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Cuffelinks Newsletter Edition 293

  •   15 February 2019

The implications of the Royal Commission are spreading well beyond the initial focus on prosecutions, mortgage broking and the two big NAB resignations. In financial advice, planners with large books of trail commissions have also been hit. How many clients realised if they generated a trail commission of $1,000 a year, it was also worth $3,000 on the value of the adviser's business?

A broker of grandfathered trail commissions, Radar Results, this week advised clients that books of clients that had sold for 3X trail in 2013 to 2017 will probably fall in value to about 1X after Kenneth Hayne's recommendation (likely trail end date 1 January 2021). This is akin to the decline in the value of taxi plates as Uber moved in. Radar said trails were previously attractive because Fee Disclosure Statements were not required and opt-in rules did not apply. Some advisers borrowed to buy these books expecting income for life. Many advice businesses do not have trails, and it was ill-informed of any adviser to expect they would last forever. There is a disincentive for an adviser to move a grandfathered client to a better product. Hayne said:

"The interests of client, intermediary and provider of a product or service are not only different, they are opposed. An intermediary who seeks to ‘stand in more than one canoe’ cannot. Duty (to client) and (self) interest pull in opposite directions." 

The Royal Commission suggests disruptive changes in the way some products are distributed. Roy Morgan research on channel usage shows managed investments are heavily dependent on intermediaries (funds are sold not bought) and how much superannuation relies on employers.  

This week, we have a survey to gauge your reaction to the Royal Commission. It's seven short questions which will take a few minutes of your time, with results published next week.

I went to university with Ken Henry, and while Kenneth Hayne was critical of many people and companies during the hearings, I examine why Henry became the Commission's biggest scalp. I recorded a podcast with Damien Klassen and Tim Fuller on consequences of the Commission.

Labor's franking policy has become a massive political issue, yet the imputation system is poorly understood. In our simple explanation, we distill it to this: to avoid taxing company profits twice, tax must be paid at either the company or individual level, but not both. If it were paid only at a company level, high income earners would benefit from the 30% tax rate. So our system taxes company profits at an individual level. Any tax already paid by the company is refunded. 

More on investing and markets ...

Rachel Folder draws on insights from Howard Marks for guidance on handling market volatility, while James Bloom says the recent rise in US bond rates makes the case for owning equities for yield much less compelling. Jacob Mitchell warns about populism trends around the world. 

Kristen Le Mesurier identifies 10 trends in ESG investing that go beyond the 'feel good' to direct implications for investments, and Patrick Potts shows which companies are likely to benefit from the opportunities presented by 5G

This week's White Paper from UBS Asset Management is a comprehensive review of China following a recent visit. We also feature the latest Exchange Traded Funds (ETF) updates from BetaShares and Vanguard in this increasingly important part of the listed market.

With so much going on, we're experiencing record numbers of visits to our website, and feel free to discuss anything relevant to our audience in Have Your Say

Graham Hand, Managing Editor


For a PDF version of this week’s newsletter articles, click here.



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