And they should be able to make a “holistic” assessment of other credit products packaged with a home loan in meeting the new best interests duty.

These are among the proposals included in draft guidance prepared by ASIC to give effect to new legislation that imposes a best interests obligation on brokers. The new duty, which applies from July 1, is in addition to responsible lending obligations

ASIC’s guidance includes its interpretation of the best interests obligation, its expectations for meeting those obligations and its approach the administering the system. It is seeking industry feedback.

The guidance is principles-based and does not include safe harbour provisions.

Information gathering. ASIC does not prescribe the appropriate information brokers should gather from their clients. Rather, it recommends a case-by-case approach.

It says: “The type and amount of information that a mortgage broker should gather to identify the consumer’s needs and objectives, and determine whether a credit contract will be in their best interests, varies depending on the consumer’s individual circumstances.”

Assessing best interests. ASIC recommends that brokers take a holistic view of products, with the cost of the loan a priority – interest rate, fees and charges and the size of repayments.

“We consider that cost is generally a factor brokers should prioritise. A failure to consider cost and investigate the lower cost options available to the consumer may be indicative of non-compliance.”

Non-cost considerations, such as loan features and accessibility, should also be assessed for the net benefits they offer.

Presenting information and recommendations. ASIC wants brokers to tailor the way they present product options and recommendations “to account for the consumer’s expectations”.

It is also emphasising the educative role of mortgage brokers. ASIC says it is important that consumers are helped to understand the options presented.

The legislation does not prescribe how many options should be presented to consumers. But ASIC says “some practices are not consistent with acting in the consumer’s best interests.”

It cites consumer research which shows that 58 per cent of consumers receive only one or two loan options.

Interaction with responsible lending obligations. According to the information memorandum accompanying the bill – Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Bill 2019 – “there are circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with.

“For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s best interests.”

ASIC says meeting responsible lending obligations is not necessarily sufficient to discharge a duty to act in someone’s best interests.

Brokers should be able to satisfy themselves that recommending from within their panel is in the consumer’s best interests. Consumers should be informed about which credit providers the broker has access to and which they do not.

Range of credit products. The broker must act in the best interests of the consumer not only in relation to the mortgage but also in relation to any other credit contracts for which they provide credit assistance. These might include credit cards and personal loans.

Brokers will be required to assess other credit products packaged with a home loan in meeting the new best interests duty.

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According to S&P Dow Jones Indices’ latest SPIVA Australia Scorecard, only 13.3 per cent of “general equity funds” beat the S&P/ASX 200 benchmark last year.

Measured over five years 20.4 per cent of funds outperformed, and over 10 years 16.8 per cent outperformed.

Mid and small-cap funds produced better relative performance, with 48.1 per cent of funds beating the S&P/ASX Mid-Small Index.

Measured over five years 29.9 percent of mid and small-cap funds beat their benchmark, and over 10 years 52.8 per cent outperformed.

The relative performance of Australian bond funds was particularly poor. Only 1.6 per cent of funds beat the S&P/ASX Australian Fixed Interest Index last year. However, on a risk-adjusted basis (taking return volatility into account), 37.8 per cent outperformed.

In the international equity category, 20.6 per cent of funds beat the S&P Developed Ex-Australia LargeMid Cap Index. Measured over five years 10 per cent of funds beat the benchmark, and over 10 years 10 per cent outperformed.

Last year, 4.3 per cent of Australian funds from all categories were merged or liquidated. Mid and small-cap funds went out of the market at the fastest rate (8.5 per cent).

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The Australian Prudential Regulation Authority reported yesterday that assets in SMSFs fell 0.2 per cent to $726.5 billion over the 12 months to the end of December. The value of assets in APRA-regulated funds grew 2.2 per cent to $1.7 trillion over the same period.

The number of SMSFs grew from 583,697 to 597,009 over the year – an increase of 2.3 per cent. The rate of growth in SMSFs has slowed markedly over the past couple of years.

Australian Taxation Office data shows a significant decline in the number of new SMSFs being established. There were 5580 establishments in the September quarter last year, which is the smallest quarterly number reported by the ATO in the history of its survey.

Commentators have pointed to tighter regulation of advisers, reports that small SMSFs are expensive to run and concerns about proposed tax changes, particularly Labor’s franking credits policy, as reasons for the slowdown.

In December, self-managed superannuation fund administrator SuperConcepts published the results of a survey of more than 600 of its SMSF trustee clients. It found that in response to a change in the franking policy 14.5 per cent would consider shutting their funds.

“SMSFs are in runoff,” says Andrew Inwood, the principal of research house CoreData, who was a speaker at the SMSF Association national conference in Melbourne last week.

Inwood says: “Member growth is running at half the rate of the rest of the industry. There is some evidence that people are moving from SMSFs back into APRA funds.”

The chief executive of the Australian Institute of Superannuation Trustees, Eva Scheerlinck, says her organisation is getting more inquiries from people who want to move their assets from an SMSF to an APRA fund.

Scheerlinck, who also spoke at the SMSF Association conference, says the sector faces a number of difficult issues. Last year’s Productivity Commission report raised questions about the appropriate minimum asset size for the establishment of an SMSF and the Labor policy on franking credits was causing concern.

“If the ALP policy is adopted it will make it less attractive to start an SMSF,” she says.

The chief executive of actuarial consultant Rice Warner, Michael Rice, says the sector will decline a little in terms of assets. “People with very large assets in their funds are getting old. The balances will be smaller in future. That is going to change things.”

Scheerlinck says the regulatory focus on the sector is likely to continue and that may discourage people from starting new SMSFs.

The debate about whether there should be a minimum asset size for setting up a new fund is still being debated, ASIC is concerned about the quality of advice SMSF trustees are getting and the influence of one-stop property shops, and the Labor Party plans to get rid of limited recourse borrowing arrangements, as well change the franking credit rules, if it wins government.

Inwood says another issue the sector has to face is what happens to trustees who suffer from cognitive decline. “There are issues of intergenerational transfer that will emerge in the SMSF sector,” he says.

Rice agrees: “Once one partner dies and one old person is left in charge, then there is a question about whether that person should be running their own money.”

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Sam Le Cornu, the former co-head and head of investments of Macquarie’s Asian listed equities business, will lead Stonehorn and is joined by Duke Lo and John Lam. Having previously worked together for almost 10 years, the team holds a consistent and successful track record in co-managing over A$4 billion.

Underpinning the venture is Trawalla Capital, a private investment firm of the Schwartz Family Office, headed by Alan and Carol Schwartz. Trawalla Capital is a shareholder in Stonehorn and will be a significant investor in the fund.

The Stonehorn team is launching an actively managed, high conviction and totally unconstrained Asia ex-Japan long-only equity portfolio. It will hold an average of 30 positions while being unconstrained in terms of sector, country and market cap.

The team is based in Hong Kong, where they will leverage their local networks, language skills and high-level access to Asia’s leading companies.

Investments are selected by cross-checking investment assumptions, conducting face-to-face management discussions, analysing financial accounts and carrying out industry checks. The investment process focuses on robust corporate governance checks, addressing environmental, social and governance concerns, while navigating the many risks specific to Asia.

Le Cornu’s, Lo’s and Lam’s previous record together is very strong. Le Cornu was named ‘Chief Investment Officer of the Year’ two years running by the Asia Asset Management Journal. The strategies they managed at Macquarie consistently posted strong absolute and relative performance for nearly a decade.

Le Cornu says: “I’m extremely excited to be working again with John and Duke to create an Asian boutique asset management firm which has a true partnership-mindset, sees its investment team invest its own money alongside its clients, and has fully-aligned interests with their clients as well.”

Lam adds, “Our investment approach is the same as what we did in the last decade. The principles behind how we organise ourselves are also the same. What will be different this time is the environment, market inefficiencies will always exist, and all it really does is further set apart the good managers from the mediocre.”

Trewalla’s Alan Schwartz says: “We have long believed the Asian market presents tremendous opportunity for Australian investors, who we think are currently underweight in their asset allocation to Asia equities. We believe in long term investing and the stronger economic growth in Asia, relative to developed markets, will continue to drive returns and draw capital to the region over the long term.

“We are therefore delighted to be partnering with Sam, John and Duke. They are established leaders who are proven in their field, whose values and approach are strongly aligned with our own. Stonehorn’s team leverages its unique networks and local presence to ensure investments are made in only the highest quality companies with a focus on strong corporate governance. We are very excited by the opportunity to be a major investor in their first fund.”

Stonehorn Global Partners will be Trawalla Capital’s third portfolio company, complementing Qualitas, a real estate investment management firm, and Armitage Associates, a growth equity manager.

The fund will initially be open to investment from institutional and wholesale investors in Asia, Europe and Australia, including high net-worth individual investors, family offices and institutions.

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The two companies announced plans to merge in November, with WAM Leaders to acquire 100 per cent of Century’s shares under a scheme of arrangement. Last week Century announced that shareholders would receive approximately 0.834 shares in WAM Leaders for one Century share.

At the time the deal was announced, the merged entity would have had $885 million of net assets and 18,000 shareholders. Century had gross assets of $96.9 million and a market cap of $91.9 million.

Wilson Asset Management is the manager of both funds. It took over management of Century from Perennial in early 2017.

Century says the merged funds’ management expense ratio would come down by at least 25 basis points a year, as a result of the removal of duplicated expenses and the larger asset pool.

It says the performance fees of the merged entity will be more favourable to Century shareholders, as WAM Leaders performance fee is payable annually rather than semi-annually.

The investment mandates of the two companies are similar. The parties head to the Federal Court on 18 February for approval of the deal.

The merger proposal is the latest move in a sector that is seeing an unusual amount of corporate activity.

Watermark Funds Management has embarked on a complete overhaul of its business, moving to convert one of its listed investment companies to an unlisted unit trust and proceeding with plans to withdraw from global equities altogether.

The company, which has around $700 million of assets, announced that it has implemented a scheme implementation deed with Equity Trustees. Execution of the deed will see its LIC Watermark Market Neutral Fund delisted from the ASX.

Watermark has acknowledged that the LIC has persistently traded at a discount to its net asset value, with the discount ranging from 10 to 20 per cent. A buyback introduced in 2017 did not do much to change things.

In another move John Bridgeman Ltd has made a bid for Henry Morgan Ltd and Benjamin Hornigold Ltd – three investment companies that have various longstanding relationships. However, at the moment the deal is being held up by the Takeovers Panel which has identified some “unacceptable circumstances”.

Towards the end of last year Wealth Defender Equities was taken over by WAM Capital, which then moved to compulsory acquisition to mop up the remaining minorities. The company was de-listed in December.

According to Independent Investment Research, at the end of the September quarter 80 per cent of the investment companies and investments trusts listed on the Australian Securities Exchange were trading at a discount to their net tangible asset backing. Thirty-nine per cent were trading at discounts of more than 10 per cent.

Independent Investment Research analyst Peter Rae says: “Given the preponderance of sub-$100 million market-cap LIC/LITs trading at large discounts, we believe this area of the market is open to further corporate action over the coming year.”

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The company, which has around $700 million of assets, announced yesterday that it has implemented a scheme implementation deed with Equity Trustees. Execution of the deed will see its LIC Watermark Market Neutral Fund delisted from the ASX.

Watermark has acknowledged that the LIC has persistently traded at a discount to its net asset value, with the discount ranging from 10 to 20 per cent. A buyback introduced in 2017 did not do much to change things.

The fund was launched in 2013 with an $80 million capital raising. Since then Watermark has not been able to raise additional funds and, as a result, the fund has been illiquid.

Watermark also concedes that the fund is too small to be run efficiently, given a number of fixed costs involved in operating a listed company.

Equity Trustees has been appointed responsible entity of the new unlisted trust, which will be a registered managed investment scheme and will appoint Watermark Funds Management as investment manager.

There still a number of steps to complete in the process, including an independent expert’s report on the transaction, a shareholder vote, ASIC and court approval.

Watermark says it is working with its advisers to ensure an efficient transfer of the company’s assets into the new trust.

There are no plans to de-list the company’s other Australian equity LIC, Australian Leaders Fund Ltd.

Watermark also announced yesterday that another LIC, Watermark Global Leaders Fund Ltd, will be converted to an unlisted unit trust in similar fashion, to be followed by a capital return to unitholders.

Watermark chief investment officer Justin Braitling says: “We embarked on an ambitious plan four years ago to build a global equities capability which would complement our Australian business.

“While this has ultimately strengthened our investment process and afforded us a broader perspective on asset markets, it has been a strain on the resources of the business and we have not achieved the results for our investors that we had hoped.”

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From February 4, the administration fees for MLC’s retail Wrap Series 2 platforms will be halved to 0.15 per cent a year on balances between $200,000 and $500,000.

Fees on balances above $500,000 will be cut 40 per cent to 0.03 per cent.

MLC Wealth chief executive Geoff Lloyd says that, based on an average balance of $480,000, the new administration fee structure will represent a saving of 23 per cent on the Wrap platform.

Clients with up to four family members will be treated as one group. Annual administration fees will be capped at a maximum of $3600 per superannuation family group and $3000 per investment group.

From April 1, MLC will also lower the administration fee for retail MasterKey Super and Pension Fundamentals products.

For balance up to $200,000, the administration fee will be cut by 25 per cent to 0.3 per cent. Fees for the balances between $200,000 and $800,000 will be reduced from 0.25 per cent to 0.20 per cent.

The flat fee for balances under $50,000 will fall from $130 to $78 a year.

Lloyd says the price changes will benefit more than 200,000 clients.

The latest changes follow MLC Wealth’s announcement last September that NAB Financial Planning and NAB Direct Advice would no longer accept grandfathered commissions from NAB Wealth superannuation and investment product providers.

And in October it increased the rates on its cash funds

Lloyd says: “Over the next 12 months we will be implementing a number of initiatives across the business to ensure our clients have access to competitive fees and our products and services are meeting their changing needs.”

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It has issued interim orders, telling JBL to stop processing acceptances received under each bid. It says it is considering its final orders.

John Bridgeman Ltd, an investment management company led by CEO Stuart McAuliffe and listed on the National Stock Exchange, launched scrip bids for Henry Morgan and Benjamin Hornigold.

Henry Morgan and Benjamin Hornigold are investment companies listed on the ASX. Stuart McAuliffe chairs both companies, and both have investment management arrangements with John Bridgeman.

The Takeovers Panel says the bidder’s statements did not adequately disclose information material to the acceptance of the bids, including the various relationships and transactions between the parties.

It has some other concerns. In relation to the Benjamin Hornigold bid, loan arrangemnets “diminished the value of important assets of BHD, making BHD less attractive t an acquirer and less likely to attract competing proposals.”

The parties failed to promptly correct the misrepresentation of conditions of the voting director’s recommendation in the bidder’s statements.

All three companies are named after famous pirates. The two ASX-listed companies have been the subject of multiple queries by the ASX and have had lengthy trading suspensions.

McAuliffe, a Bond University lecturer, once enjoyed support among investors in the companies but that support appears to have faded, as the applications to the Takeovers Panel indicate.

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Macquarie Securities has produced a study of the sector, titled ‘The Great Compression”, in which it argues that regulatory change will lead to a more transparent market

Macquarie expects the specialists’ funds under administration to grow by 85 per cent over the six years to 2026, as the established alignments between mature platforms, advisers and asset managers break down.

It believes Netwealth and HUB24 are best placed to win share and will take close to half of the specialists’ net flows over the six years.

However, Macquarie cautions that, while the vaue of the specialists is evident they are not sufficiently differentiated to yield pricing power. “We are forecasting a 12 basis point decine in revenue margins over the next three years,” it says.

“Moving to a post-Financial Services Royal Commission platform market will result in pricing pressure, in our view, from: transparency of total cost to clients driving more competitive offerings and clearer platform margins; admin margins normalising to a market rate in platform margin stacks; and conflicted remuneration methods are likely to be abolished.”

With its view that specialist platform providers will suffer margin compression, Macquarie’s estimate for earnings are much lower than consensus forecasts.

The market will grow from $850 billion of funds under administration currently to $1.5 trillion by 2026.

Macquarie estimates that for an account balance of $400,000. HUB24’s annual fee is $3116 and Netwealth’s is $3261. Compared with the lowest cost provider, HUB24 earns an additional annual fee of $785 and Netwealth $930.

“A key objective post-Royal Commission is expected to be increased fee transparency. If the industry moves to total cost per account, we believe this will drive higher-cost platform operators down.

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The FSC has re-written the Code it introduced in 2016, which was widely seen as inadequate in a number of respects.

The revised Code has broader product coverage, includes superannuation trustees and has more extensive disclosure and consumer protection provisions. There is an extensive section on mental health. It has more than 30 significant changes.

FSC chief executive Sally Loane says: “There is still time to get your views heard.”

Launching the draft of the revised Code last November, Loane said: “This is a radical overhaul. We are listening and acting on the comments we have received from stakeholders. We want a code that serves the needs of consumers.”

The re-write of the Code was led by FSC senior policy adviser Nick Kirwan. He says the Code includes a new chapter covering superannuation trustees, which mirrors the provisions of the Insurance in Superannuation Voluntary Code of Practice.

Kirwan says the draft aims to give greater support to people with a mental health condition, with clearer underwriting questions, more reliance on individual circumstances rather than automatic decisions, and treatment of people with mental health conditions as vulnerable.

“We have not found the silver bullet but we have made a number of changes that will make an incremental difference. Together they should make a substantial difference,” he says.

A big change will be a move from gathering health information from GP’s clinical notes to reports.

Wider coverage will include funeral insurance, indemnity cover and consumer credit insurance, which will have to be sold as a standalone product.

A change to the treatment of sales practices is that the revised Code will cover all distribution channels and not just channels operated by the insurer’s own representatives. The new Code also deals with coercive retention practices.

The revised Code includes a moratorium of genetic tests in life insurance. The objective of the moratorium is to ensure that people can access a level of life insurance without being asked about the result of a previously taken genetic test.

Life insurers will not ask applicants to take a genetic test as part of their application and underwriting process.

The Code sets thresholds for levels of cover for use of information in genetic tests. For example, life insurers may only ask for or use the results of a previously taken genetic tear if the amount of lump sum death cover is above $500,000 or income protection cover is above $4000 a month.

Kirwan says the FSC is working through a number of issues with ASIC as it moves towards registration. He says he is confident the drafting process for the revised Code meets ASIC requirements in terms of public consultation, content and governance (it will have an independent compliance committee).

The parties are still working on enforceability. “We believe it will be fully enforceable through AFCA but there is an outstanding question about enforceability through the courts.”

The parties are also still talking about the issue of “agility” – how easily the Code can change to meet changing circumstances.

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