Category: Wealth Management

AMP Financial Planning Ceases MDA Services

AMP Financial Planning Pty Ltd (AMPFP) ceased providing managed discretionary account (MDA) services on 10 December 2019 following the imposition of tailored licence conditions by ASIC.

In March 2019, following a surveillance of AMPFP’s MDA services and advice business, ASIC granted AMPFP’s application to vary its Australian financial services (AFS) licence to provide MDA services, subject to some tailored licence conditions (19-078MR). The tailored conditions formalised commitments made by AMPFP, in response to ASIC’s concerns, to improve monitoring and supervision of its discretionary investment services and related financial advice.

Under the tailored licence conditions, a Senior Executive of AMPFP was required to provide an acceptable attestation to ASIC by 30 September 2019 confirming that AMPFP had complied with and was complying with the tailored conditions. This was to ensure that all of the required improvements to monitoring and supervision practices had been implemented and were operating effectively.

AMPFP did not provide ASIC with an acceptable attestation in relation to its provision of MDA services. The attestation provided by AMPFP had exceptions and ASIC informed AMPFP that the attestation was not acceptable to it, and AMPFP ceased providing MDA services in accordance with its licence conditions.  

Background

MDAs create particular risks for retail clients because when a client enters into a contract with an MDA provider, they give the provider authority to make investment decisions on their behalf on an ongoing basis without seeking the client’s prior approval.

The risks increase if the person recommending the MDA service and making or influencing the investment decisions are the same because the clients may not be receiving impartial advice about the decision to enter into or remain in the MDA service. ASIC expects AFS licensees to consider the risks involved with the financial advice and investment activities of their representatives in their monitoring and supervision practices. 

Australian economic view – December 2019

Frank Uhlenbruch, Investment Strategist in the Australian Fixed Interest team, Janus Henderson provides his Australian economic analysis and market outlook.

Market review

Australian government bond yields initially followed offshore yields higher on optimism that a trade deal was imminent. However, sluggish domestic economic data and Reserve Bank of Australia (RBA) commentary on unconventional monetary policy saw government bond yields end the month lower. Improving sentiment supported equity and credit markets. Overall, the Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rose by 0.82%, with price appreciation from modestly lower yields boosting the income return.

Three and 10 year government bond yields rose to their highs of 0.88% and 1.30% following reports of a ‘Phase 1’ trade deal between the US and China and stronger US services sector data. Yields then rallied as it appeared a trade deal may be delayed and RBA commentary on unconventional monetary policy was seen as dovish. Australian three and 10 year government bond yields ended the month 16 basis points (bps) and 11bps lower at 0.65% and 1.03%.

Australian data releases remained consistent with growth running at a sub-trend rate, with limited signs of recent fiscal and monetary easing boosting domestic demand. Retail sales for September were sluggish, gaining 0.2% over the month but falling by 0.1% in volumes terms over the quarter. While there was an improvement in consumer sentiment in November, confidence levels remain subdued with indications that uncertain consumers are saving rather than spending recent gains from tax rebates and lower mortgage rates.

Despite a small improvement in business conditions in the October NAB Business Survey, both confidence and activity measures remain below longer-run measures and have yet to show signs of a meaningful response to earlier policy stimulus. Consistent with sluggish survey readings, construction work done fell 0.4% in the September quarter, while private capital expenditure fell by 0.2%. This data, along with weak retail sales, point to another quarter of subdued growth in the upcoming release of the September quarter national accounts.

Labour market conditions softened, with employment falling by 19,000 in October, the first fall in 16 months. The unemployment rate lifted from 5.2% to 5.3% and the participation rate fell from 66.1% to a still historically high level of 66%. Wages growth remained modest, with the Wage Price Index lifting by 0.5% over the September quarter for a yearly growth rate of 2.2%. RBA commentary suggests that they expect to see wages growth around these levels persist for some time before lifting as labour market slack is eventually absorbed.

Against the backdrop of sluggish activity and perceived dovish central bank commentary, markets moved to factor in further easing over 2020 after largely ruling out a December move. Markets are assigning a 60% chance of a February 2020 easing and have a 0.50% cash rate fully priced by May 2020. By the end of 2020, markets are assigning a 40% chance of the cash rate falling to 0.25%, the effective lower bound.

Credit markets benefitted from the improvement in trade-related risk sentiment and investors’ ongoing search for yield, with the Australian iTraxx Index rallying 3bps to end the month at 56bps. Primary markets were active as companies looked to finalise debt funding ahead of the end of the year. Notable deals included residential mortgage-backed securities (RMBS) issued by Bendigo and Adelaide Bank, ING, and CBA, with the latter being the first RMBS deal to replace the historically used Bank Bill Swap Rate (BBSW) with AONIA (Australian Interbank Overnight Cash Rate) as a reference rate for the payment of coupons to investors.

Market outlook

Our base case remains for an extended period of accommodative monetary policy that will only be unwound once the RBA has confidence that inflation will settle in the middle of its target band. The latest set of forecasts from the RBA saw them downgrade their near-term economic growth forecasts by 0.25%, although they left their 2020 and 2021 GDP forecasts unchanged at 2.75% and 3%. With spare capacity being absorbed at a slower rate, the RBA pushed back the timing of when core inflation reaches 2% from mid-2021, to the end of 2021.

While the RBA considered easing monetary policy at its November meeting, it chose instead to join the US Federal Reserve and other central banks in pausing to wait and see how policy easing to date flows through into the broader economy, how trade developments unfold and the extent of any fiscal easing.

The RBA maintains an easing bias and is of the view that further cuts would provide additional net stimulus. In a landmark speech, the RBA Governor signalled that a 0.25% cash rate reflected the effective lower bound for the cash rate. The Governor saw negative interest rates in Australia as extraordinarily unlikely.

If further support for the economy was required when the cash rate was at the lower bound, then the RBA would consider unconventional policy measures, with the main focus on purchasing government bonds, including state government bonds, from the secondary market to drive down the risk-free rate that affects all asset prices and interest rates in the economy. If such policy support was required, the Governor noted that a combination of policy responses, including fiscal, would deliver the best results.

With little signs of recent policy stimulus and a turnaround in house prices showing up in activity, labour market and confidence indicators, we look for a further rate cut in February 2020 which would take the cash rate down to 0.50%. The prospect of the Government bringing forward ‘Phase 2’ tax cuts worth around $13.5bn in the May 2020 Budget, which would come into effect on 1 July 2020 , would significantly reduce the burden on monetary policy and rule out the need for a further cash rate cut and unconventional measures. This is our central case view and we see the stimulus from these measures raising the prospect of the cash rate lifting over the latter part of 2022.

We see nearer term risks tilted towards our low case scenario, where the cash rate falls to 0.25% and a lack of fiscal easing forces the RBA to initially extend its forward guidance. A lack of a coordinated policy response would see the RBA embark on a government debt purchase programme that flattens the domestic yield curve. Overall, we see three and 10 year government bond yields of 0.66% and 1.05% (at the time of writing) as offering little opportunity to express strong views on duration.

We continue to remain attracted to maintaining a core exposure to inflation-protected securities in an environment where policy is being firmly directed to boosting growth and lifting inflation back towards central bank targets. Despite a modest and ongoing lift in breakeven inflation rates from the record low levels experienced in late August, current pricing suggests markets still have little confidence that recent policy moves will gain much traction. However, with the cost of buying inflation protection now so low, we feel it makes sense to position for the prospect of a cyclical lift in inflation over the next few years, especially if one contemplates even more extreme policy measures to reflate economies.

‘Something has gone seriously wrong in the economy’: Fidelity

Fidelity International cross-asset specialist Anthony Doyle has warned that the returns over the next decade won’t be anything close to the stellar performance seen over the last 10 years. Via InvestorDaily.

During a media briefing in Sydney on Tuesday (3 December), Mr Doyle said 2009 to 2019 has been a “phenomenal decade” for Australian investors. However, he said that he would be shocked if “we generated anywhere near these returns” over the coming ten years. 

“Particularly for a balanced fund, for example, the default option for most Aussie super funds. The returns over the next decade are unlikely to be anything like what we have seen over the past decade.”

The fund manager explained that lower returns are the result of a record-low cash rate and that investors are now having to move further down the risk curve in order to find returns that were once generated by defensive assets like cash. He also warned that the miracle of compound interest could soon be a thing of the past in a low-rate environment. 

“Something has gone seriously wrong in the economy,” Mr Doyle said. “After 28 years of uninterrupted economic growth, the commodities boom, low unemployment, a fiscal surplus and a current account surplus for the first time in years, our cash rate is the same as the Bank of England’s. The fact that our cash rate is the same as the UK’s tells me something has gone wrong in the Australian economy.”

Hours after Mr Doyle’s presentation the RBA left the official cash rate on hold at its final meeting of the decade. Governor Philip Lowe noted that interest rates are very low around the world and a number of central banks have eased monetary policy over recent months in response to the downside risks and subdued inflation. 

“Expectations of further monetary easing have generally been scaled back,” he said. 

“Financial market sentiment has continued to improve and long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the lower end of its range over recent times.”

While the RBA left rates on hold at 0.75 per cent on Tuesday, some economists believe the central bank will reduce rates to 25 basis points, a number flagged by Mr Lowe during a speech last week. 

“Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that,” the Reserve Bank governor said. “At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.”

However, Fidelity’s Anthony Doyle believes Mr Lowe’s comments have been widely misread by the market. 

“Many had already been expecting a reduction to 50 basis points in February and then QE after that. I think he was far more bullish in his speech and was trying to get the message across that we are a long way from QE.”

The cash rate has been cut in half over 2019, from 1.50 per cent to 75 basis points. Mr Doyle believes the RBA will be reluctant to cut rates any further. He noted that the pickup in house prices in Sydney and Melbourne could flow through to boost economic growth in the new year.

Tony Locantro’s Top Stock Picks For 2020

Tony Locantro from Alto Capital shares some of his intellectual capital.

Disclaimer: The information contained in this video is general in nature and should not be considered investment advice. Tony Locantro has personal holdings in the companies mentioned along with commercial arrangements from time to time where he is paid fees for such services. Viewers are advised to seek their own financial advice to ensure what is right for their personal circumstances and risk tolerance.

Note: DFA has no financial or business relationship with Alto Capital.

Caveat Emptor! Note: this is NOT financial or property advice!!

ASIC Imposes Additional Licence Conditions on IOOF

ASIC has imposed additional licence conditions on the Australian financial services (AFS) licence of IOOF Investment Services Ltd (IISL) as part of an application by IISL to vary its licence.

IISL sought a variation to its licence to facilitate the transfer of managed investment scheme, investor directed portfolio services (IDPS) and advice activities from IOOF Investment Management Ltd (IIML) to IISL. The transfer is part of a reorganisation of the broader corporate group (IOOF Group).

In granting the licence variation, ASIC has decided to impose additional conditions relating to the governance, structure and compliance arrangements of IISL.

ASIC’s decision to impose additional licence conditions took into account concerns highlighted by the Financial Services Royal Commission about the real and continuing possibility of conflicts of interests in IOOF Group’s business structure, ASIC’s past supervisory experience of these entities and material supplied by IISL as part of its licence variation application. IISL agreed to the imposition of the additional licence conditions.

In summary, the additional conditions specifically cover:

  • governance – by requiring that IISL has a majority of independent directors with a breadth of skills and background relevant to the operation of managed investment schemes and IDPS platforms;
  • the establishment of an Office of the Responsible Entity (ORE) – that is adequately resourced and reports directly to the IISL board, with responsibility for:
    • oversight of IISL’s compliance with its AFS licence obligations;
    • ensuring IISL’s managed investment schemes are operated in the best interests of their members; and
    • overseeing the quality and pricing of services provided to IISL by all service providers (including related companies),
  • the appointment of an independent expert, approved by ASIC, to report on their assessment of the implementation of the additional licence conditions.

ASIC Commissioner Danielle Press said, ‘ASIC is serious about improving the quality of governance and conflicts management across the funds management sector and ensuring that investors’ best interests are the highest priority of fund managers.

‘ASIC will use its licensing power, including through the imposition of tailored licence conditions to address governance weaknesses, the risk of poor conduct or vulnerabilities to conflicts of interest in a licensee’s business model.’

APRA Responds To Court Decision On IOOF Action

The Australian Prudential Regulation Authority (APRA) notes the judgment today in its court action against IOOF entities, directors and executives.

APRA initiated the action last December due to its view that IOOF entities, directors and executives had failed to act in the best interests of their superannuation members. Before taking the court action, APRA had sought to resolve concerns with IOOF over several years but considered that it was necessary to take stronger action – through use of directions, conditions and court action – after concluding the company was not making adequate progress, or likely to do so in an acceptable period of time.

The court has dismissed APRA’s application for a finding that IOOF entities, directors and executives had contravened their obligations under the Superannuation Industry Supervision Act 1993 (SIS Act). Accordingly, the case cannot proceed to a hearing on penalties, including disqualification.

APRA is examining the lengthy judgment in detail and will then make a decision on whether to pursue an appeal.

Although disappointed by the decision, APRA Deputy Chair Helen Rowell said: “This case examined a range of legal questions relating to superannuation law and regulation that had not previously been tested in court, relating to the management of conflicts of interest, the appropriate use of super funds’ general reserves and the need to put members’ interests above any competing priorities.

“Litigation outcomes are inherently unpredictable, however APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner. APRA still believes this was an important case to pursue given the nature, seriousness and number of potential contraventions APRA had identified with IOOF,” Mrs Rowell said.

Additional licence conditions that APRA imposed on IOOF in December are unaffected by today’s judgment and remain in force.

Despite today’s decision, Mrs Rowell said APRA’s tougher approach to enforcement had led to IOOF being better placed to deliver sound, value-for-money outcomes for its members.

“APRA has seen significant improvement in the level of cooperation from IOOF since this case was launched. Additionally, the new licence conditions have enhanced IOOF’s organisational structure and governance, including the role and independence of the trustee board within the IOOF group. This will better support effective identification and management of future conflicts of interest,” she said.

ClearView compliance review results in $730,000 compensation to clients

ASIC says Australian financial services (AFS) licence holder ClearView Financial Advice Pty Ltd (ClearView) has completed a review and remediation program for over 200 clients who received poor life insurance advice.

Under this program, ClearView reviewed 4,269 advice files from 279 of its advisers and remediated clients who had suffered loss. 215 clients were offered $730,138 in financial compensation and 21 clients received non-financial remediation through reissued advice documents and fee disclosure.

ASIC first identified issues of non-compliant advice by ClearView’s representatives during an industry-wide review of retail life insurance in 2014 (14-263MR).

A sample review of ClearView’s advice files highlighted broad areas of concern such as inadequate needs analysis for client, insufficient explanation about the pros and cons of using superannuation to fund insurance premiums, inadequate consideration of premium affordability issues and poor disclosure about replacement products. ASIC raised these issues as well as some concerns related to the conduct of Jason Churchill, one of ClearView’s advisers at the time.

In 2016, ASIC accepted an enforceable undertaking (EU) from Mr Churchill for failure to meet his obligations as a financial adviser (16-008MR). Under the EU, Mr Churchill agreed to undergo additional training, adhere to strict supervision requirements and have each piece of advice audited by his authorising licensee before it was provided to clients. Separately, ClearView undertook to review advice previously provided by Mr Churchill and remediate clients who had received inappropriate advice.

ClearView also began a review of the personal insurance advice provided by its advisers to determine if there was a systemic issue related to the broad areas of concern identified by ASIC and engaged Deloitte to provide independent oversight. This review found that a number of ClearView’s advisers did not undertake adequate ‘needs analysis’ for clients.

The needs analysis is a critical part of the financial advice process. It enables advisers to understand their clients’ financial situation, needs and objectives, and provides the basis for the financial advice.

To identify all instances of this issue and to remediate any adversely affected clients, ClearView undertook a full review and remediation program in accordance with Regulatory Guide 256: Client review and remediation conducted by advice licensees (RG 256).  Deloitte oversaw the review and remediation program to ensure that it was conducted in accordance with the principles set out in RG 256.

Can AMP save financial advice?

From the excellent James Mitchell at InvestorDaily. The embattled wealth manager has outlined an ambitious strategy to deliver financial advice to more Australians at a time when its competitors are abandoning the sector completely.

When AMP announced its new advice strategy last month, including a significant reduction in practice values, the news was met with anger and frustration by a significant cohort of its advisers. 

But unlike its major bank competitors the group is not looking to sell off its advice arm; instead, it has set itself the challenging task of trying to service more customers.

“It’s about more advice to more people in more ways,” AMP group executive, advice, Alex Wade told Investor Daily. “We have to solve the problem of not enough advice for Australians.”

Research by Momentum Intelligence shows that 71 per cent of Australians who don’t have a financial adviser don’t actually know what one does. There is a fundamental lack of awareness among the population about the value of advice. The royal commission, which gained widespread media coverage, hasn’t helped groups like AMP or its 2,200-strong network of advisers. 

The company has announced plans to invest half a billion dollars in its advice channel, including the development of a digital offering, which Mr Wade says will aid human interactions rather than compete with them. 

“I think there is a very big market for face-to-face. I think that will grow given that competitors are leaving,” he said. 

“The trouble with face-to-face advice is it is becoming more expensive, given regulatory changes and compliance costs.

“The AMP strategy is that we are doubling down on all advice where the others are leaving. I think we need to focus on our face-to-face advisers having compliant, professional practices at a business level. We also need to solve the underlying problem with digital.”

Mr Wade sees the digital advice element effectively acting as an engagement tool for the mass market – customers that cannot afford to pay a financial adviser a hefty annual fee. Yet. 

“That will be supported by phones, people still want to speak to a person, but I think for the mass Australian, people who can’t afford face-to-face advice yet, we need to solve it with digital. That digital channel will then send people up the three tiers to phone or face-to-face. 

“I think it will help our advisers, both employed and aligned, because they will be able to use our digital service for some of those clients who can’t afford face-to-face advice. For example, the children of their clients,” he said. 

As fees for service replace commissions, the natural trend has been for advice practices to move up-market and begin servicing wealthier clients who can actually afford their fees. 

“This all creates a problem for those who can’t afford advice,” Mr Wade said. “We are trying to counter that. We have announced $500 million to invest in advice. A large part of that will be technology in practices, compliant in design, to make them as efficient as possible.”

No Australian company has been able to successfully deliver a digital advice offering that has been embraced by the mass market. Yet. But AMP believes it can do just that. 

The company’s brand has been badly bruised by a series of scandals in recent years. Its new advice strategy has triggered an ugly backlash from advisers that have already been given termination letters. But that’s only half of the story. 

The group recently raised $784 million from shareholders, much of which will be spent on its journey to bring a digital advice solution to market while continuing to develop its network of employed and aligned advisers. The company has been in the advice game a long time. Its new approach appears to be one that will use the power of digital channels to optimise face-to-face advice, rather than eradicate it.

Suncorp completes Guardian Advice remediation program

ASIC says Suncorp Life and Superannuation Limited (Suncorp) has recently completed a remediation program, which impacted over 4,000 clients of Suncorp-owned GuardianFP Limited (Guardian Advice).

Suncorp paid $1,431,167 in compensation to Guardian Advice clients who had received poor advice.

Suncorp undertook the remediation program after ASIC imposed additional licence conditions on the Australian financial services (AFS) license of Guardian Advice because a surveillance uncovered deficiencies in the life insurance advice provided by Guardian Advice to retail clients (15-003MR).

ASIC was concerned that Guardian Advice had failed to comply with its general obligations as an AFS licensee, including monitoring and supervising its representatives and ensuring they were adequately trained or competent. A number of clients suffered harm a result of these failures.

When Suncorp announced that it would exit the financial planning business carried on by Guardian Advice in November 2015, ASIC obtained a commitment from Suncorp that it would complete the remediation program provided for in the additional licence conditions and  fund the compensation of Guardian Advice clients (15-353MR).

Additionally, Suncorp undertook to compensate clients who may have been at risk of having received poor advice from ‘high-risk’ advisers, who were identified using a range of risk metrics applied to all advisers in the Guardian Advice network. Affected clients were also compensated under this remediation program.

Suncorp’s remediation program was overseen by independent experts.