Financial advisers are operating within a paradox. On the one hand, the industry is still reeling from the blow of the Royal Commission and the high levels of mistrust within the community towards the financial services sector. On the other hand, there’s every sign that demand for quality financial advice is growing – to the extent that some advisers may find themselves on the back foot when it comes to putting in place the necessary capabilities to deliver tailored advice solutions.

It seems that, if anything, the media coverage of the Royal Commission has only raised in people’s minds the inadequacy of their own financial knowledge when it comes to managing and growing their wealth. According to the most recent survey conducted by ASIC in August this year, 79% of participants agreed that financial advisers had expertise in financial matters that the participant did not have. Even after being exposed to the negative headlines, 75% agreed that financial advisers could recommend products that they normally could not find on their own, and 73% agreed that advisers could introduce them to good ideas they might not have thought of on their own.

So the need and desire for financial advice remains in place, but consumers still face a knowledge problem when it comes to finding an experienced adviser who they believe can genuinely help them achieve their objectives. It’s clear that the main reason people seek financial advice is to benefit from the expertise of the adviser, who they believe can provide recommendations that will improve their financial wellbeing and help them prepare for major life events. What it comes down to is not the overall perception consumers have of financial advice, which remains positive, but the way in which they discern the quality of individual advisers.

When it comes to demonstrating quality, advisers need to be able to show clearly how their advice adds tangible value to the client. Once a positive first impression is made, advisers must then follow through on their value proposition with a roadmap for success that the client can understand and that makes intuitive sense. Breaking down what are inherently complex topics can be a challenge, but it’s critical to ensuring clients are fully engaged in the process and can see for themselves how your advice is helping them build their wealth and meet their objectives. High-quality investment research can play a key role in supporting this process by giving advisers the information, visual data, and easy-to-use reporting tools they need to have deeper conversations that speak directly to their clients’ needs.

The Royal Commission has not spelled the death of financial advice, but it has made it harder for advice that can’t draw a direct link between the client’s individual needs and the investment decisions of the adviser or portfolio manager. We are entering a new age of financial advice that is seeing the role of the adviser shift from that of administrator and stock picker to someone who can deliver a holistic advice experience by showing that they have a deep understanding of their client’s position and can recommend high-quality investment products that support the client’s needs. This means having a thorough understanding of the qualitative aspects of different products, how they compare, and they can be used as part of a tailored investment solution.

The results of the ASIC survey support this, and while some of the survey findings may come as a surprise, many advisers will see this as old news. When it comes to choosing an advice provider, communication is one of the most important factors customers look for and anticipate in their interactions with advisers. Experience and reputation are obviously important, but a key differentiating factor is the way advisers talk to and engage with their clients. The ability to talk to clients in a way they can understand is just as important as an advisers reputation (38% versus 36%), while taking the time to understand their client and their goals is also one of the top attributes (32%).


Source: ASIC

What’s also interesting is that, for those respondents who had received financial advice (Group A), low cost became far less of a determining factor. For advisers who are successfully able to demonstrate the value of their advice, clients are more willing to pay because they can see how the advice they receive results in superior outcomes. That’s why it’s important to have not only high-quality investment research, but the right platform and tools that can deliver this research in a way that allows you to present complex information, including in-depth product comparisons and portfolio reports, clearly and concisely.

It’s also why we’ve continually evolved Lonsec’s iRate platform to ensure it’s more than just a place to access research, ratings and data. We give you the tools you need to get a more complete picture of your client’s portfolio, analyse and compare products across a range of qualitative factors, and demonstrate how your advice is contributing directly to their investment outcomes. For advisers looking to win the conversation game, a high-quality research provider can give them the edge they need.

Lonsec has announced key changes to its research team to support the growing demand for high-quality investment research and managed account solutions.

Topping the announcement is the appointment of Lorraine Robinson as the new Executive Director of Lonsec Research, who will take the reins in early December after eight years at Evans & Partners, most recently as Chief Operating Officer, Evans Dixon Corporate & Institutional.

As an experienced research practitioner with strong commercial acumen, Lorraine brings with her an intimate understanding of what users need to support their investment decisions, and how best to deliver Lonsec’s high-quality research in a way that meets the evolving needs of wealth creators.

Libby Newman will take on the role of Director, Managed Fund Research, allowing Lonsec to capitalise on her considerable experience and genuine passion for research. Libby will be directly involved in developing Lonsec’s research capabilities and maintaining the high standards of its process.

Deanne Baker will move from the research team to take up her new position as Portfolio Manager, Diversified Multi-Asset Portfolios within Lonsec’s Investment Solutions division, which covers investment consulting and managed account solutions. Deanne will add her multi-asset expertise to a rapidly growing area of Lonsec’s business, with Lonsec’s managed account portfolios growing funds under management by more than 100% since June 2018.

Peter Green will continue in his role as Head of Listed Research, managing the significant growth in the number of new ETFs, LICs and other listed products coming to the market. Rui Fernandes continues as a senior member of the managed funds research team, with a focus on quality assurance and facilitating the expansion of the number of products that are rated.

The expanded team will be supported by a growing team of 65 research analysts and investment consultants, enabling Lonsec to continue to offer an unparalleled breadth and depth of qualitative investment product research and services.

“The speed of growth at Lonsec continues to necessitate the addition of quality people to our team,” said Lonsec CEO Charlie Haynes.

“On the back of being named ‘Research House of the Year’ in Money Management’s Rate the Raters survey for the fourth year in a row, we are excited to have Lorraine join us and for the continued depth of experience within the organisation which is the bedrock of Lonsec’s growth.”​​​

Release ends

Private markets have long been the domain of institutional investors. With benefits such as higher return potential, lower volatility, lower correlation to traditional listed assets, and enhanced diversification, it’s not hard to see why they are so attractive. Institutional investors such as super funds have been steadily increasing their exposure across the private market spectrum, which includes equity, real estate, infrastructure and debt.

Private markets by their nature require significant long-term commitments (in some cases capital can be locked up for ten or more years) and have significant barriers to entry given the large amounts of capital required. Both factors have traditionally made it difficult for retail investors to access the benefits of private markets, but this is quickly starting to change.

Private asset managers are exploring ways to make investing in private markets more accessible to retail investors by introducing greater liquidity and reducing minimum investment sizes. Along with slowing economic growth and the continued hunt for yield, this is making private markets an increasingly viable and attractive opportunity for retail investors and SMSFs seeking greater portfolio diversification.

Lonsec has seen an uptick in private market vehicles targeting retail investors coming to market over the last 12–18 months. Of particular note is the increased interest in private market funds (both equity and debt) being offered under ASX listed structures such as Listed Investment Trusts (LITs).  Such structures have been common in the UK and the US for some time but are a relatively new development in the Australian market.

Offering private assets through a LIT structure provides several benefits to retail investors, including:

  • The ability to create a diversified portfolio of unlisted assets with no minimum investment size;
  • Access to private markets in a more liquid investment structure, with investors able to buy and sell units via the ASX;
  • A greater focus on the long-term investment strategy. Because LITs are closed-end vehicles, managers are less concerned about funding applications and redemptions, which has the potential to boost returns compared to an open-end pooled vehicle;
  • No requirement to manage commitments to fund future investments. Capital is paid upfront and invested in the LIT from day one, so there are no additional capital calls for the investor.

However, as we all know, rarely do investors come across a free lunch, especially in the retail world. Trade-offs must be expected and managed in order to get the most value out of any asset class, and private markets are no different. When including private market assets in a portfolio, it’s important to think about the following:

Private market assets are illiquid

Private assets are by their nature highly illiquid, and investors wishing to redeem may have to do so at a discount to Net Asset Value (NAV). It’s important to treat an investment in private markets as a long-term investment, irrespective of the structure in which it’s offered. Investors wanting (or worse, needing!) to sell LIT units in periods of market stress, when many investors are heading for the door, may face significant discount to NAV. It’s important to ensure the private asset manager has policies in place for managing these discounts should they arise.

Expect some volatility along the way

Private assets offered in LITs will have a higher correlation to the broader equity market and are more volatile than traditional private asset investments. By offering private assets in a listed structure, market beta is introduced, exposing investors to swings in sentiment in a similar manner to any other security listed on the ASX. Volatility risk may also arise when units in the LIT are thinly or heavily traded, which could make the unit prices very volatile regardless of changes in the underlying value of the investments held by the LIT.

It takes time to become fully invested

Unlike traditional private assets, where commitments are drawdown over time, investors in private market LITs pay their capital upfront in exchange for units. Private asset managers don’t invest 100% of that capital immediately, but instead wait for investment opportunities to arise. Consequently, it may take between 12 months to four years to reach the target portfolio allocations. During this ‘ramp-up’ period, private asset managers will invest in other liquid assets ranging from cash through to credit or even equities. This ensures investors are generating a reasonable return or income from an early stage while the portfolio is getting set.

However, it does of course introduce other risks and exposures. It’s important to understand what assets you will be exposed to during the ramp-up phase, as this will impact your returns (and risk). You may not be getting the exposures you expected for some time.

Lonsec believes retail investors can benefit from investing in private markets, but they need to be mindful of the trade-offs when investing via listed vehicles. Retail investors’ needs are inherently different from those of institutional investors—they typically have shorter time frames, a greater need for liquidity, and smaller amounts of capital to invest. While private asset managers have sought to meet a number of these needs in recent years, there’s no panacea for investing in what are inherently illiquid, long-term assets. Retail investors need to ensure that investing in private markets via LITs aligns to their long-term objectives and risk appetite.

Super funds are off to a positive start in the December quarter, regaining momentum following a rocky September and paving the way for double-digit returns for the 2019 calendar year.

While markets have come under pressure in recent months, super funds have once again proved they are up to the task of navigating the significant uncertainty in markets, geopolitics, and the global economy.

Super fund returns held up well in October, despite weakness from Australian shares and signs of softer economic growth globally. The major financials sector has come under pressure due to constrained lending, lower net interest margins, and continued fallout from the Royal Commission. IT shares also suffered a dip as investors questioned the lofty valuations of Australia’s local tech darlings.

According to SuperRatings’ estimates, the median balanced option returned a modest 0.3% in October, but the year-to-date return for 2019 is sitting at a very healthy 12.5%. The median growth option has fared even better, returning 14.4%, while the median capital stable option has delivered a respectable 7.1% to the end of October.

Over the past five years, the median balanced option has returned an estimated 7.6% p.a., compared to 8.3% p.a. from growth and 4.7% p.a. from capital stable (see table below).

Estimated accumulation returns (% p.a. to end of October 2019)

  YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index 14.4% 11.9% 10.1% 8.3% 10.1% 8.5%
SR50 Balanced (60-76) Index 12.5% 10.5% 8.9% 7.6% 9.1% 7.9%
SR50 Capital Stable (20-40) Index 7.1% 6.8% 5.0% 4.7% 5.3% 5.6%

Source: SuperRatings

Estimated pension returns (% p.a. to end of October 2019)

  YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index 16.4% 13.3% 11.2% 9.4% 11.4% 9.5%
SRP50 Balanced (60-76) Index 13.8% 11.7% 9.8% 8.3% 9.9% 8.7%
SRP50 Capital Stable (20-40) Index 8.3% 7.7% 5.9% 5.5% 6.0% 6.4%

Source: SuperRatings

“This year has provided further solid evidence of the ability of super funds to deliver for their members through a challenging market environment,” said SuperRatings Executive Director Kirby Rappell.

“Whether it’s the US-China trade conflict, the weaker economic outlook, falling interest rates, or the rolling Brexit saga, there’s been a lot for funds to take in. This has been a real test of their discipline and ability to manage risks on the downside. Growing wealth in this environment while protecting members’ capital is a tall order, but they have managed it well.”

Shifting asset allocation key to managing risk

One of the most important trends in the superannuation industry is the broadening of members’ investments across different asset classes. Over the past five years, super funds have shifted away from Australian shares and fixed income and moved a higher proportion of funds into international shares and alternatives (see chart below).

Change in asset allocation (2009 to 2019)

Super fund asset allocations have shifted towards alternatives

Source: SuperRatings

The shift to alternatives is significant and has been the subject of debate within the industry. Alternatives include private market assets and hedge funds, which despite the negative connotations can provide an important source of diversification and downside protection when markets take a turn for the worse.

These assets tend to be less liquid, but they can play an important role for funds looking to generate income while managing risks for their members in a world characterised by low yields and growing uncertainty. However, funds should be clear about their alternatives strategy and the risks they could potentially add to members’ portfolios.

“This shift in asset allocation is in part being driven by the low interest rate environment, which has prompted super funds to reach for yield by allocating to alternatives and other less liquid assets,” said Mr Rappell.

“This isn’t necessarily a bad thing, and it may in fact result in a more robust asset allocation, but it’s something members should be aware of. Alternatives can help protect capital under certain market conditions, but they can also be used to boost returns by taking on some additional risk. We generally think the shift to a broader asset allocation is positive, but funds should not be complacent in ensuring risk is appropriately managed.”

Lonsec has again been voted Research House of the Year according to an annual survey of financial advisers and fund managers conducted by and reported in Money Management magazine.

Lonsec this year was considered highly regarded among advisers for the quality of its staff, its model portfolio capabilities, value for money, the quality of its consulting services, the depth of its investment product research, and the sophistication of its asset allocation research.

“We’re absolutely delighted to be named Research House of the Year for 2019, and to be voted number one by advisers for the fourth year in a row,” said Lonsec Research Executive Director Libby Newman.

“This is testament to our people, whose commitment to the continual improvement of our research capabilities and the value of our offering has kept us on top.”

The results come as Lonsec launches new enhancements to its iRate platform, which allow users to incorporate ASX shares in their portfolio analysis and comparisons, with individual superannuation investment options to be added in December. This will enable advisers to get the best possible picture of their client’s portfolio, from shares and other listed products to traditional managed funds and superannuation.

“Our ability to provide in-depth investment product research is the most important factor our advisers look for, and we’re happy that they continue to regard us highly in this area,” said Ms Newman.

“We’re also working on delivering the most powerful tools in the market, so you have the best possible view of how your advice delivers value across your client’s portfolio. This is a very exciting time for Lonsec, and we’re grateful to our adviser community for putting their faith in us once again.”

Check out the full results of the Money Management survey.

 

 

 

 

Congratulations to all of the award winners and finalists for this year’s SuperRatings and Lonsec Fund of the Year Awards Dinner. A full list of the awards is available below.

Lonsec Disruptor Award

Drawn from the Lonsec rated universe, products or issuers who have challenged the status quo.

Winner
Vanguard

Finalists
Allianz Retire+
VanEck Vectors MSCI International Sustainable Equity ETF
Vanguard

Lonsec Investment Option Award

Drawn from the Lonsec rated superannuation investment options and based on a qualitative assessment of the investment team and portfolio design to meet member needs.

Winner
Sunsuper for Life (Balanced Fund)

Finalists
AustralianSuper Balanced (MySuper) Investment Option
Cbus Industry Growth
Sunsuper for Life (Balanced Fund)

 

Lonsec Sustainable Investment Award

Seeks to recognise and highlight the work of asset managers and key players incorporating ESG.

Winner
Ausbil Active Sustainable Equity Fund

Finalists
Alphinity Sustainable Share Fund
Ausbil Active Sustainable Equity Fund
BetaShares Australian Sustainability Leaders ETF

Congratulations to all of the award winners and finalists for this year’s SuperRatings and Lonsec Fund of the Year Awards Dinner. A full list of the awards is available below.

SuperRatings Fund of the Year Award

 

Winner
Sunsuper

SuperRatings MySuper of the Year Award

Awarded to the fund that has provided the Best Value for Money Default Offering.

Winner
UniSuper

Finalists
AustralianSuper
CareSuper
Cbus Super
First State Super
HESTA
Hostplus
QSuper
Statewide Super
Sunsuper
UniSuper

 

SuperRatings MyChoice Super of the Year Award

Awarded to the fund with the Best Value for Money Offering for Engaged Members.

Winner
Sunsuper

Finalists
CareSuper
Cbus Super
Hostplus
Mercer Super Trust
QSuper
Statewide Super
Sunsuper
TelstraSuper
UniSuper
VicSuper

 

 

SuperRatings Pension of the Year Award

Awarded to the fund with the Best Value for Money Pension Offering.

Winner
QSuper

Finalists
AustralianSuper
BUSSQ
Equip
HESTA
QSuper
Sunsuper
Tasplan
TelstraSuper
UniSuper
VicSuper

 

 

SuperRatings Career Fund of the Year Award

Awarded to the fund with the offering that is best tailored to its industry sector.

Winner
HESTA

Finalists
Cbus Super
HESTA
Hostplus
Intrust Super
Mercy Super
TelstraSuper

 

SuperRatings Best New Innovation Award

Awarded to the fund that has developed and launched the most innovative product or service during the year.

Winner
Hostplus Self Managed Invest

Finalists
First State Super Explorer
Hostplus Self Managed Invest
Intrust Super SuperCents
Kogan Super
Raiz Invest Super
Sunsuper Adviser Online Transact

 

Infinity Award

Awarded to the fund most committed to addressing its environmental and ethical responsibilities.

Winner
Australian Ethical Super

Finalists
Australian Ethical Super
AMP
CareSuper
Christian Super
HESTA
Local Government Super

 

SuperRatings Momentum Award

Awarded to the fund that has demonstrated significant progress in executing key projects that will enhance its strategic positioning in coming years.

Winner
Cbus Super

Finalists
Cbus Super
HESTA
Mercer Super Trust
Rest
Sunsuper
Tasplan

 

SuperRatings Net Benefit Award

Awarded to the fund with the best Net Benefit outcomes delivered to members over the short and long term.

Winner
AustralianSuper

Finalists
AustralianSuper
CareSuper
Cbus Super
Hostplus
QSuper
UniSuper

 

SuperRatings Smooth Ride Award

Awarded to the fund that has best weathered the ups and downs of the market, while also delivering strong outcomes.

Winner
QSuper

Finalists
CareSuper
Cbus Super
CSC PSSap
HESTA
Media Super
QSuper

 

 

James Syme, Portfolio Manager, Pendal Global Emerging Markets Opportunities Fund

After five tough years, we think the combination of a more benign US monetary outlook and some extremely compelling valuations makes for some powerful opportunities in the emerging market (EM) domestic demand space.
We see domestic demand — the sum of household, government and business spending in an economy including imports but not exports — as the primary area of opportunity in EM, particularly after the 2018 sell-off.
We emphasise an exciting combination of supportive top-down conditions, good quality companies and attractive valuations.

India in favour
India is currently our most favoured market, despite economic growth recently falling to a six-year low.
We like a number of domestic names there including mortgage lenders. Now that the global liquidity outlook has eased, there is the prospect of the Reserve Bank of India continuing to cut rates even as Indian credit growth recovers.
India, unusually in EM, has not had a credit cycle in the last ten years, so the current pick-up in credit could be enduring.
Alongside that, India has ongoing demand for 5-10m residential units per year that need financing.

Mexico and UAE good value
Elsewhere, Mexican equities look markedly cheap relative to history, despite growth being decent, implying some excessively negative market expectations for the political environment.
We also like property stocks in the United Arab Emirates (UAE), particularly in Dubai.
Through its currency peg, the UAE effectively imports US monetary policy. Higher US rates coincided with oversupply of development properties to push real estate prices and related stocks down significantly.
As the Fed’s more accommodative stance improves financial conditions in Dubai, and helped by rising tourist numbers, the prospects for attractively valued Dubai property stocks look good.

South Korea and China
Turning to South Korea, the ongoing corporate governance revolution there is one of the main reasons for our overweight position.
China is a slightly separate story and continues to disappoint.
It has tightened monetary policy significantly in the last two years as the strength of the US dollar has put pressure on the Chinese renminbi, which has been a constraint on the People’s Bank of China’s ability to act.
Activity indicators remain soft, and we think that more stimulus through faster credit creation remains key to a recovery in China.

We’re bullish about:
• The EM domestic demand space offers an exciting combination of supportive top-down conditions, good quality companies and attractive valuations
• A more benign US monetary policy outlook

We’re bearish about:
• Potential for escalation in the US / China trade conflict
• Chinese growth continues to disappoint

Why allocate to Emerging Markets?
As cash rates head below 1%p.a. in Australia, the need for returns from growth assets to offset lower returns from income assets becomes very important for retirees. However in terms of portfolio construction, trying to improve returns without increasing risk becomes very important, due to the increased concerns of retirees around drawdowns. ‘

We believe that a discrete allocation to Emerging Market equities can assist retiree portfolios to achieve these goals because:
• Emerging markets tend to higher GDP growth than developed markets (DM) – and higher equity market returns (+2.46% pa over 20 years^)
• Despite this, emerging market countries are under-represented in most global equity portfolios
• The different growth profiles between DM and EM bring the benefits of diversification to a global equity allocation, without the need to try and time shifts between them.

Figure 1 demonstrates that a simple 50/50 split between MSCI World and MSCI Emerging Markets would have delivered a significantly higher return, at a very small increase in risk, than a purely developed market portfolio over the last fifteen years.

  • Figure 1: Risk-return profile since 1 Jan 2001

^ Calendar year performance of MSCI World and MSCI EM indices in AUD over 20 years to 31 December 2018.

Hear more about emerging markets as London-based portfolio manager Paul Wimborne of J O Hambro Capital Management presents an update in Sydney and Melbourne in November
Sydney (Nov 14)
Melbourne (Nov 12) 

DISCLAIMER
This communication has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 for the exclusive use of advisers and the information contained within is current as at 21 October 2019. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
PFSL is the responsible entity and issuer of units in the Pendal Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811 (formerly BT Emerging Markets Opportunities Fund). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1800 813 886 or visiting www.pendalgroup.com. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund referred to in this presentation is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This communication is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their or their clients’ objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
The information in this communication may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this communication is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.
Where performance returns are quoted “After fees” then this assumes reinvestment of distributions and is calculated using exit prices which take into account management costs but not tax you may pay as an investor.

For those inclined to question the value of financial advice, there are two important trends taking place right now that need to be reckoned with. Firstly, the federal government is committed to the scheduled rise in the superannuation guarantee, which will see the rate rise to 10% by 2021 and, if the government sticks to the schedule, to 12% by 2025. Workers are gearing up to have more of their retirement wealth exposed to financial markets in coming years, raising the stakes for the wealth management industry and making financial advice less a luxury and more a practical necessity.

Secondly, there have been some troubling signals coming from financial markets over the past six months. While the bull market trend in equities has held up since the start of 2019, the ‘recession dashboard’ is starting to light up, with leading indicators suggesting things might not be as rosy as the stock market suggests. Market turning points pose a real challenge for fund managers and have a way of pushing their process and discipline to their absolute limit. In times like these, product recommendations and manager selection really count, and advisers can quickly find their own processes exposed when things go wrong.

However, even as the value of advice is growing, the perception of advice has suffered through the trauma of the Royal Commission and the uncovering of illegal and unscrupulous practices. Regulatory changes and the shifting nature of advice will inevitably lead to some attrition in the industry, but for the rest there is an acute awareness that things won’t improve on their own. Clients need to be presented with a highly compelling value proposition that demonstrates how the advice process helps them. It also needs to address both the perception issues and the very real regulatory issues around conflicted advice and best interest duty. This is where having the right investment research becomes critical.

Quality investment research is essential to your value proposition

It’s tempting to see investment research as a cost of doing business. The reality is that research is not merely there to supply data, tick a compliance box, or support an established view on a particular product. Quality research is an essential part of the value proposition, because it enables advisers to deliver the things that clients expect from their financial advice: namely, to be able to take full advantage of the depth of Australia’s investment product market and be given recommendations that are most likely to satisfy their investment goals.

Achieving this requires advisers to conduct a full comparison of individual financial products covering a wide range of factors. For any recommendation to be meaningful, it must go beyond past performance to focus on the key qualitative factors that drive future performance and determine whether the product is in line with the client’s needs and preferences. To do this well, advisers must be able to draw on a full team of research specialists with experience across different asset classes, structures, and sectors. Having quality research means partnering with a team that can cover the breadth of products available in the market, and for each product perform the deep dive needed to truly understand how it works and how it can best be incorporated into the client’s portfolio. Having the right investment research means having the resources and capabilities to deliver on your value proposition.

This is why the regulatory challenge facing advisers should not be seen as something distinct from the value proposition. Meeting the highest regulatory and professional standards is something that clients expect, and it’s essential that advisers can demonstrate how they meet these standards. Advisers face a perfect storm of regulatory change, and the winners will be the ones able to adapt to the higher expectations set for them by the regulators and the community. Demonstrating a commitment to acting in the client’s best interest and an ability to avoid or effectively manage conflicts is key.

Tighter regulatory standards reflect the community’s desire for better investment outcomes

The Safe Harbour provisions of the Best Interest Duty state that, when recommending a financial product, an adviser must have conducted “a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter.” In practice, this means that the adviser has not simply looked at a product in isolation and determined if it’s likely to make their client better off but has actively compared it to other similar products and recommended the most suitable one.

In the case of super, there are specific requirements that relate to the due diligence advisers must undertake. Firstly, they must consider the client’s existing products and any products the client requests to be considered. Secondly, the adviser must show the benefits of a new fund, including qualitative factors such as the member servicing environment, the types of insurance the fund offers, the educational material it makes available, and the menu of investment options.

And the standards are getting tighter. The FASEA standards state that advisers “must not advise, refer or act in any other manner where you have a conflict of interest or duty.” This goes beyond the Corporations Act, which merely requires advisers to disclose a conflict and gain the client’s consent before acting for them. The FASEA standard is also broad in the sense that it isn’t limited to conflicts in relation to remuneration. The FPA’s view is that the primary ethical duty in this standard is: if you have a conflict of interest or duty, you must disclose the conflict to the client and you must not act. While these standards are tight, they reflect the community’s expectations that recommendations are free of conflict.

Partnering with a research provider gives you the resources and capabilities to conduct in-depth product comparisons and allows you to show the client how your expertise adds value. Having the right research means you’re better able to support product recommendations with in-depth analysis and detailed product comparisons. It puts you in a better position to meet the regulatory standards and it lets you have deeper conversations with your clients that directly address their needs.

Selecting the right manager involves looking at more than just past performance. It’s about delivering future outperformance based on an in-depth assessment of individual investment teams. This means understanding how people, strategies, and capabilities come together to position fund managers for success. When it comes to selecting for future success, qualitative research is not merely a filter or a heuristic, it’s the backbone of your entire research process.

While you might be able to get away with poor manager selection when the bull market is raging, the real test comes when the market reaches a turning point. Given the troubling signals from financial markets over the past six months, this is something many investors are starting to take very seriously. Market turning points pose a real challenge for fund managers and have a way of pushing their process and discipline to their absolute limit. In times like these, product recommendations and manager selection really count, and advisers can quickly find their own processes exposed when things go wrong.

Identifying future outperformance is an artform, not a science. Lonsec’s entire research process is built around understanding the range of qualitative factors that determine manager success and giving advisers the tools to select investment products based on individual client needs. Our analysis is based on an onsite assessment of investment teams, combined with a rigorous peer review process that safeguards the quality and integrity of our investment product ratings. Looking back over the past 10 years, our qualitative process has proven its worth. Lonsec’s Recommended and Highly Recommended managers have outperformed their respective benchmarks, even during a period where the long-running beta rally has pushed passive investment strategies ever higher, casting shade on many active managers who have struggled to offer value in this environment.

Conveying the importance of insurance to members is one of the biggest challenges that super funds face. Insurance is often seen as a cost rather than a benefit, especially for younger members, meaning funds need to be in a position to clearly communicate the advantages for individuals and for the system as a whole.

The government’s Protecting Your Super (PYS) package came into effect from 1 July this year and aims to reduce the erosion of account balances through unnecessary fees and costs. Part of the legislation involves the cancellation of insurance for members whose account has been inactive for 16 months or more. Based on early analysis conducted by SuperRatings, it’s clear that the PYS changes will have a significant impact across the industry. For the median fund, around 17% of insured members are expected to lose cover. For the quartile of funds most affected by the changes, this figure rises to over 23% (see table below).

What percentage of insured members have lost cover?
Quartile least impacted 13.7%
Median 17.2%
Quartile most impacted 23.4%

Based on an early analysis of member behaviour, it’s clear that members are more engaged with their insurance than was widely anticipated by the industry. According to SuperRatings, the median expected opt-in rate is around 20%. For a quarter of the industry, almost a third of members are expected to opt in, which is significantly higher than funds’ initial expectations. This suggests that inactive members are perhaps not as disengaged as commonly thought (see table below).

Expected Opt-in Rates
Quartile least impacted 32.9%
Median 20.0%
Quartile most impacted 13.4%

These results highlight the importance of fund communication in helping to convey the benefits of insurance and other member services. A member-centric approach to reinstating cover for members that opt in late is beneficial, with funds typically offering a 60 to 90-day reinstatement period. The provision of advice and insurance calculators will assist members in deciding whether to opt in and whether their level of cover is appropriate.

A variety of strategies have been used by funds over the last year to engage with this cohort of members. While traditional forms of member communications such as direct mail have been used in the past, funds have experienced success with email, outbound calling, SMS and digital marketing campaigns. There has also been significant coverage of these changes in the media, which has led to increased awareness and activity of members wishing to ensure they have the appropriate level of insurance coverage. But what’s clear is that, when presented with a clearly communicated choice, members are likely to engage and take action.

This is the start of the process, and undoubtedly it will be an evolving area that will pose different challenges for funds. A limited number of funds have passed on insurance premium increases, with a number indicating that their insurer has decided to wait and see what the overall impact of PYS and other changes such as the Putting Members’ Interests First legislation will be, and these funds may implement changes in the future. SuperRatings will continue to monitor the impact, but it’s anticipated that there will be upward pressure on insurance premiums as funds and insurers digest the changes.

Funds are operating in a different environment where there are conflicts between regulatory settings and potential claims that will emanate where insurance has been ceased for members. How funds are going to strike an appropriate balance when they’re in a somewhat invidious position will be one of the key themes that SuperRatings tracks in coming months.

This article is based on information from the upcoming Benchmark Report released annually by SuperRatings. The Benchmark Report is based on the most in-depth survey of Australia’s superannuation market, covering investment performance, fees, governance, member servicing, and insurance.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.