Capitalising on strengths
An increasingly wealthy Asia will be looking for investment opportunities in Australia and fund managers need to do more to have their investment products accepted in other regions, Harvey H Kalman writes.
A contradictory range of views has been emerging about the future of the financial services sector.
They range from it being too big, through to concern that it will continually contract because of lack of investor confidence and a burgeoning DIY approach by investors.
My own view is that the stars are aligned for a positive future for the sector, including new markets in the Asian region bringing sustainable growth opportunities.
Certainly, we have been through a time of some turmoil, with a number of poor or questionable practices identified and exposed. Although these have arisen from a very small percentage of industry participants, the overall effect has been to bring a great deal of criticism to the sector.
However, we need to also recognise that much work has been done to build the financial services sector into the economic performer it now is. Now is the time when participants in the sector can take advantage of the solid framework we have and how it has enhanced our ability to turn any negatives into positives.
We have been saying for some time that financial services is a mature industry — now is the time for it to act maturely.
A report last year by the Financial Services Council of Australia (FSC) showed the impact of the financial services on the Australian economy.
The size of the sector, particularly when compared with that of other countries, is remarkable.
It is both the fourth largest national financial services industry sector in the world and has the fourth largest superannuation and pensions sector.
It is also the second largest in Asia (after Japan) in these two categories.
Financial services already plays a crucial role across the Australian economy. The FSC points out that in total it is the largest industry in Australia.
Already Australian fund managers and product developers are seeking international opportunities but more work needs to be done to have Australian investment products accepted in other jurisdictions. They need to be made attractive to overseas investors who can access them more easily.
The combined financial and insurance services sectors contribute $130 billion to gross domestic product (GDP), or nine per cent annually.
This is more than our total exports to China.
The FSC report also said that in the aftermath of what became known as the global financial crisis (GFC) (which I believe should be called the North Atlantic Credit Crisis for reasons I will go into another time), a number of developments have occurred in the sector which are driving new and exciting opportunities for trade and economic growth.
While the FSC report was mainly concerned with the financial services sector in Australia, developments since the GFC have also created trading opportunities for Australia, particularly in Asia.
There can be no doubt that even eight years later, we are still seeing the impact of the GFC on how financial services operates, and changes in attitude and regulation because of it.
I believe that one outcome from the fall-out from the GFC is that we have gone a long way to create a much stronger financial planning profession in Australia.
We have also witnessed the evolution of stronger investor protection arising from the scandals and investor pain post 2007/8. This has not necessarily developed in the way I would have preferred, and perhaps not as enshrined in regulation as I believe is necessary.
Nevertheless we have seen dramatic improvements in compensation for the poor advice that was sometimes given in the period leading up to the collapse of Lehman Brothers.
Total compensation to investors has been greater than at any other time in the sector's history. Precedents and better internal controls that will benefit investors have been established as a result.
A regeneration of the financial services sector in this new environment has meant that there is little oxygen for bad practice; a more informed market now knows what to look for — and expect — in the search for professional, qualified and ethical financial planning advisers.
ASIA AWAITS
Good financial planning will be in demand over the next several years as baby boomers retire and the workforce increasingly recognises the need for retirement savings.
It is not only Australians who will need professional financial advice.
Throughout Asia, an emerging wealthy middle class will be seeking financial advice, as well as suitable investment products.
This could well develop into opportunities for Australian planning groups through associations, alliances and affiliations.
The increasingly affluent Asia is already very active seeking Australian investment opportunities, as we have seen in the demand for residential property. Other opportunities for Australian product suppliers will undoubtedly follow.
Already Australian fund managers and product developers are seeking international opportunities but more work needs to be done to have Australian investment products accepted in other jurisdictions. They need to be made attractive to overseas investors who can access them more easily.
Australia has already developed, or is in the process of developing, trade agreements with a number of Asian countries.
This includes China, Japan, Korea, India, Indonesia, Malaysia, and Singapore — in fact with most of our Asian neighbours.
In order to compete, Australian funds must meet what is generally regarded as international standards. Our task is to reposition our investment vehicles and ensure they are front and centre as an attractive option for overseas investors.
If these include measures that lead to increased participation in each others' financial services sector, we could see immense benefits to the sector as well as the Australian economy.
Australia has the right experience in regulatory improvements, wealth advice, asset management, product development and retirement planning, to take a true leadership position in the region. We also need to put in place the right tools, and hopefully this is now starting to happen.
We can look to the work of other countries, notably the US and those from Europe, which have already developed approaches and products that can be offered across borders.
Europe has had a collective investment vehicle (CIV) approach, the undertakings for collective investment in transferable securities (UCITS), for some time now which has given them a big advantage in moving into Asia.
Get on the world stage
A report by Pricewaterhouse Coopers (PwC) — in conjunction with the FSC — titled "Asia Region Funds Passport", said that by 2010, 50 per cent of all net sales into UCITS products were originating outside the EU, with Asia representing between 30 per cent and 40 per cent of total net sales into UCITS.
In order to compete, Australian funds must meet what is generally regarded as international standards. Our task is to reposition our investment vehicles and ensure they are front and centre as an attractive option for overseas investors.
Our government is taking concrete steps to put in place the framework to allow Australian fund managers to attract overseas investors.
With the introduction of the "investment manager regime" and the Asia Region Funds Passport, Australian fund managers should have the right structure supporting them to allow them to take products to Asia on a level playing field with European and US asset managers.
The Asia Region Funds Passport will enable us to allow easier investment into Australian funds by overseas investors, including taking into account tax or currency implications.
The combination of the CIV approach taken with the passport initiative maximises Australia's ability to truly compete with the European UCITS approach.
Additional benefits such as more protection for investors, greater investment choice and flexibility, and added diversification of the investor base for asset managers could be considered in the passport approach.
The result will open the way for more Asian investment money being invested in Australian funds.
This will allow us to capitalise on the expertise we have already developed in financial services and regulation to create jobs, increase investment opportunities, add tax revenue, and benefit our trading position.
Conclusion
It is to be hoped that Australia's decision to adopt a new and yet untried approach with the Asia Passport, rather than adopting the UCITS model, will not cause delays in getting it up and running.
We are keen to compete in the global market to attract Asian investors.
A new approach, with the right tools in place, is an opportunity Australia should look to embrace — particularly at a time when a replacement for the slowing mining industry is badly needed.
Harvey H Kalman is the executive general manager, corporate trustees services, at Equity Trustees Limited.
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