2019 CEO Survey: Francesco De Ferrari

AMP chief executive Francesco De Ferrari. Picture: Britta Campion

Every year The Australian’s John Durie asks some of the biggest names in Australian business five key questions about what’s coming in the year ahead.

Here is what AMP’s Francesco De Ferrari sees ahead in 2020.

READ MORE: John Durie’s 2019 CEO Survey.

How is your company affected by low-interest rates and what is needed to boost the economy?

The biggest impact of low-interest rates will have an impact on our clients, particularly those who are retired or are close to doing so. At the current levels, the “risk-free” rate of investment is effectively zero, which will encourage people to look for yield in riskier assets without fully understanding the consequences of doing so. Our view is that managing risk in an investment or retirement portfolio is just as important as investment performance.

Our investment management business, AMP Capital, will benefit from lower rates, particularly in infrastructure and real estate strategies, which are delivering strong performance and hence a good yield to investors, where we are achieving strong performance and good yield. For clients with longer investment horizons real assets, as we describe them, these are must-have investments in the current environment.

More broadly, my concern is that the combination of continued low-interest rates, and low wage growth and a very with a punitive environment will lead to an excessive risk-averse corporate sector which will impact economic growth.

What is the impact of government regulations on your company, including those applying to the financial sector?

Regulatory change has clearly had a huge impact on the financial services industry and is forcing change. The Future of Financial Advice legislation more than five years ago appears to have been the starting point, and the change has been extensive across super, banking, insurance. This year we have seen the Protecting Your Super and Putting Members Interest First legislation, the royal commission recommendations including removal of grandfathered commissions, design and distribution obligations, and further implementation of the Financial Adviser Standards and Ethics Authority (FASEA), among other regulatory changes. These have been built on the royal commission recommendations and a raft of other regulation in superannuation, banking and insurance.

The removal of grandfathered commissions, new mandatory education standards introduced by FASEA for advisers, and increased regulation on advice have driven significant disruption in wealth management. The regulators have also come under pressure, particularly on enforcement, which is leading to more actions and risk aversion from corporates and driving changes in approach across the industry.

We are adapting our strategy in response, but we are also trying to foster an entrepreneurial mindset in our business. To meet our client’s needs, we need to innovate. We are also changing the way we are structured.

Our strategy has had to adapt. In the past AMP, like all other financial services companies, organised itself around products (superannuation, life insurance, banking investment management), with a predominantly licensed advisor network. We are changing our business model to a business that is organised around and focused on clients. We aim to make sure the new regulatory framework achieves a strong outcome for clients.

What percentage of company revenues are spent on research and development, and how is your company using technology to improve performance?

We don’t report R & D spend like a tech or biotech business, but we are investing substantially in development – this year, we announced a $1-1.3bn investment program over the next three years. Part of that investment will be on technology-driven solutions, building on the tech-based solutions we have already developed, particularly in terms of financial advice and management. But we’re also seeking to innovate more broadly, such as product innovations to better meet client needs or service. We’re aiming to reinvent throughout the business. Technology will play a major role in how we serve clients and the good news is that we start from a strong base. We’ve developed or acquired a suite of great technology solutions such as Goals 360 and Money Brilliant. But we’ve developed most of these solutions in vertical silos. Our new client focus allows us to look at our technological applications horizontally as we bring them together and integrate them into one seamless client experience. Building our digital wealth capability is a critical part of our strategy and achieving success will involve smart integration of multiple strands of technology rather than any one single piece. It’s important to remember that product and process innovations are just as important as technological innovation.

What are the three major policy issues facing the country and what should be done about them?

I would preface my answer by saying it’s always a challenge for government to address multiple policy priorities at the one time – every stakeholder has competing objectives. It won’t surprise that we see policy impacting wealth management, in a holistic sense, as a priority. We have a compulsory super system and a huge store of personal wealth in residential real estate, and to a lesser extent in the share market. We also have a very sophisticated tax system and substantial amounts of regulation. Access to advice, not just on superannuation but on a holistic picture of an individual’s wealth, is a social need. The outcomes that can be achieved with advice are clearly superior. The policy framework around wealth management is well developed but has substantial practical challenges, for example, with definitions around personal and general advice. When it comes to the wealth management industry, a policy area of focus is around financial advice and how the new Education and professional standards for financial advisers, – captured under FASEA, are also disrupting the industry – will be implemented. Also, clarifying how advice is defined (whether its general or personal) and the requirements needed to provide advice, could be very beneficial to the end client. We would advocate for reform that makes financial advice more affordable and accessible and places the needs of the end client first. Regulatory requirements and qualifications have risen for advisers, and the industry is shrinking, so the costs of advice are rising – the result of that is that fewer people can access it. Clarifying how advice is defined and the requirements needed to provide advice could be very beneficial to the end client.

Beyond that, economic policy is obviously critical, particularly at this point in what is already a long economic cycle. The monetary policy lever has reduced influence, and moving to negative rates, for example, through quantitative easing, is not a good outcome. We’re with rates so low, the question of monetary policy is an important one. I would be supportive of further fiscal stimulus and structural reform, but that is a call for the government.

What are the major impediments to long-term growth facing your company and what can or is being done about them?

A market downturn is the biggest potential disrupter in our industry. At the moment, the discussion in wealth management is focused on achieving absolute returns but risk is the critical factor that is largely being ignored in individual portfolios. The potential impact is seriously underestimated by the community but the repercussions on many Australians could be significant and increases with age. The impact of a market downturn on a person who is five years out from retirement will be profound – they will either have to accept a lower standard of living in retirement or potentially work longer to restore their value of their retirement savings. With these risks in mind, we’re taking a lot of time to explain to our clients that it is not absolute performance but risk-adjusted performance that should be the focus. I’m sure we’ll all hear a lot more about this in the year ahead. Our business will be

clearly impacted by how well our clients are prepared and manage a market disruption. We’ll be talking to other stakeholders about it to, so the risks are properly considered. Risk is often relegated behind discussions about investment performance over one, three or five years.

But that is ignoring that most people are investing over much longer time horizons. Good performance over three years can easily be undermined over the longer term by poor management of investment risks.