Financial advisers are being encouraged to begin reviewing client portfolios ahead of the gradual phase-out of AT1 capital instruments, with Zenith Investment Partners warning against waiting until securities mature before considering replacement strategies.
The call comes as the Australian Prudential Regulation Authority (APRA) moves to remove AT1 capital instruments from banks’ capital frameworks.
“APRA is committed to removing unnecessary obstacles to the development of more innovative and competitively priced longevity products,” APRA said at the time.
“This is consistent with the government’s objective of expanding options for retirees to manage longevity risk.”
Under the changes, banks will no longer be able to issue new AT1 securities from 2027, with existing instruments expected to disappear as they mature over the following years.
According to Zenith Investment Partners, while the phase-out represents one of the biggest shifts in Australia’s fixed income market in recent years, advisers have time to manage the transition.
“The phase-out of hybrids is one of the bigger changes to hit the Australian fixed income market in recent years, but for advisers, the practical implications are manageable,” Zenith head of global fixed income and alternatives research Rodney Sebire said.
“With the transition happening gradually, it gives you time to review portfolios thoughtfully rather than reactively.”
Bank hybrids have long been used by income-focused investors seeking relatively attractive yields and franked distributions. But APRA moved in December to phase out AT1 instruments after concluding they had not worked as intended in overseas bank failures.
The regulator said the shift to higher-quality capital would improve the resilience of Australia’s banking system while preserving financial stability.
For advisers, Sebire said the focus should now be on helping clients transition to alternative income strategies that reflect their objectives and risk tolerance, rather than searching for a direct replacement.
“The income your clients relied on from hybrids can be maintained through alternative strategies,” he said.
“The main changes to work through with clients are the loss of franking credits for those who valued them, and ensuring replacement strategies match each client’s income needs, time horizon, and comfort with complexity.”
Rather than adopting a one-size-fits-all approach, Sebire suggested advisers should expect portfolios to incorporate a broader mix of fixed income assets as the market evolves.
“This isn’t a case of finding a one-for-one replacement,” the firm said.
“Different clients will require different combinations of investment-grade credit, subordinated debt, securitised assets or diversified income strategies depending on their objectives and risk tolerance.”
With the transition expected to occur over several years, Zenith said advisers have an opportunity to reposition portfolios progressively as existing hybrid securities mature, allowing changes to be implemented over time rather than through a single portfolio overhaul.
