Exploding advice myth reveals a grim reality for AMP

The royal commission has underlined one myth underpinning the financial planning industry.

ACCC boss Rod Sims. Illustration: Sturt Krygsman.

The royal commission has underlined one myth underpinning the financial planning industry, and the result is the more-than-halving of AMP’s share value in seven months to a 15-year low of $2.50, wiping about $8 billion from its value to just $7.3bn.

The myth perpetuated by AMP and the banks was that everyone needed financial advice, when in reality, for more than 80 per cent of Australians, financial planning is necessary at most twice in their lives — at retirement and when winning the lottery.

The advice industry has sadly been centre stage as a key problem child for the financial services industry in Kenneth Hayne’s inquiry.

No wonder AMP chair David Murray confided on his appointment that incoming boss Francesco De Ferrari is the last best chance to save the franchise.

Over the past three months, AMP has suffered net outflows of $500 million a month while AustralianSuper alone has received net inflows of more than $1bn a month, and the trend is reflected across the sector as industry funds gain at the ­expense of retail.

Other industry funds have ­enjoyed the same windfalls as the royal commission helped trigger a market-led restructuring of the sector, with the banks in lemming-like style selling off their wealth management assets.

Interim AMP chief and director Mike Wilkins rejects outright suggestions that his brand is ­trashed, but admits it is tarnished and thinks the outflows may continue until the Hayne inquiry is wrapped up.

He and his team are doing what they can to restore the brand before the new boss starts in ­December ahead of what is ­already being called a year of ­transition.

This is not exactly a confident tone and after yesterday’s asset ­divestment plans, shareholders were disappointed by the price ­realised, the complicated structure, the lack of immediate capital management handouts and, fin­ally, the realisation that dividends will be lower.

AMP will maintain dividend ratios of about 80 per cent of earnings, which will be about 20 per cent lower after the asset sales, so hence lower dividends.

The sale of the wealth protection business to Britain-based Resolution Life will deliver a net benefit of $2.2bn for AMP, but this includes a roughly 20 per cent ­equity stake in the UK company.

The deal was done at 80 per cent of embedded value, which shows vendors have arguably been overoptimistic in their ­valuations.

The deals show AMP is getting on with business but following the Wall Street stock price collapse, there were better days to release what amounted to a string of, ­albeit partly expected, disappointing news.

Challenging times

The Australian stockmarket is now in correction territory, down more than 11 per cent from its ­August 30 high of 6373, yet, with the obvious laggards like the banks, earnings are holding up.

MST’s Hasan Tevfik noted yesterday that if earnings fall next then we are headed into bear market territory (down 20 per cent).

The bank earnings season starts next week but hopefully they have pre-announced most of the bad news because, on Goldman Sachs numbers, they are now trading at 11 times forecast earnings, which is the biggest discount on record to industrial company earnings, which are trading at 19.5 times forecast earnings.

The S&P 200 index is trading right on its long-term average of 14.2 times and, while Wall Street continues to drive sentiment, commodity prices hold the key to the outlook for Australian stocks.

If commodity prices collapse, batten the hatches.

The US sentiment is driven in part by past overvaluations, but also a long list of uncertainties around the coming midterm elections, myriad geopolitical issues from Italy to China trade wars and on the list goes.

This sort of market is sometimes irrational, as with the 24 per cent fall in WorleyParsons this week on the back of an accretive offshore expansion and successful $2.9bn equity raising.

Record run for Sims

Rod Sims will become the longest-serving ACCC boss in history after being granted a third term, with the extra three years bringing his full term to 11 years.

This is three years longer than his two predecessors, Graeme Samuel and Allan Fels, and also tops the 10 years served by the first competition policy boss, Ron Bannerman.

In corporate life, 10 years is a rough rule of thumb as the right time for someone to lead a company, and the same applies to running a regulator.

Sims will be 71 when he steps down from the ACCC in 2022.

He was keen to be reappointed.

Sims has broad bipartisan support in Canberra but the opposition will rightly attack the timing of his reappointment, nine months ahead of time, given his term doesn’t expire until July 31.

His job needs the approval of a majority of state governments and, indeed, this approval was gained some months ago, which indeed does raise questions over why the position needed to be filled so early.

This is some sort of record for this government and the opposition rightly says this smacks of the government stacking the shelves prior to being thrown out of office at the next election.

The politically savvy Sims has done a good job, but there is a real danger in appointing anyone for a long time to run an organisation because of the danger of group think emerging.

This applies particularly in the case of Sims, who is both intellectually smart and a strong proponent of his ideas.

Next year he will lose one of the independent thinkers on the commission when former law partner Roger Featherston steps aside, which will also detract from the ACCC’s internal thinking.

Dubbed the “leftie from Lorne”, Sims, who was born in the Victorian seaside town, served as an adviser to former PM Bob Hawke and has proved extraordinarily adept at policy that advances the ACCC.

This is underlined by the present adoption of his work on electricity pricing.

Earlier this year he took out a landmark criminal cartel case against ANZ and a selection of investment banks over a failed capital raising several years ago.

The case started just as the royal commission into banks was heating up and as ASIC and APRA were being attacked for lack of action.

There is also criticism that Sims is devoting too much time to industry reviews and too little to taking law breakers to court.

He disputes the claim.

An economist, he has also attracted some criticism from lawyers who think one of their own should be running what is essentially an enforcement role.

Sims ran the micro-economic unit in the Prime Minister’s Department in the late 1980s.

The reality is there were no obvious alternative to Sims with the possible exception of fellow commissioner Sarah Court, who is a long-time government lawyer.

Change of direction

The Australian Institute of Company Directors is not the organisation it once was and this may be reflected in some of its recent surveys showing more concern for ­issues like climate change than one might imagine.

The AICD has 43,000 members, of which just 13 per cent are ASX directors, 19 per cent are on not-for-profits, 12 per cent on government boards and 46 per cent private companies.

Academics and bureaucrats now balance the suits of your grandparents’ ASX.