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Cuffelinks Newsletter Edition 296

  •   8 March 2019

Almost 2,000 people completed our survey on Labor's franking credit proposal, with 84% opposing the policy. Only 12% were in favour with 4% undecided. Obviously, this is not a random sample, with 80% of respondents over 55 and many SMSF trustees who will be materially affected. The survey results are the strongest indication yet that the policy may create major changes in super.

The most consequential finding was that over half of respondents intend changing their investments or super structure if Labor is elected. Switching from Australian equities into assets with unfranked income was the main strategy, with strong support for adding children as SMSF trustees, switching from an SMSF to a public fund, spending money to qualify for the pension and hanging on to the family home. If these intentions play out, there will be a big change in the SMSF landscape and Labor's revenue projections will not be achieved. 

Asset reallocation should not be done simply in disgust at the policy change. The new asset must have inherent investment merit, and if income is the aim, global equities will struggle to match the local market. The cash dividend from Australian banks is about 6%, which grosses up to 8.6% with imputation credits. An SMSF that sells its bank shares needs to be confident it can generate 6% in an unfranked distribution with better capital gain potential.

On switching, an industry fund with a 0.75% management fee will cost $15,000 a year on $2 million, while an SMSF can be managed with low fees (such as on term deposits and index funds) and an administration cost of about $4,000 a year, or only 0.2%. I checked a few industry funds and none of them cap their fees. Consultants Rice Warner predicts that industry funds will surpass SMSFs in total size by 2020, reaching $1.7 trillion in 2033 or 37% of all super assets.

(As an aside, and showing how difficult it will be to answer questions on a complex subject like franking, one call centre person tried to convince me that investment management fees are charged on the fund's earnings, not the fund's balance).

Source: Australian Financial Review and Rice Warner

Industry funds will become more powerful and able to influence strategy at Australian companies. Greg Combet, Chair of Industry Super and IFM Investors and former Labor minister, warned:

"You'll see more focus on ESG issues, but also over time an interest in business models, in particular in the financial services sector. AMP's model has destroyed value. That is not in the interests of shareholders and not in the interests of super fund members."

At the same time, hundreds of financial advisers who support retail fund platforms and rely on trail commissions are facing disruption. The Government has released draft exposure legislation to ban grandfathered commissions, and legal challenges are likely. Advisers argue it is unconstitutional and a theft of property rights, with half of all advisers still relying on grandfathered commissions for at least 15% of their revenue. They point to a media release on 29 August 2011 when the then Minister for Financial Services and Superannuation, Bill Shorten, said:

"Following legal advice from the Australian Government Solicitor, the government has determined that the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions."

Even if there is a ban, will the uncollected commissions make their way into consumer pockets? We stress there are many strong financial advice groups who receive little or no trails.

Last week's article on franking in public funds has been viewed 11,000 times and was republished in The SMH and The Age. It caused a flurry of requests to platforms to clarify the likely future franking treatment. This week, we reproduce the email sent to a reader by Chris Bowen to give his side of the story, and a fascinating paper by actuary Geoff Walker who shows that SMSF pensioners will be worse off under the Labor proposal than they were before 2007 when tax-free super pensions were introduced.

Adrian Harrington explains how the growth of e-commerce has played well for industrial property, while Robert M Almeida looks at the need to worry about a recession in 2019. With the February reporting season behind us, Ashley Owen shows why our market relies on a few companies, and compares the longer term performance of the big banks and miners.

While most fund managers will now talk about their ESG screens and policies, it's another step into ethical investing. Leah Willis expands on the differences with reference to particular stocks.

Tomorrow is International Women's Day, and this week's White Paper from Fidelity International called The financial power of women shows women are more risk averse than men but they need equities in their portfolios because they live longer. Suzie Toohey provides data showing most women are unprepared for retirement.

Graham Hand, Managing Editor


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




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