The impact of redemption extensions

Following a number of recent liquidity issues, platforms have found themselves in new territory.

Liquidity is obviously a recognised risk in funds management, however, platforms tend to focus more on the administrative aspects of a fund rather than the liquidity. Of utmost priority is to ensure that reports, in particular tax and regular statements, can continue to be issued within regulated timeframes.

In the main, the platforms see themselves as merely a facility to offer funds to the end clients and generally believe they have no fiduciary obligations in terms of the performance or structure of the fund itself.

A superannuation wrap is different, however, as the trustees are effectively recommending the available products and, as such, need to undertake their own research prior to making funds available to members. This is an obligation that cannot be signed away, so even letters from members indicating that no advice has been received will not force a trustee to add what they view as an inappropriate fund to their list.

Basically, the platform is an execution vehicle to facilitate the instructions of the investors/planners. The relationship between the platform and the member is not as strong as the relationship between the member and their financial planner.

When a fund available through the platform freezes redemptions, or extends their redemption period, the relationship between the member and the platform does change. Through no real fault of the platform, the client is no longer able to access part or all of their funds, however, the client service responsibility sits with the adviser and the platform, not the fund manager.

Recently, platforms have had to control this redemption process and give clear guidelines for withdrawal procedures to both the adviser and, ultimately, their clients.

It is important to note that there are several parties involved in the resolution of this — the trustee, the administrator (who may be the trustee), the dealer group, the adviser and the member.

There are a number of issues platforms have had to deal with as a result. The most important is the regulatory requirement to rollout a member’s funds from a superannuation fund within 30 days of receiving a rollover request (R6.34 SIS Regulations).

This was designed to prevent funds dragging their feet when rolling money out (potentially to a competitor), but it now has the effect of putting funds in jeopardy if all the assets cannot be realised in a reasonable time frame.

The trustee must obtain a licence variation from the Australian Prudential Regulation Authority to obtain relief from these portability requirements.

Any client who has their total pension balance invested in an illiquid fund, and as a consequence cannot draw their minimum pension, faces the prospect of having their account converted to the taxable environment of superannuation.

This process is complicated by the knee-jerk reaction of clients and advisers who submit full withdrawal requests even when there is no need to alter the asset allocation of the client or the client doesn’t need the money.

From a financial planning perspective, market conditions are driving the advice process.

Whether the redemptions are offered under a queued method or by the offer period, the influx of redemption requests simply reduces the pool of money available to the platform to satisfy its current needs.

An important consideration is that a dealer may have no choice but to recommend clients withdraw their funds if their research has downgraded that fund.

In effect, the influx of clients lining up to redeem or switch money from these funds has a profound impact on those who do require the money, such as account-based pensioners.

These clients who may rely on their pension to survive are suddenly in a queue with a number of clients who are possibly just anxious about the loss of liquidity of the fund and would like peace of mind.

Arguably, the trustee has the obligation to ensure the clients who require money for living expenses receive priority over those who simply want to reweight their portfolio. If there is no obligation, perhaps the trustee has the opportunity to do this by restricting redemption requests to account-based pensioners.

To that end, it is important that the platforms encourage dealers to keep clear heads and advise members where appropriate to retain their money in the funds unless there is a legitimate need.

A collaborative effort between dealers, advisers, trustees and platforms could help stem the tide of switches and ensure any money available from these funds is directed towards those who need it most.

Patrick Jackson is head of operations and business solutions at Fiducian Portfolio Services.