April 2012 after 14 years of operation, and over at Treasury Group, Global Value Investors, an offshoot of long-standing Investors Mutual, closed in November 2011. Some well-established and highly regarded names, such as Kerr Neilson’s Platinum Asset Management, once the dominant manager for retail flows into global equities, have experienced heavy outflows. He started an August 2012 newsletter to clients with the refreshingly honest words, “We are well aware we have done a poor job over the last two years in managing some of our funds.” In the previous financial year, Platinum funds fell from $17.8 billion to $14.9 billion, due to negative investment returns and outflows, although more recent performance has improved considerably. Listed K2 Asset Management saw a decline from almost a billion dollars in funds at the end of 2010 to $693 million by the end of 2012. In a market which once welcomed newcomers, only an established name like former Perpetual stalwart John Sevior can expect to attract large amounts in a start-up.
The financial advice industry has traditionally relied heavily on payments from product providers, especially the major retail platforms, but these are falling in preparation for FOFA. Where an adviser could once rely on an annual trail of, say, 60 basis points, or $600 on a $100,000 portfolio, to subsidise the cost of providing advice, now advisers are having to convince clients to pay directly. Investment Trends recently reported that the average planner is now charging $2,350 for comprehensive advice compared to $2,600 in 2010. When Barry Lambert sold Count to the Commonwealth Bank, he cited the FOFA reforms and market uncertainty among the reasons for moving away from the previously sacred independence.
On product development, every public superannuation business in the country is currently working on the design and implementation of MySuper options. There are major differences in interpretation of the legislation, which at one extreme could lead to large switches from existing funds into MySuper funds. The design imperative of low fees will boost index-type offers, and many will take a lead from ING's Living Super which keeps management costs down by investing in deposits for its bank.
But the granddaddy of all these issues, the one that will be with us forever, is demographic change, especially due to people living longer. It brings with it implications for product design, as investors move from accumulation to pension and prefer income over growth. It affects asset allocation, and is causing widespread reviews of the traditional 70% growth/30% defensive default option. It is the responsibility of everyone in the industry to convince their clients that they cannot assume future governments will have the finances to meet current day levels of pension and health support. If the terms of trade become less favourable and reduce the tax flows from the resources sector, it’s likely that those who do not fund their own retirement will face declining living standards just when they are at their most vulnerable. These are the baby boomers who expect to buy whatever they want when they want it, not spend frugally and within their means as the post-war generation lived.
Further complicating the ability to plan for retirement is the threat of more changes to superannuation regulations, likely to be a high profile issue in the run up to a federal election on 14 September. It will be a challenging and exciting year for everyone in financial services and their clients.