Planners at risk in new financial environment if Fixed Income definition not clarified correctly

John Wiseman

Industry consultant John Wiseman warns financial planners are at risk in the current economic environment of interest rates falling to historical lows if they fail to correctly clarify the role of Fixed Income as a defensive asset in a client’s portfolio.

Using an example of a client with risk profile that has identified them as a Balanced Investor with say an account balance of $800,000 the financial planner is required to allocate at least 50% to defensive assets says John Wiseman. In most cases this would comprise Cash / Term Deposits and Fixed Income.

The confusion for many in the advice industry is how the Fixed Income assets work, especially in SMSFs which comprise an estimated 30% of Australia’s total superannuation pool of $2 trillion affirms John Wiseman.

“It’s estimated that only 1.5% of that amount is in Fixed Income assets whilst in other parts of the superannuation pool defensive would hold approximately 25%. Numerous planners will NOT recommend a number of the current products because of confusion of where they sit e.g. Defensive or Growth? – and will allocate the majority of defensive proportion to Cash / Term Deposits”.

So, in the example of the $800,000 Balanced profile investor, their $400,000 would struggle to keep up with inflation. This issue of below inflation level returns is even tougher for a client who is a Conservative / Moderate investor.

For risk profiling and asset allocation in the low interest / return environment, planners and clients will increasingly demand a much clearer and more concise understanding of this asset class. As mentioned above there is a huge gap in the SMSF sector for Fixed Income.

The fund managers who get this right will benefit immensely with unprecedented levels of growth notes John Wiseman.

In John Wiseman’s view several steps need to be taken once the obvious is recognised e.g. the immense need for more REAL defensive products.

1. The insurance companies clarifying under the cover of their PI which of these Fixed Income products on the AFSL’s APL fits the profiling of a Defensive asset and which products should be Growth assets e.g. Hybrids (obvious).

2. ASIC insists the providers of these products when a new investment is being considered make it much clearer and in very simple terminology where they see these investments sit in the asset allocation…Defensive or Growth.

3. The AFSL holder should embark on a thorough investigation and review of all Fixed Income products on their APLs and advise the Authorised Representatives where the products should sit and fit in the risk profile.

4. The AFSL holder would be well advised to start and introduce at their PD days extensive training in this area as it is well documented not just with planners but many in the industry (let alone the clients) have very little knowledge / understanding of this asset class.

There are a myriad of reasons for this, one being both the industry and investor clients have had the luxury for several years of high interest rates and returns for Cash and Term Deposits from banks etc. and this has done the job. Quite a number have not seen the need, particularly within SMSFs, to include them as part of their portfolio.

With low interest rates predicted to be the norm for an extended period of time – something has to be done now.

5. Accountants / planners take the view they need and are willing to learn more about this very important part of a client portfolio, NO longer being able to take the easy way out and recommend and justify for clients to simply invest all their Defensive allocation to Cash and Term Deposits.

6. For fund managers it presents them with incredible potential for growth in this asset class.

To assist in addressing the situation, John Wiseman has provided the following suggestions –

• Change the Fixed Income name as there too many conflicting views.
• Fixed Income products to be assessed and made clearer to which part of the portfolio they apply i.e. Defensive or Growth. In doing so, it will assist both researchers and industry.
• Develop more appropriate training and education programs to assist planners to gain a more comprehensive appreciation of these products and their application – and in turn how best to educate and inform consumers in simple jargon free language.

John Wiseman concluded, “As the result of high interest rates over an extended number of years, Australian investors and fund managers have basically overlooked the retail side of the Fixed Income asset class. Lack of demand, especially from small investors has not required fund managers to design products in this area. However it is pleasing to note that some fund managers have seen the signs are responding.

“A further incentive for fund managers will occur on July 1 when the accountant exemption expires and those that respond accordingly will be the winners”.