8 May 2019
James Kirby – Wealth Editor
Labor’s controversial plan to scrap franking credit rebates will accelerate the exodus of superannuation investors from existing banks to industry funds and investment platforms.
A new report from stockbroker Ord Minnett suggests the trend — which has seen billions of dollars move out of retail funds and over to union-linked industry funds — will be further accelerated by investors seeking to protect themselves from the ALP franking credit plans.
The report also reveals that so-called “investment platforms” such as Netwealth or HUB24 could be major beneficiaries of this flood of money — the broker estimates both listed companies could double their super assets.
As the report suggests, “the royal commission sparked changes and this wave of change has yet to crest: Labor’s proposed banning of franking credit refunds could see many SMSF assets migrate to platforms or other pooled super vehicles.
“We estimate that more than $200 billion of SMSF assets are in pension phase, and that even more are in accumulation phase but still generating franking refunds.”
The exodus of superannuation money from the banks and self-managed super funds has also been spurred by major changes in the financial advice industry that are yet to fully play out.
It is clear already that advisers fleeing the banks and setting up under new independent licences are taking their clients with them.
The move will often involve a review of the client arrangements again prompting large movements of money which end up at industry funds or investment platforms (where investors can make direct investments).
In terms of major investment flows, the double stimulus provided by changes in financial advice arrangements coupled with the fear of losing out on franking credits once again plays primarily into the hands of the nation’s largest funds, which are classified as “pooled investments”. Under the pooled investment structure big funds will be able to substantially (but not entirely) sidestep the ALP scrapping of franking credits because retirees are only a minority of their members and the franking credits get used at the so-called “fund level”.
The most recent super data shows money pouring out of retail funds and into industry funds even with the very poor conditions of the last quarter of 2018.
Australian Prudential Regulation Authority data shows that industry fund money under management was $607bn at December 2018, versus $605bn at June 2018, with net contributions of $17.5bn. Meanwhile, in the six months to December 2018, retail superannuation money under management fell by $36bn and net contributions were negative.
As Ord Minnett suggests: “Industry data provides us comfort that while there is a strong structural trend toward industry super funds, the specialist platforms are benefiting from the structural trend of advice away from the aligned bank and AMP platforms. We see the exodus of advisers from the banks and AMP benefiting HUB and Netwealth while the exodus of clients is benefiting industry funds.”
The confirmation from stockbroking analysts that industry funds will gain even further advantage from the ALP changes will increase pressure on the nation’s biggest funds to improve transparency.
Though the largest funds have consistently suggested they will not be affected by the franking credits plan, it became clear this week that every fund will have to review their “crediting” arrangements for paying retirees if the changes goes through.
With superannuation law demanding that all members in any super fund are treated “equitably”, a change to the tax status of retirees will create a dilemma for funds: if the funds keep paying the retirees as if their special tax status in relation to franking still existed, non-retired members may be disadvantaged. If the funds reduce retiree income there will be major protests.
Either way the funds will be under pressure to detail more clearly how they distribute payments to their members.