Some of the 255,000 baby boomers who will reach retirement age in 2012 will not cease working this year due to time away from work raising children or other more immediate financial matters taking priority, such as paying the mortgage.
As a result, many of these baby boomers will find themselves coming up short or perhaps desperately trying to play catch up to get their retirement savings to where they would like them to be.
Enter financial advice. These ‘gap’ challenges, coupled with the complexities around accessing retirement savings and ongoing legislative change, mean people are going to need help.
It is this scenario that has wealth managers rubbing their hands together with delight over the opportunities that await them in 2012 and beyond.
“This will be a huge opportunity for advisers who are able to promote their skills to this expanding market,” Equity Trustees head of wealth management Phil Galagher says.
“Many of these retirees will need advice from skilled financial planners if they are to take full advantage of all the opportunities available to maximise their retirement income.”
Also characterising 2012 will be some of the practice management perennials – client retention, bedding down reform in the shape of the Future of Financial Advice (FOFA), lead generation and efficiency.
Tipped as the best business model to weather such conditions is the small boutique, which can provide personalised service to high net worth clients or the larger businesses that offer a mass customised value proposition.
At a macro-economic level, the European sovereign debt crisis, China and India’s ability to continue to fuel the growth of the global economy, Australia’s economic resilience, Basel III and the structural reform of financial markets provide significant environmental challenges for the financial services industry.
Meanwhile, low investor confidence has investors questioning the ability of equity markets to provide adequate returns and retirement income over the long term.
Welcome to 2012. What issues should be on advisers’ radars?
Australia’s immunity challenge
The high Australian dollar, household debt, housing affordability and fiscal restraint are key challenges for the domestic economy in 2012.
Growth forecasts for the Australian economy are currently being lowered from around 3.5 per cent to 3 per cent. Meanwhile, the inflation rate in the last quarter of 2011 was at 3.5 per cent, however, it is expected to come in lower at about 2.75 per cent. Interest rates are expected to be cut below the current 4.25 per cent.
Experts warn the Australian share market will continue to be affected by exposure to financials and materials, two of the weakest global sectors in the past year.
The impact the sovereign debt crisis will have on the health of emerging nations such as China and India is also of concern to economies such as Australia, which is exposed more to the troubles in the United States and Europe through its relationship with China and India.
For the past few years, China and India have been key drivers of demand for Australia’s commodities, however, both now face slowing growth rates.
But this slowing should be put into perspective. In the case of China, industrial production in November still grew by 12.4 per cent.
The ability of the Australian economy to remain strong and to indeed further expand in Asia will determine how resilient the country is to global events.
There is the expectation that investment deals with China are about to become easier with the expected creation by the Chinese National Development and Reform Commission of a $300 million threshold below which a tick of approval for foreign investment is not required.
This is good news. But there are also events, such as Australian former travel industry executive Matthew Ng receiving a 13-year sentence in December from the Chinese government on bribery, embezzlement and other corporate charges, which are stark reminders of the astuteness required in all business dealings with China.
Much disquiet over European medicine
Too little too late, poor decisions and lack of urgency are all criticisms that have dogged the handling of the European debt crisis.
Perpetual head of investment market research Matt Sherwood does not mince words when he says the solutions the European authorities propose are “doing more harm than good and that investors’ patience has run out”.
In his paper, “Will 2012 be a repeat of 2011?”, Sherwood says while in 2011 the Japanese natural disasters, the European debt crisis and declining share market valuations dominated, earnings growth was actually positive in most countries.
Despite this, nearly all countries recorded declining market valuations and negative 2011 price returns.
Sherwood says until the crisis is resolved, market risks will be elevated. Further, volatility will be high, markets will continue to be unusually correlated and “investors’ total return will be dominated by income”.
Reforms are no remedy for investor concerns
Characterising 2012 will be the commencement of some of the FOFA reforms, Basel lll and continued discussions of more reforms still to come.
But there is growing concern the timing of these reforms could actually serve to exacerbate the already eroded confidence investors have in investing and in the financial system.
Australian Unity Investments group executive and chief investment officer David Bryant warned late last year that people may consider the FOFA and MySuper reforms are being introduced because the system does not, in fact, work.
Further, people may believe MySuper creates a safety net that means they do not have to worry.
“We have a crisis of confidence and a crisis of trust right across our [financial] system – MySuper, financial advice and our investment markets – which is causing more and more people to put their money into the banks,” Bryant told the Australian Financial Review in October.
Fragile is not too strong a word to describe how investors are currently feeling about investing and the performance of their funds.
Falls from grace by high-profile investment products and investment vehicles, including Trio Capital and MTAA Super, currently under investigation following the incorrect declaration of its director fees in its payroll tax returns between 2005 and 2010, do not help.
There is also the belief that much of the reform is not needed, indeed it is a trigger-happy response to the global financial crisis (GFC) and the global push for reform. Basel lll has come under fire for being too heavy a reform for the Australian financial services industry.
In November 2011, the Australian Prudential Regulation Authority (APRA) released its discussion paper outlining its proposed implementation of the Basel III liquidity reforms in Australia.
“APRA’s objective is to strengthen the resilience of ADIs (authorised deposit-taking institutions) to liquidity risk and improve APRA’s ability to assess and monitor ADIs’ liquidity risk profiles,” APRA chairman John Laker says.
“These reforms build upon APRA’s 2009 proposals for a stronger liquidity management regime in our banking system.”
A changing playing field
The decision by international rating agency Standard & Poor’s (S&P) late last year to cut its risk assessment score for the Australian banking sector has some commentators re-evaluating the future stability of the big four and the future credit ratings of the major banks.
One of S&P’s primary concerns was the overreliance of Australian banks on funding from international markets, particularly in light of the prolonged European debt crisis, which will increase the cost of funding in international markets.
Meanwhile, the big four banks continue to kick goals in the profit department. Last financial year, Commonwealth Bank of Australia posted a $6.8 billion profit, a record result for an Australian financial institution.
However, such performance is not expected to continue as banks will be under pressure to pass on higher borrowing costs, which equity analysts say will most likely be done via lower dividend payments.
The ability of the banks to maintain their competitiveness in the aforementioned economic conditions will continue to be a theme during 2012. New players and indeed competitors will emerge this year, in particular possible competition from two of Japan’s largest banks, which are reportedly investigating entering Australia’s $850 billion residential mortgage market.
Structural change will see a new type of advice and wealth management business emerge. For example, mortgage aggregator Vow Financial recently launched Vow Legal to provide online conveyancing and related legal services for its brokers and financial planning network.
According to Vow Financial chief executive Tim Brown, the decision is part of the business’s strategy to diversify and provide multiple products and services to its brokers and will allow it to ensure all its clients’ needs are looked after.
This will be a common theme as specialisation fast emerges as a strong business strategy for advisers looking to focus on one niche market based on profession, age or service offering.
Businesses such as Global Destiny are already doing it. It has carved a niche in the medical profession through its servicing of United Kingdom clients with personal or company pension funds who have relocated to Australia.
It is these specialised models and their complete opposite – large, multi-disciplined and corporatised – which BT Financial Group head of dealer groups Matt Englund says will be the two distinct distribution models.
Meanwhile, Business Health principal Tony Stephens believes models will be organised along the aforementioned specialisation trend based on professions. “There will be a licensee for dentists, there will be a licensee for GPs, and they will be branded licensees. They’ll be branded for those particular niches,” Stephens says.
Calls for a new approach to investing
Figures from SuperRatings published in November 2011 show Australian superannuation funds reported the worst five-year returns since the introduction of compulsory super contributions.
Add to this that the Australian share market has underperformed many of its global equity market peers for the sixth year in a row, and investors are now really starting to question whether the government’s decision to increase compulsory superannuation from 9 per cent to 12 per cent will in fact help them reach their retirement goals.
“In a number of countries throughout the world there is recognition that the retirement income models of the past decade have lost some degree of public support,” APRA deputy chairman Ross Jones told the Association of Superannuation Funds of Australia 2011 national conference.
“In extreme cases, for example Argentina, the private pensions industry has effectively been nationalised.”
There are calls for investors to rethink the conventions of asset allocation in the post-GFC environment.
Mantras such as sticking to your guns with a long-term investing approach are being scrutinised, given the experience of believers following the GFC.
Even the funds management industry is turning on itself. “If you actually think about the people who are telling you that, they have an interest for you to do that because it’s a sector they dominate,” Centuria Capital chief executive John McBain says.
With the view that the after-effects of the GFC could continue another three to five years, McBain says advisers should be asking more questions of fund managers, particularly over the level of volatility in their funds.
Centuria has revised its strategic asset allocation policy setting assessment down from a 24-month outlook to a 12-month outlook. It also considers its weightings in shares based on downside rather than upside, and recently reduced one of its funds holdings from a 60 per cent allocation to a 12 per cent allocation.
The older funds management models (now so-called ‘conventional’) that do not follow the above practices are being challenged to rethink their investment styles and approaches. Investment styles such as benchmark investing, particularly for investors seeking less volatility or who have a shorter time frame, have come under fire.
Meanwhile, newer multi-asset funds that spread money over more asset classes can help smooth the ride for investors.
The push for a greater adoption of performance fees by fund managers as well as calls to reduce executive remuneration have been part of this movement and a reaction against the excesses of the industry at a time when investors are hurting. «
