John Elkovich

Fractional investment platform DomaCom Limited (ASX:DCL) is pleased to announce its Appendix 4C cash flow report for the quarter/ ended 31 December 2022 (Q2 FY23), along with the following financial and operational update.

Further strong Funds Under Management (FUM) growth delivered
DomaCom continued to report strong growth in key performance metrics over the December 2022 quarter, as shown in the following table.

Funds Under management (FUM) on the DomaCom platform was $182m as at 31 December 2022. This was up $27m (or 17%) on the previous quarter figure of $155m and well above the end-December 2021 number of $99m (with the YoY gain $83m or 84%). This strong FUM growth performance continues to be driven by multi-residential apartment developments and House and Land packages within the short-term accommodation and NDIS sector.

A sustained uplift in customer accounts to 2,180 by the end of the December 2022 quarter was a major contributor to the strong growth seen in DomaCom’s FUM. The customer accounts metric advanced on both a QoQ (up 181 or 9%) and YoY (up 716 or 49%) basis.

The growth in FUM has also been accompanied by a further increase in the number of sub-funds on the DomaCom platform. By 31 December 2022, 129 sub-funds were in place. This total was up by 14 (or 12%) on the prior quarter figure and well above the year-ago number, with the YoY increase in sub-funds 41 (a gain of 47%).

DomaCom relists on the ASX
DomaCom relisted on the Australian Securities Exchange (ASX) on 23 December 2022, after satisfying all the conditions for re-admission to quotation. The Company’s capital structure as at the date of re-admission to quotation on the Official List of the ASX is set out below.

DomaCom Limited (ASX:DCL) is the operator of an innovative fractional investment platform for a wide range of assets across wholesale and retail markets. The platform offers investors and financial advisers easy access, reporting and transparency with comparatively lower minimum investments and competitive fees.Investments on the platform can include a range of unique assets from agriculture, energy, securities, commercial and residential property.

As a leader in the Australian financial sector, DomaCom has a reputation for innovative structures and making portfolio diversification a reality for investors.

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With the addition of 40 NDIS properties across Australia, the DomaCom Fund’s FUM has grown to $114m.

NDIS is the government’s generously subsidised housing program for the disabled and is attracting significant attention from a cohort of investors wanting some part of their portfolio to have some direct social value.

DomaCom’s fractional investment model accommodates this investment through a syndicated structure enabling investors to diversify across multiple properties in different locations from as little as $1,000.

The interest has been led by ASR Wealth Advisers who recognise the income opportunities from this property sector where returns of 8% to 14% are achievable.

Annual funding for NDIS services including housing is around $24b and waiting times for approval to a home are typically 1 to 2 years, there is a lengthy waiting list for disability housing so demand is strong into the future.

ASRW Head of Property, Khaled El-Katateny says of the strategy, “Our mission was to create an investment opportunity that fits within the ESG realm. These days, more investors are conscious of the effect their investments have. We have managed to create a product here that our clients can be proud of, whilst achieving above market returns. Utilising the fractional model has the added benefit of spreading investment risk by providing diversification and passive income for our clients, whilst opening up a variety of other opportunities, not usually available to retail investors.”

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Arthur Naoumidis

The new year has started well for the DomaCom Fund, with the company announcing it has reached $100m in funds under management, the bulk of which has been in property acquisitions for small investors and self-managed superannuation funds.

As the Fund has grown over the past few years it has embraced a wider range of assets than just residential property where it had its genesis, now offering investment in areas previously only available to sophisticated investors.

DomaCom has given all investors access to a range of commercial property opportunities, rural farmland, renewable energy, property developments, disability and affordable housing, special opportunities in new business, mortgage lending and land banking.

Perhaps the most progressive development for the  DomaCom Fund is an investment product for Seniors Home Equity Release and a Shariah compliant housing finance solution for Australia’s Islamic community.

These new and innovative financial models demonstrate the flexibility of the platform where almost anything that passes a strict due diligence process can be syndicated for groups of investors, families and friends. Certainly in the property world everyone can get their foot on the property ladder and enjoy the growth that this asset class  delivers.

DomaCom has worked diligently to secure some unique rulings for SMSFs and seniors looking to downsize and use home equity to top up their super.

SMSFs represent a significant percentage of investors who are able to curate a portfolio of high value assets by syndicating with other investors to maintain a balanced portfolio.

DomaCom CEO Arthur Naoumidis expressed his thanks for the support of a small but growing supporter base among investors, licensees and their financial advisers for driving the fractional model forward. “It is this innovation coupled with advisers progressive thinking that has enabled us to deliver financial and investment solutions that are in the best interests of investors with specific needs”.

“There is a demonstrable benefit to fractional investing which we look forward to building on with more advisers in 2022”, he said.

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Arthur Naoumidis

DomaCom is celebrating a 3 year partnership with DFS Portfolio Solutions having added some $30m to DomaCom’s FUM through the DFS  Mortgage Fund.

The basis of the partnership was to facilitate the capture of the significant risk premium available in the private credit market during a period of historically low interest rates; and moreover, to provide diversified credit exposure without co-mingling loans, thus maintaining full control of the investment capital. This DomaCom structure has enabled DFS to achieves this, which significantly differentiates itself from other mortgage fund offerings, giving investors greater comfort and peace of mind.

CEO, Arthur Naoumidis said “We are pleased that our fractional platform helped to deliver a significant level of FUM to DFS, particularly during the past 18 months which has been difficult for many platforms. The combination of DFS superior income performance and DomaCom’s syndication platform has delivered an excellent result for investors and one that can be accessed by any DomaCom accredited adviser looking for a strong income alternative for their clients.”

DFS and DomaCom can now demonstrate 3 years of performance history, where the first mortgage fund now  covers 27 loans with an average LVR of less than 60%, generating an annualised 3 year net return of 8.01%pa.

With a defensive asset profile, the average weighting to maturity has been 13 months.

DFS Portfolio Solutions Managing Director, Stephen Romic, says the relationship and the process dealing with DomaCom has worked well for DFS and it has allowed us to generate enhanced risk-adjusted returns for our clients across their defensive holdings.

“With an expectation of continuing low interest rates and a solid track record with DomaCom we hope to attract more independent advisers to our Mortgage Fund and keep working with DomaCom. DomaCom is a unique, versatile platform that works well in the property and mortgage asset classes”.

A further indication of the strength of the relationship between DomaCom and DFS, a new fund was recently added the DFS Wholesale Enhanced Credit Fund for wholesale investors.

Both DFS and DomaCom are looking at making further inroads into the independent advice industry providing customised services for small advice practices and larger dealer groups.

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Arthur Naoumidis

Highlights

• DomaCom has been informed that AustAgri Group Limited (“AustAgri”) subsidiary Global Meat Export Pty Ltd (“GME”) has completed the acquisition of the business assets and operations of Cedar Meats Pty Ltd (“Cedar Meats business”).
• DomaCom has previously announced that it has entered into a Revenue Recognition Agreement with AustAgri relating to a conditional proposal to onboard AustAgri into a DomaCom sub-fund on the DomaCom Platform by exchanging shares in AustAgri for units in the DomaCom sub-fund (AustAgri Transaction).
• The acquisition of Cedar Meats business assets and operations by GME represents fulfilment of the first key condition under the Revenue Recognition Agreement. As a result, DomaCom has resumed its final legal and financial due diligence for the AustAgri Transaction.
• Other outstanding conditions which must be fulfilled to allow completion of the AustAgri Transaction to proceed include:
  • satisfactory completion of legal and financial due diligence by DomaCom and AustAgri
  • AustAgri shareholder approval
  • DomaCom shareholder approval, and
  • AustAgri refinancing its transaction loan facility with longer term loan facility.

No assurance can be provided that these conditions will be fulfilled. DomaCom Limited (ASX:DCL) (‘DomaCom’ or ‘the Company’) is pleased to announce that it has been advised that the Cedar Meats business assets and operations have been acquired by GME. This represents the first important step towards completion of the AustAgri Transaction.

GME management have advised DomaCom that the business will continue to trade as Cedar Meats Australia and it will be business as usual. The business will remain family operated with both Pierre and Tony Kairouz continuing to head up operations of GME and all current management and staff will remain and operations will continue as normal. Pierre and Tony Kairouz are expected to obtain a substantial ownership interest in AustAgri and is currently being negotiated.

AustAgri Transaction

As previously announced, the main commercial terms of the AustAgri Transaction include:

• a newly-established DomaCom sub-fund proposes to acquire at least 75% of the issued shares in AustAgri by entering into share/unit exchange agreements with AustAgri shareholders
• under the share/unit exchange agreements, as consideration for the acquisition of AustAgri shares by the DomaCom sub-fund, AustAgri shareholders will receive 1 unit in the DomaCom sub-fund for every 1 AustAgri share exchanged
• DomaCom Australia Limited, will receive an annual management fee of 0.88%pa of the value of the DomaCom sub-fund with a minimum annual fee of $2.6 million plus GST for a minimum period of 5 years, and
• DomaCom will issue 100,000,000 DomaCom shares to AustAgri shareholders (Revenue Recognition Shares) in recognition of the minimum $13,000,000 in contracted management fees over a 5 year period to be delivered to DomaCom for management of the DomaCom subfund.

The AustAgri Transaction remains subject to a number of conditions precedent which may or may not be fulfilled including:

• Satisfactory completion of legal and financial due diligence by DomaCom and AustAgri
• AustAgri refinancing its transaction loan facility with a longer term loan facility
• AustAgri shareholder approval, and
• DomaCom shareholder approval.

DomaCom reiterates that no assurance can be given as to if or when the AustAgri Transaction will complete.

DomaCom due diligence

As a result of the completed acquisition of the Cedar Meats business assets and operations by GME, DomaCom has resumed its final legal and financial due diligence for the prospective transfer of at least 75% of the issued shares in AustAgri to a DomaCom sub-fund.

Transaction Loan refinance

GME has entered into a loan facility which enabled it to settle on the acquisition of the Cedar Meats Business. In the meantime, formal valuations are being refreshed for the Cedar Meats business and the properties to facilitate the refinancing of the transaction loan with a longer-term loan to facilitate the next phase of its development. Whilst the property assets of Cedar Meats are used as security for the loan facilities, the property assets themselves remain held by the Kairouz family trusts until the Transaction Loan is refinanced.

AustAgri shareholder approval

As previously advised, the exchange of at least 75% of the issued shares in AustAgri for units in the proposed DomaCom sub-fund requires AustAgri shareholder approval at a meeting of AustAgri shareholders to be convened under item 7, s611 Corporations Act. In relation to the required meeting of AustAgri shareholders, DomaCom notes that:

• a statutory notice period applies in relation to any meeting materials to be prepared and sent by AustAgri to their shareholders for the purposes of the item 7, s611 approval. ASIC policy requires that an independent expert report be prepared and for it to accompany the relevant meeting materials detailing an item 7 s611 transaction, and
• ASIC policy expresses a strong preference that meeting materials for an item 7, s611 transaction are provided to ASIC for review at least two weeks prior to despatch to AustAgri shareholders.

DomaCom shareholder approval

Due to the extended delay since the 21 October 2020 EGM where DomaCom shareholders previously approved the AustAgri Transaction and the issue of the Revenue Recognition Shares, DomaCom will in due course issue a Notice of Meeting to hold a further General Meeting to seek new approvals from DomaCom shareholders.

DomaCom CEO, Arthur Naoumidis, said: “Our planned on-boarding of AustAgri onto the DomaCom Platform has been a stop-start affair since we first announced it to the market more than 12 months ago. But at last real progress has been made, with the acquisition of Cedar Meats business assets and operations by GME. This means we can now again resume final legal and financial due diligence for this company-transforming transaction. If it completes, the AustAgri Transaction will provide a significant boost to DomaCom’s revenue base and its total funds under management.

As our AustAgri due diligence process recommences, we continue in our efforts to complete the shortfall raising, a precursor to DomaCom shares resuming trading on the ASX. Over the months ahead, we look forward to updating the market on further exciting developments leveraging off our unique fractional investment platform.”

This announcement has been authorised for release to the market by Company Secretary Philip Chard.

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Farmers have seen the value of their acreages skyrocket.

In this article DomaCom examines the case for investing in rural property and looks at how investors can invest in this pandemic-proof sector at a time of steeply appreciating land values.

It’s not just city dwellers that are amazed – or in some cases bemused – about the resilience of the Australian property market. Farmers have also seen the value of their acreages skyrocket, with some analysts pondering whether the increases have exceeded the ability of the earnings potential of the land.

According to Rural Bank’s annual report on farmland values, the median price of Australian farmland rose 12.9 per cent in 2020 – to $5907 per hectare. This marks the seventh consecutive year of growth, with farm values increasing at a compound annual rate of 7.6 per cent over 20 years.

The 2020 increase was spurred, in part, by the easing of the drought and booming commodity prices, along with the realisation that the Covid-19 pandemic would not temper agricultural demand (except for niche sectors such as lobster production).

Along with Northern Territory beef growing country, Tasmania leads the way on farm values. Based on 3.71 million hectares of land traded nationally during the year, the Apple Isle recorded a 25 per cent year on year increase, while NT values soared 65 per cent.

Victorian, NSW and Queensland values gained 6.9 per cent, 15.6 per cent and 11.8 per cent respectively.

“The demand is being driven by strong, relatively consistent commodity prices,” the Rural Bank report says. “When coupled with an excellent season (it) has also provided farmers with capital to invest.

“Unlike other parts of the economy, Covid-19 has (with some exceptions) not dented agricultural returns or confidence.”

Firming commodity prices improve sentiment…

The confidence is reflected in the buoyant market for most ‘soft’ commodities, notably wheat and beef, coupled with largely ideal growing conditions.

The United Nations Food and Agriculture Organisation’s (FAO’s) food price index stood at 127 points in May 2021, a circa 40 per cent year-on-year increase. The index is also only a touch below its record high of 137.6 points achieved in February 2011.

“The sharp increase in May reflects a surge in prices of oil, sugars and cereals along with firmer meat and dairy prices,” the FAO says.

The Australian Bureau of Agricultural and Resource Economics forecasts winter crop conditions to be well above average, but with regional variations.

“The opening to the winter crop season was promising … with favourable late summer and autumn rainfall in most cropping regions in Western Australia, New South Wales and Queensland,” the agency says in its June crop update.

“The favourable seasonal conditions in these regions, and high world prices, are expected to drive the area planted to winter crops nationally to a record high.”

Most South Australian and Victorian cropping regions have been less fortunate and will rely on decent winter rainfall for a good harvest.

For existing landowners, the robust values provide further equity to invest at a time of rock-bottom interest rates.

But beware the cycles…

But as any farmer knows, there’s always room for caution.

“If the history of Australian agriculture has taught us anything, the next economic shock, drought, natural disaster or unforeseen challenge is just around the corner,” Rural Bank says.

“And we are all familiar with the ever-increasing challenges presented by a changing climate.”

On balance, the bank expects agricultural productivity and profitability to continue to support the value of Australian farmland.

“The optimism and ingenuity of Australian farmers cannot be overestimated,” the report says.

“Farmers are achieving returns from seasons that would have been loss makers a decade ago (and) they manage inputs and costs more effectively than ever before, achieving returns on good and marginal land.”

Investing in agribusiness

For most investors, listed agricultural companies have provided a broad exposure to the rural offering in some form or another.

ASX agricultural stocks include the diversified Elders, landowner Rural Funds Management, beef producer Australian Agricultural Company, wheat handler Graincorp and almond grower Select Harvests.

Specialist listed trust Vitalharvest owns many of fruit and vegetable grower Costa Group’s properties and has been subject to a spirited takeover battle.

Such companies allow the investor exposure to the benefits of scale and technology-driven innovation and best-practice land and water management.

However, a listed entity will generally move in line with the market, removing the benefits of diversification that investing directly in rural property can provide.

In most cases the farms are corporatised, so success depends heavily on the calibre of management.

Divide and conquer

While fractional investing may sound exotic, the share market uses the same principle. By breaking a company into shares, investors can buy a portion of the entity for a relatively small outlay.

Thus, many everyday Australians can claim to ‘own’ Telstra, BHP or the Commonwealth Bank. Similarly, we can be ‘farmers’: fractional rural property investment breaks a rural property into affordable segments, thus enabling investors to buy a portion of a property.

Fractional investment also enables farmers to raise capital while retaining a significant portion of their landholding.

Mutual benefits

For investors, fractional investing:

• allows limited funds to be spread across multiple rural property assets, providing diversification through different geographic locations and agricultural usage
• enables a socially responsible investment – investing in rural property can relieve farmers of bank debt and enable them to make capital investments that improve productivity and, in turn, reinvigorate rural communities
• enables co-investment with the farmer – in any situation where the person driving the investment has ‘skin in the game’, they will work hard for positive outcomes
• provides security – fractionalised property is an asset of a registered managed investment scheme and the property title is held by a registered custodian
• allows for transparency – each property asset is segregated into a sub-fund, so returns and costs pertinent to each property are kept separate and applicable to investors in that property only.

Benefits to farmers include:

• selling a portion of equity enables expansion and investment, which in turn provides farm businesses with a mechanism to improve economies of scale
• increased financial flexibility and security – family-run farms have been under strain from increasing debt, which in turn limits borrowing capacity to purchase more land and grow the business.

And for financial advisers:

• fractional rural property investment provides an opportunity for financial to add value to clients by providing exposure to a true growth asset, one that is generally uncorrelated with other growth assets.
• advisers can easily invest a portion of their clients’ investment portfolio in rural property and take advantage of this emerging thematic. A liquidity facility allows investors to trade out when they are ready to do so, subject to the availability of a buyer.
• fractional rural investment offers the potential for enhanced fees by including direct rural property investment in client asset allocation strategies.

DomaCom’s rural strategy

In an Australian first, in 2017 DomaCom crowdfunded the $858,000 purchase of Doyles, a western district beef property. Since then, DomaCom has continued to revolutionise farm ownership with its fractional investing model.

The DomaCom Rural Farmland Strategy is a perpetual campaign designed to acquire quality agricultural properties in the range of $1 million to $5 million.

The properties can be suitable for grazing, cropping or other areas of food production. The acquisition may be in syndication with other investors, the property vendor or a next-generation farmer.

When sufficient funds have been accumulated, investors can accept or decline specific properties as presented and join one or more individual campaigns.

When a property is accepted with sufficient funds, DomaCom moves to acquire it after conducting due diligence (including legal review of the contract of sale, formal valuation and a property inspection).

Funds surplus to the acquisition cost may be applied to the next farm acquisition which will also need investor acceptance and its own due diligence process.

As each property becomes fully subscribed it is segregated in its own sub-fund.

DomaCom is targeting an average yield of 5 per cent per annum across its rural portfolio, over and above expected capital growth averaging 6 per cent.

In many cases, the property will be leased to the current, or next-generation farmer operating the property.

Using the DomaCom platform, aspiring farmers can increase their equity over time by purchasing investor units in the sub-fund that holds the property. Retiring farmers who sell and lease back the family farm will similarly not be burdened with debt and can use the released equity to increase productivity.

DomaCom’s next rural funding campaign is for Highclere Farm, a 100-hectare grazing and orcharding property next Scottsdale in northern Tasmania.

The campaign seeks to raise a minimum of $300,000 for a 52 per cent interest in the property. The vendor will retain 48 per cent equity in the property and enter a ten-year rental lease, providing investors with comfort about the owner’s ongoing commitment.

Meanwhile, Doyles has delivered a 43 per cent for the 94 investors, over and above a 4 per cent rental yield.

As rare as hens’ teeth

According to Rural Bank, 8,187 farm deals took place in 2020, a 14.5 per cent increase. But this rebound was from record low levels in 2019 and the number of transactions is still about 40 per cent below the peak levels of two decades ago.

The longer-term trend of declining transactions means opportunities are becoming less frequent. Thus, tightening access to suitable parcels of land and increased competition for fewer parcels will play a role in driving increased values.

DomaCom expects farmland values to continue to rise, underpinned by both the buyer demand and increased farm profitability.

Feed the world

When it comes to global commodities, the only certainty is that demand for food – and quality farmland – will continue to rise as the population swells and arable land decreases.

This means Australian farmland is almost certain to increase in value in the long term, although access to sustainable water supplies remains a key variable.

According to the FAO, 690 million people – about 9 per cent of the world’s population – go hungry every day and two billion do not have access to adequate nutritious food.

If the trends continue, 830 million people will be undernourished by 2030 and the organisation’s ‘zero hunger 2030’ target will not be met.

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This article provides general information only and has been prepared without taking into account the objectives, financial situation or needs of individuals. The information contained in this article reflects, as of the date of publication, the views of DomaCom Australia Limited ABN: 33 153 951 770, AFSL 444365 (DomaCom) and sources believed by DomaCom to be reliable. We do not represent that this information is accurate and com­plete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither DomaCom, its related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. Past performance is not a reliable indicator of future performance. Investing involves risk including loss of capital invested. ©2021 DomaCom Australia Limited.

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Investors can gain exposure to emerging asset classes that tick all the ESG investing boxes.

With ethical or socially responsible investing becoming enshrined in the thinking of institutional funds and retail investors alike, demand for assets that fit that bill will only grow.

By the same token, investors need to maintain appropriate diversity in their portfolios and ensure that their investing strategies are tax effective.

Through the fractional platform model, which is gaining ground in Australia, investors can gain exposure to emerging asset classes that tick all the ESG (environment, social and governance) investing boxes while offering above-market returns.

In this article we explore three of them:

1. Affordable housing
2. Carbon offset credits
3. The rapidly growing market for Islamic finance in Australia.

1. Affordable housing

Affordable rental housing is provided by registered community housing providers (CHP) to tenants on low to moderate incomes. These providers might own some of the dwellings and also manage properties for investors, institutions and government bodies.

Many providers specialise in providing accommodation to particular client groups, which may include disability and youth housing or aged tenants.

As an investment sector this has caught the eye of the large industry super funds, with Australian Super, Cbus and Aware Super all earmarking considerable funds.

Formerly State Super, Aware Super is leading the sector with a $400 million commitment, including a 102-unit ‘build-to-rent’ affordable development in Miranda in southern Sydney (half of which is dedicated to affordable housing).

In a new measure that acknowledges the importance of fostering affordable housing investment, the Australian Taxation Office allows a 60 per cent capital gains tax concession on the sale of such an asset. This compares with the standard 50 per cent discount on properties held for more than 12 months, and the same for equities.

As its name implies, affordable housing provides accommodation to needy tenants at below-market rates. For investors, it’s a case of navigating considerable paperwork, but the rewards can be well worthwhile at a financial level and in terms of the emotional satisfaction of contributing to a socially beneficial initiative.

For the investor to be eligible for the concession, the housing provider will issue them with an annual affordable housing certificate. This shows the number of days the investment property was used to provide affordable housing during the income year.

The paperwork also serves as a declaration the property met the conditions of eligibility for the CGT discount. According to the ATO, the provider must issue this certificate on or before 31 July immediately following the relevant income year. In the case of non-direct investments, the provider will issue the certificate to the relevant trust, managed investment trust or partnership.

The ATO stresses the importance of keeping a good record of affordable housing certificates, as they record the total number of days the dwelling was used to provide affordable housing after 1 January 2018.

Each entity that holds an ownership interest in the dwelling also receives a certificate from the provider showing that the dwelling was used to provide affordable housing.

To be classed as affordable housing, the property must be “real” and not a caravan, mobile home or houseboat (or indeed a tent). The dwelling cannot be commercial premises and – crucially – the tenancy must be overseen exclusively by a registered community housing provider. Other conditions are that the property must be “genuinely made available” to rent (as with any other investment property).

The dwelling – and it can be new or existing – must be offered at below market rents to “eligible tenants on low to moderate incomes”. This is based on a household income and household consumption test.

The affordable housing must be offered for a minimum of three years (1095 days), but this period does not have to be continuous.

There are no specific postcodes or geographic areas that define where affordable housing must be.

To be eligible for the CGT concession on sale, the owner must be an Australian individual resident. Alternatively, the capital gain can be distributed via a managed investment trust (MIT) or an “interposed partnership” (not including public unit trusts or super funds). But only the individual investor can claim the discount.

CHPs are strictly regulated by state-based community housing registrars and have specific reporting obligations.

A new affordable housing rental and shared equity model

DomaCom, Australia’s only ASIC registered fractional platform operating in this space has partnered with community housing providers to deliver affordable housing to essential workers (nurses, firefighters, teachers and police officers).

With a rental and shared equity model affordable housing is one step further in helping people achieve equity ownership in residential property by involving developers on the equity side who give the platform a rebate ranging from 10% – 20% which is split between investors and tenants. This is in addition to the tenants receiving a discount of 25 per cent of the market rent.

After due diligence, DomaCom creates a syndicate campaign for each property, with investors contributing 40-50 per cent of the purchase price.

A loan is established through the National Housing Finance and Investment Corporation to fund the remaining amount of the purchase price at 2.5%.

Investors in this asset class receive an immediate uplift in the value of their investment from the cash rebate.

A unique aspect is that tenants are gifted one per cent of equity each year until they reach 5 per cent. As well as empowering the tenant to property ownership, this mechanism acts as a leasing incentive to retain the tenant.

Through a minimum investment of $1,000, investors share the benefits of rental income and capital growth and are compensated for the reduced rental yield by the discounted government loan of 2.5 per cent (based on a maximum loan to valuation ratio of 40 per cent).

The rental and shared equity model is a leveraged growth investment rather than an income investment, as rental income services the debt component.

Technically speaking, the fund is an investment vehicle managed by DomaCom. As an ASIC-registered managed investment scheme, the fund issues units in the sub-fund that holds the property.

2. Offsetting CO2 emissions with carbon credits

The push to “decarbonise” economies is fast gaining momentum, with most governments setting some form of carbon emissions target.

More than 170 companies to date have pledged to become carbon-neutral by 2050, while 77 countries (including the UK) have set similar goals. Closer to home, the South Australian government has committed to 100 per cent renewable power by 2030.

Globally, renewable projects are being spurred by a combination of powerful factors, including the stricter emissions target, population growth and supply constraints. In Australia, some of the constraints are caused by the retirement of coal-fired plants, such as Victoria’s Hazelwood and NSW’s Liddell.

Battery storage offers not just the underlying ability to smooth out variable renewable generation, but commercial opportunities such as arbitraging low and high demand periods.

Ideally there would be a seamless transition between coal and gas fired power and renewable energy (with battery backup).

But battery technology is still evolving, as are other storage methods such as hydrogen derived from green energy.

While individuals can take direct action such as taking public transport and avoiding unnecessary flights – which is not so difficult during the global pandemic – carbon emissions are going to be an unavoidable aspect of economic activity for some years to come.

Alternatively, carbon credits allow companies and individuals to offset their unavoidable emissions from certified projects than can verify their impact.

These credits are generated from certified activities that support community development, protect ecosystems or install efficient technology to reduce or remove emissions from the atmosphere.

Investing in renewables

There are increasing opportunities via the fractional model for investors to participate in renewable investments that produce income far in excess of current and likely future interest rates. Most projects offer medium to long term power purchase agreements, with additional revenue from large renewable generation certificates. Investors can expect to receive monthly distributions, equating to a yield of 4 to 8 per cent.

3. Islamic finance

Observant Muslims are constrained from accessing traditional lending and deposit products because of restrictions imposed under Shariah Law.

Notably, these include the levying of interest.

Globally Islamic finance is said to be growing at 15-25 per cent a year and now accounts for more than $US2 trillion of assets.

Australia’s 2016 Census shows there were about 600,000 resident Muslims in the country, representing growth of 27 percent (130,000) on the 2011 survey. This is now getting close to 1 million.

Given that, Australia also hosts one of the fastest growing Islamic finance sectors. Estimates put the value of the local sector close to $200 billion and that’s with only 5 per cent of the local Muslim community accessing the market.

Essentially, Islamic finance allows observant Muslims to undertake investments such as buying a house without falling foul of their beliefs.

A core tenet of Islamic financing is that interest is usury (riba) which favours the lender over the borrower. The principles also prohibit investing in forbidden (haram) activities such as producing pork or alcohol.

The rules also prohibit any form of speculation or gambling, which means that ownership of goods cannot depend on an uncertain event in the future.

The contract must also pertain to a real underlying transaction and not entail excessive risk or uncertainty, which rules out derivatives contracts as well as short selling, bonds and options. Parties to a contract must bear the profits and the losses equally.

Islamic banking solutions include profit and loss sharing partnerships (mudarabah), where one partner provides the capital to another partner responsible for investing and managing the capital.

Another iteration is a profit and loss sharing joint venture (musharakah) by which all partners contribute capital and share the profit and losses on a pro rata basis.

In the case of a property purchase, the bank and the investor jointly purchase the asset and the investor builds up equity in exchange for payments.

Other alternatives are leasing arrangements by which the lessor (the owner) leases the property in exchange for rental and purchase payments.

On the investment side share ownership is allowed, as is private equity activity. While conventional bonds are prohibited, Shariah-compliant bonds mean the paper represents an ownership in the asset rather than a debt obligation.

The constraints of Shariah Law also mean that Muslim workers are constrained from superannuation choices, because most funds invest in debt instruments and possibly other proscribed industries.

Acceptable alternatives include the Sharia-complaint super provider Crescent Wealth, which “actively avoids investments in industries such as gambling, alcohol, tobacco, weaponry, and interest-earning organisations.”

The Muslim community in Australia currently ranks home ownership at close to half the rest of Australia so there is significant opportunity in funding residential property for this community, with a very reasonable return to investors including rental income and capital growth.

DomaCom offers investors a fractional exposure for Muslims and non-Muslims sympathetic to the principles of Islamic financing via a relationship it has forged with Crescent Finance, which is part of the Crescent Group.

It offers an Income Fund that predicts a minimum yield of 3% and targets 4.5% and a Growth Fund that expects a minimum capital gain of 3% and targets between 6-7%. Both funds can be accessed via the DomaCom platform.

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For those retirees with reduced income potential and diminishing super savings, the family home may be their saving grace.

Covid highlights the retiree dilemma

If you are looking for one word to describe 2020, volatility would seem to fit the bill. Every aspect of our lives, whether it be financially, socially, or work, was like a roller coaster ride. Into lockdown, out of lockdown, especially in Victoria. Often isolated from family or close friends. And then coping with investment markets still giving a good imitation of a yo-yo.

COVID drove us indoors, suspended our social lives and devastated businesses and personal incomes. That quaint phrase all those years ago by the Queen, when she described 1992 as her “annus horribilis”, comes to mind.

Many people either received JobKeeper (now officially ended) or higher JobSeeker payments to tide them over, but others haven’t been so lucky, with senior Australians certainly in this category receiving very little financial help to bridge the gap between what they receive and what they need.

At the same time, many of these retirees are finding that the traditional asset allocation split between equities, property, bonds and cash is not necessarily doing them any favours in the current environment. Dividend income is under pressure, property faces several issues around rental income, interest rates remain at record lows, as well as bond yields. In short, a bleak outlook.

It’s time to think outside the square, to examine emerging sub-classes of assets that could provide better income and capital growth. And these investment options can come with other benefits such as diversification and social responsibility without sacrificing liquidity or sharply increasing risk.

Syndication or fractional investment puts another option on the table, allowing retirees (and other investors) to invest in these assets at a lower entry price, as well as offering the opportunity to deliver diversification, minimise risk and increase returns.

Equity release

Enter the family home. For those retirees with reduced income potential and diminishing super savings, the family home may be their saving grace.

And for investors, with property tipped to increase dramatically, it could be a boon with the addition of a guaranteed rental return, no tenancy risk (seniors stay in their property and only pay rent on the percentage of the equity they sell), a secondary market to exit and a long-term time horizon.

A key pillar of Australia’s future retirement income policy must be the family home (although the Government still must figure out how), with the parlous state of the economy and volatile markets almost making this inevitable.

For this to happen it will become imperative for financial advisers to be involved in providing the necessary planning for our aging population, many of whom are vulnerable, potentially open to elder abuse and possibly not armed with the necessary knowledge to make informed decisions.

Whilst downsizing is an option there are several considerations, among them, the social and lifestyle impact of moving and the cost of selling, repurchasing and moving. Downsizing could be a consideration if using some of the proceeds top  up super is an objective.

If staying or aging in place is a key objective, there are only four avenues for home equity release from only seven providers for a very large demographic that will require access to their home equity over the coming years. They are:

• Government Pension Loan Scheme – a prescriptive Government funded home equity release solution linked to the Aged pension with a limited pension payment option only. Repaid upon sale of the property.
• Reverse Mortgage – four providers – funded by lending markets, similar to a home loan but with no regular repayments required. The capital and interest is repaid upon sale of the property. Residual equity uncertain.
• Home Reversion – one provider only. Postcodes where this is available are very limited. Residual equity uncertain.
• Equity Release Agreement – one provider – can be funded by family, friends, individual investors or institutions. Fixed costs. Residual equity more predictable.

There is also the potential for seniors to make downsizer contributions under the legislation from their home equity. This can occur in one of two ways. The first is to sell the family home, downsize to a cheaper home and top up super from the proceeds, up to $300,000 per spouse. There are some rules around this, among them, how long the home has been held, the age of the members and when the contribution is made in relation to the settlement.

The second is to enter an equity release agreement to sell a fraction of their family home, stay put and use the sale proceeds, again up to $300,000 per spouse to top up super to increase income. There is only one Fund that can do this at this time, the DomaCom Fund.

The time is here and now for advisers to get up to speed in this sector, to engage the seniors market, and their families where this is appropriate, and provide the solution most suitable for each individual or couple needing equity release to provide for a financially fulfilling retirement.

With a new fractional debt-free senior equity release product guaranteeing  long-term rental income and a share of the future capital value of a wide range of residential property, advisers can control both ends of the transaction. This can be helpful where investors in a senior’s property are related parties.

The long-term nature of seniors’ equity release properties is ideal for SMSFs which, by their nature, have a long-term outlook in the accumulation stage. It also dovetails with the financial needs of many seniors who similarly have a long-term horizon regarding their retirement funding.

The release of the new fractional model that comes under the Equity Release Agreement^[1] enables this to occur because the fractional model is the only financial product in the equity release space.

Case study on equity release

• Gwen is 84 and owns a mortgage free property worth $900,000
• She needs $200,000 for a more comfortable retirement
• Her 4 children have shown a desire to help their mother in retirement
• Funding options under consideration include:
  • Personal loans from the siblings to Gwen
  • Reverse Mortgage
  • Government Pension Loan Scheme – no lump sum
  • Home Reversion Scheme
  • Senior Equity Release – funded by children
• Because the Senior Equity Release the vendor (Gwen) must receive financial advice and it is recommended that siblings are also involved and receive financial advice (a possible client generation opportunity)
• Senior Equity Release has a calculator to model and illustrate the outcome

Considerations:

• Centrelink entitlements need to be considered when deciding on the settlement outcome i.e. lump sum vs flexible monthly payments
• The children can agree to any rental income between 0% and 3% the life of her equity

Benefits:

• Gwen is able to remain in situ
• She can ‘bequeath’ part of the children’s inheritance whilst still alive
• She can choose to receive a lump sum or a flexible monthly payment
• If necessary she move into an Aged Care facility and lease out her house and keep the rent (which could be used to pay her daily room charge)
• The DomaCom Fund provides a third-party structure with independent Trustee and Custodian to avoid any possible family disputes
• There is a liquidity facility (secondary market) that enables individual siblings to exit the investment if required
• The children will receive investment returns (capital and agreed income)
• Following confirmation from the ATO, Gwen may also contribute the $200,000 released into Super if she wishes under ‘Downsizer’

Property assets with income and growth potential

There are other models open to investors such as the property savers market. Saving for a deposit traditionally meant piling money into a bank account where the return tracked interest rates and, when you had sufficient capital, it became a property deposit.

Today, this approach means almost zero interest will be paid on any bank savings. But there is an option that allows a small investment to grow with the property market: a simple residential fractional property syndicate where buyers can invest via a syndicate in an area where they want to live. For example, if you want to live in Carlton or Balmain you can invest in a property in those areas with, but independently of, other like-minded investors.

One fractional model seeks out developer discounts by buying several properties in a single tranche then splitting the discount (which can be from 10% to 20%) between investors and tenants.

Discounts come from developer savings on sales commissions and marketing and are passed on to investors and tenants resulting in an immediate uplift in capital value. It’s like bulk buying for investors.

Investors, whether they are saving for their own home or investing for the longer term, also get less tenancy risk as the tenants earn equity over the period of their tenure.

The beauty of this innovative model is that the savers can also be the tenants and get an extra lift in their savings if the property is where they want to live.

Indicative capital growth for this investment model is about 5% with additional estimated yields of 3 being a fair indication of the broader market

Investing that helps others

Disability and affordable housing are in high demand and can’t be built quickly enough to satisfy the demand. Investors stand to benefit from Government subsidised housing in the form of very low interest rates (2.5%) and/or subsidised rent payments to owners.

Where this model is used in the affordable housing space for essential workers, the “bulk-buying” discount from developers also applies as does the tenant share of discount. Indicative growth in the affordable housing space is around 8% to 10, owing to the geared nature of the investment.

In both models, tenants having equity also provides market depth for investors as they will soak up equity from others as and when they can do so from their savings and income.

Both models are well worth understanding if advisers want to offer better income and growth prospects to clients.

Renewable energy and “future” investments

For income, renewable energy projects are another way to go. Low on capital growth but high on the income side with a depreciable asset, renewable energy is here to stay.

For those clients with a longer-term time horizon, land banking might be their cup of tea if they think rezoning for future use will increase values.

Another area that has done well for many investors is rural farmland, a commodity that has appreciated well over the past few decades and one that attracts better rental income than many capital city residential properties. It’s also a “green” investment, as well as assisting our next generation of farmers to work the land without the pressure of large mortgages, allowing them to sow their capital more productively.

Rental returns are usually in the 4% to 5% range and passive non-farm income is also possible. Growth figures are positive with an estimated 6% plus average annual growth

The fractional investment model gives investors the ability to syndicate into loan or individual mortgage sub-funds to lend to specific properties or developments with first mortgage security and,  typically, earn 5% p.a. plus. Where developments are concerned this is cheap settlement insurance.

Advisers are in the box seat with most of these investment models as they can structure both sides of many of the transactions between retired income clients and wealth accumulator growth clients.  Advisers can also assist liquidity by matching various client needs internally via their client bases.

The shape of investing is changing in many ways, providing financial advisers and their clients with multiple avenues to achieve financial goals beyond the traditional equity, property, cash and bond markets.

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[1] See Reverse mortgage and home equity release – Moneysmart.gov.au

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Arthur Naoumidis

DomaCom Limited (ASX:DCL) (‘DomaCom’ or ‘the Company’) is pleased to announce that the Company’s platform has been integrated with BGL Corporate Solutions Pty Ltd. (‘BGL’) Simple Fund 360, Australia’s leading  self-managed superannuation fund (SMSF) administration solution.

BGL has implemented a seamless data interface with DomaCom which will allow 200,000+ SMSF’s to use the DomaCom Fund. Following the integration, SMSFs’ accountants are now able to receive automated transactional data feed into their Simple Fund 360 software from the DomaCom platform.

The integration with BGL is a major milestone for DomaCom that builds upon the Australian Tax Office (‘ATO’) ruling on downsizer contributions last year. Specifically, the ATO’s Administrative Binding Advice^[1] confirms part disposal of a home for downsizer contributions. This means that a person can dispose of part of their home under DomaCom’s Senior Equity Release platform and be eligible to make a downsizer contribution.

The ability to contribute the proceeds of downsizing part of a home into superannuation was one of several measures announced in the 2017-2018 Budget to reduce pressure on housing affordability in Australia. From 1 July 2018, eligible people aged 65 or over have been able to make a downsizer contribution into their superannuation of up to A$300,000 from the proceeds of selling all or part of their home.

As downsizer contributions are not subject to the usual concessional or non-concessional contribution caps, they can still be made when a member’s balance exceeds $1.6 million. Whilst 5,000 retirees used this facility in the first year, research indicates that a large proportion of retirees would prefer to access the downsizer provisions while being able to continue living in their homes.

The ATO confirmation on part disposal now means that SMSF retirees can use DomaCom’s Senior Equity Release platform to sell a part interest in their home and make a downsizer contribution without having to move out of their home. While a residential property cannot be sold to an SMSF, a part interest of a home can be sold to DomaCom’s Senior Equity Release platform which provides cash to the member that they are legally able to contribute to their SMSF.

DomaCom CEO, Arthur Naoumidis, said: “DomaCom is excited to partner with BGL on efficiently delivering the benefits of our innovations to Australia’s self-funded retirees. The ability for retirees to support themselves by modifying their personal balance sheets and moving some of the financial resources tied up in their homes to their super funds will enable them to enjoy a better retirement. Thanks to our partnership with BGL, they will be able to do this with the knowledge that their accountants can efficiently administer their SMSF’s.”

BGL Managing Director, Ron Lesh, said: “BGL has been at the forefront of innovation in the delivery of SMSF administration solutions since 1997 and I am pleased to welcome DomaCom to the BGL family to help our clients support their self-funded retirees.”

Highlights

• DomaCom has been integrated with BGL via a data implementation
• BGL provides self-managed superannuation fund (SMSF)  administration to 60% of Australia’s 600,000 SMSF’s
• Accountants can now more efficiently administer their SMSFs and access data from DomaCom
• SMSF’s can now use DomaCom’s  Senior Equity Release platform to benefit from the Australian Tax Office’s recent ruling on downsizer contributions and top up their SMSF

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[1] https://www.ato.gov.au/General/ATO-advice-and-guidance/ATO-advice-products-(rulings)/Administratively-binding-advice/

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There has never been a greater need for sound financial advice, especially Australians in or nearing retirement.

Strange as it might seem, financial advisers might be on the cusp of a golden era. Not only will it enhance their bottom lines, but it will increase the market valuations of their practices. For those that focus on senior Australians, the financial rewards could be even more pronounced.

There are myriad reasons for asserting this proposition, but three stand out: (i) retiring baby boomers, who number more than 20 per cent of the population, will be retiring in droves in the years ahead, (ii) the fact many do not have financial advice, and, (iii) for some, the family home will be their biggest asset and will need to be an integral part of their retirement income strategy.

These are not the only factors at play, of course. The banks exiting wealth management in the wake of the Financial Services Royal Commission has been well documented (this trend was evident before the inquiry), the decline in the number of advisers in response to rising educational and professional standards, and the industry shift from commission-based remuneration to fees. For many advisers, the speed of change was too much.

For those advisers who have adjusted to the new environment and are aligning themselves with the higher ethical and educational standards, opportunities abound. But it is imperative they get on the ethical and professional bandwagon. Courtesy of the Royal Commission and parliamentary inquiries, there has been no shortage of evidence casting the advice industry in a bad light. And, sadly, it has a long history.

Remember, for example, the Timbercorp Group, which offered investors managed investment schemes in olives, almonds, and timber, that went into voluntary administration in April 2009. Two months later, the liquidators were summoned – the day of reckoning for nearly 20,000 investors was nigh.

Over its 17-year history, Timbercorp had raised more than $2 billion from these investors, many of whom not only lost their investment, but, in some instances, were bankrupted because they had borrowed from Timbercorp’s finance arm (backed by ANZ) to invest in these schemes. With the company in liquidation, their investment had gone sour, yet they still had debts owing, making bankruptcy their only option.

The bitter aftermath of Timbercorp’s demise became a veritable lawyers’ picnic. It went on for years. In all of this the role of financial advisers, and how they how exercised their duty of care to these investors, became a critical issue.

In the event, ASIC’s investigation into Timbercorp’s collapse concluded there was no systemic mis-selling of these agribusiness schemes by financial advisers that warranted enforcement action. But several advisers were required to write to clients where the advice was “potentially inappropriate” to explain to them how they could make a complaint.

That was ASIC’s letter-of-the-law ruling. But did it pass the pub test? Did these advisers meet their duty of care to their clients? Clearly there were several red flags. First and foremost, these schemes were tax-driven, and, as history tells us, such schemes are typically unviable.

A promised after-tax compound return of 14% highlighted that old investment maxim – if a return sounds too good to be true, then it probably is. Many investors, and some advisers, simply did not understand the risks involved with this investment product. Again, a golden rule – if you don’t understand it, you shouldn’t be in it, and you certainly shouldn’t give advice about it.

This is the image – and type of financial product – that the advice industry is leaving behind. They understand that ethical, professional advice that creates more trust and confidence will command a premium in a growing market, especially from retiring baby boomers.

To ensure this happens, the advice industry must commit to the principle of “duty of care”. If it does so, much of what’s required to have sound ethical standards and professional behaviour will fall into place. Although “duty of care” has become one of the industry’s buzz words that gets thrown about like confetti, it is the primary principle underpinning the industry. So, what does it mean?

Under the ASIC Act and the Corporations Act, financial advisers must:

• Not engage in unconscionable conduct or misleading and deceptive conduct
• Act in the best interest of the client
• Not make false or misleading statements
• Provide their services with “due care and skill” (a term to this effect is implied into all contracts between financial advisers and their clients)
• Provide their services efficiently, fairly and honestly
• Provide advice that is appropriate for the client, taking into account the client’s needs, objectives and circumstances; and
• Provide clients with a variety of documents such as financial services guides and statements of advice.

As these legislative frameworks highlight, a duty of care is one of the basic tenets of financial advice. Aside from these two Acts mentioned above, it is also embedded in the Financial Adviser Standards and Ethics Authority’s (FASEA) Code of Ethics. FASEA was established in April 2017 to set the education, training, and ethical standards for financial advisers.

In essence, what it is saying is that advisers must always act in the best interests of their clients and to place the client’s interests above their own when giving advice. By doing so the adviser engenders trust into the relationship, with the client having confidence that the adviser is always working in his/her best interests. This doesn’t mean the advice is always perfect; but it does mean it is ethically based.

So, what does this require of the adviser? To always act in accordance with the appropriate professional conduct and ethical standards laid down by the relevant professional body. It means disclosing all relevant facts to the client at all times. This includes any compensation arrangements and potential conflicts of interest, not only between the client and adviser but the adviser’s employer and/or AFSL.

Transparency is critical to the client-adviser relationship. Regular communication affords both parties a better understanding of the relationship, as well as providing a safety net in the event of potential conflicts of interest or a change in the adviser’s approach to business and/or investment.

It’s also imperative that clients fully understand the nature of the services they are getting from an adviser, and what will be the compensation for those services. The latter point is critical when it comes to any non-salary compensation an adviser receives.

At a practical level, there are several steps advisers must take to ensure duty of care. First, they need to conduct a “fact find” to establish, as well as possible, the client’s objectives and goals. Issues that will be important are a client’s health (as well as their partner’s health), what are their likely income needs (how many dependents and lifestyle expectations), CPI, likely living costs (are they renting, or do they own their home), risk assessment, and do they wish to downsize.

Then there are the four pillars of retirement income to be considered: superannuation; existing savings and investments; home ownership; and eligibility to the aged pension and social security.

With growing doubts about whether the Superannuation Guarantee (SG) will be increased, as well as calls for superannuation to be open to first home buyers, for example, the dynamic between these four pillars is likely to change. Advisers need to be aware of these broader changes to the system to be meeting their duty of care.

Financial modelling also comes into play to find those investment strategies and products that will best meet the client’s need for income and/or capital growth. This could mean a diversified portfolio, buying an annuity, or an equity release product. No one size fits all, and duty of care means finding the right fit for each client.

Remember, too, there are specific requirements relating to financial modelling. Under RG175, advisers are obligated to maintain their industry knowledge about new products, investment options and alternative strategies. Under Standard 5 of the FASEA Code of Ethics, advisers cannot allow their APL to limit their view of potentially suitable products; putting round pegs in square holes will not satisfy their duty of care.

Advisers must also be conscious of the fact that more consumer protections have been built into the legislative and regulatory regimes governing the industry and this is further leveraging consumer confidence. But these protections come at a financial cost to the consumer. So, there is an urgent need to make professional financial advice more affordable and accessible, and to achieve this the red tape around the delivery of financial advice needs to be cut – without lowering either ethical or professional standards.

In particular, advisers must have greater flexibility to offer single-issue advice or scaled advice, especially as it relates to retirement income strategies. The cost of not doing so could lay the groundwork for a far bigger social injustice as people make life-changing financial decisions without any advice.

If the Government does take this step – and there are indications, especially in the wake of COVID-19, that they will do so with ASIC currently reviewing submissions to its Consultative Paper 332: Promoting Access to Affordable Advice for Consumers as part of this process – then it will potentially create a fresh client base for advisers, particularly among those nearing or in retirement. For those doubting the need for greater access to advice, especially by baby boomers, consider the following:

• An estimated $3.5 trillion will transfer across over the next 20 years, an enormous intergenerational wealth transfer;
• 76% of Australians have no will, of whom many will be baby boomers;
• 53% have not discussed their legacy with their children;
• 70% of families lose their wealth by the second generation;
• 90% of families lose their wealth by the third generation;
• Australians over age 71 have $30 billion in home loan debt;
• Many baby boomers missed the superannuation boat with the SG only being introduced in 1992;
• Current low interest rates are likely to remain so for many years;
• Lower dividend payments because of the COVID-induced recession; and
• The need for professional advice has never been so great.

For all these reasons, there will be a thirst for advice, and nowhere will this be more evident than with the baby boomers’ family home. Options for those nearing or in retirement are to sell to either downsize or opt for a sea-change. But research shows that for many people at this stage of life neither option is particularly palatable. Surveys by seniors’ organisations like National Seniors Australia have shown they would much prefer to age “in place”, meaning a form of equity release – and for this, many will need advice.

For advisers, this will become an integral part of the new frontier as it has the potential to generate different business streams, as Steve Prendeville, Founder and Managing Director of Forte Asset Solutions, a specialist in financial services mergers and acquisitions, explained to a recent webinar on the Downsizer Legislation.

Establishing relations with baby boomers opens the door to extending the business relationship to children, grandchildren, even extended families. As any marketing person knows, a recommendation from personal experience, especially when it comes to professional services, has enormous validity. It also means the baby boomer becomes an active, not passive client, and with that activity comes the opportunity to enhance revenue streams.

As Prendeville highlighted, this is not a one-way street. These baby boomers will benefit from getting advice, many for the first time. It takes the adviser-client relationship beyond the traditional areas of retirement advice, social security information, and monitoring to intergenerational advice, estate planning, equity release and aged care. In short, it transforms the advice package – and the practice.

Prendeville used the example of a suburban practice to make the point. With 157 clients, it had annual receivables of slightly over $600,000, FUM of $112 million and EBIT (earnings before interest and tax) of $180,000. Clients were sticky, earnings and revenue consistent, there was no over reliance on key clients, and the average FUM was $715,000.

But there were weaknesses. The demographics showed an ageing client (56% were 70 plus) representing mortality risk, little growth, asset-based fees, no service segmentation and key man risk. Based on these numbers, the practice could be priced at either two times revenue at $1.2 million or 4.8 times EBIT at $864,000. But if generational advice is added to the mix, then revenue is priced at 2.2 times for $1.350 million or EBIT at 5.4 times for $1.08 million – sizeable differences.

When the family is brought together to make lifetime decisions and the children witness the care and consideration for their parents you can offset mortality risk by retaining FUM with the second generation.

Obviously, the addition of intergenerational advice depends on how many are receiving that advice, but as a rule of thumb the involvement of clients’ children can add 20% of the value of the business, as well as lower the average age of the client base. It’s worth remembering the Pareto Principle – for most businesses, 20% of clients generate 80% of revenue.

The financial advice industry has endured several tough years. Yet there has never been a greater need for sound financial advice, especially Australians in or nearing retirement, providing enormous opportunities for those advisers who are prepared to meet the challenge.

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