Latest / The Money Puzzle / Relax... the new super tax looks dead in the water

Transcript

Relax... the new super tax looks dead in the water · The Money Puzzle

0:10
Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby, the Wealth Editor at The Australian. Welcome aboard, everybody. Now,
0:17
Speaker 1: we're not a news program, as you know, but we
0:21
Speaker 1: are alert to news as it happens. And just now,
0:24
Speaker 1: there's a lot happening for investors around super, around financial advice,
0:32
Speaker 1: and the landscape is altering quite quickly. And I think,
0:38
Speaker 1: you know, to be a complete investor, you do need
0:40
Speaker 1: to be up to speed with what's happening. You don't
0:43
Speaker 1: need to know everything. You don't need to know all
0:45
Speaker 1: the macro and all the speculation, but you do need
0:48
Speaker 1: to know the terms in which you are investing. And
0:53
Speaker 1: that's what today's show will actually hinge on. You need
0:58
Speaker 1: to be up to speed. And my guest is very
1:00
Speaker 1: much up to speed on all things in this area
1:03
Speaker 1: because he's the editor-in-chief of the Conexus Group. And Conexus
1:08
Speaker 1: is a financial publishing and information group. It has all
1:10
Speaker 1: sorts of arms. It does some professional magazines like Financial Planners,
1:15
Speaker 1: for instance. And it has a Conexus Institute, which is
1:18
Speaker 1: a not-for-profit think tank. And that issues reports in the area.
1:25
Speaker 1: His name is Alex Vicovich. First time on the show.
1:28
Speaker 1: Lovely to have him. How are you, Alex?
1:30
Speaker 2: G'day, James. Thank you for having me.
1:32
Speaker 1: I've picked a good week to have you, haven't I, really?
1:34
Speaker 1: I don't think I've had as many calls from the
1:36
Speaker 1: general news desk all year as this week because there's
1:40
Speaker 1: so much happening. In fact, there's a Senate committee tomorrow
1:43
Speaker 1: on super, for instance, where they're hauling, hauling the CBUS chairman,
1:48
Speaker 1: Wayne Swan, in front of them at last.
1:51
Speaker 2: Against his will, I believe.
1:52
Speaker 1: Against his will. It would seem so. And there's been
1:57
Speaker 1: big news on the three million super tax, which was
2:00
Speaker 1: the biggest kind of policy change in super for some
2:03
Speaker 1: time this week, all sorts of things happening. So good
2:06
Speaker 1: to have you on. Look, why don't we start, first
2:08
Speaker 1: of all, with super and what's happening around super? Because
2:11
Speaker 1: I think people are, I have to tell you that
2:13
Speaker 1: people are concerned about some of the issues in the
2:17
Speaker 1: industry funds. Every industry fund is different, but they're all
2:20
Speaker 1: run in broadly the same way. And many of them,
2:24
Speaker 1: Australian super, HESTA, Uni super, they've all had for want
2:30
Speaker 1: of a better word in recent times. CBUS is outstanding,
2:33
Speaker 1: of course, because ASIC are taking them to court for
2:36
Speaker 1: delayed payments on death benefits and disabilities. The APRA are
2:41
Speaker 1: also investigating them. There's a whole bunch of issues around them.
2:45
Speaker 1: And people, interestingly enough, as you probably know, Alex, a
2:49
Speaker 1: lot of journalists and media people were in CBUS because
2:52
Speaker 1: they were in the old media super, which was hoovered
2:55
Speaker 1: up by CBUS in the way of these big funds.
2:58
Speaker 2: That's right. Yeah, I was a member of Mediasuper myself
3:01
Speaker 2: before setting up a self-managed super fund.
3:03
Speaker 1: Snap. So was I. But I have to go back
3:06
Speaker 1: to 2006 for that one. But here's the thing. What's
3:09
Speaker 1: your initial impression of this? Is it a year where
3:12
Speaker 1: we say this is the year the super funds actually
3:14
Speaker 1: had to professionalize and come to the table and sort
3:17
Speaker 1: out some of the issues that are not actually, in
3:20
Speaker 1: many occasions, in the best interest of individual investors?
3:24
Speaker 2: Yeah, thanks, James. And I like the way that you
3:26
Speaker 2: frame it. At the outset, this is a week where
3:30
Speaker 2: a whole range of financial services, policy debates, political fights
3:34
Speaker 2: are coming to a head. But I'd probably say that
3:37
Speaker 2: every week in the last 30 years of compulsory super
3:40
Speaker 2: has been contentious and there have been big political issues.
3:44
Speaker 2: Just on the super funds themselves, we are seeing more
3:47
Speaker 2: scrutiny from regulators. The way that the superannuation industry is
3:51
Speaker 2: regulated is really important to understand because it has two
3:54
Speaker 2: separate regulators involved. One that's Prudential in APRA and another
3:59
Speaker 2: one that covers conduct in ASIC. And so no one
4:02
Speaker 2: has a full piece of the sector and they just
4:04
Speaker 2: each look at different little bits. But both of them
4:08
Speaker 2: are really looking, as is the parliament, at the sort
4:11
Speaker 2: of growth and growth of industry super funds, which you'd
4:13
Speaker 2: have to say is one of the biggest developments in
4:16
Speaker 2: the Australian economy.
4:17
Speaker 1: $ 4 trillion industry now.
4:20
Speaker 2: $ 4 trillion, it's just ticked over in the last few
4:24
Speaker 2: days in terms of the public reporting. That does include
4:27
Speaker 2: the SMSF sector. But the important thing around super is
4:31
Speaker 2: not so much the number, but the fact that it
4:33
Speaker 2: has effectively a 12%, maybe one day 15% annualized growth rate, right?
4:38
Speaker 2: So that pool really is never shrinking. And I think
4:41
Speaker 2: that's the first thing to understand about why we're seeing
4:44
Speaker 2: this scrutiny. Partly, it is just a function of the
4:48
Speaker 2: increasing size. You're talking about the world's third biggest pool
4:52
Speaker 2: of retirement assets, despite us having a much smaller population
4:56
Speaker 2: than comparable nations. And you're also talking about a pool
5:00
Speaker 2: of assets that's twice the size of the Australian economy,
5:03
Speaker 2: which is really hard to get your head around.
5:05
Speaker 1: But here's the thing. I suppose people see these issues
5:08
Speaker 1: and they are in super funds, and it's only natural
5:11
Speaker 1: that people would say, will the investment performance of my
5:18
Speaker 1: super fund be diluted or damaged or weakened by obvious
5:23
Speaker 1: weaknesses in other parts of the funds. At CBUS, for instance,
5:27
Speaker 1: you know, if they're delaying payments to death benefits and
5:31
Speaker 1: treating people badly on that front, is that going to
5:33
Speaker 1: hit my investment performance? If I can't see, if I
5:36
Speaker 1: can't access AOT or UniSuper for some reason, because they've
5:40
Speaker 1: got some IT cock up Well, have they got IT
5:43
Speaker 1: cock-ups in the investment department? And I think that's what
5:45
Speaker 1: people are worried about. What would you say to people
5:49
Speaker 1: who come up to you on the street and say,
5:51
Speaker 1: I'm worried about my industry fund because it's getting all
5:54
Speaker 1: sorts of bad publicity?
5:56
Speaker 2: Well, the first thing I'd say is that it's awesome
5:58
Speaker 2: they're engaged with their superannuation and what their fund may
6:00
Speaker 2: or may not be doing. I think it's important to
6:03
Speaker 2: hold them to scrutiny. They are fiduciaries. They have a
6:06
Speaker 2: really strong legal obligation to members. And so it's great
6:09
Speaker 2: that we're holding them to account. There's two separate issues
6:12
Speaker 2: that are really being looked at the moment. The one is,
6:14
Speaker 2: as you say, really you could describe as member experience,
6:17
Speaker 2: the way that funds are engaging with their members, things
6:21
Speaker 2: like death benefit claims, insurance claims, and there's a strong
6:25
Speaker 2: body of evidence that these things need to improve. In
6:29
Speaker 2: terms of the links between that and the investment performance,
6:31
Speaker 2: maybe you could argue that insofar as people are leaving
6:35
Speaker 2: the fund and that then reduces the quantum of the
6:40
Speaker 2: assets that they can invest, that could have a flow
6:42
Speaker 2: on effect or insofar as it's distracting key C-suite executives
6:48
Speaker 2: from the fund to some of these other issues, then
6:51
Speaker 2: you could argue that's having an effect. But really, I
6:53
Speaker 2: think you would want to, in truth, separate these kind
6:57
Speaker 2: of member experience and communications issues, which are really important
7:01
Speaker 2: and which need to improve and which deserve scrutiny from
7:04
Speaker 2: the investment performance. But the other area where the regulators
7:09
Speaker 2: are cracking down and where we're seeing a lot of
7:10
Speaker 2: media activity is on the governance. We're seeing this, of course,
7:14
Speaker 2: most notably in the case of CBUS, where there have
7:16
Speaker 2: been longstanding ties to the CFMEU, the now defunct trade union,
7:22
Speaker 2: infamous trade union. And these issues have been bubbling away
7:25
Speaker 2: for a long time, not just in industry super funds,
7:28
Speaker 2: which are union linked, but right across the sector. Who
7:31
Speaker 2: are the right people to be sitting on the boards
7:34
Speaker 2: of these organisations, which is a really powerful organisation? What
7:38
Speaker 2: sort of competencies should they have and what governance processes
7:42
Speaker 2: do they have in place to ensure that they're investing
7:46
Speaker 2: in a way that's in line with members' best interests? That,
7:48
Speaker 2: I think, has a much more meaningful and direct influence
7:51
Speaker 2: over the return that members are actually getting.
7:55
Speaker 1: One of the things you mentioned there before when we
7:57
Speaker 1: talk about how much is in super, a trillion dollars.
8:01
Speaker 1: It just so happens, it just occurred in the September
8:05
Speaker 1: quarter ATO figures that the SMSF sector has passed a
8:09
Speaker 1: trillion dollars, right? So there you go. Very roughly a
8:12
Speaker 1: quarter of all the money in super is in the SMSFs.
8:16
Speaker 1: Self-managed super funds. Many of our listeners are interested in SMSFs.
8:22
Speaker 1: They often write in and ask, should I start one,
8:24
Speaker 1: et cetera. We're always having a debate about how much
8:26
Speaker 1: you should have in SMSFs. But I just want to
8:29
Speaker 1: ask you, do you think that this rocky period for
8:34
Speaker 1: the big industry funds will benefit self-managed super funds? And
8:38
Speaker 1: if people leave industry funds, I'm guessing they don't go
8:41
Speaker 1: to another one. I'm guessing they actually do start an SMSF.
8:44
Speaker 1: What's your experience there?
8:45
Speaker 2: Look, there's a range of places where people go. My
8:47
Speaker 2: experience and what the research would show is that statistically
8:51
Speaker 2: very few Australians switch funds at all. And that, you know,
8:55
Speaker 2: because we have a default system and the whole system
8:58
Speaker 2: was set up by the unions and by the people
9:01
Speaker 2: who were advocating for it to be a default system
9:04
Speaker 2: that would work in the background while you were living
9:06
Speaker 2: your life and you didn't have to really think about.
9:08
Speaker 2: So we have seen a slight uptick in people switching
9:12
Speaker 2: out of funds in the last year or so, and
9:14
Speaker 2: particularly CBUS in more recent times has seen some outflows.
9:18
Speaker 2: Whether that's Fair or not, I don't think it's necessarily
9:21
Speaker 2: a reflection on the returns they have or haven't been receiving.
9:25
Speaker 2: But I also don't think it's, I think it's a
9:27
Speaker 2: good thing that people are paying attention to these governance issues.
9:32
Speaker 1: Our listeners wouldn't be typical in that they would be
9:34
Speaker 1: paying attention. That's why they listen to the show. So
9:38
Speaker 1: here's the thing. You were saying about the flow on effects.
9:40
Speaker 1: So let's say money flows out of a fund. I'm
9:42
Speaker 1: not going to pick any fund. But let's say one
9:44
Speaker 1: fund constantly has bad news month after month. and the
9:49
Speaker 1: money starts to flow out. That is, there are net outflows, right?
9:53
Speaker 1: So there's more money going out. And let's say their
9:55
Speaker 1: investment team were unchanged. What could occur? Is it that
10:00
Speaker 1: what would be the problem? That they'd have to charge more?
10:04
Speaker 1: Is that it? That their costs would effectively have to
10:08
Speaker 1: go up because their revenue is going down? Or how
10:10
Speaker 1: would it work?
10:11
Speaker 2: Well, I think that would be a big decision to make.
10:13
Speaker 2: And there's all sorts of regulations that would prevent them
10:16
Speaker 2: from that being their first port of call. But it
10:19
Speaker 2: changes their liquidity profile, right? So it means if you
10:22
Speaker 2: are seeing people in outflow, it naturally changes the way
10:26
Speaker 2: you invest because you need to be in a position
10:28
Speaker 2: where you can pay people out. And the thing about
10:30
Speaker 2: a lot of big industry super funds, particularly those that
10:33
Speaker 2: have a very young membership base, is they invest in
10:36
Speaker 2: a way where they don't expect to be paying people
10:39
Speaker 2: out in pensions for many decades on the whole. That
10:42
Speaker 2: allows them to invest in venture capital. It allows them
10:45
Speaker 2: to be a little bit more aggressive in the share market.
10:48
Speaker 2: And so if they were to start to see outflows,
10:51
Speaker 2: that would meaningfully change their investment behavior in that way.
10:55
Speaker 2: The other thing is that the size of the pool
10:58
Speaker 2: obviously determines what sort of assets you can invest in.
11:01
Speaker 2: And a lot of super funds have a real preference,
11:04
Speaker 2: rightly or wrongly, for big unlisted assets like airports and
11:09
Speaker 2: toll roads and things that they co-invest or they directly
11:12
Speaker 2: invest in these assets, not always via a managed fund.
11:15
Speaker 2: So to the extent that was depleted that would be
11:19
Speaker 2: a very real difference in terms of their investment strategy.
11:23
Speaker 1: Does it concern you when you see occasionally big losses
11:26
Speaker 1: in that unlisted area? Commercial property, obviously, several funds, but
11:30
Speaker 1: also occasionally out of the blue, we see big funds
11:33
Speaker 1: taking a big hit on what is obviously a big
11:36
Speaker 1: bet on something here and there.
11:39
Speaker 2: It does concern me to some extent because you never
11:42
Speaker 2: want to see a loss either by an individual private
11:44
Speaker 2: household or by a major super fund. But I think
11:47
Speaker 2: it's important to remember these funds are pretty well diversified.
11:51
Speaker 2: And the other thing, I mean, as a journalist, you
11:54
Speaker 2: want to jump on these stories. We're right to focus
11:56
Speaker 2: on them. But the thing I worry more about, James,
11:59
Speaker 2: is actually that you've got this culture, particularly within the
12:02
Speaker 2: big funds, of real cautiousness and political correctness. And they
12:07
Speaker 2: don't want to take on any risks. They'd all happily
12:12
Speaker 2: be fast followers, but they don't want innovate. I worry
12:16
Speaker 2: that therefore sometimes they're missing opportunities, frankly, where the investors
12:22
Speaker 2: they've got on start are very keen to pursue an opportunity,
12:25
Speaker 2: but they're so scared of media backlash or of getting
12:28
Speaker 2: it wrong. And as your listeners will realize, getting it
12:30
Speaker 2: wrong sometimes is a really healthy and normal part of investing, right?
12:34
Speaker 2: And these are highly well diversified.
12:36
Speaker 1: You're talking strictly in the investment sense of getting an
12:38
Speaker 1: investment wrong as opposed to getting a process wrong like
12:42
Speaker 1: a payout or whatever payments.
12:43
Speaker 2: Okay.
12:43
Speaker 1: Okay. Also on super, it would seem, and he says,
12:48
Speaker 1: I say this, folks, carefully, it would seem that for
12:53
Speaker 1: all the attention, for all the, what they used to
12:56
Speaker 1: call many column inches of coverage on the plan to
13:00
Speaker 1: introduce a new super tax of 15% on amounts over
13:06
Speaker 1: 3 million on, believe it or not, unrealized gains, which
13:10
Speaker 1: was daft, I thought, that plan, looks now like it's
13:16
Speaker 1: not going to happen. Alex, could you tell us what
13:20
Speaker 1: you think at least is going on?
13:21
Speaker 2: There's at least a chance that it happens, but we're
13:24
Speaker 2: running out of time. We're in the last sitting week
13:26
Speaker 2: of parliament, possibly the last sitting week of the government's
13:29
Speaker 2: first term, depending on when we go to an election.
13:31
Speaker 2: There's two different theories. One is that the shot clock
13:34
Speaker 2: simply has run out, and this is a pretty ambitious government.
13:38
Speaker 2: There's 70 pieces of legislation that they want to get
13:40
Speaker 2: through this year. Clearly that won't happen. But there is
13:43
Speaker 2: a view that given, as your listeners will remember, some
13:47
Speaker 2: of the proposals they took to the last election, including
13:50
Speaker 2: the franking credits proposal and the negative gearing proposal, anything
13:54
Speaker 2: that scratches up on a tax, albeit one that should
13:57
Speaker 2: only affect people with $ 3 million in their account or more,
14:01
Speaker 2: there are some who think they're sort of scared of
14:03
Speaker 2: the politics here. And, you know, they don't have the
14:06
Speaker 2: bipartisan support for this, and that makes it very difficult.
14:10
Speaker 2: And partly that's because of the way that they've drafted it.
14:13
Speaker 2: I totally agree with you that the unrealized gains proposal
14:16
Speaker 2: is mad, as is the lack of indexing here, so
14:19
Speaker 2: that one day this will capture a very large number
14:22
Speaker 2: of Australians.
14:23
Speaker 1: Yeah, every year captures more people with inflation. Okay, so
14:26
Speaker 1: it looks like, for now, it looks extremely unlikely that
14:31
Speaker 1: the 3 million tax will get through, folks, in this week.
14:34
Speaker 1: And that would mean that it doesn't get through at
14:38
Speaker 1: all until there's another sitting of Parliament, which would be post-election.
14:41
Speaker 1: So one last thing on this, Alex. I suppose they
14:44
Speaker 1: could bring it to the election and then it would
14:47
Speaker 1: be an election promise. And then they'd have a stronger
14:49
Speaker 1: chance of a stronger mandate of getting it through on
14:52
Speaker 1: the far side, especially if they cleaned it up and
14:55
Speaker 1: amended a bit more of a practical tax as opposed
14:58
Speaker 1: to the sort of very complex dog's breakfast of a
15:02
Speaker 1: plan it is at the moment.
15:04
Speaker 2: They could, but I'd be very surprised to see that, James,
15:06
Speaker 2: given they promised no changes to super last time. I
15:09
Speaker 2: think they'd be more likely to do the opposite, which
15:11
Speaker 2: would be not take it to the election and then
15:13
Speaker 2: potentially introduce it subsequently.
15:14
Speaker 1: All right. So they would bring it back. They just
15:17
Speaker 1: wouldn't bring it to election. Possibly.
15:19
Speaker 2: I actually, while this does affect superannuation and there's an
15:22
Speaker 2: important precedent here, particularly for people who have SMSFs, this
15:25
Speaker 2: is not really a superannuation story. This is much more
15:29
Speaker 2: a budget and tax story. It's about trying to shore
15:32
Speaker 2: up the fiscal position in a way that they were
15:34
Speaker 2: hoping would be inoffensive. But they've structured it in a
15:37
Speaker 2: way that has meant it's not billionaires here who are
15:40
Speaker 2: affected by this. There's also plenty of regular farmers and
15:43
Speaker 2: small business owners. So I think that's been either a
15:45
Speaker 2: misstep in the drafting. They didn't quite realize those were
15:50
Speaker 2: the cohorts who would be affected.
15:52
Speaker 1: Okay. Yeah. It's funny, isn't it? Every government looks for
15:55
Speaker 1: that inoffensive tax. And unfortunately, there's no such thing. Okay,
15:59
Speaker 1: we'll take a break. Hello, welcome back to the Australian's
16:10
Speaker 1: Money Puzzle. I'm James Kirby. I'm talking to Alex Vicovich.
16:13
Speaker 1: He's the Editor-in-Chief of the Connexus Group. And we are
16:16
Speaker 1: talking news. We are talking very much news on the
16:19
Speaker 1: run here for you, the investor, because as I mentioned,
16:23
Speaker 1: you need to know this. It's worth hearing what's going on. So,
16:28
Speaker 1: For instance, from that first segment there, I wouldn't be
16:31
Speaker 1: waiting around for this 3 million super tax to the
16:35
Speaker 1: extent that it affects you or more pertinently to the
16:39
Speaker 1: extent that it might affect you someday should you be
16:42
Speaker 1: successful in your investing over the long term. So let's
16:45
Speaker 1: just put that to one side for the moment. Similarly,
16:48
Speaker 1: I think this affects a lot of people. The big
16:51
Speaker 1: troubles at the big industry funds, the issue, folks, is
16:54
Speaker 1: as an investor, the issue is can they quarantine? the
16:58
Speaker 1: ineptness and incompetence that's coming through on the bureaucracy, if
17:03
Speaker 1: you like, of the big funds from their investment teams.
17:06
Speaker 1: I don't know. I don't know if they can. They
17:09
Speaker 1: have so far. That's all I can tell you. But
17:11
Speaker 1: I don't know if they can forever. I mean, if
17:13
Speaker 1: a fund is completely inept in lots of ways, it's
17:16
Speaker 1: unlikely to be superb in the investment department. Now, you
17:21
Speaker 1: also published this Professional Planner magazine, more than a magazine.
17:26
Speaker 1: It's obviously, it's a website, etc., and you cover all
17:28
Speaker 1: the news there. Financial advice, it too is sort of
17:34
Speaker 1: stuck in a bit of a political mire, isn't it?
17:37
Speaker 1: There was a plan by the Minister Stephen Jones to
17:40
Speaker 1: overhaul financial advice in a fairly significant way, cut a
17:43
Speaker 1: lot of red tape and allow the big industry funds
17:46
Speaker 1: to expand what they offer in financial advice. Could you,
17:51
Speaker 1: is it humanly possible to distill all that and tell
17:54
Speaker 1: us what's going on?
17:56
Speaker 2: Yeah, well, you're right that it is a difficult one
17:58
Speaker 2: to distill because the crux of the problem with financial
18:01
Speaker 2: advice is actually how complex the laws themselves are. So
18:04
Speaker 2: it's no surprise that the debate around that complexity also
18:09
Speaker 2: tends to be fairly complex. But basically, it is what
18:12
Speaker 2: we see in a lot of areas in the markets,
18:14
Speaker 2: which is there is a genuine and probably very needed
18:19
Speaker 2: impulse by governments to regulate, which is what we've seen
18:22
Speaker 2: Over the last 20 years, there were a range of
18:24
Speaker 2: scandals that your paper was covering, and as was I,
18:28
Speaker 2: in the financial planning world, largely in the kind of
18:31
Speaker 2: bank-owned sort of structure that exists.
18:33
Speaker 1: And the banks basically sorted that out by running, and
18:36
Speaker 1: they dumped it, right? So we're left with, here's the
18:39
Speaker 1: odd thing. There's 15,000 advisors left. There was 30,000 at
18:44
Speaker 1: the time of all that Royal Commission. And the fees
18:47
Speaker 1: are about five grand a year on an ongoing basis
18:50
Speaker 1: for people. Is there anything you see that can improve
18:53
Speaker 1: that situation happening now?
18:55
Speaker 2: Yeah, well, the first thing I'd say is in the
18:58
Speaker 2: last couple of years, we spoke earlier about coming out
19:00
Speaker 2: of media super and going into an SMSF myself. And
19:04
Speaker 2: one of the things that precipitated that and came along
19:07
Speaker 2: with that was becoming a comprehensive advice client, which I'm
19:11
Speaker 2: a big believer in. And I pay a lot of money.
19:14
Speaker 2: I'm not a rich guy. I'm a journalist like yourself.
19:16
Speaker 2: And I do pay these exorbitant rates now for comprehensive advice.
19:20
Speaker 2: And I've got to say, I think it's pretty good value.
19:23
Speaker 1: So does it save you five grand a year, at least?
19:26
Speaker 2: It saves me five grand a year or more, I
19:30
Speaker 2: would say, James, in avoided disputes with my spouse. And
19:34
Speaker 2: I think that's really what it provides you. It provides
19:39
Speaker 2: peace of mind. It provides relationship benefits and all sorts
19:42
Speaker 2: of things.
19:43
Speaker 1: Could you tell us what, just in nature... The real
19:47
Speaker 1: benefits of paying for that advice in nature? Are they tax?
19:52
Speaker 1: Are they stopping you doing something? Are they telling you
19:55
Speaker 1: something you didn't know?
19:56
Speaker 2: I think it's primarily sort of lifestyle and psychological for
20:00
Speaker 2: me in terms of knowing that there's a professional that's
20:05
Speaker 2: in your court to help help you through big life moments,
20:09
Speaker 2: whether it's a pay rise, a redundancy, a change in
20:13
Speaker 2: your situation and inheritance. And also, we all get flooded
20:17
Speaker 2: with these communications from fund managers and others. If something
20:21
Speaker 2: does occasionally pique your interest, having a support staff to
20:26
Speaker 2: a financial advisor that you can just quickly flick that to,
20:29
Speaker 2: I find that enormously helpful. So I think it's just
20:32
Speaker 2: having someone in your corner in what is, even for
20:34
Speaker 2: those of us like you and I who are paid
20:37
Speaker 2: to understand these things, it is notoriously the complex, right?
20:41
Speaker 2: So that's the first thing I'd say is I do
20:42
Speaker 2: think it's worth it at the prices they're asking. The
20:45
Speaker 2: question is, what model do we come up with for
20:48
Speaker 2: regular workers, mums and dads who will never be able
20:51
Speaker 2: to afford that, which increasingly there's a large number in
20:54
Speaker 2: that pool, right, given cost of living. And so it's
20:57
Speaker 2: funny you mentioned the banks getting out. It's a controversial view.
20:59
Speaker 2: My personal view is banks probably need to be part
21:02
Speaker 2: of the solution because banks That is the organization that
21:06
Speaker 2: most Australians have their primary financial relationship with. And yet,
21:10
Speaker 2: as you say, if you walk into a bank branch
21:12
Speaker 2: tomorrow or more likely use your bank app and you
21:15
Speaker 2: ask for financial advice, it's not clear what process is triggered.
21:19
Speaker 2: But what is clear is most of the banks provide little,
21:22
Speaker 2: if any, financial advice these days. And so the other one,
21:25
Speaker 2: given the banks have got little interest, at least until
21:28
Speaker 2: the laws change to make them more complex and less
21:30
Speaker 2: expensive to comply with, That other option that is coming up,
21:34
Speaker 2: which the government's trying to do something about, is expanding
21:37
Speaker 2: the options within your super fund. The amount of advice
21:41
Speaker 2: that is provided by the fund and in the fund.
21:43
Speaker 2: And that's a pretty good idea on paper for the
21:45
Speaker 2: same reason I just said. People have an existing relationship.
21:48
Speaker 2: They defaulted into this fund. A lot of their questions
21:51
Speaker 2: will be about super invariably. But given the politics we've
21:55
Speaker 2: just spoken about and how contentious super is, There's a
21:58
Speaker 2: lot of issues associated with that.
22:00
Speaker 1: Is that anywhere nearer reality in Parliament?
22:04
Speaker 2: They have had a few small achievements, it's fair to say,
22:08
Speaker 2: over the last couple of years. They have wound back
22:11
Speaker 2: a few small things, but most financial advice providers would
22:14
Speaker 2: say that's not moving the dial. It's certainly not helping
22:16
Speaker 2: them reduce the cost.
22:18
Speaker 1: The idea of redrafting legislation to the point that the
22:21
Speaker 1: big super funds can expand advice for everyday investors, where's
22:25
Speaker 1: that at?
22:26
Speaker 2: Well, that's currently, there's an exposure draft. There's draft legislation
22:29
Speaker 2: being written at the moment. The problem is the lobbyists
22:32
Speaker 2: around this space just don't agree at all on what
22:34
Speaker 2: the model should look like. And the dispute, James, is
22:37
Speaker 2: around whether or not funds should be able to collectively
22:41
Speaker 2: charge their members for the advice.
22:43
Speaker 1: Which is what they want, right? That's what they want.
22:45
Speaker 2: That's what they want, apparently. They haven't said so publicly,
22:48
Speaker 2: it's important to say, but that's what my sources suggest
22:51
Speaker 2: and that's what it is believed they are advocating for
22:54
Speaker 2: in private.
22:55
Speaker 1: Logic would suggest that's how they always want to do things,
22:58
Speaker 1: isn't it, really?
22:59
Speaker 2: And it's important to note that is how the existing
23:01
Speaker 2: model works for what's called intrafund advice, which is a
23:04
Speaker 2: much narrower scope form of financial advice.
23:06
Speaker 1: Okay, and explain to listeners what's wrong with that.
23:11
Speaker 2: Well, it depends on your frames of reference.
23:13
Speaker 1: What people say is wrong with that.
23:15
Speaker 2: Yeah, I mean, what's wrong with that is that one
23:18
Speaker 2: of the main findings of the Banking Royal Commission, if
23:21
Speaker 2: people remember, was this idea of fees for no service.
23:24
Speaker 2: where people were paying out fees for advice or for
23:27
Speaker 2: investment services and then not receiving the benefit of that.
23:30
Speaker 2: And critics would say this is the same thing, where
23:33
Speaker 2: you're a Superfund member, you don't feel you need advice
23:35
Speaker 2: or you don't even know they offer advice, and yet
23:37
Speaker 2: you're subsidizing somebody else's advice. Some people take issue with
23:41
Speaker 2: that on principle.
23:42
Speaker 1: Okay, and you're subsidizing somebody who's in there asking them
23:45
Speaker 1: 100 questions, and you're both paying the same rate. You're
23:48
Speaker 1: both paying the same rate always, whether you access it
23:51
Speaker 1: or not. Okay, very interesting. All right. I think that's
23:54
Speaker 1: probably all we can say on financial advice. It's worth
23:56
Speaker 1: bringing people up to date on that. It's a pretty
23:59
Speaker 1: interesting area, folks. I think just to make one final
24:03
Speaker 1: point on that, the industry for all the talk around
24:08
Speaker 1: it is very much stuck for now with a model
24:11
Speaker 1: which is highly regulated and surveys, which for all of
24:16
Speaker 1: late have shown that they are saying, the planners are
24:18
Speaker 1: saying that more than 50% of their costs are to
24:22
Speaker 1: do regulation as opposed to giving you advice. That's no good.
24:26
Speaker 1: That has to improve. But it is in something of
24:30
Speaker 1: a political quagmire. OK, back in a moment with some questions. Hello,
24:43
Speaker 1: welcome back to the Australian's Money Puzzle podcast. I'm James
24:46
Speaker 1: Kirby talking to Alex Vicovich. who's the editor-in-chief at the
24:50
Speaker 1: Conexus Financial Group and someone who is very much across,
24:55
Speaker 1: particularly across the goings-on, if you like, the big picture
24:59
Speaker 1: about financial advice and super in the market and particularly
25:03
Speaker 1: in Canberra, which is currently, of course, in its last
25:06
Speaker 1: sitting week of parliament where they're trying to squash 70 bills,
25:11
Speaker 1: squeeze 70 bills through. Let's say that they won't get
25:15
Speaker 1: 70 bills through In the next few days, that's for sure.
25:18
Speaker 1: It'll be interesting to see if they get anything in
25:20
Speaker 1: relation to our world as investors. Through that would make
25:23
Speaker 1: a difference to us. We covered that in the first
25:25
Speaker 1: two segments. Now, some interesting questions. Lofty, L-O-F-T-Y. Hi, Lofty.
25:30
Speaker 1: I have a question about tax and super. I'm invested
25:33
Speaker 1: primarily in low-cost index funds through an industry super fund. Well,
25:36
Speaker 1: there you are. I heard recently that tax is withheld
25:39
Speaker 1: from returns to provide for future capital gains. Is this true?
25:43
Speaker 1: And would this not cause a measurable tax drag on
25:46
Speaker 1: the portfolio over the long term? He tells us how
25:48
Speaker 1: much he has, whether he should start SMSF. I think
25:52
Speaker 1: we might as well put the figure in. I don't
25:54
Speaker 1: like normally doing this, but you don't know who Lofty
25:56
Speaker 1: is and nor do I. Don't have his surname. And
25:58
Speaker 1: this is never advice. This is always information. But he's
26:01
Speaker 1: got half a million, which is that sort of amount
26:03
Speaker 1: that would have you starting to think about whether you
26:05
Speaker 1: should start SMSF. Two parts to that question. The first
26:09
Speaker 1: part is about the collection. how they deal with capital
26:12
Speaker 1: gains tax in the big super funds. And they play
26:14
Speaker 1: a game on that, where they give you a bonus
26:16
Speaker 1: if you stay and you lose it if you don't.
26:20
Speaker 1: So it is how it works, Lofty. And you have
26:27
Speaker 1: to go with it or not go with it. That's
26:28
Speaker 1: how they do it. Is that right, Alex? Have you
26:30
Speaker 1: any issue with that?
26:31
Speaker 2: Yeah, that's right. And I'm glad you gave the figure, James,
26:35
Speaker 2: because when it comes to SMSFs, the figure is important,
26:38
Speaker 2: or at least it's Seen to be important. So you're right.
26:42
Speaker 2: I would say that shouldn't be the determining factor, really,
26:45
Speaker 2: of whether you set up an SMSF. I mean, I
26:47
Speaker 2: know for me personally, it certainly wasn't about reaching a
26:49
Speaker 2: certain threshold and then crossing over. For me, it was
26:52
Speaker 2: about wanting to invest in a particular asset that I
26:55
Speaker 2: couldn't through my upregulated super fund. So it was very
26:58
Speaker 2: much a personal thing. decision i'd also say you know
27:01
Speaker 2: i i like the way lofty is already thinking you
27:04
Speaker 2: know if they're invested in low-cost index funds through an
27:08
Speaker 2: app regulated fund that already indicates to me that they
27:11
Speaker 2: are taking some control.
27:12
Speaker 1: Yes they're active they're in what's called.
27:15
Speaker 2: A choice product effectively or an investment option within a
27:18
Speaker 2: fund and you're starting to get closer to the reality
27:21
Speaker 2: of what an smsf feels and looks like anyway if
27:24
Speaker 2: you want so it's clearly not a totally default option
27:27
Speaker 2: that Lofty's gone with here. So if they're already accustomed
27:31
Speaker 2: to low cost funds, then that probably sets you up
27:34
Speaker 2: well for an SMSF in some ways, because that's one
27:37
Speaker 2: way to sort of, there are higher costs, of course,
27:41
Speaker 2: associated with the running of the fund and the auditing
27:43
Speaker 2: and the tax accounting that you probably need. And so
27:46
Speaker 2: if you're in low cost index funds by preference, well,
27:49
Speaker 2: then you can use some of that revenue that you
27:52
Speaker 2: might otherwise be spending on active management and put it
27:55
Speaker 2: towards the running of the fund is, is one thing
27:57
Speaker 2: to consider. But as you say, James, I certainly wouldn't
28:01
Speaker 2: take tax advice from a journalist. So I'd be going
28:05
Speaker 2: to get professional advice.
28:06
Speaker 1: Certainly, yeah. To anyone who starts, certainly anyone out there,
28:09
Speaker 1: if you're going to start an SMSF, you must. Yeah.
28:14
Speaker 2: But I think the point to make is the motivations
28:16
Speaker 2: for setting one up. And for me personally, it's that
28:18
Speaker 2: freedom and control and willingness to spend your time running
28:23
Speaker 2: a fund. I think that needs to be a primary motivator,
28:25
Speaker 2: regardless of if you've got 50 grand in there or
28:28
Speaker 2: 5 million.
28:29
Speaker 1: And as I always say to Lofty and all the
28:31
Speaker 1: Loftys out there, you've got to be prepared to fill
28:34
Speaker 1: out a lot of forms forever. Hey, is there a
28:38
Speaker 1: figure that you personally feel a person would need in
28:43
Speaker 1: a fund to start an SMSF?
28:45
Speaker 2: Look, it's really contentious, right? As it gives its guidance.
28:50
Speaker 2: I think that actually some of these figures are overstated.
28:53
Speaker 2: I think the amount of money is not, a problem
28:56
Speaker 2: and plenty of experts I speak to increasingly with technology,
29:00
Speaker 2: which can bring the cost of servicing the, particularly if
29:03
Speaker 2: you are already spending on, for example, a good accountant
29:07
Speaker 2: or professional advice, I think you could have well less
29:09
Speaker 2: than $ 500, 000 and run a good self-managed super fund. But
29:13
Speaker 2: only if you've got the financial literacy and the appetite
29:17
Speaker 2: to do it all.
29:18
Speaker 1: So you're saying like if somebody was really invested, if
29:21
Speaker 1: you like, in their own financial situation, future and were
29:27
Speaker 1: numerate and capable and obsessed with low cost, then they
29:32
Speaker 1: could start one for much, much less. Is there a
29:35
Speaker 1: rock bottom figure of which you say, listen, it's not feasible?
29:40
Speaker 2: Look, I mean, it really depends. I mean, if you're
29:42
Speaker 2: spending more on the running of the SMSF than you
29:45
Speaker 2: are in the returns, then obviously that's not a good
29:48
Speaker 2: position to be in as a super fund. You know,
29:50
Speaker 2: I certainly have spoken to myself, millennial investors, for example,
29:54
Speaker 2: who might only have $ 100, 000 in super and run perfectly good.
29:59
Speaker 2: self-managed super funds that are, you know, well-governed and competitive
30:03
Speaker 2: with the upper regulated system. So that's not advice, but
30:06
Speaker 2: I think much less around the number itself.
30:09
Speaker 1: So there you are. You see, if you want to
30:11
Speaker 1: be making, if you think about it, if it's 5,000
30:14
Speaker 1: ongoing for advice and also other costs, you know, really,
30:18
Speaker 1: unless you're bringing in, you know, five and a half
30:21
Speaker 1: or six, you should subtract that from what you make.
30:24
Speaker 1: So that's what you got to do, guys. Keep that
30:26
Speaker 1: in mind.
30:27
Speaker 2: I would just add, James, you do see the opposite
30:29
Speaker 2: as well, right? I know I've heard of quite a
30:31
Speaker 2: few multimillionaires who have recently, you know, cashed in their SMSF,
30:35
Speaker 2: shut it down and move back into an upper regulated
30:38
Speaker 2: fund due to the ease with which they, you know,
30:41
Speaker 2: they don't want to spend as much time anymore running
30:43
Speaker 2: the fund or because there's a particular upper regulated industry
30:47
Speaker 2: fund or retail fund that they're keen on. So it
30:50
Speaker 2: does happen both ways.
30:52
Speaker 1: Yeah. And there's a point at which people might say
30:53
Speaker 1: they might have started a fund at 40 and they
30:56
Speaker 1: might be 70, 80. And they say, oh, you know,
31:00
Speaker 1: it's all too hard. I can't do this anymore for
31:01
Speaker 1: a variety of reasons. And I'm not just saying mental decline.
31:04
Speaker 1: I'm just saying they started the fund because they wanted
31:07
Speaker 1: to have a million dollars in super. And now they have.
31:09
Speaker 1: And I'm saying, well, I don't have to do all
31:10
Speaker 1: that work anymore. OK, we're slightly running out of time.
31:13
Speaker 1: I'll just jump to one last question from Russell.
31:16
Speaker 2: It's hard.
31:17
Speaker 1: Russell says it's hard. It's still hard. to understand the
31:21
Speaker 1: risk of private credit. The share market is easy to understand.
31:25
Speaker 1: Any day it can drop 25% or more. I like
31:28
Speaker 1: the way you put that, Russell. And it grows at
31:30
Speaker 1: an average of 9% to 10% per annum over the
31:33
Speaker 1: very long term. What would be the black swan events
31:37
Speaker 1: that severely damage or wipe out your investments? Hey, Russell,
31:42
Speaker 1: they're black swan events. We don't know what they are.
31:45
Speaker 1: That's the whole thing. They're black swans. I don't mean
31:49
Speaker 1: to be facetious. But that's it. That's the nature of it.
31:53
Speaker 1: If I could tell you what the Black Swan events were,
31:55
Speaker 1: I'd have a hedge fund.
31:56
Speaker 2: We don't know what they are, James, but arguably by
31:59
Speaker 2: its very nature, we know what they are in the
32:01
Speaker 2: share market better than we know what they are in
32:03
Speaker 2: private credit. So that's the first thing that I'd say
32:06
Speaker 2: is the clue is in the title. And the fact
32:09
Speaker 2: that these are effectively loans that are not connected to
32:13
Speaker 2: public markets means by their very nature, they are more
32:17
Speaker 2: opaque and you're less able to work out what they're
32:20
Speaker 2: really worth. You're less able to obtain reliable research. And
32:25
Speaker 2: I'm not saying people shouldn't invest in private credit. It's
32:27
Speaker 2: the hottest asset class in the world for a reason, right?
32:30
Speaker 2: But that reason is that you can generate a return
32:34
Speaker 2: at the moment, or at least we've been able to
32:35
Speaker 2: over this past cycle. And that return is based on
32:38
Speaker 2: the risk involved. And so very much with private credit,
32:41
Speaker 2: there are very real risks that the investors wear. The
32:45
Speaker 2: thing to think about mostly in private credit, in my view,
32:47
Speaker 2: is less a black swan event that might affect the
32:50
Speaker 2: market or the underlying loans, but more about the competency
32:53
Speaker 2: of the asset manager involved, assuming there is one involved.
32:56
Speaker 2: And if there's not, then I think that's a bit
32:58
Speaker 2: of a red flag for me. Because you do see
33:01
Speaker 2: at the institutional level, asset managers who truly do specialize
33:05
Speaker 2: in this space and have done it for hundreds of years,
33:08
Speaker 2: and they've been through lots of different credit cycles. And
33:11
Speaker 2: that would give me a little bit more comfort. But
33:13
Speaker 2: even then, Let's not pretend lending is easy, right? Credit
33:16
Speaker 2: Suisse was doing this for hundreds of years before it
33:18
Speaker 2: came unstuck. This is not an easy thing and it
33:21
Speaker 2: sometimes gets misconstrued.
33:23
Speaker 1: Do you think the chances of the everyday investor getting
33:25
Speaker 1: into a good fund are slimmer now that it has
33:30
Speaker 1: become the hottest?
33:32
Speaker 2: I definitely think, personally, the best way to access private
33:35
Speaker 2: credit is probably through a large institutional investor where they
33:39
Speaker 2: are through economies of scale. So, you know, the super
33:43
Speaker 2: funds themselves are really loading up on private credit. Not
33:47
Speaker 2: always in a good way. I mean, there are some examples.
33:49
Speaker 2: Australian super, for example, is now doing its own direct
33:52
Speaker 2: lending in Europe without an asset manager. That worries me
33:56
Speaker 2: a little bit. I don't know what, Australian super certainly
33:58
Speaker 2: doesn't have hundreds of years of experience doing that. But nonetheless,
34:02
Speaker 2: I think if you want the returns from private credit,
34:05
Speaker 2: doing so in a large diversified institutional environment is probably
34:09
Speaker 2: a better way to do it. In an SMSF or
34:11
Speaker 2: as a private investor, there's still plenty of good private
34:15
Speaker 2: credit funds out there. But I also worry that some
34:18
Speaker 2: of the problematic funds that are most likely to be
34:20
Speaker 2: exposed if there was a Black Swan event, they are
34:23
Speaker 2: trying to raise capital from retail and wholesale investors. So
34:27
Speaker 2: I certainly think that regular listeners to this who are
34:29
Speaker 2: being attracted by the sort of 10% plus returns on
34:33
Speaker 2: offer or whatever, this is definitely an area where, you know,
34:36
Speaker 2: if it looks too good to be true or if it,
34:39
Speaker 2: you know, these are not bonds. It needs to be
34:41
Speaker 2: really well understood. And it's a hot market, but I'd
34:44
Speaker 2: be cautious.
34:45
Speaker 1: Okay. Terrific. Terrific. Thank you very much. And thanks very
34:48
Speaker 1: much for coming on the show, Alex. Really good to
34:50
Speaker 1: have you. Alex Vicovich there from the Connexus Financial Group. Thanks, Alex. Thanks, James.
34:57
Speaker 1: I'd like to thank Leah Samoglu, who did heroic work
35:01
Speaker 1: to get on, not so much to produce the show,
35:03
Speaker 1: but to get to the point of producing the show today.
35:06
Speaker 1: So thank you, Leah, in particular. And let's have some emails, please.
35:10
Speaker 1: themoneypuzzle at theaustralian.com.au. Talk to you soon.