Wealth Management – Page 30 – Digital Finance Analytics (DFA) Blog

Funds Under Management Now $2.5 Trillion

ABS released their funds management data to December 2014. The managed funds industry had $2,489.9b funds under management (including some changes to the data capture and revisions), an increase of $57.6b (2%) on the September quarter 2014 figure of $2,432.3b. The main valuation effects that occurred during the December quarter 2014 were:

the S&P/ASX 200 increased 2.2%
the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 0.8%
A$ depreciated 6.7% against the US$.

At 31 December 2014, the consolidated assets of managed funds institutions were $1,958.5b, an increase of $48.8b (3%) on the September quarter 2014 figure of $1,909.7b. The asset types that increased were:

overseas assets, $29.6b (8%)
shares, $14.6b (3%)
short term securities, $8.6b (10%)
bonds, etc., $4.3b (4%)
derivatives, $0.8b (65%)
other non-financial assets, $0.2b (2%).

These were partially offset by decreases in:

other financial assets, $3.4b (11%)
deposits, $3.2b (1%)
land, buildings and equipment, $1.5b (1%)
loans and placements, $1.0b (2%)
and units in trusts, $0.2b (0%).

At 31 December 2014, there were $503.9b of assets cross invested between managed funds institutions whilst the unconsolidated assets of superannuation (pension) funds increased $54.4b (3%), public offer (retail) unit trusts increased $4.5b (2%), life insurance corporations increased $4.3b (2%), cash management trusts increased $0.8b (3%), and common funds increased $0.2b (2%). Friendly societies were flat.

Time To Fix Financial Planning Properly

There will, no doubt, be more calls for a Royal Commission into the impact of poor advice provided by financial planners, following the reports of mis-advice at the NAB, which follows on from CBA, and a long list of other firms.

It is clear that there has been significant poor advice provided by some, perhaps influenced by target chasing, commissions, personal gain or errors. Many who received such poor advice will probably be unaware, and simply observe their portfolios are not performing as they expected. On the other hand, poor performance does not necessarily mean poor advice, it could be simply market dynamics, because most investments are inherently risky. That said, it is therefore hard to get a good read on how many people are impacted, but my guess it is into the many thousands, many of these victims do not have deep pockets so cannot fight back.

The superannuation balances of Australians now stand at more than $1.93 trillion so more households will need advice going forward. Much of that could still be conflicted in the current industry structures. Conflicted advice is right in the middle of the current industry problems, and whilst there are many excellent advisors doing the right think by their clients, the reputation of the entire industry is being trashed.

Despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide.

Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here. Any link between the two creates conflict and the risk of poor advice.

So, first we need to fix up the industry going forwards. Personally, I think the architecture of a solution is pretty clear, if unpopular from a market participants perspective. Next we need a mechanism to identify people who have received wrong advice, so it can be rectified. That of course is a complex process, and again will be resisted by the industry.

We do not need another couple of years of inactivity whilst yet more inquiries rake over the coals some more. Rather it is time for action.

NAB Financial Advisors Under The Microscope

According to the Sydney Morning Herald,

“The National Australia Bank has quietly paid millions of dollars in compensation to hundreds of clients given what it considers inappropriate financial planning advice since 2009.

The bank is the latest institution to face disturbing revelations of misconduct in its financial planning division, with a Fairfax Media investigation uncovering instances of forgery, “rogue advisers” and multiple sackings inside its financial advice arm.

A cache of confidential internal documents obtained by Fairfax Media reveals that, according to NAB, 31 of its financial planners were terminated, suspended or had their resignations “ensured” due to conflicts of interest, inappropriate advice, inappropriate practices or repeated compliance breaches

Disturbingly, the document states that these instances were not detected by the bank’s internal controls, but through client complaints or queries by authorities”.

This is further evidence that the financial advice sector is not up to scratch, and that despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems. Remember the superannuation balances of Australians now stand at more than $1.93 trillion.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide. Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here.

Financial Adviser Directory Will Be Active End March 2015 – ASIC

ASIC, is well advanced with work on an industry-wide public register of financial advisers to be up and running at the end of March according to an update released today.

The register will contain details of all persons employed or authorised – directly or indirectly – by Australian financial services (AFS) licensees who are authorised to provide personal financial advice to retail clients on Tier 1 (investment) products. Tier 1 products are financial products other than basic banking products, general insurance products or consumer credit insurance products or a combination of any of those products.

It is intended the register will be accessible online from ASIC’s MoneySmart website from 31 March 2015.

The Government had announced plans to establish the register in October 2014, and intends to make regulations relating to the register in coming days. ASIC is working with licensees and authorised representatives to assist them to provide the required information in accordance with the timetable in the planned regulations.

ASIC has a dedicated webpage www.asic.gov.au/far and encourages all licensees to subscribe via this webpage to receive email correspondence about the register.

Managed Funds Now Worth $2.44 Trillion

The ABS just released their Managed Funds data to September 2014. The managed funds industry had $2,439.5b funds under management, an increase of $26.6b (1%) on the June quarter 2014 figure of $2,412.8b. The main valuation effects that occurred during the September quarter 2014 were as follows: the S&P/ASX 200 decreased 1.9%; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 2.4%; and the A$ depreciated 7.6% against the US$.

The consolidated assets of managed funds institutions were $1,922.7b, an increase of $20.0b (1%) on the June quarter 2014 figure of $1,902.7b. The asset types that increased were overseas assets, $16.8b (5%); deposits, $4.4b (2%); short term securities, $2.5b (3%); units in trusts, $2.3b (1%); land, buildings and equipment, $0.6b (0%); and shares, $0.1b (0%). These were partially offset by decreases in other financial assets, $5.8b (16%); bonds, etc., $0.5b (0%); other non-financial assets, $0.2b (2%); and loans and placements, $0.2b (0%). Derivatives were flat. There were $484.7b of assets cross invested between managed funds institutions.

Unconsolidated assets of superannuation (pension) funds increased $24.3b (1%), life insurance corporations increased $3.0b (1%), public offer (retail) unit trusts increased $1.9b (1%), cash management trusts increased $0.6b (2%), common funds increased $0.2b (2%), and friendly societies increased $0.1b (1%).

ASIC To Monitor CBA Financial Planning Businesses

ASIC has appointed KordaMentha Forensic to examine two of the Commonwealth Bank of Australia (CBA)’s financial planning arms’ compliance with new Australian financial services licence (AFS) conditions.

KordaMentha Forensic will report regularly to ASIC the results of their review of past activities by Commonwealth Financial Planning Limited (CFPL) and Financial Wisdom Limited (FWL) to identify high-risk advisers and affected customers, and CFPL and FWL’s compliance with the new conditions.

ASIC will release the findings, and CFPL and FWL will be required to address any deficiencies identified.

ASIC imposed the conditions on CFPL and FWL – and flagged it would appoint an external compliance expert – after a scheme developed to compensate customers of former CFPL advisers was not applied consistently across all affected customers of the two businesses. This inconsistency disadvantaged some customers. The conditions include CFPL and FWL offering customers up to $5,000 to have their financial advice independently reviewed.