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DEC 2010 - Jan 2011

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The Power of We

C o nten ts

December 2010 - January 2011 06 08 09 10 13

Opinion and views From the editor Sanders Whiteley Slattery Practitioner perspective

Professionalism 30 The real reason so many people are underinsured Client relationships 42 Identifying client value in an advice setting

Cover story - page 14

Superannuation 44 Why we need to rethink default options 48 50 51

Planner profile - page 34

S&P FUND AWARDS And the winner is... Award methodology Winner profiles

Investor psychology 70 Do clients sabotage their own plans?

SPECIAL REPORT Cash

73 The king is dead; long live the king Risk 78 Competition in the life insurance market

SPECIAL REPORT ETFs

83 88

Looking behind the ETF curtain

Client case study - page 38

Technical

90 96 98

ROUNDTABLE The real risk in the Future of Financial Advice

Self-managed super Minding your own business The only constant thing is the pace of change

Recruitment 100 Planning emerges as a viable career 102 103 105

Practice management Martin Mulcare Rod Bertino Peter Switzer

Sharemarket 106 Why markets are forever blowing bubbles Managed funds 108 Changes are coming, ready or not Property 110 Winners and losers in this economic rebound

Private banking

112 Tips for engaging the next generation of clients Philanthropy 113 Clientsâ&#x20AC;&#x2122; giving can have a life of its own Final word 114 On the list: Ferrari, models and Tricky Dicky

Traps with deductible contributions to super

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FR O M T HE EDIT O R

This is not a game for dummies I

’ve decided to ditch this journalism lark and become a financial planner. Better money, probably. And a step up in the public opinion stakes, too. That’s a win-win, as far as I’m concerned. There can’t be that much to it. I’ll spend a few hundred bucks and do a quick course to get RG146-compliant. I’ll find a dealer group willing to let me set up under its licence. I’ve got the book, Financial Planning for Dummies, and I saw something called the Master Guide to Financial Planning in Dymocks the other day - I’ll buy that, too, if only so it looks good on the bookshelf. (I'll probably keep the Dummies guide out of sight.) I might struggle to gain Certified Financial Planner (CFP) status, but that’s not a dealbreaker - there are plenty of financial planners out there who are not CFPs.

I own a suit and a calculator and even an old Armstrong Jones leather briefcase that I can scrub the mould off. I’ll get a haircut. There’s a serviced office I can rent, just down the road from home. I could be up and running in the New Year. How would you feel if I were to start calling myself a financial planner? You should be annoyed and dismayed, at the very least. You should also be downright embarrassed. You should, in fact, do everything within your professional powers to stop me. I’ve often said, only half in jest, that if there’s nothing to stop me from setting up and calling myself a financial planner, then the barriers to entry are too low. Right now, they’re way too low. I don’t think anyone seriously doubts that. Raising the barriers to entry - keeping out

people like me - should be high on the industry’s to-do list, if not the number one item. So it’s with some anticipation that we await a major policy announcement from the Financial Planning Association of Australia (FPA) on just this issue. Just over a year ago, the FPA issued a consultation paper, Education expectations for professional financial planners. The FPA board’s thinking on the education issue was clear then, and by all accounts it hasn’t changed significantly since. Being a financial planner should, first and foremost, be something to be proud of. It should not be the case that planners are constantly defending their business and their industry against accusations of shonkiness and lax standards. It should be something that requires dedication and hard work, and requires more than cursory study. So second, becoming a financial

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FR O M T HE E D I T OR

but if we take the November 2009 paper as a guide, it’s heading in the right direction. It’s one thing to set standards for new entrants - do that yesterday, as far as I’m concerned - but of critical importance will be how the FPA decides to deal with those who already work as financial planners. Professional Planner will be attending the FPA conference in late November, and will be at the formal unveiling of the education plan. We’ll report back on what the FPA has to say, its specific aims, and how it plans to achieve them, on this, and on a range of other issues. Keep an eye on Professional Planner Online from November 22 to 26.

Dec 2010 - Jan 2011 - Issue 27

Editor: Simon Hoyle simon.hoyle@conexusfinancial.com.au Journalist: Krystine Lumanta krystine.lumanta@conexusfinancial.com.au Head of Design: Saurav Aneja Publisher: Colin Tate

planner should be a genuine achievement. And third, the public needs to be told bludgeoned about the head, if need be, until it sinks in - that a “professional” financial planner is a true professional: highly educated, qualified, held to exceptionally high standards of behaviour and conduct, accountable to other professionals - and subject to sanction by their peers, where appropriate - and unequivocally committed to the public interest. You will only be regarded as a professional when and if the public - the general community believes that you’re professional. It also doesn’t help the public perception when websites like The Eureka Report are exposing the millions of dollars of soft-dollar payments made to financial planners by product manufacturers. It’s not just that the payments look unprofessional (even though they do); the problem is more that the payments directly contravene a voluntary code of practice drawn up by the FPA and the Financial Services Council (FSC). Right now, if people like me can get in, there isn’t a hope. That’s why everyone who is serious about raising the bar and aiming for true professionalism should wholeheartedly support the FPA’s stance on education. The only caveat is that we’ve yet to see the fine detail of the plan;

***

This is the final edition of Professional Planner for 2010. We’ll be back in late January with the February ’11 edition, which will also mark a return to monthly publication. When we launched, in late 2007, we published monthly, but like everyone else, we were forced to make changes to the business during the global financial crisis. In April 2009, we started publishing every two months. But as the worst effects of the GFC begin to recede, we’re looking forward to landing in your in-tray more frequently once again. Simon Hoyle simon.hoyle@conexusfinancial.com.au

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Cover Image : Saurav Aneja Planner Profile Photos: Paul Jones www.pauljonesphotography.com.au Professional Planner is published by: Conexus Financial Pty. Ltd. Level 1, 1 Castlereagh Street, Sydney GPO Box 539 Sydney NSW 2001 Ph: 61 2 9221 1114 Fax: 61 2 9232 0547 Conexus Financial is an independently-owned company.

Executive Directors: Colin Tate, Debbie Wilkes, Greg Bright

Circulation 10,716

C O LU M N

here’s been a bit of discussion in the past few months about words like “profession”, “professional” and, my favourite (given my job title), “professionalism”, with a number of solid attempts to nail these slippery terms down. Just to fatten this new dictionary we seem to be writing, I want to introduce a couple more to you. Let’s start with “professionalise”. If someone is a professional, it generally means they have been through some form of “professionalisation” process, usually education-oriented, followed up with some form of professional trial, allowing them entry into membership of a professional organisation. And straight away I’m sure you can see the problem here - obviously the whole approach of becoming a professional depends on the existence of: (1) an accepted education process and then, (2) a professional organisation supported in its role of allowing admission as a professional. Unfortunately professions can’t spontaneously come into existence. They too have their own professionalisation process to go through; and whilst it’s true that they can take a number of different forms, they all have to go through the basic trials by fire. One of those trials (and another word for our emerging professional dictionary) is “legitimisation”. Most of the academic literature suggests this is something that can really only be gifted by the public, after years of demonstrating socially valuable service. When I began my investigation into this in the early days of my PhD research, I was working under the assumption that this was, academically,

the biggest “barrier to the legitimisation of financial planning as a profession”. After all, everyone keeps telling us we have high community distrust and low confidence to overcome. I know it annoys financial planners to hear this (because, as my research showed, their clients do genuinely love them) but unfortunately the research also shows that the public perception is true - although with one modification. I don’t believe it's actually distrust; I believe it’s more like a high level of scepticism. Plenty of others are writing about how shallow media, unethical advertising and opportunistic politics feed this storm of distrust - and no doubt there is some truth there. But unfortunately politics and media cannot be the whole answer. Magnification can only be successful if there was an existing scepticism to build on in the first place. The pages of our media are full of writing and measurements on the issue of trust - some even in an informed way - so I’ll leave that one for today and focus on a problem that I think is far worse than community distrust. The heart stopper from my research, the results that sent me back to the lab to run the tests again (well, euphemistically, anyway), was the startling, clear proof that not only is the wider public sceptical about financial planner professionalism, but the vast majority of the financial planner community is too. It turns out that the professional community of financial planners is just as sceptical as the public when it comes to views about their colleagues’ self interest, conflict and professional competence.

Now that I’ve pinned it under the research microscope, I can of course see this everywhere in the real world. For instance, it’s there in the endless reams of aggressive blog commentary on trade press websites. Many of those blog tirades are live examples of that distrust, pitting colleague against colleague, adding little constructive depth to the desperately needed professional debate and ultimately only diminishing the community of financial planning. Something to ponder when you read that stuff - Treasury and ASIC get the same media emails you do. Maybe we have all swallowed the public messages, or maybe we harbour our own doubts based on direct experience, but I suspect it’s more complex than each of those individual things. Whatever the cause, our unflagging scepticism about the profession beyond ourselves is holding us back as a professional community. There are still some large steps to take in the professionalisation journey, including directly tackling the issue of professional competence; but our own distrust is a demon we have to face if we hope to hold ourselves out as profession. Not just because the consumer community deserves more optimism, but because the professional community of financial planning does. Otherwise, how can we be so indignant when the community arrives at the same conclusion that we do? To comment on this article go to . www.professionalplanner.com.au Deen Sanders is deputy chief executive officer and head of professionalism for the Financial Planning Association of Australia.

Sanders

The planners’ dictionary

Deen

CO L U M N

here has been considerable debate about the practical impact that the introduction of a “best interests” test will have on the provision of financial advice. The best place to start is the policy intent. The findings of the Parliamentary Inquiry into the collapse of Storm Financial concluded: “Present conduct standards are useful in that they prohibit clearly inappropriate advice being given to consumers, but the threshold is low enough to allow advice that favours the adviser’s interests above those of the client. ..”(p87) While we are yet to see a finalised formulation of the best interests test from the Future of Financial Advice (FoFA) consultative process, it seems that there is general acceptance that the duty will focus on the conduct of the adviser rather than the quality of advice delivered. In combination with the measures which will create a prohibition on receipt of commissions or volume-based payments from product providers or platforms, the best interests test is likely to spell out that a planner will be expected: • To act in good faith; • Not to have a material personal interest in the subject matter of the advice; • Take reasonable steps to consider a range of products when making a product recommendation. The following are some thoughts about how the best interests obligation might apply in practice: • The test will have to apply not only to the financial adviser but also to the dealer group and licensee. Given the commercial and legal framework within which financial advice

is delivered, the licensee and dealer group effectively control the scope and quality of advice, and product and systems used to deliver it. So the best interests obligation must apply to the individual financial planner as well as the licensee and dealer in order to be effective. • Obviously there are a lot of advisers who work for a vertically integrated brand. Current research reveals that around three quarters of funds under advice flow to a related party fund manager. Even after the best interests obligation is legislated, there will still be commercial pressure for an adviser to prefer the brand(s) which are produced or sponsored by his or her employing entity. However, under a best interests test, once the adviser has determined the client’s needs, risk profile and circumstances and devised a strategy to satisfy those needs, and before they make a product recommendation (if the strategy requires a product recommendation at all) they must undertake a competitive analysis of products on the market to ensure that the products recommended are not only appropriate but that the product recommended best fits the client’s interests, particularly their financial interests. • While the “reasonable steps” defence will mean that they do not need to consider every product on the market, they cannot exclude whole classes of product. So if approved product lists do not include a reasonably broad range of product types, planners will have to refer on clients whose needs they cannot satisfy. Advisers and dealer groups will not be able to shield their selection as “the

most appropriate on the group’s APL”. • There should be no capacity for the adviser to contract out of his or her best interests obligations. • The best interests obligation will not prevent an adviser from providing limited scope advice. In fact, there may be situations where it is in the client’s interests to limit the scope of the advice - that is, where their situation and needs are straightforward and their budget is limited. However, where the scope of the advice is limited, the adviser must take responsibility for ensuring that any limited scope advice is in the client’s interests. Given the asymmetry in knowledge which would typically exist between client and planner, the planner is in a better situation to judge whether a limited scope will be in the client’s best interests. Once the financial planning industry is transformed into a profession, the trust and confidence of consumers will follow. But the transformation has to be legitimate and comprehensive.

To comment on this article go to . www.professionalplanner.com.au David Whiteley is chief executive of Industry Super Network

Whiteley

The ‘best interests’ test

DAVID

C O LU M N

he Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has become increasingly concerned about the impost of excess contributions tax in situations where SG contributions exceed an employee’s concessional contributions cap. SPAA argues that it is wrong in principle for employees to suffer penalties simply because their employer makes super contributions for them according to the law. This is the basis of SPAA’s recent submission to Treasury. In our submission, titled Excess contributions tax and SG contributions, we argue that super fund members are often penalised for contribution cap breaches because they have multiple employers or may work in industries where contractor-style arrangements prevail. SPAA has already put to Government and regulators that in the vast majority of cases, contribution cap breaches are inadvertent breaches, and this is a classic example. In the case of having multiple employers, we have also proposed a commonsense solution; in particular, that members should have the opportunity to “opt out” of the 9 per cent SG contributions where there’s a clear risk that their concessional contributions cap would be breached in that financial year. If the total salary or wages paid by an employer to an employee in a quarter exceeds the maximum contribution base for the quarter, the total salary or wages to be taken into account for SG purposes is the amount equal to the maximum contribution base. The maximum contribution base for a quarter is indexed each financial year. For the 2010/11 financial year, the maximum contribution base is

$42,220 per quarter. This means for 2010/11 an employer’s SG liability is capped at $3800 per quarter for each employee (that is, 9 per cent of $42,220) irrespective of the total salary or wages paid to that employee. Sub-section 19(3) of the Superannuation Guarantee (Administration) Act 1992 refers to the total salary or wages paid by an employer and makes no allowance for salary or wages received by the employee from other employers. Therefore, when determining the maximum contribution base for each employee, the employer does not include the salary or wages received by the employee from other employers. Subject to transitional rules that apply until July 1, 2012 for members over age 50, a $25,000 cap applies to concessional contributions made by, or on behalf of, a member of a superannuation fund for a financial year. Concessional contributions generally include SG contributions, salary sacrifice contributions and personal contributions which you have claimed, or intend to claim, as a tax deduction. Concessional contributions in excess of the member’s concessional contribution cap are subject to excess contributions tax at the rate of 31.5 per cent. Excess concessional contributions are then counted against the member’s non-concessional contributions cap and may be taxed at an additional rate of 46.5 per cent if the excess concessional contributions, as well as the member’s non-concessional contributions, exceed the member’s non-concessional cap. This could conceivably result in tax of about 93 per cent. As an employer’s SG obligation has no regard for salary and wages paid to

their employee by other employers, it is possible for some employees to receive total salary and wages in a financial year for SG purposes that will generate annual SG contributions in excess of $25,000. Employers are legally obligated to pay SG contributions on behalf of these employees, despite the fact that their employer may incur excess contributions tax for some or all of the contribution. We believe it is unfair that employees are penalised simply because their employers are obeying the law. In a commonsense measure, SPAA proposes that employees likely to be affected be allowed to elect in writing to their employer that their employer not be liable for the SG charge. The election would be required to be accompanied by documents showing that the employee’s concessional cap would be exceeded if the SG contribution were made. And, of course, for those who have inadvertently breached the caps already, SPAA continues to encourage the Government to consider our proposed solution to have those excess contributions automatically refunded.

To comment on this article go to . www.professionalplanner.com.au

Andrea Slattery is chief executive officer of the Self-Managed Super Funds Professionals’ Association of Australia (SPAA)

Slattery

This tax is excessive

Andrea

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P R A CT I T I O N ER P ER SP E C T I V E

Be not afraid of change Change brings opportunity, but only to those smart enough to recognise it and brave enough to take a chance. Dennis Bashford explains

have been in this industry since it kicked off in the mid to late 70s, and I have learned to live through the constant, and often major change that has characterised this business. And as has often been the case in the past, what is going on now certainly is going to change the environment in which we work. But remember, we have faced traumatic change before. You might recall that in 2004, Financial Services Reform was supposed to have signalled the end of the world - and for some it may have. But the interesting thing was that others absolutely prospered, even though the environment was the same for all. So really it all comes back to your capacity to adapt to the environment; to appreciate that change, properly managed, presents tremendous opportunities, but that it could mean difficult times for those who ignore it. So let’s put things in context. Whenever there’s change, mistakes will be made; but without change there is no opportunity for improvement. So the question becomes: “Would we have preferred to keep the industry, and the type of people that made it up, exactly as-was, or do we think that it is better today?” I think that today we are an industry that is very much more professional, and one which we can be proud to be part of, despite the misinformation that we are barraged with; and in fact it could be argued that we have become a profession, even if it is yet to be formally recognised as such. All of this progress is largely the consequence of change. Despite the predictions, the world is yet to come to an end. In fact it could be argued that the world has become a better place. Don’t get me wrong; change has not been easy and we have all suffered heartburn to varying degrees over the 30-odd years that financial

planning has existed; but we are now more professional, credible and stronger, and we are an industry that has given tremendous comfort to hundreds of thousands of Australians. Change brings opportunity for those who recognise that. We have all been surprised by people and organisations who come out the other side of disruption and upheaval much better and more strongly placed than ever. And we all ask ourselves: Why? My father is a classic example of what I am talking about. His first trade was the same as his father’s (my grandfather’s) - he was a collarmaker. He made collars for horses. However, my father realised very early in the piece that the time for horse-drawn wagons was fast drawing to a close, and he went on to become a boilermaker. And, like you, he had the courage to go into business for himself. My dad recognised that the world was changing, and he identified the opportunities that the new world offered. He chose to exploit them and ended up building a large and successful business. To end the story, and to make my point, both his original boss and his father (my grandfather) could not adapt, and curiously, both of them ended up working for him. It is difficult to draw too many parallels between financial planning and my father’s business, but the process he went through when faced with change is pretty much the same. It has been around for a long time, long before my father, and it is well proven. Whenever an environment remains constant, growth and development tend to be incremental because there is little opportunity to leverage off anything. But when the environment changes, those who have positioned themselves properly find that the rewards are directly proportional to the degree of change. So what does it take?

The first step requires the courage to take a risk. But it also means providing leadership, with a program that gives your staff the opportunity to grow and develop, and gets them aligned with the objectives of your practice. It means creating a positive and happy environment. It means giving them a sense of achievement, by giving them an understanding of the part they play in the success of your business. Creating such an environment is not that difficult because if I can do it, it has got to be relatively easy, and obviously it takes no special skills or talent. So invest in your people - don’t skimp on them. Don’t give someone a go and just hope that it will work out. Be patient, and only bring on people who you are confident can give you and your business what it needs. Have the courage to spend the money and have a plan to manage them. Take the time to think about your business. Very few people seem to end up with the type of business they had hoped for. This is because they are too busy putting out bushfires; so little thought or commitment is given to the strategic requirements of the business, and it is these that will shape how it looks. Don’t fool yourselves that you are too busy. Either do it, or accept that the way your business looks now is the way it’s going to remain. You need to work out what you want to work on. You need to get committed, and have the courage to make yourself accountable to someone who is not going to let you off the hook. The opportunity is there and what you do with it is up to you.

Dennis Bashford is managing director of Futuro Financial services. This is an edited version of a presentation to the Futuro Business Forum.

t should be a matter of grave concern to all professional financial planners that the barriers to entry to the industry remain so low. And it should be of equal concern that financial planning remains so far down the list of career choices for students leaving school and entering the country’s universities. A glaring hole in the industry’s plans to attain the status of a profession is that there are still individuals in business who - with little more than a four-week crash-course in some very basic competencies - can call themselves “financial planners”. And more terrifyingly, they can find themselves in a position to dispense “advice” to the public. However, as long as there remains a perception that the barriers to entry to the financial planning industry itself are either very low or non-existent, the struggle will continue to convince the public at large of the virtues and values of good financial planning services. Phil Butterworth, managing director of the listed DKN Financial Group, describes the current situation as “just ridiculous”. “We absolutely have to raise the bar, and put in place a much better process of how people get education, before they give any financial advice. The bar is way too low,” he says. “It’s too easy to get in. Therefore, the public is sitting in front of people who have done a four-week course. That’s just ridiculous.” But education needs to take place on several levels, simultaneously. Elsewhere in

this edition of Professional Planner, the chairman of the Government’s Financial Literacy Council, Paul Clitheroe, explains why basic financial literacy is such a pressing concern, and the role planners can play. Professional Planner also takes a close look at the shortcomings of RG146, and some suggested improvements to its implementation and enforcement. And we examine why educated clients are also a vital part of the mix. The FPA has been attempting to make clear in the public’s mind the difference between “professional” financial planners (which has been interpreted as shorthand for “FPA members”) and the broader population of financial product advisers - who may hold compliance with RG146 as their sole “qualification”. It’s done this over the past 10 years or so largely by increasing the demands it places on its own members - both in terms of their professional obligations, and standards of education. The FPA’s success has been mixed. The public doesn’t seem to be drawing any meaningful distinction between “professional planners” and the rest, just yet; but the FPA’s own members are increasingly moaning about the association making life difficult for them to work as financial planners – so to that extent, at least, it has worked. Professional Planner understands the FPA is finalising the release of a new education strategy, which will be formally released at the national conference on the Gold Coast

in late November. It is likely to implement many of the ideas and proposals contained in last year’s white paper – specifically, focusing on tertiary degree requirements and further distancing the association and its members from RG146. Any change to the FPA’s approach to education, particularly developing degree courses through universities, will very likely have flow-on effects for the Certified Financial Planner (CFP) designation, and may touch on issues around how closely the CFP is linked to membership of the FPA. Raising educational standards seems to have solid support within the industry. Research conducted exclusively for Professional Planner by the market research firm Tepana Associates, shows that clearly. What’s likely to cause debate - and this is the discussion that may kick-off during the upcoming FPA conference - is exactly how the requirements should be determined, and by whom; who they should apply to; and from when. In this regard, the paper on the issue of education produced by the FPA a year ago may be instructive. It sets out six “education expectations” (see box), and it is understood that the final form of the educational revolution about to be unveiled kept many of the original principles more or less intact through the consultation process. No doubt there will be changes to the timing from that set out a year ago, but if the objectives remain the same.

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Key findings of the Tepana Associates research Is the FPA’s 2009 policy on continuing professional development (CPD) supportive in setting an appropriate framework for planners’ maintenance and development of relevant knowledge and skills? Kathleen Tepana: The difference between FPA members and non-members was significant. Twice as many FPA members (62 per cent versus 32 per cent) agree that the FPA’s new 2009 policy on continuing professional development (CPD) is supportive in setting an appropriate framework for planner’s maintenance and development of relevant knowledge and skills. More than half the non-member respondents were unaware of the changes, or didn’t know if they were appropriate.

If you agree with the FPA’s plan to require a tertiary degree for all new planners, just briefly why do you agree? Many advisers want their industry to be seen as professional; they want the bar to be raised; and they want to be considered along the lines of an accountant or a lawyer. A number of advisers believe a degree requirement should have been a prerequisite to financial planning years ago, and that the industry bodies have been slow to recognise the importance of this initiative. A lot of advisers believe a relevant degree qualification is a necessary prerequisite for the industry because there is the potential for significant harm to the financial well-being of investors as long as the industry remains product- instead of profession-driven. Tepana:

A degree qualification was seen to be important if the industry is to be considered a true profession and move away from a sales-driven image. A degree should mean that advisers have improved analytical skills, are more capable of deeper analysis of investments and some advisers believe it will enhance professional manners and should apply to all planners not just new planners. Respondents said:

“If clients knew how little educated Advisers legally needed to be to give advice they would be horrified. It is time to bite the bullet and be serious about education in our profession.” “Creating barriers to entry, specifically educational barriers, remove the ease at which cowboys can enter the industry. Notwithstanding this

comment, a higher level of education will flow into higher levels of advice.” “But a degree does not create a professional, removal of the financial institutions vested interest in the FPA is the only way to get to some basis on professional approach versus the chase of self-interest and profit.” “So the public knows that the planner has a high standard minimum education and has had enough time to be exposed to all the facets of financial planning. Every other "profession" has a degree requirement.” “Some financial planners, including me, are keen to be recognised as the professionals we are, rather than being classed with real estate agents. To manifest our professionalism, we must have professional qualifications, like engineers.”

THE FPA EXPECTS 1. By 2015 we would like to see that all new entrants who wish to become professional financial planners have as a minimum a tertiary qualification in financial planning. - Consideration will be given to including this in membership criteria of the FPA for new members joining after this date. - All Certified Financial Planners are currently required to be tertiary qualified. 2. By 2012 we would like to ensure that most qualifying programs on offer through University or pathway qualifying programs on offer through Vocational institutions will be built on professionally aligned and commonly recognised curriculum. - The FPA will “engage the educational community” to share a globally-recognised curriculum framework for financial planning. - The FPA will collaborate with the educational community to an Australian financial planning education system that meets our collective curriculum objectives. 3. We want to work with the regulator, the Government and the profession to develop an objective assessment mechanism that instils confidence in financial planner entry standards. - Requires a review of current reliance on competency-based assessment and the use of national standards (including RG146) due to their failure to deliver consumer or industry confidence. 4. By 2012 we believe that all newly qualified professional financial planners should undertake at least one year of full-time supervised work in client-facing activity before being able to hold themselves out as a financial planner. - This experience could be structured as a professional year (PY) and could form part of what’s required to attain the CFP designation. 5. By 2012 we expect that education programs designed for new entrant financial planners should provide a clear entry pathway to professional designation, and student membership (at least) of a professional body should become mandatory. - Many students are unaware of the professional pathways and professional obligations that lie ahead of them when first entering the industry. Educators and students would benefit from clearer alignment and professional recognition for their programs beyond the national standards framework. 6. By 2011 we expect that Continuing Professional Development (CPD) should include a mandatory component or program in ethics, and Australian Financial Services Licensees should dedicate resources and attention to the supervision of CPD to ensure it focuses on professional alignment, rather than simply compliance with RG146. - A new CPD policy became effective on July 1, 2009, encouraging a broader and more meaningful range of ongoing professional development that the previous policy. Source: Education expectations for professional financial planners, FPA, November 2009

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“FPA still needs to raise the bar towards professionalism and get rid of their life agent policy flogging (high hidden commissions) legacy.” “I think more on the job training needs to be introduced I am not sure if it needs to be a degree, or if the advanced diploma coupled with more on the job training would suffice.” “To lift the professionalism and public perception of the value of competent advisers. I want to see the day where financial planners are sitting at boardroom tables on par with lawyers and accountants. To do that tertiary study capability is a must.”

If you disagree with the FPA’s plan to require a tertiary degree for all new planners, just briefly why do you disagree? Tepana: Advisers that disagree with the FPA plan to require a tertiary degree think that an unrelated degree that covers topics that are of no benefit to financial planning will not help create proficient planners and they think the ongoing study required for CFP is already equivalent to a tertiary degree. Respondents said:

“Academic qualifications don't guarantee integrity in the adviser. The current academic theory does not assist in wealth accumulation and management. With all their qualifications, economists, fund managers, treasurers and bankers didn't predict a drop in asset value and did nothing to prevent clients from losing wealth. Only an adviser who was prepared to throw the academic theory away and make his own decision that assets were overvalued and therefore get out and go to cash saved his clients wealth.” “There is the counter argument that: experience is a key indicator of effectiveness; that soft skills are as important as technical skills (and way more profitable); that life's experience is more valuable

in an adviser than academic study; and that study without experience is a menace.” “Firstly you would have to define ‘a degree’. The degree must be relevant to the field of financial planning. I know of planners who studied languages as their degrees or arts etc. who qualify to undertake the CFP program, but someone with years of practical experience and multiple post graduates (of Graduate Diploma level) in finance and financial planning related fields are not eligible because they do not have 'a degree' and are somehow less qualified - so in order to do so they would be forced to study any old degree in order to be considered professional enough to we worthy of the CFP program. If that is the FPA’s idea of a professional industry then it is a bad joke and will never succeed in being viewed as a profession by the general public. More financial planning-related degrees need to be made available. Not low level courses.”

If you are a CFP practitioner, just briefly what improvements could be made to the program? Tepana: There were numerous nega-

tive comments made about having to continue ongoing study and pay an annual membership to retain the CFP status. Some advisers influence others not to study for CFP and advise them instead to select another qualification that they can retain and take with them without having to continually study and pay an annual membership to retain CFP status. Advisers would like more group and face to face training included in the CFP study such as tutorials, lectures and team work. In addition, they would like interactive workshops to discuss issues with other participants. The following subjects would be considered improvements to the CFP program: • Client and relationship aspects such as psychological and lifestyle studies and mentoring • ETFs, indexing, derivatives • SMSFs • Debt management

• • • •

Tax structures Estate planning Succession planning Less focus on managed funds

Respondents said:

“More university based lectures and tutorials, CFP 5 - less should be on SOA plan and more should be on the complexities of financial advice from global standpoint, advising from an independent view. Practitioners who obtained the qualification without having to meet the current standards and tests should be made to do so. CFP - should aim to be viewed at accountant's CA or the analyst CFA program,” “Continue to raise the bar, especially around professional standards and holding CFPs to public account - the way CPA/CA do” “Unfortunately the designation was too easy to get in the past. It is not a reliable indication to the public as to the abilities of the planner. And the code of ethics is not enforced by the FPA, so some use the CFP designation to hide their ways. The current CFP course is good and planners need to be competent to pass it.” “I have my CFP qualifications; however, I will not pay $600 per year to put the 3 letters after my name. This is ridiculous and obviously money making scheme as no other professional after completing their degree needs to pay a yearly basis for the privilege.” “More emphasis needs to be placed on soft skills rather than often technical areas that occur irregularly in the real world. More specialist qualifications for those who wish to work in particular areas such as SMSF, derivatives and synthetic products etc.” “Attend regular classes (doesn't have to be every week) - break course assignments and exams down into smaller components that get assessed individually - would help with workload of study and test all areas of importance. A six-hour exam for CFP5 is ridiculous. Financial Planning is not about being

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able to memorise potential exam answers - it is about understanding different client situations and knowing that different strategies may apply. With regulations changing frequently it is pointless encouraging the marathon memory test - as a professional you should always be referring to current data. It is the knowledge of application of that data that is important.” “I would like to see ethics and client relationships be something that has to be redone or refreshed every few years as a requirement for maintaining CFP designation. For those that got their CFP without doing the CFP program then it should be mandatory to have completed the ethics unit and perhaps one other unit as a requirement to maintain their CFP. This is the cornerstone of being a CFP and should be for those to be a member of the FPA if the FPA was serious about standards.” “The program was a joke; it just repeated things from DFP. It attempted to go further in depth,

however mixed topics, skimmed some while going to deep in some areas without first setting the context.” “Interactive workshops to discuss with others studying and in the industry. Rural areas don't have access to workshops which I feel would benefit a lot of non-city advisers wanting to study.” “I encourage all prospective persons to rather go for a masters. This will go with them wherever they go and do not rely on ongoing practice and/or membership of an organisation.” “Most current learning revolves around investments and the statistics. Some clients come in with a simple problem and a simple solution. A lot of clients come in with complex situations requiring tax structure and relationship help. The program could be improved with more relationship handling skills and "scenario handling" skills. The program needs to allow advisers to be trained in handling complex situations in respect to Tax structures/estate planning/succession planning.”

“Get rid of the exam multiple choice components for CFP. If you've proved yourself at every other level and have 5 years continuous customer facing experience, with highly proficient file ratings at audits and no registered / formal complaints then this should be good enough for discretion to be applied to be granted CFP status. I have seen good people leave the industry because the CFP exam is the final hurdle that some just cannot get past, yet it does little to prove ability and does plenty to demote morale. It is unnecessary, costly and based upon an American model which is not suited here. Also the SoA should be a commercial SoA, not the nonCommercial SoA; there's another $150 just to learn how to write a Plan that we'd never use in the real world. Ridiculous!”

To read more detailed findings of the Professional Planner/Tepana Associates research on financial planner education, please visit Professional Planner Online - www.professionalplanner.com.au

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Educated clients better for business

Financial education needs to become more consumer-oriented as there are significant benefits in having educated clients. Krystine Lumanta reports

t is essential for the average adult to be able to make decisions about mortgages and loans, maintain a budget and save for retirement. Particularly in this time of uncertainty, clients shouldn’t have to wait for a life-changing event such as the global financial crisis (GFC) to ignite a desire to know more about their finances. But for a client to become genuinely involved in the process, they need to have an awareness of their finances - so that they can start thinking of advice as vital and valuable, instead of a hassle. Motivating a better attitude toward money will push clients to share related information with their adviser and, at the end of the day, make them accountable for what happens with their money. Rob Skinner, co-founder of independent financial education website innergi, says his fee-for-service learning resource reinforces a commitment to education. He says the website was always an idea but came to fruition when the reality of uneducated clients became overwhelming. “In my financial planning business, I had 30 per cent of clients coming from other planners - I could see first-hand that clients were moving,” Skinner says. “Planners don’t have the time to educate, so when a couple that was receiving an allocated pension asked me, ‘Can you explain what an allocated pension is to us?’ I thought surely this was already discussed. But they had no idea of what their previous planner had arranged. I started to ask, ‘Are educated clients important to my business?’.” Skinner says advising clients can be less time-consuming if the clients have basic money education and skills. Issues can immediately be recognised and dealt with by both parties. “I’m a big believer that an uneducated cli-

ent is not necessarily a time-bomb, but they’re certainly a risk,” he says. “I could see with a lot of clients their heads were getting full because by the time you walk them through where they’re at, managed funds, admin platforms, franking credits, how investments work, how insurance works, estate planning, superannuation, their heads are full and sometimes they need a break because it’s just too much.” Skinner says he is unaware of any other model that offers the same depth, engagement, interaction and innovation as innergi. The lack of independent resources available to clients means that all they can rely on is what they’ve been told by their planner, which has created uncertainty and a client mentality of: “I’m supposed to trust you, I don’t really understand but let’s do it anyway.” Skinner says educated clients are also much better to deal with in general. “Who do you like working with? I found an educated client is easier to do business with. You don’t have to explain franking credits every time or how a managed fund works if they have a level of knowledge. You can get down to the meatier issues a lot more quickly and you can sit in a meeting and talk about franking credits for five minutes but if they’ve already got that knowledge you can move on fairly quickly. You’re saving your time as well as saving your client money.” Skinner says clients are sharing their positive experience with friends and in turn making an effortless recommendation. “An educated client can become an advocate and therefore this is another benefit they add to your business,” he says. Skinner says financially empowered clients understand the role of advisers, creating an appreciation for the industry and helping them to

justify the fee being charged. “[It means] spending less time explaining concepts and, when things go wrong, you’re going to have less trouble as clients understand what’s going on and they’re going to expect [volatility]; but for someone totally in the dark who’s lost $10,000 in their super and has been paying you [for your advice], they’re going to be jumping up and down. You’ll have to put that fire out.” Skinner says most would agree that an educated client is a good thing, but there is uncertainty amongst advisers about how it can be achieved. He believes that in this modern world of technology, the delivery of educational content should be online. “I was looking at how financial planners themselves are learning,” he says. “There’s webinars and online training but we don’t do that with clients. It’s almost like we’ve missed this opportunity to engage or provide extra education. “Allowing clients to discover what is important about money to them is necessary. Keeping information from a client is no longer an argument.” Skinner says the advantage of innergi is that it can be branded and implemented into financial organisations. “The opportunity with innergi is that a planner can all of a sudden get a massive resource and look like they’ve spent up big and offer it online,” he says. “We give them the framework and businesses can add their own articles, activities and video. They take the full branding of it. “Incorporating innergi means that you can refer clients to read a particular module before sitting down with them so therefore, they will have a fairly good sense of what it is that will be discussed.”

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Skinner says education available to clients has traditionally been “pretty bland”. “If you’re going to educate on something that is seemingly boring and trying to make it interesting, how do you do that?” Innergi has addressed this issue by providing live education through video - rather than static information - along with a “money personality” quiz, module activities and specific calculators, without naming particular products. “I’m amazed at the amount of people who are engaging in our online quizzes to find out about themselves and their attitude toward money,” Skinner says. “Financial education is part of the genuine approach to engage clients.” He says he doesn’t blame the industry for the lack of resources available. “It’s too expensive,” he says. “Maybe you can get a bank to go there, but for most businesses that are arguably small to medium … you’re not going to have a lot of budget for these resources. But I’d argue that people are looking.” According to the ANZ Financial Literacy Survey Australia (2008), 86 per cent of respondents felt they needed further financial education. “It’s like advisers are happy for their clients to get financial advice from Google,” Skinner says. “That’s what’s happening. So we’re giving them a safe place to search. People want to know how the financial industry works but no one wants to be sold a product.” Andrew Shakespeare, senior adviser of JSA Financial Planning Group, has found that after using innergi’s knowledge centre for a year, engaging clients and receiving valuable referrals are the biggest benefits. “When they don’t understand concepts like shares, insurance or super, I have them read a particular module and that way, they become very engaged in the advice process and they understand why we’re going down a certain path,” Shakespeare says. “It’s also been a cost-effective way of providing referrals to us. Its effectiveness as an interactive tool means that clients want to share it with their children, family and friends. This has strengthened our business’s brand recognition.”

Shakespeare says considering a client’s money personality is another difference that has helped business. “The ‘money personalities quiz’ means I get to know my client in much greater detail. If I understand their behaviour, I can tailor [advice] to their needs much better,” he says. “The knowledge centre has given us a professional look - particularly access to the specific calculators that are hard to find online.” Meanwhile, Fortnum Financial Advisers has announced it will go live with its knowledge centre in January 2011. Ray Miles, executive chairman of Fortnum, says it is about delivering a “total client experience”. “Clients need to know what they’re doing,” Miles says. “They need to have a place to go to besides the financial planner. The biggest benefit will be that they’ll know the right things to ask and also realise that we’re working in their best interests. In the long-term, I believe referrals will come because with Fortnum, they’re getting resources they wouldn’t otherwise get. “The financial services industry is pretty complex, so we certainly have a responsibility to educate clients.” Skinner points out that while particular advisers provide education, “it’s biased toward their products, so therefore non-conflicting education needs to be provided and accessible to everyone”. “This is our way of catering to clients who think they have ‘silly questions’ to ask their adviser,” he says. Paul Resnik, co-founder and director of FinaMetrica, which uses a system to assess financial risk tolerance, says educating clients on the risks of the finance industry creates more engagement, understanding and commitment to their adviser. “I’m an advocate for clients’ informed consent - collaborative decision-making that leads to clients taking some responsibility for their financial future,” Resnik says. “Feedback from our subscribers is that there is greater persistency of investment and less

churn when clients are involved in the decision as to the amount of investment risk they take on.” Resnik says there’s a general perception that advisers know best, neglecting the real needs of the client. “There is a philosophical argument that leads to a commercial benefit in the form of the client’s informed consent to the plan they accept from their adviser,” he says. “In the alternative approach where the adviser simply tells the client what to do there is the obvious danger that the adviser does not weigh up the competing goals in the same way that the client would. In this professional judgment or paternalistic model of advising, the adviser takes all of the risk as there is no shared responsibility with the client.” But Resnik says this can easily be remedied. “Advisers must share the decision-making or clients will continue to lose trust and faith,” he says. “As an industry, we deliberately mislead people so they can’t make informed decisions. Clients are generally financially illiterate so the best way to change this is to explain the risk in their investment in a way that is relevant to them. If clients don’t participate in the decisionmaking, they are less likely to be interested in the outcome.” Skinner says education “needs to be something that forms part of our regular communication with clients, becomes part of the clientservice proposition”. “It’s important to continually engage and be proactive,” he says. “Prospective clients are now going to be a lot more sophisticated and knowledgeable. Younger clients are going to want to know [about the process]. We want to help people with their confidence and knowledge on money - that’s ultimately what we want to do.”

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Grass-roots role for planners

The industry can play a signifcant part in helping raise standards of financial literacy. Paul Clitheroe says it will pay off for everyone in the long run

ne common characteristic that all professional financial planners have is a genuine enthusiasm for better financial literacy across our community. In my role as chairman of the Australian Government Financial Literacy Board I am asked by planners on a regular basis, “how can I best help?”. This is a really good question, and the answer is simple in parts, complex in others. Firstly, let me summarise where we are. At a national policy level, we have made significant progress. The benefits of financial literacy are supported by both sides of politics. This can be seen in the reappointment of the Financial Literacy Board - which was established by the Howard Government - by the Labor Government, when it came to power. In 2010, several new positions were announced and my role as chairman, with the existing board, was extended by a further three years. The major change was a shift of the executive team from Federal Treasury to the Australian Securities and Investments Commissions (ASIC). This had some pluses and minuses. Treasury is at the heart of economic policy in Canberra, but ASIC is responsible for the actual “hands on” implementation of investor education and consumer financial literacy. A huge plus will be seen later in 2010 when the two powerful consumer/investor websites Understanding Money and ASIC’s FIDO are combined to give consumers not only the best of both sites, but a significantly enhanced site with information, tools and functionality that will greatly benefit the million-plus Australians who have visited and used these two sites. A major focus of the National Strategy has been to get effective implementation of financial literacy in the school system. For decades I, and many others, have been

Paul Clitheroe

pushing for money skills to be taught as a separate subject area; and to be blunt, while our cause was worthy, we were hopelessly misguided. The school curriculum is packed, resources are short and teachers stressed. So it was a major break-

through in the “Melbourne Declaration” to get financial literacy recognised as a key statement of learning. Since then, curriculum development, teacher training and financial literacy resource develop-

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ment have proceeded at a pace and it is a key priority to transfer this into the national curriculum. In core subjects this is as follows: • Mathematics: Financial and consumer literacy is a natural application of mathematics and is included in content descriptions and in the content elaborations. • Science: Financial and consumer literacy is highly relevant to the contemporary application of science, including in technological innovation and engineering; for evaluating scientific claims in media and advertising; and for making informed decisions in relation to a range of contemporary social issues, such as sustainability. These authentic contexts for financial and consumer literacy as it relates to science are incorporated as content in the science curriculum, particularly within two strands - Science Inquiry Skills and Science as a Human Endeavour. • English: The English curriculum, and the critical thinking capability that runs through it, provides students with opportunities to engage with consumer and financial literacy concepts in personal and broader social contexts. Students listen to, read and view a range of texts, including everyday and media texts, and are taught to understand the language, analyse advertising messages and social issues, use and question research and data, challenge points of view, and express opinions about actions that impact on their own and others’ lives. Another important focus of the National Strategy is technical training. Some 1.6 million generally young Australians undertake such training. It is agreed that financial literacy, and

in particular business financial literacy, is an essential skill, but implementation has some way to go. Australia has a nationally recognised education and training system made up of 11 National Skills Councils funded by the Department of Education, Employment and Workplace Relations. These councils provide formal training and qualifications across more than 70 industry groups. Financial Literacy units of competencies form part of the Financial Services Training Package and sit within the Innovation and Business Skills Council (IBSA). Currently ASIC encourages and facilitates the uptake of these across trade and industry areas. ASIC's current initiative in Vocational Education and Training is to lead financial literacy reform by linking and developing government policy. ASIC has been piloting the inclusion of financial literacy competencies into the training of apprentices across various trades in partnership with industry. Universities are also increasingly introducing financial literacy as subject matter and individual courses. The University of Western Sydney has taken a strong leadership role in this area. So how do planners help? Well, the first point is that they already are in their day-to-day work with clients and pro-bono work in the community. Financial Planning Week is another example of bringing financial literacy into the community. The reality is that the implementation of financial literacy policy will, like drink driving initiatives and skin cancer awareness, take decades, and plannersT:200 should mm not underestimate the importance of their ambassadorial role in the

move from increased awareness of the need for financial literacy to actual behavioural change. In time to come, there will be increased demand for experienced planners as lecturers and mentors to groups of teachers in local communities. But I would ask planners to recognise that research shows that while we can all add to awareness, that the biggest factor in actual behavioural change is a face-to-face meeting. Planners wanting to use pro-bono time to get into the nitty gritty of improving peoples’ lives should look at financial counselling and programs, such as those run by the Smith Family, which are using mentors to assist families to break out of the poverty cycle. Please remember, financial literacy is not about investing in a sophisticated manner; this is a higher-level skill. It is about spending less than you earn, planning for regular bills, having a budget, not getting into debt traps and not falling for scams. Australians who get better with money will undoubtedly become financial planning clients of the future, but right now they need help with the basics.

Paul Clitheroe AM is chairman of the Australian Government Financial Literacy Board and a founding director of financial planning firm ipac Securities.

Australia • Asia • Europe • Middle East • The Americas

no.12 At T. Rowe Price, we believe it’s critical to research investment opportunities from the ground up. Our dedication to hands-on, fundamental research is just one way we seek to avoid unnecessary risks and ﬁnd true long-term opportunities for our clients. Under here?

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Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian Financial Services licence (“AFSL”) in respect of the financial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defined by the UK FSA, or as defined in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.

AS Strip - Australia Research

C O V E R S T O RY

Driving standards for industry entry RG146 has its critics as well as its advocates. But as education of financial planners evolves, it’s likely to become a far less relevant industry standard. Krystine Lumanta reports

f we were issued drivers licences without the need for a test and completed hours, driving would no longer be a privilege. And if the RTA and the police stopped enforcing speed limits, we’d be free to drive like maniacs. Shortcomings in licensing requirements and poor policing are obvious to road users. Exactly the same issues plague the financial planning industry and the operation of Regulatory Guide 146 (RG146). Slack enforcement has resulted in large gaps and variations in training standards. Courses are often offered on a “shortest and cheapest” basis, with some training providers “going rogue” and offering the qualification in as little as eight days. There are growing calls for the industry to abandon RG146 altogether, as any kind of minimum requirement for participants. But while regulators still require anyone practising as a financial planner to attain RG146, the industry is stuck with it. A spokesperson for the Australian Securities and Investments Commission (ASIC) says: “Informal discussions with industry stakeholders about the effectiveness of the training in RG146 is being conducted. “We recognise the need to continually review and refresh our guidance and aim to ensure members of the industry pursue professionally relevant programs

Low standards and poor policing are a recipe for disaster

and credentials,” the spokesperson says. “At this stage, no changes to the policy are planned.” It appears that ASIC believes RG146 remains adequate at this point in time. So for the foreseeable future, the low entry requirements dictated by RG146 will continue to stand in contrast to the high entry requirements of other professions. Tim Steele, director of AMP Horizons Financial Planning Academy, believes RG146 is a reasonable standard only as an entry point as “its inconsistent application by registered training organisations (RTOs) makes it unreliable”. The Horizons academy was set up in 2007 as a strategic initiative to help recruit and place financial planners within the AMP planning networks, and to make sure graduates are adequately educated and trained. “We do not have confidence in RG146 as a qualification,” Steele

says. “So we require any applicants to Horizons to complete a technical assessment as part of their application process.” Steele says training providers are creating variations in education, rather than establishing an industry-wide standard. “There are some that offer very exhaustive training packages to students; then there are others that offer a less than robust solution or training program,” Steele says. “For a true career-changer, who’s never been a financial planner, we really believe and encourage all candidates to complete a RG146 training program that is rigorous,” he says. Steele believes that amongst the arguments for and against RG146, there is a basic solution. “We fundamentally believe there should be external assessment of RG146 with oversight from ASIC [who] should take responsi-

bility for administering the assessment of the qualification across the entire country,” he says. “It should work just as it does in the US. The National Association Of Securities Dealers (NASD) is the authority responsible for dealer groups in the US and they’re also responsible for the individual securities licensing of financial advisers. They administer all tests that relate to securities licensing and it should work the same way here. “RTOs should be responsible for delivering the appropriate curriculum and training to help the development of their candidates and students and they would then send them out to then complete a test that’s administered by ASIC.” Noel Maye, chief executive officer of the Financial Planning Standards Board in the US, says having RG146 is better than having no entry standards at all. “At least in Australia you’ve got something,” Maye says. “It’s true in the sense that around the world there’s plenty of variability in what people have to do or not have to do to provide advice and products. Looking at what you’ve got here, to some extent the job of the government is to set a threshold - a minimally accepted threshold. So while there’s some who may feel RG146 is too low, there’s probably people who are failing to get in at that level. So at least it’s keeping some people out. “Right now in the United

CO V E R S T ORY

States, to be an investment adviser representative you have to take a competency exam, and it’s significant. Our certification helped the securities group develop it. Prior to that…as long as you could pay money, and breathe, you’d get registered.” Maye says that “to a certain extent I would say you definitely don’t want the standard for someone selfidentifying as a financial planner too low, because that doesn’t make a whole lot of sense if this person is supposed to be this competent professional who can advise holistically”. Within the arena of RTOs, the majority rejects RG146 as a minimum threshold, recognising that it is not the only component to compliance. They also agree that there is not enough being done by ASIC to police RG146. John Prowse, managing director of Pinnacle Financial Services Academy, says that now is the time for a new industry standard because “without its enforcement, RG146 is irrelevant”. “Where are the regulators? Someone at ASIC needs to start taking an interest in this,” he says. “There’s nothing wrong with having a standard, but is it at the right place? And is it even the right

owns RG146 Training Australia, standard to begin with?” says he’s waiting for the industry Training providers want to adopt a code similar to that in RG146 expanded to incorporate New Zealand, whereby authorised a higher benchmark, such as an financial planners undergo regular Advanced Diploma in Financial training and assessment in order to Services or tertiary education at maintain competence. a university, in conjunction with Better requirements will remove future education and training. conflict of interest, and competency But there are opposing views will not have to be called into queson how to increase the quality of tion, Sinclair says. education provided by training “Regulated guidelines should providers and how this level can be still apply, but it needs to be exmaintained. panded,” he says. The solution - supported by “I think the real debate is about Steele - that continues to emerge in compliance debates is the introduc- ASIC having diploma level courses and whether…the education standtion of an external nation-wide ard that ASIC regulates should be assessment. As there is no formal increased to advanced diploma level central assessor under RG146, RTOs have been self-assessing their or higher. “My view is that ASIC should students. increase the minimum requirement; Prowse continues to encourage and also, in a lot of other industries, the exam, having brought it to the it’s mandatory that you’re a member media attention last year, and says ASIC can take control by issuing an of industry associations, and I’d like to see that happen. The remaining objective assessment which in turn 20 per cent in the industry will only will finally create what has been lacking in financial planning educa- do what’s required of them if it’s mandated, so I think that ASIC tion - a measureable standard. needs to continue to mandate the “All students would study minimum requirement for advisers.” toward an ASIC-set exam and Lindsay Rowlands, managing thereby, those that were taught in director of the Australian Institute eight days would certainly fail,” he of Financial Services and Accountsays. ing (AIFA), disagrees with the call Dr Mark Sinclair, managing diT:200 mm for external exams. rector of Mentor Education, which

“It’s not the solution. It sounds appealing but it’s not a matter of having another method of assessment. I think the solution is simply in the managing of training,” he says. AMP’s Steele says that if RTOs are confident in the quality of the output of their program they should have no concern about their students completing an external exam. “I would believe that the good providers would be shouting from rooftops in support of this because it would help them differentiate themselves from the lower quality players in the market,” he says. Rowlands says RG146 will remain unchanged as long as there are “students who just want to fly through [the training], amongst those who are genuinely interested in their pursuit”. “There’s an ongoing battle to improve the standards, but they [RTOs] think it’s not their problem, they just have to comply with the law; so as long as the adviser gets the certificate, the training quality will remain low,” he says. “The market allows it and the regulator doesn’t do anything.”

Australia • Asia • Europe • Middle East • The Americas

no.15 At T. Rowe Price, we believe teamwork is essential. With a collaborative team of over 350 investment professionals* around the globe, our best ideas are shared across countries, sectors, and asset classes, for the beneﬁt of all of our clients. troweprice.com.au/truth

Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian Financial Services licence (“AFSL”) in respect of the financial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defined by the UK FSA, or as defined in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International, Inc., T. Rowe Price Global Investment Services Limited and T. Rowe Price (Canada), Inc. *As of 30 June, 2010.

AS Strip - Australia Teamwork

P R O FE S S IO NA L IS M

Here is the real reason why too many people are underinsured Robert MC Brown says that if planners were trusted more, underinsurance would be much less of a problem

n 1978 I attended my first life insurance sales conference. It was held in the ballroom of a sparkling new Sydney international hotel and its purpose was to fill the audience with the necessary evangelical zeal to go out there into the marketplace and sell more life insurance policies. We were told that the Australian public is “chronically under-insured” and that we had a moral obligation to sell them more policies, for which we would be handsomely rewarded both in heaven, and by the payment of (undisclosed)

commissions at levels that, these days, would make even the most aggressive financial planner blush with embarrassment. Times have changed - or have they? In 2010, we’re still being told about the “chronic underinsurance problem”, although this time that “problem” is being trotted out as a justification for allowing insurance sales to continue to attract commissions in the context of the proposed Future of Financial Advice legislation. “Life insurance is different,” we’re told. “It’s sold, not bought, so the only way to fix the

under-insurance problem is to allow advisers to continue to receive commissions.” Of course, the fatal flaw with this analysis is that life insurance has been sold exclusively through the commission model since Adam was a boy; and the Australian public is still under-insured! Surely, therefore, commission is not the answer. Perhaps, a strong clue to solving the “problem” (if it is a problem at all), lies in an understanding of the industry’s own questionable practices over the past thirty years. Could it be that the public doesn’t trust life insurance

ACI0004/TEA/PP

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P R O FESSI O NA L I S M

companies and their intermediaries? Let’s take an uncomfortable journey and examine some lowlights of the industry in modern times. The 1980s were boom years for life insurance selling in Australia (which is strange, given the abolition of state and federal death duties in the late 1970s). Nevertheless, throughout that decade, an army of high pressure sales agents aggressively sold “whole of life” insurance policies to an unlimited supply of prospects who were attracted by promises of big income tax deductions for their businesses and capital guaranteed returns. This was the “heyday” of “split dollar agreements” and the good times were rolling. The widespread successes of sales agents were rewarded with huge undisclosed commissions and volume bonuses (up to 250 per cent in some cases). In addition to lucrative commission structures, these were the days of low/no interest/no FBT Agency Development Loans (ADLs), during which time tens of millions of dollars were

‘Life insurance has been sold exclusively through the commission model’ literally thrown at “big producers” by otherwise conservative life insurance companies who were at war over market share. In most cases, their mutual status and their lack of accountability to shareholders made it possible to engage in practices that would now be viewed as an irresponsible, if not illegal, use of shareholders’ funds. The “big producers” were courted on the basis of “whatever it takes” to sign them up to

an agency agreement. Many accountants were offered ADLs because it was correctly assumed that the profession was well placed to convince clients to buy. A minority of accountants couldn’t resist the temptation, selling out their independence in return for a pot of easy money that could be employed to buy a building or to pay off the working capital overdraft. And some of the more colourful (and less astute) sales agents were understood to have ploughed their loans into fast cars and luxury yachts. Such was the strong sense of ego-driven competition surrounding who could win the biggest ADLs, that there were weekly stories in the financial media about who had extracted how much out of whom. The main qualification criterion for an ADL was simple. Sell lots of “whole of life” insurance (or even promise to do so), and you too could be the recipient of millions of dollars in loans - most of which were written with such inadequate security as to make the US sub-prime market look positively responsible.

wide.

P R O FE S S IO NA L IS M

The best way to describe the life insurance industry in the 1980s is to say it was in a state of frenzy. Market share was king, financial disciplines appeared to matter little, and if consumers’ interests were served, that was a happy coincidence. And then the sales frenzy subsided. The 1987 stockmarket crash, followed closely by the “recession we had to have” in the early 1990s, acted to ensure that the sales of “whole of life” insurance policies ceased. The recession meant that cash-starved businesses and individuals who should never have been sold these policies in the first place could no longer afford to pay the hefty premiums ($100,000 per annum was common). To make matters worse, many of the policies were funded through bank overdrafts on which agents were receiving trailing commissions. As a result, the clients suffered termination penalties (but still owed the bank), the agents suffered substantial commission write-backs (which curtailed their impressive lifestyles) and the insurance companies wondered how to recover the ADLs and their tarnished reputations. At much the same time, compulsory superannuation was introduced, providing for most people a minimum amount of life insurance cover and an excuse for not buying any more. The fall of the life insurance agent coincided with the rise of the financial planner. Not wishing to be tainted by the poor image of life insurance selling, many former insurance agents found new opportunities in the world of managed investment funds, and life insurance was pretty much ignored as the province of the old “white shoe brigade”.

Robert MC Brown

That is, until the global financial crisis, when financial planners suffered a crisis of their own. No one wanted to buy managed funds. So the next best thing was to switch the selling focus to “risk” - that is, to the selling of life insurance policies. And creating the impression that Australia has a “chronic under-insurance problem” wouldn’t do that campaign any harm at all. I’m not suggesting the Australian community doesn’t need more life insurance. I’ve heard those claims throughout my career and I’m not in a position to dispute them, irrespective of the somewhat conflicted sources from which much of the “research data” comes. My point is that continuing with commission-based remuneration is clearly not the answer. In the recent words

of a well-established financial planner who understands the point: “Insurance is the next frontier in the battle to give Australian consumers access to commissionfree, independent advice and is also the key to unlocking the chronic under-insurance problem in Australia. “Wiping out commissions on insurance is a sure fire way to reduce the cost of personal insurance as well as to encourage people to seek advice on how best to protect their income and their family, without paying excessive premiums. “Every person will have a different insurance need….for instance, as an individual moves through life and their debts are repaid, their adviser should consider reducing their insurance cover, but often this creates a conflict of interest for the adviser as it reduces the commissions on the insured amount. “When there isn’t the conflict of commission, clients can feel confident knowing that we will find the best and most affordable outcome for them….the fee for service model should be extended to insurance.” Therefore, to suggest that insurance should get a “special carve-out” from the FoFA legislation is unjustified and won’t solve the “problem”. The solution lies in trust. Not the kind of (mis) trust that comes with commissions, but the kind of unqualified trust that comes with a true “fee for service”.

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The beehive is a marvel of insect engineering. Using only their mouths, bees form the wax they produce into a series of almost perfect hexagonal cells. The comb infrastructure they build has dedicated sections for larval nurseries, honey storage and even a message centre.

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AUI Healthcare Property Trust Wholesale Units

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*This information is intended to provide a broad summary of the AUI Healthcare Property Trust. Investment decisions should not be made upon the basis of past performance, since future returns will vary. You should refer to the relevant Product Disclosure Statement (PDS) dated 25 June 2010 if you wish to know more about the product. A copy of the PDS can be obtained from the Issuer of the AUI Healthcare Property Trust – Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454 by calling 13 29 39 or from our website australianunityinvestments.com.au. You should consider the PDS in deciding whether to acquire, or to continue to hold the product. The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned September 2010) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria.

P LANN E R PRO F IL E

P LANN ER P R OF I L E

When

When Phil Butterworth set out his planning group's strategy, simple commercial considerations led to a

align

commerce and clients structure that seems exactly right for the times. Simon Hoyle reports

ith the benefit of hindsight, the strategic plan set out about six years ago by DKN Financial Group looks incredibly prescient. In fact, it was driven by simple commercial considerations: how to help the financial planning practices it works with to maximise their own profit - in turn, enriching DKN shareholders. Not surprisingly, Phil Butterworth, the chief executive of DKN, views recent industry changes positively, and welcomes much of the change

likely to come, as set out in the Government’s Future of Financial Advice (FoFA) proposals. Butterworth argues that significant regulatory change had to happen. And if change wasn’t driven by government, then it would have been effected by the industry itself, in response to consumer demands - though it may not have happened as quickly as is has, and will, had the industry been left to its own devices. Butterworth says regulatory change has to take place simply to take into account how the industry has already changed over a number of years.

“Through all these small and seemingly insignificant changes, you can see why the industry has had to have a bit of a hard look at itself, because it’s actually grown up quite quickly, but the framework it’s growing up in hasn’t changed a lot,” Butterworth says. “Sure, we’ve had FSR, but you’ve gone from sole practitioners to, now, firms; it’s a much larger part of the economy; superannuation is a much larger piece of the pie and it’s got a lot more presence; yet the framework in which it’s been guided hasn’t really evolved. “The industry had to make it evolve. It had to

P LANN E R PRO F IL E

be either industry- or consumer-driven; I think what’s happened ... is the industry has been driving the changes - and the consumer had a fair bit to say around that as well, in regard to pricing and getting rid of commissions - but with the GFC and Ripoll and everything else that came through, and the Storm issues, it’s absolutely accelerated the requirement for change. “Whether or not it’s legislation, because it’s so transparent about what has to happen, it will be industry-led anyway. I think the majority of what’s been proposed in the reforms, most of it’s going to be embraced by the industry. There are a couple of areas of debate, but I think on the whole it’s going to be addressed. “To put it back into context, the way we established DKN in the early days - this is going back six years ago to when we listed it - we made some fundamental decisions which in hindsight have stood us in pretty good stead through what is now pending as changes. “We wanted to act as a buying group, and as a buying group what you’re delivering are betterpriced services to the underlying investor. And so our target market was fee-for-service advisers. “If you have the philosophy of wanting to use the buying power of associated firms to access better-priced services for those firms and their clients, that was the fundamental co-operative vision DKN had six years ago when we were listing.” Butterworth says it’s a misconception that the planners who are shareholders in DKN will become wealthy through that investment. They might, but that’s not the aim, he says. “The value-add was never going to be about ‘Here’s a big paycheck’; it was all about if you want to be associated with the group, you’re going to get most of the value through help for your business to become more profitable in its own right,” he says. “Our primary focus was, use us to help you become more efficient and profitable in your own business. If you can do that, we win; if you’re a shareholder in us, that’s a nice value-add, but your retirement [plan] isn’t building value in DKN, it’s building value in your own practice. “When you look at that as a framework of

Name: Phil Butterworth Position: Chief executive, DKN Financial Group Years in financial planning/financial services: 17 Qualifications: Bachelor of Commerce Relevant industry background and experience: Responsible for delivering shareholder returns through driving the strategic direction, operations and culture of DKN. Industry experience spans distribution, platform development, dealer services, business acquisition and implementation. He is a member of the Financial Services Council Advice Board Committee.

how we’ve grown DKN, then if you have a look at FoFA and what they’re proposing, and they’re saying one of the big ones is the banning of commissions, well the impact of that [on DKNaligned planning firms] is marginal. In fact, we’re seeing that as a significant opportunity, because we have the framework around how to convert those guys who wish to convert to be fee for service. We can help them do that. “We see the next three years as the biggest land-grab opportunity for DKN that’s ever presented itself. We’ve been growing nicely organically, but we see this growth can be escalated, because our model is well-aligned to where the reforms are going.” That’s not to say Butterworth agrees with all aspects of the FoFA proposals - far from it - but the general direction that the industry is headed was anticipated, if not predicted, by the co-operative, buying-group structure the group adopted; and therefore, with a couple of specific exceptions, holds no great concerns. “A fee-for-service model, the banning of commissions, a fiduciary obligation - we have no issues with any of that,” Butterworth says. “We see the biggest challenge for advisers in the marketplace probably isn’t the reforms; it’s really being able to articulate clearly what their value proposition is, and getting back their own confidence and also investors’ confidence to invest back in the market.”

Butterworth says there are three elements to how DKN aims to help its practices articulate a value proposition to clients. “The first one is our administration service, or platform, which we’ve fundamentally aligned with BT,” he says. “What we’re aiming to do there is deliver a very low-cost, efficient platform for them to operate their business as a fee-for-service model. “They can access a well-priced platform, so they can retain their own margin in their own practice, rather than relying on rebates. “The next part is through Lonsdale, and the associated services we’re building out of Lonsdale; there’s a whole range of practice management skills and compliance and licensing offerings that we can offer to firms. We’re licenceagnostic: you can run your own licence, or if you wish to rent a licence you can take it from Lonsdale; that licensing regime to us is moot. “Resolve that problem or question, and what you’ve got to resolve then is what do you need in your business then to run your business as efficiently as possible. First of all you have to protect your business, so compliance is a significant offering that we have. The compliance framework around how you run you business, the ongoing training and development of staff and your personnel; and we’ve got a range of practice management programs, such as your standard ones like business planning and succession planning and the like. “Another one we’re rolling out is your value proposition. We do have a specific module that we run a firm through, which is them defining their value proposition, defining their pricing model, and defining the way they price on their client segments. That’s a big tool that we’re rolling out at the moment. “The final plank in our offer is that we will use our own capital to invest into financial planning firms. That capital can be used to help internal succession, or to help a firm grow through acquisition. And we’re looking at expanding that area of our business. It went on hold a bit over the last couple of years, through the GFC where it was difficult to invest; but now you can see where the skeletons are, and now’s the time to

P LANN ER P R OF I L E

Phil Butterworth

expand that area again. “And our target market is the boutique feefor-service firm.” As the CEO of a listed wealth management business, Butterworth always has one eye on the share price. He’s responsible for maximising the profit of the listed entity, but he says too close a focus on just one measure of the company’s performance can be counter-productive. “You can get yourself caught up on the share price, particularly as the CEO and wanting to add value to your shareholders,” Butterworth says. “But there are some points in the market where you’ve got to stop worrying about the share price and you’ve just got to focus back on the underlying drivers of your business. And if you get those right, when the time is right the market will re-rate your share price. “The reason why it’s difficult to address that at this point is, it’s not a DKN issue, it’s a sector issue. Our share price went up 23 per cent from last year; our share price really hasn’t changed and we’re back into growth mode from a profit point of view. We’ve got a very strong balance

sheet - we’ve got over $8 million cash in the bank - and we’ve got no risks. We’re pretty well reform-ready. “Why isn’t our share price growing again? I think it’s fairly simple. I think everyone knows that wealth management stocks have two issues circling them at the moment. One is markets everyone knows we’re leveraged to the markets, so if markets are moving again we’re going to move again quite rapidly - and the other one is reforms. It’s a bit like with the mining tax: if a sector has an overhang of legislation, it is going to be run away from. You’ve got to take it back to basics: Why would [a] broker recommend a sector that’s going through reform? There’s an easier sell for that broker in regards to positioning another stock with their clients, which maybe is not going through a sector reform. “So you can’t expect to have a huge degree of interest in a sector which is going through reform. That’s the biggest anchor at the moment in regards to not just our share price, but others in our sector.” Not all the FoFA reform is positive for the industry, even if Butterworth thinks DKN is well placed to weather it. “Let’s talk about platform rebates to the practices as a classic example,” he says. “Now, DKN does not get a rebate - let’s make that clear. The revenue we make from our packaging of the platform through BT is not affected by these reforms. “We do pay a small rebate to practices, but other providers of platforms pay significant rebates to practices. If these rebates are turned off, for our guys, because we don’t pay much out - we price the product low and therefore have low rebates - the cashflow impact is marginal. “If you’re using a more expensive platform and you’re getting significant cashflow in your business and that is turned off, and they’ve built their business around that rebate, as opposed to revenue from their clients, those firms are going to go through some significant stress. “My assumption - and I could be wrong - is that as the platform provider is providing that big rebate, if I was the adviser I’d be saying you’re no longer paying me 40 bps or 30 bps as a rebate,

you’re going to reduce the cost of your platform so I can charge the client, so it’s a straight replacement [of revenue]. “But can you imagine that conversation with all your clients? ‘The platform has reduced its fee and therefore I’m increasing mine’. As a client, I’d say, ‘Why?’ They may have a better sales story than that, but you could assume that you may not get 50 per cent converted. “The value impact to these practices could be quite significant. Those who have their heads in the sand and think it’s not going to change ... our view is it may not get legislated now, it may happen again in three years’ time, or the industry may enforce it, but regardless of when it’s going to happen - because it most likely will at some point - you must start transitioning our business now, while you’ve still got time to do that.” One of the FoFA proposals Butterworth opposes vehemently is the opt-in requirement. “That’s one of the ones [where] we have real difficulty agreeing at all with anything that’s been proposed in that space,” he says. “It’s more the administration that goes with that. It’s [a] philosophical [objection], yes, but it’s also the administration: how do you track it? How do you enforce it? It’s a real issue.” Butterworth says the client is going to engage in an ongoing relationship with a planner, on a fee-for-service basis, with the fee agreed between planner and client and paid by the client to the planner, and the client can elect to terminate that relationship at any time. “Leave it at that,” he says. “To say that client now has to opt-in, what’s your timeframe of having that client elect to opt in? Retirees are away, they’re on holiday, they’re interstate ... does it have to be within three months of the anniversary date? Who tracks that? Who enforces it? All those types of things. “Yes, it could be there’s a lot of lazy revenue generated by advisers through the old trail system, but be that as it may, moving forward it’s fee for service and fiduciary obligation. “To legislate it I think is overkill.”

C LI E N T CAS E S T UDY

CLI EN T C A SE S T U D Y

The good

Oil

By creating the right balance between guaranteed income, capital protection, and the promise of capital growth, a Perth-based couple managed to have their cake and eat it. Mark Story explains how

n 2005, Perth-based diesel fitter, John Leeds, and wife Janice finally found themselves with enough surplus cash to fast track a diversified wealth accumulation strategy. With two grown-up daughters finally off their hands, the family home all but paid off - and a six-figure income burning a hole in Johnâ&#x20AC;&#x2122;s pocket - they decided to knock on the door of professional planner Gus Sadri. Up until this point, John - who had little more than a couple of legacy Colonial funds and two small super funds - was a fairly dormant investor. While Sadri had inherited John as a client some years earlier, following a company buy-out, they had had minimal dealings with each other. Having been given the opportunity to conduct a full review of current and future financial needs, Sadri discovered that John and Janice wanted to live on an income of $40,000 (after tax) annually, supplemented by an additional $20,000 income from part-time employment. Wealth Creation

Based on his initial review, Sadri was quick to recommend that the Leedses implement a threepronged wealth creation strategy.

Firstly, he recommended borrowing $125,000 against the family home (valued at $400,000) and investing 40 per cent into direct shares and the rest into growth-oriented managed funds, under a Colonial First State platform. Secondly, given the amount of surplus cash John was now accumulating, Sadri recommended significantly beefing-up his super through a salary-sacrifice strategy, thereby reducing his annual tax bill by 15 per cent. To diversify risk, Sadri recommended share exposure through CommSecâ&#x20AC;&#x2122;s model portfolio comprising eight to 10 non-speculative, blue-chip domestic shares - covering resources, industrials, banking and media sectors - paying fully-franked dividends. Following disappointing returns from the direct shares portfolio, relative to the managed funds, both Sadri and John concluded that direct shares provided insufficient diversification. So the shares were sold within 12 months and the proceeds reinvested in numerous managed funds. While they were enjoying double-digit returns, all managed funds were cashed-out in March 2007 in the lead-up to the GFC - leaving the Leedses with a $69,000 return on the $125,000 theyâ&#x20AC;&#x2122;d initially borrowed.

C LI E N T CAS E S T UDY

Income

With John having just turned 55, the third part of the strategy included transition-toretirement through an allocated pension - with a growth risk profile - based on a maximum drawdown of 10 per cent. With interest rates low and managed funds continuing to perform well, Sadri recommended using the $69,000 from the sell-down to make a lump-sum undeducted contribution into his Colonial First State super fund. John contemplated selling the shares he had acquired through an employee share plan to pay out the mortgage. But with interest rates still at historically low levels, and the outlook for shares continuing to improve, he decided to continue to service the remainder of the debt taken out against the family home, and to remain invested in his existing managed funds portfolio, which proved to be a useful strategy during the bull phase of the market 2003-07 “Over the ensuing two years, John continued to salary-sacrifice into his employer super fund until his retirement in April 2009 - at which time his pre-retirement (non-commutable) pension was converted into a commutable allocated pension,” Sadri says. “Now that John has turned 60 the fund is commutable and he can draw down lump sums tax-free.” Reinvesting lump sums

John’s retirement brought with it the vexing issue of what to do with the $552,000 lump-sum payout from his Employee Defined Benefit Fund with BP. Owing to the nature of this fund, which offered a fixed-interest-style return - based on salary and years of employment - John had by default been safeguarded against the ravages of the GFC. But with no option to take his retirement benefit as a regular pension, John was left with no choice but to reinvest elsewhere. While John initially contemplated investing his lump sum within a self-managed super fund (SMSF) structure, he didn’t want the fiduciary and trustee responsibilities associated with maintaining it.

‘John initially contemplated investing his lump sum within an SMSF’ “Onerous compliance aside, a SMSF just wasn’t considered a cost-effective option, as substantial fees would gradually eat into the returns over the years,” John says. “Given the extra costs they were incurring, none of my friends with SMSFs seemed to be forecasting demonstrably better returns than me.” Safety net

At face value, with the S&P/ASX All Ordinaries Index trading at 3800 points - still around 40 per cent down on its high of February 15, 2007 - the market was awash with value. Nevertheless, with John and Janice’s appetite for risk severely compromised, their brief to Sadri was simple: Replicate a level of security that John had within his defined benefit employer fund, with some upside for capital growth. With long-term investment horizons still ahead of them, lack of capital growth meant term deposits didn’t appeal. And given the downside of zero accessibility to capital, the option of locking the entire amount into an annuity with a reputable life office was equally unappetising. Out of the total $552,000 available, Sadri recommended that 45 per cent ($250,000) be invested in a CommInsure Guaranteed Index Track Annuity with a 15-year term. What attracted Sadri to this annuity was the guaranteed income stream, combined with the potential to achieve compounded increases of up to 5 per cent per annum, in line with the movement in the S&P/ASX 200 Price Index. “This $250,000 effectively offers $369,000 in

The Planner GUS SADRI Financial adviser Wealthwise Pty Ltd

An authorised representative of Financial Wisdom, Sadri’s qualifications include a Master’s Degree in Economics and a Diploma of Financial Planning. Aftre working in banking in the Middle East, Sadri spent a long stint at Godfrey Pembroke as a para-planner, before becoming a financial adviser in 2002. Winner of the Financial Wisdom Top Adviser WA award in June 2004, Sadri is the recipient of the Value of Advice Award 2010. Advice structure Wealthwise transitioned to a fee-for-service model five years ago. It operates a three-tier fee system in-line with the volume and complexity of advice provided. As the firm is still transitioning from older legacy products, any remaining trails are refunded back to clients, together with any GST incurred. While clients can choose a feefor-service or trailing commission model, almost without exception the former option is preferred. History When Sadri inherited him as a client following a company buy-out, John Leeds’ only investments were a small super fund and a couple of legacy Colonial products he’d held since the mid 1990s. It was a gearing plan proposed by Sadri to position John and wife Janice for future growth - once the family home was finally paid off in 2003 - that accelerated their opportunity to start adding value through advice. With the gearing strategy severely compromised by the GFC, growing concerns over John’s pending retirement spurred their interest in seeking more comprehensive financial advice in 2008. Strategy Now debt-free, John and Janice had sufficient income to accelerate a wealth accumulation strategy; but their risk profile following the GFC meant that capital preservation was going to be equally, if not more important than future capital growth. As well as wanting guidance on gearing into direct shares and salary sacrificing, they also needed advice about what to do with a defined benefit employer fund lump sum that John’s would receive on retirement. Having turned 60 this year, John wanted to ensure they had guaranteed funds to live on, plus some potential exposure to long-term capital growth.

CLI EN T C A SE S T U D Y

Meeting needs

Financial situation Fee for advice Net debt gearing Family home Super: Janice Super: John Insurance cover Account-Based Pension CommInsure Guaranteed Index Track Annuity AXA North Guarantee Net asset position

At inception

Now

$550 $125,000 $350,000 $ 5,000 $450,000 $300,000 (via employer super) Nil Nil Nil $680,000

$1,925 $ 125,000 $ 650,000 $ 12,000 $ (as below) Nil (now retired) $ 138,000 $ 250,000 $ 320,000 $1,245,000*

* Client also has BP shares worth more than $50,000 (acquired under employee share plan).

fixed income over a 15-year period,” says Sadri. Guaranteed growth

For the remaining $302,000, Sadri recommended AXA North Guarantee, an investment growth-style super asset, offering a “protected growth guarantee” for a term of 10 years. This means that at the anniversary date of the investment - if the markets have increased in capital value - the investment growth would be locked in. “So if the market does go down in the second or future years, the protected value is locked in at the anniversary date of the investment - and that’s what the client would receive (without breaking the guarantee term),” says Sadri. As a case in point, he says the original $302,000 has already gone to $322,585 on the first anniversary date - and it’s this figure that gets locked in as the protected balance. ”This part of the strategy was particularly appealing to John and Janice as it met their specific need to be invested in the market with exposure to growth-style assets - albeit with capital protection for the term of the guarantee,” says Sadri. While the “protected growth guarantee” associated with this feature does incur a 2.5 per cent protection fee, John says the benefits of having this type of insurance cover and exposure to growth-style assets far outweigh what equates to a relatively small premium cost. Meantime, Sadri also suggested a change in the classification of the pension established four years earlier, from a pre-retirement pension to

‘If the market does go down in the second or future years, the protected value is locked in’ an account-based pension. By dispensing with the “non-commutable” feature, John and Janice can access their capital for any unforseen future expenses. Tax

Prior to starting the initial transition-toretirement (TTR) strategy, John was paying $39,000 in PAYE tax. But through salary-sacrificing and TTR implementation, this has since dropped by $6000 a year to $33,078. Prior to John turning 60, tax was applicable on the income from the annuity and the drawdown from the account-based pension, but it did contain a 75 per cent tax-free component, plus a 15 per cent tax offset. But since turning 60 last July, any income coming out of the pension is now tax-free. In addition, John is eligible for a dependant spouse rebate of around $2150 on Janice’s income.

With the retirement strategy now implemented, Sadri says John and Janice can enjoy a worry-free lifestyle knowing that their hardearned nest egg is sufficiently incubated from future sharemarket shocks. As well as offering a predictable income stream to meet lifestyle expenses, his retirement strategy for John and Janice also offers the potential for an additional guaranteed 5 per cent annual return. While this is predicated on the S&P/ASX 200 rising in value by 5 per cent, there are few exceptions when the sharemarket has failed to deliver this modest annual return. By doing this, Sadri met the specific objective of potentially sound capital growth for that portion of John’s investments. So in addition to full exposure to the sharemarket, and a guarantee term of 10 years, they also received a unique “protected growth guarantee”. Over the next three and five years respectively, Janice and John will both be eligible for the age pension which, Sadri says, will further reduce the risk of them outliving their capital. As a retiree, John says he’s chuffed with the sense of financial security he and Janice now have, plus the embedded flexibility within the overall plan to respond to lifestyle changes. He says the plan design accurately meets his need for both capital growth and protection. John admits that the guarantees underpinning the bulk of their investments make him more confident about his capital lasting longer. And their financial plan has gone a long way to allaying those niggling fears about income streams. “While I quickly established a rapport with Gus, it was equally important that Janice did too,” says John. “If I hadn’t been able to walk out of Gus’s office understanding all of his recommendations, I would never have walked back in.”

Are you invested with Australia’s award-winning boutiques? Alleron Investment Management Winner Golden Calf Award 2010 (Australian Fund Manager Awards)

C LI EN T R ELAT I O N S H I PS

Identifying client value in an advice setting Defining value is easy, says Peter Bowman; the real challenge is to communicate, deliver and demonstrate it

ATI Asset Management Finalist Golden Calf Award 2010 (Australian Fund Manager Awards)

H3 Global Advisors Emerging Manager of the Year 2009 WINNER

2009 AUSTRALIA

Regal Funds Management Tasman Market Neutral Fund* Winner Best Market Neutral Fund 2010 (Australian Hedge Fund Awards) Amazon Market Neutral Fund* Winner Best Asian Relative Value Fund 2010 (Eurekahedge Asian Hedge Fund Awards)

Contact: Jason Collins, Ascalon Capital Managers p: 02 9017 9732 e: collinsj@ascalon.com.au w: www.ascalon.com.au Issued by Ascalon Capital Managers Ltd (ABN 14 093 660 523, AFSL 300697) (Ascalon). Ascalon has minority equity stakes in, and distribution arrangements with, Alleron Investment Management Ltd (ABN 71 109 874 160, AFSL 278856), Above the Index Asset Management Pty Ltd (ABN 25 111 239 591, AFSL 295904), H3 Global Advisors Pty Ltd (ABN 78 074 254 425, AFSL 233811) and Regal Funds Management Pty Ltd (ABN 30 107 576 821, AFSL 277737). This advertisement is for general purposes only and does not constitute an offer, sale, issue or solicitation of such an offer. As this release is prepared without taking into account your objectives, financial situation or needs, you should seek professional advice and must consider the relevant disclosure document before making a decision whether to invest. Past performance is not an indicator of future performance. Standard & Poor’s Information Services (Australia) Pty Ltd (ABN 17 096 167 556, AFSL 258896) (“Standard & Poor’s) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au. *Currently open to wholesale investment only.

tructural change, increased consumerism, legislative change and competitive pressures are forcing financial planners and advisers to more clearly articulate and demonstrate the value that they provide to the market place. A customer value model can provide decision makers with the ability to map the client experience they deliver against a desired client value. Let's take a closer look at each of the client values. Goal-based value

This is the most obvious of all the client values. If a financial

planner meets the client’s goals, they are going to be satisfied. How well do you meet your client’s goals? More importantly, how well do you demonstrate to your client that you're meeting those goals? Client goals can take all shapes and forms. Typically they will express in one of four ways. Firstly, they might express a need to get clarity on their current position. This may include helping them make the most of what they have got; helping them budget to reduce waste and make better purchasing decisions; and helping them pay less tax. Secondly, they might express their goal in terms of being better

Customer Value Model Client value Goal-based value

Consequence-based value

Advice and adviser attribute-based value

Satisfaction delivered Client goal-based satisfaction: based on meeting their objectives Client consequence-based satisfaction: based on their participation in the advice process Attribute-based satisfaction: based on the experience provided to the client through the advice process and the adviser.

C LI EN T R ELAT I O N S H I PS

off financially. This could be around helping them achieve a lifestyle goal or helping them make a retirement goal a reality. Thirdly, they might express their goal around financial stress - a goal to be more in control and less worried about money. This may include giving them clarity and direction, avoiding bad financial decisions and ensuring debt levels don't get out of control. It might also include wealth protection outcomes, like insurance. Fourthly, their goal might be expressed as a need for more time. This may involve being their personal financial controller, allowing them to focus on their career or the things they would prefer to be doing. Consequence-based value

The financial planning process, by its nature, requires the client to participate in the process. This process may be transactional (a one-off need) or it may be part of an ongoing personal advice service. The challenge for advisers is to ensure that the client experience is a positive and relevant one. Consequences of using an adviser and advice process might include: the client's ability to set realistic and achievable goals, manage cash flow and pay the bills without stress; act with certainty and confidence; be informed and educated about money matters. It might also include providing motivation and support as you both work towards their goals and have ongoing proactive advice as their life situation changes. Remember it's not just about the destination; it's also about the journey you take

who can identify, implement and articulate client value will be able to obtain a strategic advantage in the market place.

Five tips for implementing value-based advice:

1. 2. 3. 4. 5.

Articulate at review time how you meet client goals. Manufacture an advice process that delivers positive consequences of participating in the advice to your client. Build meaningful relationships and make your advice process easy to participate in. Check that the value you think you are providing to clients actually is valued by them and delivered to them. Find the mix of client values that set you apart from the rest, and build your reputation on them.

to get there. Attribute-based value

Satisfaction results from the attributes of the adviser and their advice process. What an adviser does is something most advisers have struggled to define in terms of demonstrating value. Attribute-based value might include the ability to work with an adviser who: • is qualified and authorised/ licensed to provide financial advice; • is experienced in the provision of advice; • has the ability to build meaningful and lasting relationships; • can make sense of it for me, who will motivate and navigate; • has access to a greater level of support, technical and research resources and solutions. Attribute-based value might also be demonstrated by the advice process through: • productive and time-efficient advice; • a process that includes implementation; • the provision of either transactional or ongoing services; • the delivery of a personal outcome. Defining value is easy, but

what's next? There are undoubtedly other factors that form a part of goal-based value, consequencebased value and attribute-based value. In some ways, defining value is easy. The challenge is really how to communicate, deliver and, most importantly, demonstrate value. Financial advisers and planners

Peter Bowman is head of marketing for Financial Services Partners

Contango Capital Partners Limited ASX Code: CCQ

Pre-tax NTA at 30/09/2010 $1.11 • CCQ was listed on the ASX on 30 May 2007 • Foundation investment is Contango Asset Management Ltd • Contango Asset Management Ltd offers specialist listed securities for SMSFs • Contango Asset Management Performance as at 30/09/10: Product Inception Index Added Value (pa*) Micro Cap

Mar 2004

Small Ords

15.4%

Small Companies

Feb 2005

Small Ords

6.4%

Australian Shares

May 1999

ASX300

1.4%

Income Generator

Oct 2004

LPTs

7.2%

Global Value

Jan 2008

MSCI ex Aust unhedged

15.2%

For further information contact David Stevens on 03 9222 2333 * Added value per annum since inception Source: Contango Asset Management Limited - The historic performance of the Manager is not a guarantee of the future performance of the Portfolio or the company.

S U P E R ANNUAT IO N

Rethinking default options John Wilson says it’s time we revisted how superannuation fund asset allocations are set for different members

rior to the introduction of compulsory superannuation, in 1992, the typical super fund paid inflation-adjusted pensions based on some ratio of final salary, depending on the length of service. The employer contributed money to its superannuation fund to cover the anticipated cost of providing this benefit, known as a defined benefit, or DB fund. In this situation, the employer takes all the risk. Compulsory superannuation changed all this. The employer's obligation is confined to paying the annual legislated amount, with the employee assuming all other risks. The system is now largely an accumulation or defined contribution (DC) structure. Some 80 per cent of the money in superannuation is now in accumulation funds, with the members' retirement incomes directly dependent on contributions and the investment returns achieved on their account balances. This rises to 86 per cent when self-managed funds are taken into account. Whose money is it?

Given the accumulative nature of superannuation, it is no surprise that older members account for most of the money and have higher average balances. The age distribution of vested benefits varies significantly according to the fund type. However, and importantly for asset allocation and fund design, in each category, more than half the assets are held by those older than 50 years. The greater concentration of older members in retail funds reflects the fact that historically many fund members have switched from a not-for-profit fund to a for-profit fund around their retirement date. While this is also a reason for the higher concentration of older members in self-managed funds, the large proportion of self-employed members suggests that

tax management is important in determining the contribution flows. Investment approach

With this background, does the way the money is invested make sense? Not-for-profit funds, while they offer a limited range of investment options, hold 65 per cent of their assets in the default option, either because members deliberately choose that option or don't want to make a choice. The analysis will focus on these default options. In a sample of 12 representative funds, the average proportion of growth assets held by the default option is about 80 per cent. A fundamental question arises, namely: “Is it appropriate to have 80 per cent in growth assets, given the current pricing of sharemarkets and also the age structure of the owners of the assets?” Starting points matter

While it is tempting to be fully invested in equities on a “buy-and-hold” basis because of their superior long-term returns, the volatility of this average belies the usefulness of this strategy. It is far better to be invested in equities when they are priced to produce above-average returns - that is, above 6.75 per cent per annum real returns - and not be involved when they are priced for lower than average returns. The question is whether this can be done; is there a way to assess future equity returns? One of the reasons that share prices fluctuate widely is that the market’s pricing is heavily influenced by the level of profit margins. When margins are high, investors believe they will stay high and raise share prices, thereby accepting lower starting yields, in the belief that elevated profit margins will underpin strong future profit growth. Conversely, when profit margins are low, investors see that as a guide to the future and

demand higher starting yields to compensate for the sluggish outlook for profit growth. Profit margins, however, revert to average: they do not stay abnormally high nor unusually low for long periods. A straightforward way to adjust for this is to calculate the market's price-earnings ratio using a 10-year average of earnings. It is possible to compare these cyclically adjusted price-earnings multiples with subsequent market returns to see if they provide any guide as to what returns investors can expect from the sharemarket. There is a clear coincidence of low starting multiples and subsequent high returns and vice versa. Based on this, the best guess is that the US sharemarket will have lacklustre returns over the next 10 years. The cyclical-adjusted priceearnings ratio is currently 19.9, with the S&P 500 at 11,005. The average real return when this ratio has previously been at these levels has been 3.4 per cent per annum, with a spread of 9.0 per cent per annum on the high side and minus 3.3 per cent per annum on the low. The high correlation of international sharemarkets with the US sharemarket means that the return for global markets will also be lacklustre, along with those from “equity-equivalent” alternative assets, which are considered growth assets. The answer to the first part of the question is that if you are concerned about returns over the next 10 years, this is not the time to have a high exposure to equities, or equity equivalents. Ending points matter, too

The second part of the question is related to the first. For those nearing retirement, the investment earnings in the last few years are by far the most important because they determine the level of capital available to fund retirement. Members of Australia's superannuation system resemble regular savers who put aside 9 per

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S U P E R ANNUAT IO N

cent of their wages each year for 35 years, reinvesting investment income along the way. Clearly, if you save over the course of 35 years, every one of the returns in individual years will have some impact on the amount you accumulate. But, for a 35-year saver, the real return in the last year is 35 times more important than the return in the first; the return in the second-last year is 34 times more important, and so on. Think of the amount that the 35-year saver accumulates as being 35 different lump sums, one for each year. Only one of these, the first, is affected by the return in the first year, but all 35 are affected by the return in the last. Not-for-profit aged funds have 57 per cent of their assets held on behalf of those 50 years and older. With the prospect of a low real return from equities over the coming decade and the likelihood of negative returns, it would be prudent to secure the capital available for retirement by being invested in fixed interest securities rather than in equities.

Similarly, retirees should be very defensive in their asset allocation. Even when the sharemarket is fairly valued (in the case of the US market, priced to return the long term average of 6.75 per cent per annum real), the expected income difference between being invested in equities and being invested in inflation-linked bonds is modest; about 12 per cent per annum for those with a 20-year life expectancy. This assumes that the equity return is guaranteed, which, of course, it isn’t. The risk of not achieving the expected return from holding shares means that retirees should rely overwhelmingly on more secure income sources. Of course, the argument is even stronger if the expected return from equities is below average, as it is now. The funds’ constituency

Whether rational or not, it is easy to understand why the default option isn’t managed for those with most of the money; that is,

older members. Younger employees dominate the membership of not-for-profit funds. This is especially so for industry funds, with half their members under 35 years and over 80 per cent of members below 50 years. Primarily the client of the fund is the employer, which wants to ensure that the designated fund does a “good job” and does not cause employees to become disgruntled; more precisely, it wants the selected fund to avoid doing a “bad job” relative to others. The best way to avoid standing out from the crowd is to be part of it, and this behaviour is evident in both the broad asset allocation and in the selection of asset classes for the default options. As a result, there is tight grouping of returns; the average per annum rate of return for our sample of 12 funds for the five years to June 2009 was 4.8 per cent with a high of 6.3 per cent and a low of 3.7 per cent. It is unlikely that this focus on the “average” member will change.

SUP E R ANN U AT I ON

Age-based default options

A practical solution to meeting the needs of older members is to change the default option according to the member’s age. Age-based default options are offered by only a handful of the twenty largest not-for-profit funds. Although the age brackets vary, all the funds significantly increase defensive assets as the members' age increases. However, in our sample of 12 funds, only one of the funds has a majority of defensive assets for those aged 60 years and over. While the logic of the standard default option is easy to see (average equity returns are more certain over longer periods than shorter periods and are superior to those of defensive assets), it isn’t so clear what underlies the investment mix of the age-based default funds for older members. Once people approach retirement their main concern should be about how to replace their working income; in effect, how to fund their

expenses once they are no longer employed. This is similar to the situation faced by a defined benefit fund: how to invest the assets to ensure that income is generated to meet the promised benefit, which is generally an indexed percentage of final salary. There are few funded defined benefit schemes in Australia. However, the UK still has a large number of corporate defined benefit schemes and these can give a guide to an appropriate investment allocation for age-based default options. Those schemes with a high proportion of pensioners (80-100 per cent of total members) typically have 80 per cent of their assets in defensive assets: 70 per cent fixed interest, 5 per cent cash and 5 per cent insurance policies. Based on this, it is clear that the level of defensive assets in the age-based default options for older members offered by not-for-profit funds is too low to satisfy actuarial assessments of matching income from assets with pension liabilities.

No easy task

Most fund members are guided by the default investment option offered by their fund. However, this option is suitable for younger members rather than those closer to retirement. As a result, the default options favour growth assets, where a long time frame is needed. Older members, who do not have the luxury of time, are ill-served by standard default options, especially when equity markets are priced to deliver below average returns, as now. Even those funds that recognise the need to provide a more conservative age-based option still have too much allocated to growth assets and need to increase fixed interest investments to better match the cashflow generated in retirement with the members’ living expenses.

John Wilson is chief executive of PIMCO Australia

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S&P FUN D AWA R D S 2 0 1 0

And the winner is... T

he Standard & Poor’s Fund Awards 2010, presented in association with Professional Planner, are designed to identify and acknowledge excellence in the Australian managed funds industry. The awards identify fund managers with the best capabilities, in a range of asset classes (see next page). They do not seek to identify the best specific products; rather, it may be inferred that a manager with a strong capability in a particular asset class may manufacture a range of sound products based on that capability. Leanne Milton, head of research for S&P, says the awards are not meant to identify the fund managers whose products will be the absolute best performers in coming years. “But we do think that they have a high probability of providing consistently good performance, in a risk-adjusted manner,” she says. “And we feel they’ve covered all bases: they’ve got a really good team; they’ve got a lot of resources at their disposal, or they make good use of those resources and use them in an appropriate manner; that they’ve got a disciplined process, repeatable process; and good risk management and controls for the particular product

we’re looking at.” Milton says the awards are intended to be forward-looking, and for that reason incorporate a high degree of qualitative analysis. “Overall it’s about the qualitative, forward looking, and over time we would expect that manager to outperform,” Milton says. Hard data, such as past performance, is also factored in, but really only as a mechanism to check whether the fund manager does in practice what it says in theory it will do. “We look at historical performance mainly to make sure that what they’re telling us about their performance and their investment style is true-to-label,” she says. “We want to make sure what they say they do is actually reflected in their performance; because if it isn’t, while they might tell you that their process is conducted in a certain manner, it might signify that the implementation is not there, somewhere along the line.” Milton says even the best-of-the-best mangers will occasionally underperform both the market and their peers. “Every manager, based on their style, will have periods of underperformance,” Milton says.

“That’s why [the assessment process is] forward looking over a market cycle - around about five years. What you’d expect to see is that they’d be the outperformer, or very close to the outperformer, in a risk-controlled way, relative to their peers.” At the end of the process, Milton says, S&P aims to identify those managers that are “best in class”. That does not necessarily mean, however, that every winning fund is automatically appropriate for advisers to recommend to every client. “It really does depend on the individual client: what are their goals, and what are they trying to achieve?” Milton says. “We really wouldn’t have all that individual information. But if you’re trying to build an Australian equities portfolio, say, and you’re happy to take on a certain level of risk, you might look at the managers that we’ve nominated. “We have our funds Insights website, and all our ratings are published on that website. We provide a six or so page report and that provides any individual investor with all the information they would need to know about that particular fund manager.”

S & P FU ND AWARDS 2010

Award Methodology The methodology for the Standard & Poor’s Fund Awards involves a qualitative assessment of specific investment-management capabilities within a sector, rather than being based on the past performance of individual funds. S&P selects finalists from those managers that have demonstrated superior quality in their investment capabilities and that S&P considers well positioned to sustain success. By “investment capability”, we mean the combination of investment strategy, investment team, and investment process; supported by appropriate risk management, compliance, administration, and governance. To highlight this, the S&P awards differentiate between a manager’s investment capabilities; where a manager has more than one investment capability in an asset class or award category, we identify the specific capability that we are recognising. The requirements for a capability to qualify are: • The investment-management capability must be available and open to Australian retail investors, and • The investment-management capability must be known and familiar to S&P. Awards are a direct recognition of an investment-management capability. Where a distribution group represents the manager of a capability in Australia, we award the underlying manager and give recognition to the distributor. Our selection process considers the following elements: • Investment-management capability, • Relativity to peers, and • Achievement. An awards committee, which comprises members of the S&P Fund Services research team, selects the capabilities. This is chaired by head of research, Leanne Milton.

Sector Awards These awards recognise excellence in individual asset classes. There is generally one award for each sector. We will announce up to five finalists for each sector; the minimum is three. Sector awards will exist in the following categories: • Australian Equities - Large-Caps • Australian Equities - Small-Caps • Australian Fixed Interest • International Fixed Interest (including Diversified) • Listed Property • International Equities - Developed Markets • International Equities - Emerging Markets • Alternative Strategies • Separately Managed Accounts (SMAs) • Structured Products S&P reserves the right to withdraw an award for a sector if it believes there are not enough participants in the sector to make the award meaningful, or where there are structural issues within a sector that would preclude the majority of participants from being eligible for the award. S&P reserves the right to amend, substitute or withdraw a

finalist’s nomination prior to the fund awards, if it believes there has been material change to the finalist’s business, product or fund ratings on which the nomination was originally predicated.

Group Awards Standard & Poor’s also sees value in acknowledging overall funds-management excellence through our group awards. This year there are three group awards, including the introduction of one new award. Only one award has been given for each group. We have announced up to five finalists for each sector; the minimum is three. The group awards are: • Product Distributor of the Year, and • Fund Manager of the Year. These group awards are also judged using our qualitative, committee-based selection process. The Product Distributor of the Year award recognises those managers offering investors access to what we view as a range of sustainably strong investment capabilities across a range of asset classes or award categories. The Fund Manager of the Year award recognises those managers with a compelling investment proposition to the market. The fund managers concentrating on single asset classes have equal claim to a group award as managers offering coverage across multiple asset classes. Source: Standard & Poor’s

S&P FUN D AWA R D S 2 0 1 0

Fund Manager of the Year

Fund Manager of the Year WINNER:

Colonial First State Global Asset Management

FINALISTS:

Colonial First State Global Asset Management

(in alphabetical order)

Fidelity Investments Australia

Perennial Investment Partners

Schroder Investment Management Australia

Tyndall Investment Management

S&P says: Colonial First State Global Asset Management (Colonial First State) is a truly

Colonial says: I think the GFC taught us two things: Firstly, how

global asset-management firm, headquartered in Australia, but with global representation and operations in a number of global markets. From its modest beginnings in 1988, it has grown its assets under management to US$148.8 billion, at August 31, 2010, making it one of Australia's largest fund managers. It offers a wide range of quality and diverse product offerings across a range of asset classes. Its range of investment offerings differentiates it from many of its peers. Colonial First State provides exposure to Australian equities, Australian and global fixed interest and credit, direct property and infrastructure investments, domestic and global property securities, emerging market equities, global equities, global listed infrastructure securities, global resources, and other short-term investments. Its products also provide diversity in terms of investment style and are designed to meet a variety of investor risk-return characteristics. S&P considers Colonial First State to be an innovative manager with the ability to bring wellconstructed products to the Australian market. Investment personnel are of a high calibre, bringing the necessary expertise and experience to their respective investment portfolios. Together with robust investment processes, appropriate risk-management systems and controls, and the requisite organisational support, a number of these capabilities have been rated highly by S&P. Colonial First State continually strives to enhance its investment capabilities and product range as new investment opportunities and themes arise. The quality of Colonial's offerings is clearly highlighted by their prominence as finalists in four of the asset class categories of the 2010 fund awards. S&P considers these attributes to be exceptional within the industry. Colonial First State is a worthy winner of the 2010 Fund Manager of the Year Award.

important liquidity is when managing money; and the second, how important it is to stick to your process and stay true to your style and philosophy. It has been vital to just keep doing what you’ve told your clients you’re going to do. Following 2008, the last 12 months have been a lot easier so obviously, markets have performed a lot better and they’ve been a lot stronger; so again we continue to just keep doing what we’ve been doing. Our success has come from our relying and staying true to our process across a whole range of asset classes. We have very defined philosophies and styles. Across that whole range of asset classes, we’ve stuck true to the process through difficult times and also good times. It’s about not being too excited when markets overshoot and also not getting paralysed when markets underperform. It’s always been a matter of your process and relying on it. You also need to take advantage of opportunities so if you’ve got a solid process, you’re in a position where if you don’t get too overexcited when the market rallies, you’re then in a position to be able to take advantage of opportunities when the market sells off. Our success has been a combination of those two things. In terms of our outlook for the next 12 months, and without being able to predict the future, certainly corporate profitability looks strong but consumers and governments seem to be in a more difficult position so we’re going to have a very interesting 12 months ahead of us. - Tony Adams, co-head of global fixed interest and credit, Colonial First State Global Asset Management

S & P FU ND AWARDS 2010

Product Distributor

Product Distributor WINNER:

Macquarie Professional Series

FINALISTS:

Equity Trustees

(in alphabetical order)

Macquarie Professional Series

Pinnacle Investment Management

Zurich Investment Management

S&P says: Macquarie Professional Series, which is a part of Macquarie's Banking and

Macquarie says: This has fundamentally got everything to do with

Financial Services Group, is recipient of the Product Distributor of the Year award for the second year in a row. The Macquarie Professional Series fund range is designed to focus on a limited number of exclusive relationships with specialist managers with whom Macquarie has formed partnerships, and whose products are then offered to the Australian retail market. The current Macquarie Professional Series managers include Arrowstreet Capital (five-star rated global active, quantitative equities manager), Concord Capital (owned by Invesco Australia), European Investors (three-star rated global property-securities manager), Independent Franchise Partners (four-star rated global equities-large-cap manager), Walter Scott and Partners (five-star rated global equities-large-cap manager), and Winton Capital (fivestar rated alternative strategies-futures based strategy manager). The aim of the Macquarie Professional Series is to develop and distribute a suite of "best of breed" funds providing these partners with administrative and distribution expertise in the Australian market. The quality of the managers chosen by Macquarie Professional Series is a reflection of the discerning approach it has taken in selecting these managers. Macquarie has taken into account the gaps and opportunities and relevance of these products for the Australian marketplace and has provided Australian investors with access to managers and capabilities which may not have otherwise been available to them. Macquarie Professional Series continues to provide quality fund and manager information to financial planners, investors, and other industry stakeholders for each of the above products, in a professional and timely manner. Macquarie Professional Series is again a worthy recipient of this award.

our managers. We’re honoured that that’s recognised. Without the quality managers, we would not be winning this award, which is the Product Distributor of the Year. We certainly interpret this as a recognition that we’ve selected world-class managers, on more than one occasion, and have continued to do so. In our due diligence with our managers, we looked deeply into their processes and we knew that certainly on the other side - prior to the GFC - while we had good real performance, absolute performance, we weren’t the top of the pops. But [when markets turned down] we knew the managers we had selected had quality processes and outstanding stock selection processes that would carry through all market conditions. Clearly, financial planners have investors’ interests as their primary concern; so the financial planning community, when we talk to them, are investigating the managers we bring, on behalf of their investors. But they’re also looking for unique investment strategies that are easily explained to their investors. We have that in our minds when we’re looking for managers. We’re looking for proven track records, unique investment strategies that can continually find new ways to deliver alpha. - Adrian Stewart, head of distribution, Macquarie Professional Series

S&P FUN D AWA R D S 2 0 1 0

Alternative Investments

Alternative Investments WINNER:

Platinum Asset Management

FINALISTS:

BlackRock Investment Management (Aust)

(in alphabetical order)

Colonial First State Global Asset Management

Denning Pryce (Zurich)

K2 Asset Management

Platinum Asset Management

S&P says: Platinum Asset Management (Platinum) is the worthy winner of this year’s Alternative Manager award. In a growing and competitive environment that continues to see rapid growth in the number of managers offering alternative investment products to meet investors' demands for active absolute return management, Platinum continues to set the benchmark in the Australian marketplace. Since 1995, the manager has consistently presented as the “best in class” equity alternative manager. Platinum exemplifies the desired profile of an equity absolute return manager on a risk-adjusted return basis. It demonstrates: Outperformance of relevant benchmark; protection of capital in downward markets; lower overall risk, including lower standard deviation, lower beta exposure; repeatable and stable alpha generation; and business operations that follow best practice and maximise investor protections. The investment team, led by Kerr Neilson, represents one of the most experienced and talented investment teams in the world, in our view. Based here in Sydney, the international strategy combines these talents in several four-star and five-star products that Platinum offers. Andrew Clifford, Simon Trevett, and Jacob Mitchell - who are some of the underlying portfolio managers that contribute to the international strategy - could arguably win an award for their individual capabilities. The quality of the sector and regional-focused analyst teams enables Neilson to apply the best investments to a well-organised and disciplined global macro-overlay approach to investing. The Platinum International strategy is an absolute return-focused, global long/short listed equities capability, with a focus on reducing draw-downs in negative markets. The strategy has the capacity to use a range of investment tools, such as: Bottom-up stock selection; country, industry, and thematic tilts; currency positions; market beta shorting; cash discretion; and derivatives. The strategy may be suitable for consideration as a core holding in an investment portfolio for investors with an investment time frame of at least three years.

Platinum says: Coming out of the GFC, nothing has fundamentally changed for us. We try to remain independent from the market consensus, and as sceptical about what the market is often telling us. In many ways we were expecting not quite the degree of problems we had, but certainly we’d positioned our portfolio to protect our investors in light of that. I don’t think we’ve really changed anything we do. We’ve learned some lessons as well, and we’ve been surprised at the effects of leverage in the market. Talking about the past 12 months, there’s a high degree of shorttermism in the market again. We still think there are huge issues in the global imbalances, and it’s going to take a lot of working out to get to the stage where we think we’re in good shape. So we’ve been surprised at the strength in the market. Looking ahead, there are some big decisions that the Chinese and American governments have to make; we don’t know what they’re going to do. There’s a lot of stimulus from the US and the Chinese currency strengthening that will be positive for markets in the short term. That’s going to go some way to addressing these big issues that remain - so we expect markets to remain strong if that does occur. But we’re not expecting, over five years, the market return just the beta from markets - to be good. We still think there’s a lot of ‘unleveraging’ that has to go on. - Andy Grimes, investment process executive, Platinum Asset Management

S & P FU ND AWARDS 2010

Australian fixed interest

Australian fixed interest WINNER:

Tyndall Investment Management

FINALISTS:

AMP Capital Investors

(in alphabetical order)

Colonial First State Global Asset Management

PIMCO Australia (Equity Trustees)

Tyndall Investment Management

UBS Global Asset Management (Aust)

S&P says: Tyndall Investment Management is awarded the Australian Fixed Interest Manager of the Year, highlighting the strength of its fixed-interest capability, which was upgraded to five stars during our 2010 review of the sector. The fixed-interest team is led by Roger Bridges, who is joined by six other professionals who form the Australian fixed-interest team. In aggregate, the managing team is considered well balanced and appropriately resourced. Members are highly credentialled and experienced, and bring an exceptional level of numerical competency. S&P has a favourable view toward the firm's investment process, which is considered well structured, uncomplicated, and a key source of alpha. We continue to be impressed by its consistent application and proven success throughout the course of a full market cycle. A key tenet of Tyndall's approach is its heightened risk-aware approach to portfolio management. Tyndall believes that by adopting a long-term view and instituting a disciplined risk framework, the returns will look after themselves. A key facet of this belief is that alpha should be targeted from multiple, as opposed to single, sources. By instituting investment strategies including duration, yield curve, sector, and issue selection, this is expected to better position the fund to take advantage of interest rate movements while also improving the overall risk characteristics. S&P has been encouraged by Tyndall's ability to generate returns on a superior risk-adjusted basis and contends that Tyndall's established and well-defined risk framework has been central to this success. S&P acknowledges the strength of the capabilities' longer-term performance track record. The manager has retained a more traditional/core approach to fixed-interest investment at a time when other sector peers have been more prone to oscillating portfolio positions through tactical credit tilts in an attempt to enhance alpha. While S&P acknowledges that there may be times when the manager's more defensive focus may lead to performance lagging sector peers, we also note that returns are more likely to be generated in a more consistent manner. We feel that this may aid investors from a portfolio-construction and risk-budgeting perspective.

Tyndall says: The GFC showed us that our process was right. We had the right options using multi-faceted alpha-sources and that came right for us; so I think we were one of the few managers that beat the benchmark during that year. The defining moment for us in the last 12 months concerned issues around the US - whether there was going to be a slowdown and quantitative easing. Domestically, we got that pretty right but it was just the US that derailed us temporarily so we had a little bit of a soft patch, but now we’re coming back. At the moment, it’s all at macro-trading, curve and duration but obviously, credit we rely on as a sort of base-low/base-line power station. We’re seeing interest rates going up here to around five-and-a-half, but domestically we think volatility is already fairly priced-in, so rates will go up, but we’re worried about what happens offshore in the future, particularly with the US and questions of sovereign risk slow-down. There are a lot of unanswered questions at the moment which will impact on us here in the Australian market. - Roger Bridges, head of fixed income, Tyndall

Managing risk with a measured approach Fixed interest investors aren’t looking for excitement. They want reliable, consistent returns and stable income achieved with active risk management. That’s just what the Tyndall Australian Bond Fund delivers. Managing over $15 billion in fixed interest, the experienced team behind the Tyndall Australian Bond Fund focuses on actively managing risk rather than chasing returns. Their approach is disciplined. They aren’t distracted by short-term index movements or the performance of peers. Instead, Tyndall takes care of risk, and the returns follow.

Not surprisingly, the Tyndall Australian Bond Fund is one of Australia’s highest rated fixed income funds. This includes a rating of Five Stars from Standard & Poor’s* identifying the Fund’s strength of process, experienced team and risk focus.

S&P FUND RATING

No surprises. No excitement. Just a measured approach to risk management. And that’s exactly what your clients need from their fixed interest investment.

For more information on the Tyndall Australian Bond Fund contact your National Key Account Manager at sales@tyndall.com.au or, visit www.tyndall.com.au/AustralianBonds The value of an investment can rise and fall and past performance is no guarantee of future performance. Any information contained in this advertisement has been prepared without taking into account an investor’s objectives, financial situation or needs. Investment decisions should be made on information contained in a current Product Disclosure Statement (PDS) and applications to invest will only be accepted if made on an application form attached to a current PDS available from Tyndall. The Responsible Entity of the Tyndall Australian Bond Fund ARSN 098 736 255 is Tasman Asset Management Limited ABN 34 002 542 038 AFSL No 229 664 (trading as Tyndall Asset Management). ‘Tyndall’ means Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No 237 563. * To the extent that any ratings, opinions or other information of Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s”) constitutes general advice, this advice has been prepared by Standard & Poor’s without taking into account any particular person’s financial or investment objectives, financial situation or needs. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Past performance is not a reliable indicator of future performance. Ratings can change or cease at any time and should not be relied upon without referring to the meaning of the rating. For more information regarding ratings please call S&P Customer Service on 1300 792 553 and also refer to Standard & Poor’s Financial Services Guide at www.fundsinsights.com. Each analytic product or service of Standard & Poor’s is based on information received by the analytic group responsible for such product or service. “S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc. © 2010 Standard & Poor’s Information Services (Australia) Pty Limited. 2251_PP

Global Bond Fund of the Year and educational website offering CPD points! Now all I need is to find an ant farm!

Ret hink your defence

www.rethinkyourdefence.com.au

S&P FUN D AWA R D S 2 0 1 0

International Fixed Interest

International Fixed Interest WINNER:

PIMCO Australia (Equity Trustees Limited)

FINALISTS:

Bentham Asset Management

(in alphabetical order)

Colonial First State Global Asset Management

Macquarie Investment Management

PIMCO Australia (Equity Trustees)

Schroder Investment Management Australia

S&P says: PIMCO is one of Standard & Poor's highest rated managers. Of the five products rated within the international fixed interest peer group, all have received a five-star rating. This highlights our opinion that across multiple opportunity sets the firm can produce classleading returns within an appropriate investment time frame. Not surprisingly, the firm scores highly on a number of metrics used by S&P when assigning both a fund rating, and the fund award for international fixed interest. PIMCO has been a stable organisation throughout its history, and has a high level of staff retention in key areas. The firm has significant resources at its disposal, including a team of 450 investment-related personnel, with Bill Gross and Mohammed El-Erian leading the team in their co-CIO capacity. The firm's investment process is global with open lines of communication and visible interaction and accountability of team members. The process engages the views of all investment personnel through formal quarterly cyclical and annual secular forums, which generate a strategic three-to-five-year outlook for the fixed-income markets. Diversification of investment ideas reduces the reliance on single-strategy positions and themes, thereby delivering a more consistent return profile over the medium to long term. The firm adds value from a combination of top-down strategies such as duration, country allocation, yield curve, sector rotation, and bottom-up security selection. The end result is the creation of a model portfolio that ensures a consistent application of the firm's views across all client mandates. PIMCO's business structure is clearly defined, with business management and accountmanagement responsibilities separated from the investment team, clearing the way for the portfolio-management team to focus on investing rather than business growth and marketing. PIMCO has established itself as a significant manager of global fixed-income assets in Australia. As of June 30, 2010, PIMCO managed US$1,117.35 billion of fixed-income assets worldwide, of which $A30 billion represents Australian client mandates.

PIMCO says: Coming through the crisis, the effects on the business are that people are much more concerned abut the liquidity of their investments, particularly in fixed interest. And in the crisis we’ve had there are also fantastic opportunities. I think that what has contributed to us winning this award is really the consistency of our performance and the fact that we are really looking after our clients’ interests in producing the best alpha that we can. And especially, through the last 12 months, coming out of the GFC, it was important to explain to our clients and to get the performance and take advantage of the opportunities that were available in the market. I think there’s quite likely to be continuation of the volatility in the markets; obviously interest rates are quite low at the moment and are likely to stay low for some time before we begin to see rises at some stage, maybe next year. So the outlook for fixed interest is for further consolidation at these levels, but there will still be plenty of opportunities amongst that volatility - and for us, that’s the advantage of PIMCO. - Julian Foxall, senior portfolio manager, PIMCO

S & P FU ND AWARDS 2010

Australian Equities - Small-Cap

Australian Equities - Small-Cap WINNER:

Eley Griffiths Group

FINALISTS:

Aviva Investors Australia

(in alphabetical order)

Celeste Funds Management

Eley Griffiths Group

Fairview Equity Partners

Invesco Australia

S&P says: This is the second year running that Eley Griffiths has been awarded the S&P Small-Cap Manager of the Year. Our high degree of conviction is testament to co-portfolio managers Brian Eley and Ben Griffiths, who have worked together for more than a decade and in the process established an enviable track record. Co-founding Eley Griffiths in 2003, they prudently outsourced non-investment activities, and progressively added a dealer and third analyst, who are now making a significant contribution to the team's overall stock coverage. Their passion and ongoing commitment to the business are clear, which is particularly demonstrated in the alignment of interests with investors through their significant co-investment and full ownership of the business. As small-cap specialists, both portfolio managers are highly regarded by S&P for their extensive experience in the sector and complementary skill sets, which encourage different perspectives in the investment process. The manager believes that the performance of small-cap stocks is driven by the relative strength of a company's management, industry structure, earnings profile, and valuation; and that companies displaying strength in these characteristics will deliver above-average returns over the medium term. Their investment approach, while active, is also disciplined, with a very strong link between the team's research effort and final portfolio weightings. Returns continue to be strong, with the team generating consistent risk-adjusted excess returns over the longer term in excess of objectives. Eley Griffiths has not tended to exhibit the same extremes in relative performance as some of its peers, which can partly be attributed to a broader approach to stock selection and diversified sources of alpha. The strategy remains open to retail investors but is closed again to new institutional money, with the manager acutely aware of the competitive disadvantages of managing too much money in this sector.

Eley Griffiths Group says: The biggest lesson from the GFC is that when you’re managing money, you’ve always got to have an eye for the downside. We’re all trying to get upside winners but we also have to be mindful of the risks. As a fund manager, you have to realise there’s a time when you need to be in cash, where you need to be aggressive in your cash allocation and then there’s a time when you need to be aggressive in equities. The GFC was a line-up of events where risk-management skills came to the fore. Cash holdings had to be maximised and so there’s a time when you sit and don’t do a lot of investing but you do a lot of monitoring. The GFC certainly reinforced those skills. I’ve experienced most of the market’s wobbles along the way and learnt that each crisis is different and they have their own set of forces, so a fund manager has to act accordingly. Seeing these crises in the past, I think we went into the market panic pretty well prepared for rough conditions. That’s not to stay that we weren’t shocked by what happened, but we were prepared and the portfolio was structured accordingly. During the past 12 months, the market has enjoyed enormous liquidity and I think resource stocks have come in for especially strong support so the challenge for managers like us, who tend to have a more conservative style, is really keeping pace of the aggressive moves of the market. We don’t own a lot of conceptual or thematic stock; we own stocks that have sound fundamentals. For us, it’s been staying with the market and keeping up with what’s been a hectic pace. Looking at the next 12 months, we remain upbeat on equities. We think the profit cycle continues to move in favour of equities as an asset-class investment as equities represent good relative value, certainly as they relate to bond yields. We think there are a large amount of capital raisings that are amongst us now and the fact that merger and acquisition activity has returned would suggest that corporates also see valuations at attractive levels, so I think fund managers should also see them as attractive. We’ll telegraph that we’ve won the award through our website and let all our various stakeholders and service providers know that we’ve won the award. We’ll be telling people that we’ve got this great acknowledgement from the industry. The FoFA reforms that are underway are probably a good thing. Anything that the Government can do to protect the integrity of Australian financial services - which is one of the best financial services models in existence today - anything that goes to enhance and reinforce the credibility of our process and our sector, should be encouraged. - Ben Griffiths, portfolio manager, Eley Griffiths Group

WINNER â&#x20AC;&#x153;Australian Equities - Small Caps Sector Awardâ&#x20AC;? S&P Fund Awards 2010 ... for the second year running Committed to excellence in small company portfolio management.

Visit us at www.eleygriffiths.com.au

Eley Griffiths Group is a boutique fund manager specialising in Australian small companies. Our philosophy centres around a belief in stock-picking, the need for a disciplined stock selection process and the value of an experienced investment management team. The Eley Griffiths Group Small Companies Fund has been awarded a 5 star rating from S&P and is accessible through a number of platforms and wraps.

Any information contained in this advertisement has been prepared without taking into account your particular objectives, financial circumstances and needs. Before making any decision based on this report, you should assess your own circumstances or consult a financial planner. Past performance is not a reliable indicator of future performance. Eley Griffiths Group Pty Limited ABN 66 102 271 812 AFSL No 224818

S & P FU ND AWARDS 2010

Property

Property WINNER:

ING Clarion Real Estate Securities

FINALISTS:

AEW Capital Management (BT)

(in alphabetical order)

AMP Capital Brookfield

CBRE Global Real Estate Securities (Advance)

ING Clarion Real Estate Securities

S&P says: ING Clarion Real Estate Securities (ING Clarion) has been awarded the Property Manager of the Year. This is the fourth year in a row that Clarion's strategy has won this award and this reflects the ongoing regard S&P has for this capability. Clarion's global property-securities strategy has been rated five stars by Standard & Poor's since 2006. The strategy is considered to be a core global property-securities capability, which provides a long-only, diversified exposure to global (ex Australia) property securities. The Clarion Real Estate Securities team continues to be one of the most comprehensive, experienced, and highly regarded teams in S&P's rated global and domestic property-securities peer groups. We continue to be impressed with the team's calibre - particularly its senior group, led by Ritson T Ferguson - and also the strong team stability and cohesion. We believe that the team's experience and history of working together remains conducive to a successful working environment. We have high regard for Clarion's philosophy and investment capability. The combination of the top-down portfolio design with bottom-up security analysis, which characterises Clarion's investment approach, has been well considered and consistently applied since the strategy started. The process is further enhanced by the team’s representation in each of the markets in which they invest and the securities analysts' access to ING Real Estate's proprietary global real estate research. While short-term performance has seen a dip over the past year, this is somewhat consistent with the performance of Clarion's active manager peers, in what has been an unusually volatile market heavily influenced by non-real estate-related issues. More importantly, the strategy has met its excess return objective over all time periods greater than one year. The strategy is expected to outperform when private real-estate fundamentals are being recognised by the market. The strategy’s objectives are appropriate and supported by a competitive fee structure, which reaffirms our belief that the strategy is well placed to exceed its relevant investment objectives.

ING Clarion says: The GFC has been an interesting experience for those involved in managing money in the way that movements are not always what you expect and that if the whole market does start moving, big swings are really possible. For clients, I think it’s very important to keep this in mind. It’s also important to have their portfolios well diversified and to make sure they work with managers who have a good outlook on what’s happening in the market. The highlight for us in the past six to 12 months has been working very hard in bringing new concepts to the market. We’ve been bringing out new funds, working with financial planners and advisers and getting these funds out to clients. There are some interesting products in the Australian equities space that we’ve recently launched, so we’re very happy about that. I believe our success comes down to the fact that ING Clarion, who are partners in the US, have got an extremely strong track record in managing global real estate. It’s not an easy sector, so it’s definitely one of those sectors that have had a lot of impact from the GFC. Our team is stable and well-experienced so winning this award shows the processes they use and the focus they have in this type of strategy have paid off again, giving us this award for the fourth time in a row. The next 12 months will still be challenging. There’s no clear road ahead yet. There is a lot of uncertainty in the markets and a lot of things that are yet to come out. Again, it will be up to really good managers, whether it is in fixed income, equity or property, to actually show their skills in managing their portfolios. They need to ensure they’re picking the right companies and making the right decisions because it’s still a market where not everything will go well. I think you’ll see people who have good views coming up pretty clearly from the rest of the market. It’s an interesting time ahead. This award is a great recognition internally for the people who work hard every day to deliver performance in order to manage the funds. It’s also a great support for the sales and marketing people when they meet with clients because it will give them comfort and trust that they’re working with a manager who has clearly been recognised as a top performer in this category. - Steven Billiet, chief executive officer, ING Investment Management

International property. Intellectual property.

Brought together to deliver you alpha. ING Wholesale Global Property Securities Fund Unrivalled global reach. Exclusive property research. And the art of delivering alpha. The ING Wholesale Global Property Securities Fund offers astute investors a unique and highly potent combination of insights and intelligence that have created consistent outperformance since inception. The Fund combines the global reach of one of the world’s largest listed real estate fund managers with exclusive property market research.

Highly Recommended

S&P FUND RATING

Winner S&P Property Sector Fund Award Four years in a row - 2007, 2008, 2009 and 2010

Find out more today on 1800 832 911 or at www.ingim.com.au/GPS

ING Investment Management Limited ABN 23 003 731 959 AFSL 233793 (INGIM) is the responsible entity of the ING Wholesale Global Property Securities Fund (Fund) ARSN 115 202 358. This document has been prepared without taking into account any person’s objectives, financial situation or needs. Investors should refer to the latest offer document for the Fund before making any investment decision. Standard & Poor’s Rating: Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au. Lonsec Rating: The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned January 2010) for the ING Wholesale Global Property Securities Fund) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial products. They are not a recommendation to purchase, sell or hold the relevant products, and you should seek independent financial advice before investing in these products. The ratings are subject to change without notice and Lonsec assumes no obligation to update these documents following publication. Lonsec receives a fee from the fund manager for rating the products using comprehensive and objective criteria. Zenith Rating: The Zenith Investment Partners (“Zenith”) ABN 60 322 047 314 rating (Recommended February 2010) for the ING Wholesale Global Property Securities Fund referred to in this document is limited to “General Advice” (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of these financial products on this basis. It is not a specific recommendation to purchase, sell or hold the relevant products, and Zenith advises that individual investors should seek their own independent financial advice before investing in these products. The rating is subject to change without notice and Zenith has no obligation to update these documents following publication. Zenith usually receives a fee for rating the fund manager and products against accepted criteria considered comprehensive and objective.

S & P FU ND AWARDS 2010

International Equities - Developed Markets

International Equities - Developed Markets WINNER: Independent Franchise Partners (Macquarie Professional Series) FINALISTS: (in alphabetical order) Arrowstreet Capital (Macquarie Professional Series) Independent Franchise Partners (Macquarie Professional Series) MFS Investment Management (BNP Paribas Investment Partners (Australia)) Platinum Asset Management Walter Scott & Partners (Macquarie Professional Series)

S&P says: Independent Franchise Partners was established in June 2009 by the former Morgan Stanley Investment Management (MSIM) global franchise team. The team is led by experienced investor Hassan Elmasry, who spent seven years at MSIM building the US$10 billion strategy with this team. The investment team, while small, is relatively experienced and sufficiently resourced for the focused nature of the strategy. All team members are owners in the boutique investment-management business. Independent Franchise Partners applies a distinctive, benchmark-unaware investment approach, culminating in a concentrated portfolio of companies considered to be high quality with strong, sustainable franchise value. With a focus on sustainable cash flow and valuation the manager has a natural bias to industries such as: branded consumer goods, tobacco, household products, pharmaceuticals, media and publishing, and information services. These structural biases helped returns, when compared to many of the sector peers, especially through 2008. These companies have relatively resilient cash flows and have managed to keep dividend yields high, enabling the company to buy back shares or grow organically. This achievement gives S&P strong conviction in the ability of the manager to deliver on its objectives consistently, and through a variety of market conditions. The manager has also maintained return volatility below that of the broader market, despite the strategy’s concentrated nature.

Macquarie says: In terms of the impact of the GFC, there was in fact no change to the investment process, so the Franchise Partners’ process has been the same through all market conditions. We still held up in terms of performance. The quality and value biased within the portfolio held up and really did a lot of heavy lifting in portfolios through that time. Clearly there are always lessons to be learnt through a crisis, but the outstanding thing with Franchise Partners is that what we did learn was the validation of our process. One of the opportunities that came out of the GFC in the last 12 months has been an increase in investment opportunities, but again we’ve taken our time to assess those opportunities. We’ve not been reacting too quickly to them and we’ve pretty well stuck to our process, as there hasn’t been high turnover in stocks, so we’re again validating our long-term hold approach to stocks. We’re very patient and very conservative in both our approach and our process. We take a long-term perspective, we have a unique investment strategy and we’re looking for franchises that are sustainable, that are throwing out high levels of yield, for a cash flow yield. That certainly hasn’t changed and we’re very confident that that can continue. Again we’re just taking our time and being patient. The market in the next 12 months is probably going to be more of the same in terms of volatility and there will continue to be a lot of noise in terms of markets and the result of that volatility, so we will simply focus on investing in high-quality companies. To a large degree, we are not overly influenced by those distractions in the market. The S&P awards are very important to us. We intend to promote the fact that we’ve been recognised in this way, being highly rated by S&P, and we’re very proud of that. S&P have had a very close look under the bonnet of Franchise Partners so we intend to maximise the leverage that that gives us within the adviser community. It certainly gives us the credibility that we’re looking for. I think with the FoFA, if you take a step back on the detail of the reforms, they are generally there with the right intent and that is, to deliver a higher quality advice to investors and increase the confidence that investors have in the financial planning community. We fully endorse that and encourage that. - Adrian Stewart, head of distribution, Macquarie Professional Series

From a London High Street to your street

In 2004, we began a global search to find some of the world’s best investment managers for the Macquarie Professional Series. First to come aboard was the team at Independent Franchise Partners (IFP), located just off Oxford Street in London.

8.6% per annum during the past three years1. A testament to its track record and approach, IFP was recently awarded the Standard & Poor’s International Equities – Developed Markets Fund Manager of the Year for 2010*.

IFP invests in companies that enjoy a sustainable competitive advantage through difficult-to-replicate intangible assets such as patents, licences and brands you may find on any high street. IFP believes these characteristics are likely to translate into high returns on capital and above average investment returns, with less than average absolute volatility.

In Australia, the IFP Global Franchise Fund is available exclusively through the Macquarie Professional Series, a collection of truly differentiated specialist investment portfolios. For more information, talk to your Macquarie Business Development Manager or visit our website.

This high quality approach has yielded impressive results; the IFP Global Franchise Fund outperformed the Global Benchmark by

IFP Global Franchise Fund To find out more visit www.macquarie.com.au/professionalseries or call 1800 214 616. *Winner of Standard & Poor’s Awards: International Equities – Developed Markets 2010. Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au. ® Macquarie Professional Series is a registered trademark of Macquarie Bank Limited. Investments in the IFP Global Franchise Fund ARSN 111 759 712 (Fund) are offered by Macquarie Investment Management Limited ABN 66 002 867 003 AFSL No. 237492. Investments in the Fund are not deposits with or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 or of any Macquarie Group company and are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Neither Macquarie Bank Limited, Macquarie Investment Management Limited nor any other member company of the Macquarie Group guarantees the performance of the Fund or the repayment of capital from the Fund or any particular rate of return. This information is for advisers only and must not be passed on to retail clients for the purposes of recommending an investment in the Fund or any other financial product or class of products. This document does not contain any financial product advice and has been prepared without taking into account the objectives, financial situation or needs of any particular investor. Before making a decision to invest in the Fund, investors should read the Fund’s Product Disclosure Statement (PDS), which is available from us, and consider, with or without their financial adviser, whether the investment fits their objectives, financial situation and needs. Applications for units in the Fund can only be made on an application form contained in the current PDS. Past performance is not a reliable indicator of future performance. You should not base your decision to invest solely upon past performance information. [1] Relative to MSCI World in the 3 years to 30 September, 2010. ST/MQ/PS/PP/Nov2010

S & P FU ND AWARDS 2010

Separately managed accounts

Separately managed accounts WINNER:

Ralton Asset Management and Dalton Nicol Reid

FINALISTS:

Dalton Nicol Reid

(in alphabetical order)

Goldman Sachs Asset Management & Partners Australia

Ralton Asset Management

S&P says: Dalton Nicol Reid and Ralton Asset Management are both being awarded the Separately Managed Accounts investment manager of the year. The award reflects an investment manager's ability to address SMA specific risks. The award does not necessarily reflect S&P's highest rated SMA investment manager. Both managers are well aware of the potential risks specific to SMA model portfolios and manage their portfolios to mitigate these risks. Both managers are also highly proactive in informing advisers and the market in general of the strengths and risks of SMA model portfolios. The high degree of respect the managers have built with advisers is reflected in the strong uptake of their model portfolios. S&P regards the managers' model portfolios as highly suitable for an SMA environment being characterised by low turnover, a concentrated investment portfolio and rapid execution of investment ideas. The risk of lower net returns due to transaction slippage is mitigated by a number of factors, including low to moderate turnover and the timely communication of trading ideas to the SMA platform providers. The level of communication with SMA platform providers and the various checks and balances ultimately act in the investors' best interests. While both boutique managers have relatively small investment teams, S&P was impressed with the quality of investment ideas, experience of team members, and the general work ethic of the respective investment teams. The alignment of interest through remuneration and ownership structures are strong. Historical performance, while not indicative of future performance, has been strong with the managers outperforming their respective benchmarks and the Australian large-cap sector average. S&P regards Dalton Nicol Reid and Ralton Asset Management as true market leaders in the SMA segment.

Ralton Asset Management says: It’s been a difficult time over the last 18 months, and it’s been a test of everyone’s mettle. Certainly the boutique structure we’ve got, where there’s ownership by all the investment team and the executives in the structure, has helped us get through the tough times, being personally incentivised to create success for the business. It’s really been a test of our business, and proven the commitment of everyone. It’s been a growing recognition that individual management of accounts is the way to go, and I think it’s crept up on everyone. The infrastructure built out over the past 12 months means you’ve now got the ability to distribute SMAs in a similar way to managed funds, via platforms. You’ve got the next generation of platforms that are very good at managing direct shares, and that’s how you distribute a model portfolio. You’ve got the ratings houses like S&P recognising the merits of SMA managers. And just the growing connection with the financial advisers through to MSA platforms and the portfolios - they can access them quite easily now through most of the major dealer groups. FoFA is definitely good for our business. There’s a greater emphasis on transparency - fully transparent, not only portfolios but fee structures, and that’s what SMAs are all about. It’s putting out there on display all that we do, and not being too sensitive about the IP side of things. We embrace transparency and we think it’s going to be a critical part of future financial advice. - Damian Holland, managing director and head of distribution, Ralton Asset Management

S&P FUN D AWA R D S 2 0 1 0

Structured Products

Structured Products WINNER:

AXA Asia-Pacific Holdings

FINALISTS:

“North” (AXA Asia-Pacific Holdings)

Commonwealth Bank of Australia

ING Funds Management

S&P says: AXA Asia-Pacific Holdings is the recipient of S&P’s Structured Product of the Year

AXA says: The effect of the GFC on managing money was really to

award on account of its North product. S&P considers North to have the attributes and ability to meet the investment needs of the product’s target investor market. The award reflects the innovative nature of the product, strong product features, an unrivalled range of underlying investment options, and the efficiency with which the guarantee structure delivers the targeted risk-return objectives. North is designed for a highly risk-intolerant investor group, who are concerned about longevity risk and income-sequencing risk, and who want to move up the risk-return spectrum by minimising downside risk in investment growth and contributions. In doing so, North addresses the key concerns of those investors who have entered the drawdown stage of their investment lifecycle. While product fees are high in absolute terms, the absence of indirect costs actually has the potential to deliver competitive risk-return outcomes when compared to alternative capital protection structures, especially in a volatile market environment. North’s capital guarantee structure is the key differentiating feature of the product. Uniquely, it maintains 100 per cent exposure to the total returns performance of the underlying managed fund investment. In many other capital protected products, participation in the total returns performance of the managed fund may vary from 0 to 100 per cent, and there can be a range of indirect costs imposed upon investors. S&P considers the capital guarantee costs as an appropriate insurance premium. Additionally, investors in North may switch underlying managed fund investments, switch the protection off, and make contributions and partial withdrawals. The combination of features is unique for a capital-protected product in the domestic market and their flexibility may suit the needs of investors in their drawdown stage. North is a stand-out product in a market that has at times lacked innovation.

make sure that you have sustainable risk management processes in place, so it stress-tested our hedging approach as it were and it performed remarkably well. I think as well, the GFC had an effect on reawakening people’s appreciation of risk and the effect that that can have on their savings. Certainly over the last six months, given some of the volatility in the market and the interest rate volatility as well, it’s meant that we had to look very closely at the product design and we found it to be sustainable again. I think over the last six months as well we launched the new Protected Retirement guarantee. That has been very well received by advisers, in terms of being able to address longevity risk at the same time that it’s addressing market risk. This award reflects an evaluation of our product that takes it a step further in terms of understanding the impact that it can have on individual savings and the risks that they actually face. The point of the FoFA reforms is actually having trustees think more clearly about longevity risk and the risks that retirees are now facing. I think that’s clearly a step in the right direction. We’ve been very accumulation-focused over the last 15 to 20 years in Australia and I think that reorientation is a good thing. - Andrew Barnett, head of structured solutions, AXA Asia-Pacific Holdings

S & P FU ND AWARDS 2010

Australian Equities - Large-Cap

Australian Equities - Large-Cap WINNER:

Fidelity Investments Australia

FINALISTS:

Ausbil Dexia

(in alphabetical order)

BT Investment Management

Fidelity Investments Australia

Perennial Investment Partners (Perennial Value-

Management)

Tyndall Investment Management

S&P says: We continue to hold the view that the Fidelity Australian Equities strategy is one

Fidelity says: Post-GFC I do not think the core of what we do is dif-

of the stand-out offerings within the highly competitive large-cap Australian equity space. While the strategy has been five-star rated since 2008, this is the first year the manager has received S&P's coveted Large-cap Australian Equities Manager of the Year award. Portfolio manager Paul Taylor has been at the helm since the inception of the fund in 2003. He demonstrates great clarity around portfolio decision-making and the overall direction of the strategy. Rolling returns have consistently exceeded the fund's objectives since inception on a risk-adjusted basis across varying market conditions, not just those more conducive to Taylor's growth-orientated investment style. This is a strong reflection of Taylor's stock-picking abilities, as well as the core team of locally based analysts and the manager's broader research network. Fidelity's Australian equity team is structured quite differently to most of its peers, with its stock coverage provided by both domestic and offshore-based analysts who form part of the manager's extensive global research network. This potentially provides Fidelity's team with greater global perspective when assessing companies - particularly those deriving a significant component of their earnings offshore or subject to stronger global influences. The primary objective is to ensure that coverage is provided by the most appropriate resource within the region as the companies evolve. With markets becoming increasingly globalised, it's arguably more important than ever that Australian equity managers have a strong understanding of what's going on in Asia in particular, with a big chunk of the Australian market geared to the dynamics of these markets. This provides further argument for analysts to be closer to these markets through more frequent offshore travel or, like Fidelity, being able to tap into on-the-ground resources.

ferent - we still watch companies from the bottom up. That’s always the way we are going to do it. You learn new things about individual companies through how they handle difficult conditions, so that might change the companies you buy, but fundamentally we still see companies from the bottom up - they have balance sheets, they have sales, they have costs. I think the thing we do that others don’t is we still spend as much money on investment management through the cycle. On the business side, it’s always a challenge when your revenues are under threat, and you’ve got to do things to run your business differently through that period. But the thing we don’t change is the way we manage money and the commitment to investing. We let our investment managers do what they need to do, travel where they need to travel and to see companies to work out the right way to run money for clients. It’s the business side we slow down; it’s the marketing side we slow down. It’s great being private, because that lets us do it. I think S&P is looking for consistency: very good consistent performance, above benchmark, that is explainable. And it’s very strong risk management, too. Around the Fidelity world, we’re fairly optimistic about the markets. We don’t think there’s going to be a double dip. For a while there’s going to be fairly difficult conditions still, but we’re pretty optimistic - if you take a three-year view, certainly. - Gerard Doherty, managing director, Fidelity Investments Australia

Fidelity understands that long-term success comes from being reliable.

Australian products are world-renowned for their resilience and performance. The Fidelity Australian Equities Fund is no different. Having outperformed its benchmark by 4.47% p.a. over fi ve years, it is a proven fund you can rely on. And here’s why. Our locally based team has first-hand market knowledge and is backed by a 900-strong investment team that share relevant information across the globe in real time. This proprietary ‘three-dimensional view’, where we not only talk to companies, but also their suppliers, distributors and customers, ensures that our fund will continue to withstand the test of time. Better research. Better minds. Better ideas. To know more, visit www.fidelity.com.au

This advertisement was issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575 AFSL No. 237865. Fidelity, Fidelity Investment Managers and Globe logo are trademarks of FIL Limited. Past performance is not an indicator of future performance. The Fund’s benchmark is the S&P/ASX 200 Accumulation Index. Returns are quoted net as at 31 July 2010 and are calculated based on month-end to month-end unit prices with all distributions reinvested. Net returns take into account all fees and expenses charged but do not include any tax paid or buy/sell spreads. The investment team figure represents the resources of FIL Limited and FMR LLC, a US company and its subsidiaries. This includes portfolio managers, research analysts, research associates, traders, division management and other investment professionals, as at 31 March 2010. You should consider the Product Disclosure Statements (PDS) before making a decision to acquire or hold the product. The PDS can be obtained by contacting FIL Investment Management (Australia) on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is Perpetual Trust Services Limited (“Perpetual”) ABN 48 000 142 049. © 2010 FIL Investment Management (Australia) Limited. Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s”) Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com.au

S & P FU ND AWARDS 2010

Separately managed accounts

Separately managed accounts WINNER:

Dalton Nicol Reid and Ralton Asset Management

FINALISTS:

Dalton Nicol Reid

(in alphabetical order)

Goldman Sachs Asset Management & Partners Australia

Ralton Asset Management

S&P says: Dalton Nicol Reid and Ralton Asset Management are both being awarded the Separately Managed Accounts Investment Manager of the Year. The award reflects an investment manager's ability to address SMA specific risks. The award does not necessarily reflect S&P's highest rated SMA investment manager. Both managers are well aware of the potential risks specific to SMA model portfolios and manage their portfolios to mitigate these risks. Both managers are also highly proactive in informing advisers and the market in general of the strengths and risks of SMA model portfolios. The high degree of respect the managers have built with advisers is reflected in the strong uptake of their model portfolios. S&P regards the managers' model portfolios as highly suitable for an SMA environment being characterised by low turnover, a concentrated investment portfolio and rapid execution of investment ideas. The risk of lower net returns due to transaction slippage is mitigated by a number of factors, including low to moderate turnover and the timely communication of trading ideas to the SMA platform providers. The level of communication with SMA platform providers and the various checks and balances ultimately act in the investors' best interests. While both boutique managers have relatively small investment teams, S&P was impressed with the quality of investment ideas, experience of team members, and the general work ethic of the respective investment teams. The alignment of interest through remuneration and ownership structures is strong. Historical performance, while not indicative of future performance, has been strong with the managers outperforming their respective benchmarks and the Australian large-cap sector average. S&P regards Dalton Nicol Reid and Ralton Asset Management as true market leaders in the SMA segment.

Dalton Nicol Reid says: In terms of the business of managing money, it’s been apparent that at the end of the day clients and advisers are enjoying the visibility of knowing what assets they own inside their portfolio. Post the GFC there’s been question marks around the structural issues around unitised trusts, and SMAs in a deep, liquid market are a perfect vehicle for investors to use when they’re looking for tax benefits, transparency issues, portability - all in all, I think in the right marketplace it’s a better vehicle to use from the client’s perspective and the adviser’s perspective. The major platforms are starting to look at this space. S&P are coming in to do awards, they’re leading the charge in terms of owning the space around rating SMA managers, and I think you’re just seeing this idea that people want to have separately managed accounts. This award means a lot to Dalton Nicol Reid. We’ve been in the industry for almost 10 years, we’ve been running managed accounts for almost a decade, so it’s nice to get some national presence. Harley Dalton, chief executive officer, Dalton Nicol Reid

S&P FUN D AWA R D S 2 0 1 0

International Equities - Emerging Markets

International Equities - Emerging Markets WINNER:

Schroder Investment Management Australia Ltd

FINALISTS:

Aberdeen Asset Management

(in alphabetical order)

Colonial First State Global Asset Management

Franklin Templeton Investments Australia

Schroder Investment Management Australia

S&P says: Schroder Investment Management Australia Ltd (Schroder) has been awarded the International Equity - Emerging Markets award for the third year in a row. The strategy has been awarded five stars since it was first rated by S&P in 2007, and S&P continues to view the manager as the leading provider in the peer group. The portfolio-management team of five is based at Schroder's offices in London and is led by head of emerging markets Allan Conway. One of the other managers is primarily responsible for investment strategy, while the remaining three have responsibility for specific countries within each region. Being located in the UK time zone offers the managers the advantage of being able to communicate effectively with Schroder's 25 dedicated global emerging-market analysts working in the Far East, the Middle East, Europe, and Latin America. Together they manage approximately A$25 billion across several emerging-market strategies. The team is considered by S&P to be very large and very experienced for the peer group. Conway has developed a very successful approach to managing emerging-market portfolios over a career that now spans 30 years. The core strategy exploits several sources of outperformance that are combined in an efficient risk-controlled manner in order to generate consistent outperformance over time. A quantitative model drives country selection, while stock recommendations are provided by the worldwide team of fundamental analysts. A stand-out feature of the Schroder process is the way that capital is allocated in the portfolio to produce the consistency of risk-adjusted returns. The portfolio's exposure is managed over time so that more capital is drawn away from country and stock recommendations that are working less well and added to those that are currently adding value. The result has been a long and consistent track record of outperformance, and the retail version of the strategy continues to exceed its objectives since launching in Australia in 2006.

Schroder says: “S&P puts a very strong focus on the qualitative aspects of the team - the quality of the team, the size of the team, what resources the fund manager brings to bear in managing a product. At the end of the day it’s not just about performance, it’s about the credentials of the team. For the Schroder’s emerging markets team, we’ve got one of the largest teams in the world. For emerging markets especially, companies are governed by local factors, not as much by global factors, and so really having local analysis is where we’ve got our strength. We’ve got people located in Latin America, South America, all through emerging Asia and emerging Europe, so that actually helps stock research in something like an emerging markets strategy. The GFC for Schroder has been a blessing in disguise, because it has reinforced for us, and for our clients, that [a fund manager has] to have a strong balance sheet. You need a singular focus on investment management, not be distracted by what’s going on around you or what others are doing around you. The GFC has reinforced that - we have no debt, we’re majority family-owned, so where our competitors are going through a lot of M&A at the moment, we’re not distracted by that. So investors can go through and just focus on managing money. Awards are very important because they are recognition by your peers and by independent parties of how you’re going. It’s also important for clients and for advisers to say there has been independent expert research and review of a product. That third-party endorsement is very important for a business like ours, particularly in the retail business where we are working with advisers and having a fund award is critical.” - Stephen Kwa, head of product and marketing, Schroder Investment Management

I N V E S T O R PS Y CHO L O GY

Do clients knowingly sabotage their own financial plans? Understanding how a client thinks is the key to getting your message across, says Robert Skinner

ave you ever had a client seemingly sabotage their own financial plan, be slow to take up your brilliant advice or just not as excited as you are about the strategies you have recommended? You might even feel as though your clients are just going through the motions at your reviews. Worse still, you may not know that your clients are just going through the motions. You may have even met with a prospective client, outlined a great strategy, and they decided not to proceed? Don’t worry, you are not alone. I had to battle with one client for 18 months to get them to commit to a transition to retirement pension. The numbers showed that they would save $8000 a year in tax - yet I had to drag them kicking and screaming. On the flipside you can recommend a strategy to a client, only to find the client changing their mind in two months’ time, wanting to do something differently - or they have found a new opportunity. An easy trap to fall into is assuming the client just does not get it; or it is the client’s fault that they are shooting themselves in the foot by not embracing the plan with the same excitement or vigour that you are. Trying to get them across the line by explaining the logic does little to help. When you notice resistance, it is important to remember that your clients have individual behavioural preferences, which may or may not be the same as yours. If your financial planner recommended a 20-year $1000-a-month savings plan - which

itio ed

used up 90 per cent of your surplus - would this do it for you? Or are you more opportunistic did you jump on tech stocks in 1999, or do you like to have fingers in a few pies to keep things interesting? Some clients love the idea of saving regular amounts over a long time period - a brick at a time - yet others like to chase tactical opportunities and would find a 20-year savings plan dull and boring. Having a client adopting a strategy or financial plan that does not suit their natural preferences leaves you and the client vulnerable to sustainability risk. Sustainability risk relates to the reduced sustainability that occurs when you attempt to follow a strategy or plan that simply doesn’t suit your preferences. So if you find a regular savings plan boring, you probably won’t stick with it for too long. If you find a large amount of investment debt risky and scary, then it won’t take long for you to abandon the strategy. The added complication is that generally you won’t know your client’s preferences - at least not with valuable accuracy. Herein lies a massive opportunity for the financial planning industry. By getting to know your client’s behavioural preferences, and helping your client understand these too, you can talk with the client about which parts of your plan will appeal to them and which parts won’t. Knowing your client’s preferences may not change your advice to the client; however, more

importantly, it may change how you communicate with your client. Keep this in mind for the next time a client gets six months into an ongoing savings plan and wants to cancel; or a client borrows money to make a one-off investment and six months in they are feeling uncomfortable. The advice could well be sound, or even great, yet the client still wants to sabotage the plan. When this happens, it often indicates that the type of strategy the client is attempting to follow may not suit their preferences. The client does not feel aligned or engaged with the strategy. Interestingly, preference testing has been available for more than 80 years, and to date it is mostly used in workplace situations. This kind of knowledge and understanding of clients would assist the planner take their relationship with their client to a totally new level. Imagine a client saying, “My planner knows me better than I know myself ”. This level of “knowing your client” has not been embraced by our industry - yet.

Robert Skinner is a co-founder of innergi www.innergi.com.au

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SP ECI A L R E PORT

The king is dead; long live the king Cash and cash products proved to be a safe haven during the global financial crisis (GFC), but now advisers are looking for the catalyst to drive that cash back into other asset classes. Krystine Lumanta reports

he high level of surplus cash sitting in client portfolios reflects continued uncertainty created by the global financial crisis (GFC) and its aftermath. Investors remain apprehensive. Although the theoretical “risk-free” nature of cash products offers security, its relatively low long-term return means investors could be missing out on better returns in other asset classes. Cash has been tagged the “I don’t know what to do” option; but now, as memories of the GFC begin to fade a little, advisers are looking for the catalyst that will give investors the confidence to emerge from their safe havens and once again take on some investment risk. Andrew Inwood, principal of CoreDatabrandmanagement, believes seeing some level of economic certainty is the catalyst that will bring cash back to original allocations. “When there is confidence around people’s ability to earn income and when job security is restored, then people will move out of cash and into other asset allocations,” Inwood says. “We also started to favour cash as an asset class over shares and other [investments]. Cash is attractive, liquid, a risk-free opportunity. So it becomes an attractive asset class for all those reasons. Rich people are starting to move out of cash, but the mass affluent haven’t started yet. They tend to move when it’s too late.” Serg Premier, general manager of deposits and transactions at NAB, agrees, trusting that N A Rin 3 equities 5 8 3 _ will P P encourage _ P r e s asshift 3 4 back x . p stability tod traditional allocations.

‘Economic certainty is the catalyst that will bring cash back to original allocations’

“We’ve seen this for a long period: as you get volatility in the equity market, you get a movement into cash. Stability is clearly one of the catalysts,” he says. The rebalancing back into other asset classes obviously also depends on clients’ individual goals. David Simon, executive financial planner at Westpac, says the “catalyst comes down to the client’s investment objectives and goals”. “A lot of our clients have longer-term goals so five years-plus - but cash is very much a shortterm based investment option,” Simon says. “Over time, growth-based assets have generally outperformed cash. “That’s why clients are more aligned to invest in growth assets. However, because the sentiment is quite poor after the global financial crisis (GFC), people are reluctant to completely invest P acash g e [into 1 other 3 / allocations] 1 1 / 1 0 , all in 1 2 : go.” 4 9 their one The Dimensions: Wall of Money Report

November 2010, released by Tria Investment Partners, asks whether the “wall of money” - the $70 billion of post-GFC cash that flooded into bank term deposits in 2008-2009 - will return. Tria says the structural demand for yield “will continue to increase as the population ages” and so for managers providing the right products, it is purely “a waiting game”. Conversely, the solid foundations of traditional mortgage funds appear “bleak” for the future. In any case, “it will not be business as usual” if the wall of money returns. The Australian Cash Report for Quarter 3, 2010, conducted by CoreData-brandmanagement, found that $55 billion was sitting in surplus retail deposits as at June 2010. Inwood says he isn’t surprised by this buildup of cash. “Australians have switched to saving their money instead of spending,” he says. “We became savers after the GFC and this happened really fast in October 2008. We’ve become net savers really quickly, and that behaviour is just starting.” Simon believes surplus cash has “not significantly built up as an outcome of the GFC itself ”, but reiterates it’s as a result of its short-term nature. “Cash is normally held for only two to three years, because of the fact that it is capital-secured and there is no volatility, whereas the other asset PM classes, such as shares and property, have a timeframe of at least five to seven years,” he says.

S P E C I A L REP O RT

Michelle Hutchison

Simon says Westpac has been rebalancing its clients’ portfolios in order to address the cash imbalance. An initial asset allocation will change over time, he says. “Rebalancing has been a critical strategy in the current market, because the natural default is that cash allocation had a greater allocation due to the fact that growth assets have come down. Naturally, when clients rebalance and reset, you’re moving away from cash into growth assets.” But Simon says it’s still important to make sure clients are “maintaining a minimum cash reserve to access for immediate needs and shortterm needs”. “Let’s say, for instance, a client has got 25 per cent of their original portfolio in cash and 75 per cent in growth assets,” he says. “If growth assets reduce in value or perform N A than R 3 5cash, 8 3 [then] _ P P at _ the P r next e s checkpoint s 3 4 x . pd worse

Peter Forrest

meeting, the allocation to cash is made greater than the 25 per cent. If it’s now 30 per cent, what we do is rebalance the client back to the original asset allocation. So effectively, that would mean reducing the cash component by 5 per cent, then replacing that into the growth assets to get that back up to 75 per cent. “A couple of things we are doing - which means that over time the cash component is reducing - is, for instance, the concept of dollarcost averaging. “Our clients invest the same amount of money spread over a period of time and make regular contributions rather than investing one lump sum.” This minimises the risk of clients investing into a market at its peak. “One of the outcomes is that the client is effectively employing the principles of buying low and selling high,” Simon says. P “By a g default, e 1 they’re 3 / 1 slowly 1 / 1 reducing 0 , 1 2 : 5 0 their

Andrew Inwood

cash component. So part of the strategy is that they gradually get into the market by reducing their cash component over time and, obviously, increasing their market-related growth assets at the same time. “During the initiation of the GFC, a lot of our clients became quite scared to put all their money in at once. A strategy we adopted was to defer the investment over a period of time. We’re finding that over the last couple of years people are gradually getting most of their dollar-cost averaging strategies completed.” Peter Forrest, head of cash product for Macquarie Adviser Services, says an effect of the GFC may be that long-term cash holdings in portfolios are higher in future than they were previously. “We’re seeing advisers will continue to have demand for cash and cash products, through good times and bad, because of their ability to PM provide capital security,” Forrest says.

SP ECI A L R E PORT

“This means customers are still after simple products that offer a good return. “Advisers are always looking to mix their portfolios on behalf of their clients, so it will depend on individual situations; but we’re seeing cash, in a medium- to long-term strategy, forming a bigger part of assets compared to how it was a few years before.” Forrest says the demand has prompted Macquarie to swiftly provide enhanced cash products to its customers. “We continue to develop our cash products to have strong functionality and [we] invest in technology to enhance this,” Forrest says. “We also provide competitive interest rates, as well as a focus on our service and on the relationship with our advisers to continue to support them.” NAB also chose to revise its cash product offerings after the move to cash during the GFC “reprogrammed” an appreciation for the defensive asset among advisers and investors. “We’re been improving our existing product, the National Cash Manager Account,” Premier says. “The features we are focusing on are a competitive interest rate paid on the entire balance; providing a flexible commission structure, obviously for the professional planners; and we also have the rebate commission returned back to clients. It offers a dedicated service team specifically for financial planners so that they can call us and get assistance and help. “The growth rate we were experiencing [during the GFC] was 19 per cent [per annum], which was obviously at its peak and was very strong. At the moment, we’re finding that cash is growing at around 8 per cent [per annum] so it’s not growing as fast as what it was during that period, but we’re still getting significant growth in cash. NAR3 5 8 3 _ PP_ Pr e s s 3 4 x . p d “It is a rebalancing by customers, and also

‘We’re seeing advisers will continue to have demand for cash and cash products’

financial planners, as cash has become part of the diversification of investment strategies for the individual. They’re paying attention, seeing cash as the viable asset class now.” Simon adds that because “the demand for credit in this country significantly outweighs the amount of deposit holders” it’s now a wonderful environment for investors. “They can actually get a much higher rate in comparison to what has ever happened before,” he says. “So one of the outcomes of the GFC is the fact that it is very expensive for banks to access cash overseas, which means that they’re looking to their domestic customers to access cash to allow them to lend at a more competitive rate. They’re certainly fighting for cash from customers and obviously offering a higher interest rate to what’s ever been [offered] in the past.” Keeping cash products relevant is vital to Premier and his team. “We’re working closely with [the] financial planning community,” he says. “We believe that the product we’ve got out there is a great offer for clients and financial planners. It also offers advisers the features of a traditional banking product with flexibility that they’re P a gused e to. 1 3 / 1 1 / 1 0 , 1 2 : 5 2 “We’re very excited that we’re able to meet a

need in the marketplace and we’ve been getting very good feedback.” The surplus cash in the market has created more competition between banks and the products they offer. While this is seen as a win for investors, it’s less clear how long this situation will last. The Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding closed to new liabilities on March 31, 2010. This meant Macquarie’s then-$9.9 billion Cash Management Trust (CMT) - the oldest in the country - would no longer be subject to the wholesale guarantee. Macquarie proposed to convert investments in its CMT into investments in an at-call Cash Management Account (CMA), a product that would continue to be covered by the Government guarantee. Forrest says there are a number of key differences between the CMT and CMA. “One of the most significant benefits for investors [is] that the Macquarie CMA offers a higher rate of return than the Macquarie CMT did,” he says. “Investors were able to transition from the Macquarie CMT to a Macquarie CMA while retaining the same functionality, BSB and account number, with no interruption to service.” With cash expected to settle back to traditional long-term portfolio allocation levels, product providers nevertheless expect good demand for cash-based offerings. Premier predicts that in the next 12 months “[what] we will see is that clients will start to [prefer] cash products, particularly as clients approach retirement age, as well as seeing the benefits of a flexible cash product, where you may be able to park cash for a period of time and then utilise it for another investment”. PM “Cash will actually become a much more vi-

S P E C I A L REP O RT

able asset class as part of the overall portfolio for the client,” he says. Because of this, clients are now asking where cash should sit in their portfolios and how much is actually appropriate. “We advise that clients seek the advice of a professional financial planner,” Premier says. “Because of the different needs of everyone, it’s very difficult to generalise for every case. What we would suggest is that they look carefully at the interest rate and the features of the cash management product to make sure [it meets] their circumstances.” Michelle Hutchison, consumer advocate at financial comparison website RateCity, says the average online savings account is currently offering very good rates for savers and is therefore an ideal option for those who want certainty. “The average online savings account rate has increased by 29 basis points, from 4.77 per cent in June to 5.06 per cent in October,” Hutchison says. “While this is the average, there are even better deals on the market. For instance, Virgin Money’s Virgin Saver is at 6.75 per cent, although it’s only for four months, and UBank’s USaver account is offering 6.51 per cent.” Hutchison says when it comes to term deposits, there haven’t been major movements overall from the four major banks, meaning rates may have hit their peak. “With the higher costs of funding for institutions, it’s likely that these high term deposit rates could be starting to fall,” she says. “This means that if you’re thinking about locking in a term deposit, now is the time, as you could miss out on significant savings. “For instance, by locking away $50,000 into a 12-month term, at 5.96 per cent, you could earn almost $3000 at the end of the term. Compared to a rate of 4 per cent, for instance, you could NA R on 3 5almost 8 3 _ $1000 P P _ of P rinterest.” e s s 3 4 x . pd miss out

‘This means that if you’re thinking about locking in a term deposit, now is the time’

Hutchison says three-month term deposits are the most popular among investors, and “we have noticed that they have dropped by 119 basis points since June, to an average rate of 3.60 per cent”. “Average three-year terms have also dropped, but only by 16 basis points and are at a much higher rate than the average three-month terms at 6.28 per cent,” she says. “Average 12-month terms have not moved since June, while six-month terms have increased by six basis points. One-month terms increased the most out of the term deposit rates in the study by 130 basis points to 4.90 per cent. “This shows that there are currently much better returns for long-term term deposit accounts than short-term accounts.” Although online savings accounts appear attractive to the average person, Hutchison recommends that they be examined with caution both by investors and advisers. “[They] need to be careful of the terms and conditions associated with each online savings account as some have restrictions on how much you need to deposit or [the] minimum amount of withdrawals per month to be eligible to receive these high rates,” she says. “For example, with the UBank Saver acPa ge 1 3 / 1 1 / 1 0 , 1 2 : 5 7 count, you must set up an automatic savings plan

and deposit at least $200 each month.” Simon says tying down money for a set period of time is a factor that should also be considered beforehand. “Even though term deposits offer capital security guarantee and reliable income, the problem with this is firstly, the opportunity cost,” he says. “Once they’re locked into that term deposit there’s an opportunity cost for various different areas, one of them obviously being growth markets. If you’ve locked in that term deposit, you’re not accessing growth markets so there’s a real opportunity cost there. “The second is interest rates. If you’re in an increasing-interest-rate environment and you’re locked into a term deposit account, you’re fixed at that particular rate and you can’t change that until the deposit matures. “The third trap would be the fact that all clients need to have a cash reserve where they can have immediate access and immediate liquidity for unforeseen and emergency circumstances. Money is tied up in a term deposit because of illiquidity and [this] prevents people from accessing [it] at short-term notice. These are the three real traps associated with cash.” The CoreData-brandmanagement Australian Cash Report estimates it will take “somewhere between two to five years” to return excess cash allocations to longer-term historical levels. Note: The RateCity study was conducted in October 2010. Term deposit rates are nominal rates based on a balance of $50,000.

RISK

Competition in life insurance Richard Weatherhead says life insurance is currently front of mind for many stakeholders in the financial services industry

any traditional financial advisers have focused on superannuation and investment and have written relatively small amounts of risk insurance. However, since the GFC, many have now turned to this product line as a genuine source of revenue growth for their practices. Many dealer groups and wealth managers are actively seeking to acquire practices with risk insurance specialists. Consequently, there is a takeover premium for such practices in contrast to the relatively depressed valuations for advisers with superannuation and investment practices. The Government, Treasury and regulators have a focus on risk insurance as a result of: • The Future of Financial Advice (FoFA) changes - in particular, whether these should apply to risk insurance; • The Cooper Review - strengthening the position of default insurance within superannuation and recommending a ban on commissions; and • Various ASIC reviews that have an impact on risk insurance, including consumer credit insurance. Insurers and reinsurers are seeking new avenues for distribution of their products, with new distribution alliances being formed (for example, Tower and Virgin Money) and regular product launches being targeted at new market niches. For example, over the past year new direct life products have been launched at the rate of almost one per week. The industry is getting across the message regarding underinsurance, with in-force premiums up 11 per cent over the 12 months to March this year (albeit less than the16 per cent increase achieved over the previous 12 months) and with increasing usage of insurance needs

calculators provided by superannuation funds and wealth managers. The success of campaigns such as the Financial Services Council’s (FSC’s) Lifewise campaign contribute to raising public awareness regarding the need for insurance, and this will drive further growth. Despite the growing market, competition for a share of it continues to intensify. The adviser market constituted 62 per cent of the market by premium income but only 42 per cent by amount of cover. This reflects the relatively higher premium rates for risk insurance in the adviser market (which has an older demographic and wealthier client base than superannuation funds). The fastest growing segments are employer master trusts and industry funds, which we expect will capture an additional 10 per cent market share between them over the next 10 years. This reflects a number of factors acting in favour of these segments: • An increased share of new employees entering the work force in combination with high levels of default cover; • Price competitiveness, in part driven by the scale of many funds, giving them increased buying power; and • A significant increase in the provision of intra-fund, single issue or modular advice to superannuation fund members, which we anticipate will increase five-fold over the next 10 years. The direct life insurance market will maintain its market share but, in a growing market, this will constitute significant growth. Two of the key factors that appear to be driving the growth of direct life insurance are: • Technology; and • Multi-touchpoint distribution strate-

gies. The Web is becoming a focus for many direct life insurance distribution strategies, not only for customers to research products and buy online but also as a starting point for customers who may ultimately request telephone-based advice (either general or personal) or as a destination for those responding to TV advertisements or due to promotion of the site in letters or branches. The Web has become an essential tool for many prospective customers to carry out tasks such as a self-assessment of insurance needs and basic product research prior to obtaining cover either online, over the telephone, in a branch outlet, or even through an adviser. Multi-touchpoint distribution strategies are becoming more important for access to potential clients in different demographic groups. For example, Gen Ys (and the emerging Gen Zs) may have a greater preference for self-directed research online, but with the back-up of telephone advice if they need it. Older people may be more comfortable discussing insurance needs either face to face, in a branch or over the phone initially but still carry out personal research and even apply online. Having said this, stereotypes are dangerous and multi-touchpoint distribution strategies have the benefit of providing all the access options clients may wish to choose. Price Competition

Perhaps the most intense price competition recently has been in the group insurance market with many major funds having reviewed their insurance arrangements over the past 12 months (including AustralianSuper, Statewide Super, First State Super and Health Super).

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RISK

Graph 1. Premium for Adviser Sold and Direct Life Products Relative to Industry Fund Products Female Non-smoker, $600,000 Death & TPD, Own or Any Occupation Disability Definition

Graph 2. Premium for Adviser Sold and Direct Life Products Relative to Industry Fund Products Female Non-smoker, $5,000 Per Month Income Protection, Indemnity, 2 Year Benefit Period, 90 Day Waiting Period

Price has remained a key selection criterion for superannuation fund trustees, despite the significant focus on both accessibility (for example, online application and automated underwriting) and service standards. Premium reductions of anywhere from 5 per cent to 40 per cent have been achieved during insurance reviews with insurers’ profit margins being squeezed as a result. Margins have become increasingly vulnerable to increased claim rates in the future. Indeed, some funds have experienced deterioration in claims rates, particularly for income protection cover, and have been challenged in maintaining cover levels and prices going forward. Price changes in the adviser market have been less pronounced and competition continues to focus on enhanced features and insurance processes rather then prices.

Income protection prices continue to edge upwards, particularly for agreed value (as opposed to indemnity) cover. Some insurers have expressed concerns regarding pricing in areas such as partial trauma benefits for early stage cancer and the impact of increasing mental disorder claims. However, there has been no direct pricing action in response to these trends to date. Price competition has been almost absent from the direct life insurance market to date. Allianz is the only major direct life insurance writer that promotes cost as a differentiator for its products in the market. However, we expect price competition to be an increasing factor in the direct life insurance market in the future. High distribution costs mean that direct life insurance products are amongst the most expensive in the market. Ultimately, consum-

ers will compare prices and make purchasing decisions accordingly. So price competition will drive down prices, even though this has not happened to date. The risk insurance aggregator market is not expected to develop in Australia to the same extent that it has, for example, in the UK. However, consumers will increasingly carry out their own price comparisons before purchasing, which means that comparison sites will be more heavily used. The Graph 1 shows, across the age spectrum, the annual premium payable by a female non-smoker for $600,000 of death and total and permanent disability cover. The premiums quoted are the median prices for products in key market segments: • The adviser market; • The direct life products market; and • Industry superannuation funds (voluntary cover). The graph shows separate results for those in white collar and light manual occupations. The graph demonstrates the significant buying power of superannuation funds and their low distribution costs, given the high proportion of cover provided on a default basis and the fact that many superannuation fund costs are funded from administration fees rather then risk insurance premiums. On the other hand, direct life product prices include significant distribution costs associated with that channel, including advertising, web development and marketing. Graph 2 shows a similar comparison for income protection

cover of $5000 per month with a two-year benefit period on an indemnity basis. What will be a trend in future risk insurance prices?

Many insurers will face upward pressure on capital requirements following implementation of APRA’s review of capital standards. The claims experience improvements of recent years will clearly not continue indefinitely, which suggests price stabilisation, particularly in the group insurance market. Increased competition in the advice market will put downward pressure on adviser-sold risk insurance prices and those of direct life insurance writers. Overall, insurers will need to grapple with increased capital expenditure to drive technology and process improvements at the same time as they absorb these pricing pressures. Competition in the advice market may also lead to a disaggregation of the cost of advice from premium rates, irrespective of the outcome of Treasury’s review under the Future of Financial Advice (FoFA) reforms. After all, separating the advice element from current prices would reduce them by around 25 per cent, making a significant difference to price comparisons such as those in the graphs above. All of this is great news for consumers who will enjoy better products at lower prices with improved, streamlined insurance processes.

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The SPDR MSCI Australia Select High Dividend Yield Fund is issued by State Street Global Advisors, Australia Services Limited ABN 16 108 671 441. You should consider the PDS available for this product in deciding whether to acquire or continue to hold this product. The PDS is available at www.SPDRs.com.au. “SPDR” is a trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Standard & Poor’s,® S&P,® SPDR® and S&P 500® have been registered in many countries as trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by State Street Corporation. Further limitations and important information that could affect investors’ rights are described in the prospectus for the applicable product.

SP ECI A L R E PORT

Looking behind the ETF curtain As exchange-traded funds take off, and product specialisation increases, there’s a growing demand for information on how these vehicles work. Research houses are responding. Simon Hoyle reports

n keeping with the “only in America” cliché, earlier this year a highly-specialised exchange-traded fund (ETF) was launched. Called the Wound Care ETF, it was exactly what the name suggests. “It only invested in companies that provided wound care, such as bandages, sutures and that kind of thing,” says Zac Wallis, ETF strategist for Morningstar. “It was a very limited universe and the ETF subsequently received very little support and actually was shut down. “Obviously Australia is nowhere near the maturity of the US [ETF market], and I think a lot of the ETFs that will come to market in the next year or so will be based broadly on common, widely-known and more popular indices.” The Wound Care ETF illustrates an issue that is likely to become bigger for financial planners as the market develops beyond the plain-vanilla, big, liquid index ETF concept. The next step will inevitably involve products that are more complicated or esoteric than current ones. Already overseas there are - among others leveraged ETFs, inverse ETFs (where the return from the ETF is the inverse of the underlying index) and synthetic ETFs that do not hold physical stock at all. While the market is holding its breath waiting for the Australian Securities Exchange (ASX) to change its listing rules to allow fixed income ETFs to be listed, Professional Planner understands that synthetic ETFs are likely to be available to Australian investors before year’s

end. A newcomer to the ETF space is reportedly posed to launch four new products, structured in a way that Australian investors have not seen before. To date, ETFs available to local investors have adopted either a full-replication approach (where the ETF holds every stock, in the same proportions, as an underlying index), or “optimised sampling” (where a subset of index constituents are put together to mirror the index characteristics). “There’s another method that’s not necessarily widely known in Australia at the moment, and that’s around synthetic application,” Wallis says. “That is a tricky one. Elsewhere [overseas] they have become popular, because there are some very attractive prices on these; and what it basically is, is a product provider entering into a swap contract with, typically, an investment bank. “It’s a total-return swap for the index outcome. So there’s no tracking error, and you will get the index outcome. But there is counterparty risk associated with that investment bank. And that’s a scary thing for a lot of investors. “Obviously, there’s collateral being posted by the investment banks to reduce some of that counterparty risk and, post-GFC, counterparty risk has become a big issue and it’s more frontof-mind when entering these types of things. “But collateral today, versus, say, two or three years ago, is of a higher quality, and the credit standards that are imposed are more stringent. So counterparty risk is less of a concern today

than it was two or three years ago, but it’s still a risk.” Keeping up with these developments, and unravelling the different structures - both of the ETF providers themselves, and the underlying indexes - is a full-time job. Leading research houses are moving to meet demand for information by launching ETF ratings and research services. Dug Higgins, senior investment analyst for Zenith Investment Partners, says the newer entrants to the ETF research game are, in fact, those more likely to be familiar to financial planners. “It’s interesting from the point of view of the provision of research in the Australian market [that] there’s been some guys coming out of the US who have been in this market for some time…and some stockbrokers,” Higgins says. “Up to now the ‘mainstream’ fund management researchers, like ourselves and S&P and the like, haven’t been in this space. “A lot of the other groups are looking at ETFs from the point of view of being equities, so they are issuing ‘buy’, ‘sell’ or ‘hold’ recommendations. The managed funds guys, on the other hand, are going down the path of rating ETFs like managed funds.” So instead of issuing things like price targets or earnings targets, as with traditional stock research, the fund research cohort are focusing on issues and putting out ratings far more familiar to planners. “It’s looking at it much more from the point

Precise in a world that isn’t.

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S P E C I A L REP O RT

of view of saying, firstly, what is the index I am getting exposure to? Who is providing the index construction, and is it worthwhile getting into?” Higgins says. As Professional Planner was finalising this article, S&P issued its first ETF rating; it put out a “very strong” rating on the SPDR S&P/ASX 200 Fund (ASX code: STW) - an ETF managed by State Street Global Advisors (SSgA). The rating would be familiar to anyone who has read an S&P managed fund report; in part, it said: “The rating reflects a combination of very low direct and indirect costs, a highly liquid secondary market, a simple and transparent portfolio-construction approach and historical performance that has been very true to style. “Additionally, STW has proven, and will likely continue to be, a highly tax-efficient investment vehicle; in a comparative sense, it may generate superior after-tax returns for investors with anything other than a zero per cent marginal tax rate.” Rodney Lay, a director of fund services at S&P - and the analyst behind the STW rating says it’s easy to think that all ETFs and all ETF providers are created more or less equal. But they’re not, and Lay says that understanding the nuances of different ETFs, both their structure and underlying indexes, is critical for planners. Lay says planners’ general knowledge of ETFs is “probably reasonably good”, but there are a lot of subtle differences that lurk beneath the surface between products and issuers. Lay says that even the taxation status of ETFs is full of potential traps for the unwary. The taxation of an ETF can be very different from that of an unlisted managed fund, even if the underlying index or portfolio is identical, because of the redemption and creation process that underpins the ETF market. That’s the theory - but in practice, Lay says, because demand in the local market for the

‘It is “definitely a common misconception” that they are all, in fact, the same’ creation of new ETF units has to date generally outstripped redemptions, those differences have not yet really been shown up. “In theory the ETF should be more taxefficient, but they haven’t been as efficient as the theory would say,” Lay says. Although the products may superficially look similar, Wallis says it is “definitely a common misconception” that they are all, in fact, the same. “There are a number of different ways to skin a cat; the same applies to ETFs in regards to the way they’re structured,” Wallis says. “If you just look at the market currently, Vanguard use an optimised sampling approach to create an ETF…so they mirror the key risk and return characteristics of the underlying index by holding more or less of certain stocks in that index, to avoid having a long tail and [to avoid] churning the portfolio at reconstitution dates. And they’ve proven to be quite successful at doing that over time. It’s exactly the same approach they apply [to their unlisted index funds]. They have strong experience in doing that. “And it’s worth knowing that all the Vanguard ETFs in Australia currently are separately listed share classes of their unlisted managed funds. “So it’s a different way that they have structured their ETFs, whereas State Street have a

full replication process, where they hold every stock in the index.” The index replication approach has implications for the return characteristics of an ETF, Lay says. As a general rule, a full-replication approach has lower tracking error, but it may incur relatively high transaction costs (particularly if the index in question has many stocks in it, or if some of those stocks are illiquid). On the other hand, an optimised sampling approach may reduce transaction costs (because it does not hold every stock in an index) but it exposes investors to “alpha risk” - the risk that it may not accurately track the underlying index. “Planners need to be aware of what the exposure is in an ETF,” Lay says. “The portfolio may be tracking a chosen index, but the portfolio may have less stocks in it than the index. “Advisers should be aware that this ETF tracks an index, but don’t think that you’re getting full replication of it - there are stocks that have been removed.” Full replication works when “all the stocks [in an index] are sufficiently liquid, so they do not need to cut particular stocks out”, Lay says. Higgins says that fundamentally, investors and advisers “need to know what an ETF is designed to do”. But before even exploring an ETF as an appropriate solution for a client, they need to be sure that a passive approach is what they want. He says not even that is a given. “One of the things I’ve noticed from advisers is that they are not all that interested in an index play at the moment,” Higgins says. “But if they are a fan of passive, ETFs do pretty well at that. The only curve-ball is that advisers need to be careful about what index they’re getting into. Some are not very mainstream indices; some of them are very narrow. In looking at some of the ones that are operating, one of the

Introducing SPDR ® MSCI Australia Select High Dividend Yield Fund. The SPDR MSCI Australia Select High Dividend Yield Fund is issued by State Street Global Advisors, Australia Services Limited ABN 16 108 671 441. You should consider the PDS available for this product in deciding whether to acquire or continue to hold this product. The PDS is available at www.SPDRs.com.au.

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SP ECI A L R E PORT

things that occurs to me is, OK, it’s useful for some people to get liquid, low-cost exposure to these markets, but the fact that these vehicles are there doesn’t necessarily mean it’s a great way of doing it. “Because there’s not a lot of competition yet - there’s only one ETF [covering] Taiwan and I think there’s only one ETF giving you exposure to South Korea - the question is, is it necessarily giving you good exposure? Are they very heavily weighted towards the mega-caps? “Just because you can, doesn’t mean you should. Advisers are going to have to look behind the label a little bit. “Then, to take a step on from that, you have to look at the indexes - how they are constructed, and who is constructing them.” And finally, a close look needs to be taken at the ETF providers themselves. “Managers in any sector are not all created equal,” Higgins says. The “risks of partnering some of the entities that are around” is greater than partnering with some others, he says. Wallis says S&P’s ETF research methodology is “similar in some respects to what we do in the funds research space”. “There’s a number of different factors we look at: the parent, obviously, looking at the ETF issuer and how that is as a business; and identify any issues in relation to the business and their needing to outsource things like custody or implementation, or things like that. “Once we get the compliance thing with the parent ticked off, you’re looking into the physical products. The big thing about ETFs is, I guess, there’s two ways to look at it. You can look at it for a short-term investment opportunity for specific sector exposure or specific exposure that you need or don’t have in your portfolio already; and there’s one for a more long-term holding, and you buy an index just for that beta exposure. “For the more long-term holding, you’re

‘A number of lessons have been learned in other markets, particularly the US’ looking for an index that makes sense; it’s actually a factor of the market, it’s not something that the product provider has just built to be self-serving. “The STW ETF, which tracks the S&P/ ASX200 Index, if you’re an investor looking for market exposure, that’s a very suitable ETF. The index makes sense, there’s no holes in it, in the way the index is created or in the way State Street implement that portfolio. “That’s an important part too: the implementation. The index creator might have an effective way of building that index, but whether or not the ETF provider can implement and run that, and manage it effectively, is a different story. “A number of lessons have been learned in other markets, particularly the US, around the implementation issues that have popped up. It’s been interesting to see some of the tracking error risk on some products, particularly some of the ‘nichey’ type indexes; the tracking error has blown out substantially. “It comes back to the parent being experienced and having a portfolio implementation and management capability that’s proven and robust. It’s typically, to date, the managers who have had success in the passive funds space who have had success in that regard.” Higgins says planners also need to be wary

of products that are too specialised - the Wound Care ETF is a case in point. Picking an ETF that fails to attract enough money might mean it cannot operate efficiently (and so costs more than it should), or has to close down altogether. While investors would probably not lose money if an ETF shut down, it can be a hassle to have to revamp a strategy or to find an alternative investment option. When you add so-called cross-listed ETFs into the picture, it becomes more complicated again. Wallis says that “there’s a few things we’re trying to make clear to our adviser clients, and first and foremost is understanding the nature of the product, which is the index”. “Things like emerging markets and BRIC and China, it’s all been publicised that it’s working well, but there are certain characteristics to investing offshore with ETFs at the moment that investors need to be aware of - particularly with the iShares products, which are cross-listed from the US,” he says. “Australian investors are just getting an Australian-dollar version of a US outcome. If you bought an S&P500 ETF, the Australian dollar has rallied [against the US dollar], so Australian investors have had a negative experience there. Because the S&P is more or less flat and the Australian dollar has gone up, they’ve lost money. “It’s quite common to get the complaint that we saw the index do XYX, yet my outcome is this. And you have to explain that over the period that you’ve suffered some sort of currency translation loss on that transaction. “There’s also some tax implications on investing in cross-listed securities; Australian investors are subject to withholding tax on cross-listed ETFs, so there’s a 15 per cent tax on income. And they’re also subject to estate tax, should the investment amount on an inheritance from a deceased estate go past a threshold limit, which

Precise in a world that isn’t.

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is $US60,000. So for example, if your parents passed away and they had $US100,000 in US S&P500 ETFs, there would be tax implications for every dollar invested in excess of $US60,000. And that’s something that’s not widely known.” Wallis adds that the exact treatment also depends on what type of investor you are, and how you invest in the ETF - for example, whether you’re investing as an individual, or as self-managed super fund (SMSF). “iShares are very transparent in providing information around that,” he says. “The withholding tax is actually higher than [15 per cent] but iShares are proactive in providing the W8-BEN form, which is like a dual tax treaty between Australia and the US, and if investors fill out this form they get the lower withholding tax. “They’re very proactive in the way they disclose that and in providing information to investors on that issue.” The providers of ETFs have to deal with two distinct styles of research. There’s the traditional stockbroker-style research (which tends to be bottom-up in nature), and the research more typical of the managed funds sector (which tends to be more top-down). Graham Smith, business development manager for SSgA, says neither approach is intrinsically superior; rather, they have different objectives and therefore cater to different audiences. Smith says advisers who are deeply into ETFs, and have been using them for several years, tend to blend the different styles of research to gain a more rounded picture of the sector and its products. Overall, Smith says SSgA welcomes the additional scrutiny that the sector is under. “We’re very pleased that the main research houses in Australia, as well as the leading stockbrokers - so it’s not just the S&Ps and the Morningstars, it’s the Bell Potters and other brokers - are all starting to provide a lot more

‘And the conclusions that they have drawn, we are very comfortable with’ scrutiny in this area,” Smith says. “It’s driven by demand. And we’re pleased to see the additional level of investigation - it shows that ETFs are coming of age.” Smith says stockbrokers and managed fund researchers “are coming at it from different angles –and they’re deliberately different”. “Our experience - and a lot of this is relatively new in the space in Australia - is that the level of scrutiny the bulk of the fund research guys are going to is very deep, and very appropriate,” he says. “We found that it was a very intense process, and they’re looking for a lot of detail, a lot of detail that we are not used to providing around these listed instruments. “And the conclusions that they have drawn, we are very comfortable with.” Smith says the fund research houses are also serving to educate the financial planning community about what ETFs are, how they’re structured and what they are designed to do. The managing director of iShares in Australia, Tom Keenan, says anything that gives “an independent, third-party endorsement of a product is very beneficial for advisers who want to use ETFs”. “It solves a compliance issue for them.” Keenan says. “Research is a critical piece of the ETF ecosystem that is falling into place and will help

make ETFs more mainstream – a number of things have to happen for them to become more widely used, and research is one of them.” Just as researchers say that not all ETF providers are created equal, so ETF providers say that not all research is created equal. Keenan ventures the opinion that “Morningstar is certainly leading the way”. “They’ve got a significant ETF research capability in the US that they’re very easily able to leverage,” he says. “There’s no doubt that they’ve taken the lead in ETF research in Australia. And I think Lonsec is doing some good research as well. “Everyone is still educating themselves on ETFs, and researchers and research houses have had to do the same.” Keenan says the emphasis of research houses coming from a managed funds background is quite different from researchers from a stockbroking background. Broker research tends to focus on “trading ideas, and the research to back that up”, while the managed fund-style research “is more focused on the structure of the ETF and the ETF provider, and whether that ETF is going to deliver the outcome it says it’s going to deliver”. “The next step in all of this is for researchers to start providing guidance on how ETFs are used in portfolios,” Keenan says. “How do you build a portfolio? In time, we’re going to start seeing model portfolios containing ETFs being rolled out by research houses. That will proliferate when we get ETFs across different asset classes. “Research houses can add value by providing guidance on how to implement asset allocation decisions. “This is a natural evolution of the industry, but it does start to change, to a certain degree, the services that a lot of these research houses have been providing.”

Precise in a world that isn’t.

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Who doesn’t like dividends? Nobody, that’s who.

Precise in a world that isn’t.

T E C H N I CAL

Traps with deductible contributions to super Louise Biti explores the rules for claiming tax deductions on personal super contributions and steps you can take to avoid falling into the many traps

ersonal contributions to super may be tax deductible, but traps exist for the unwary and can result in significant tax penalties. Advice in this area needs to take into consideration the client’s eligibility to claim a deduction, the timing of contributions and other transactions, and completion of the correct paperwork. Before launching into advice on the deductibility of contributions, the first step is to separate out the decision on whether a client is eligible to contribute to super (defined under Superannuation Industry Supervision (SIS) rules) from the decision on what type of contribution to make (defined in taxation legislation). To make a contribution to super the client needs to meet the eligibility requirements in SIS. This means they need to be under age 65 or between age 65 and 75 and have met the work test (40 hours within a 30-consecutive-day period). To then claim a tax deduction for personal contributions the client will need to meet the 10 per cent rule. In most cases this requires the client to be self-employed (sole trader or in a partnership) or unemployed. However, if the total of employment income (including directors’ fees) plus reportable fringe benefits and reportable super contributions is less than 10 per cent of total income, the client may also qualify for a tax deduction. The interaction between SIS and taxation rules is shown in the diagram. How much to claim?

An eligible client can claim any amount as a tax deduction. However, amounts that exceed the concessional contributions cap will be taxed

Has a personal contribution been made to a complying SMSF? No

Yes Is the member under age 75?

Yes

Is the member selfemployed, unemployed, retired or meets the 10% rule? Yes

No deduction allowed

Yes

Is it within 28 days of the month following 75th birthday month?

No deduction allowed

Has the trustee been given a s290-170 notification?

Yes

Deduction is allowed

at a penalty rate of 31.5 per cent. In most situations, it is important not to claim a deduction for amounts that will exceed the cap. Deductible contributions reduce personal

income tax but are taxed at 15 per cent in the super fund. Therefore, the tax calculations should balance the rate of PAYG tax saved against the tax paid on concessional contributions. A tax

T ECH N I C A L

deduction should only be claimed if the personal tax rate on a dollar is more than 15 per cent. To be tax effective, tax deductions should generally not be claimed for amounts that reduce a client’s taxable income below $30,000. This is the point where each dollar starts to be taxed at a rate higher than 15 per cent.

website www.ato.gov.au and must be provided before: • the tax return is submitted for that financial year, or • the contributions are used to start an income stream, or • the contributions are split with a spouse. If any of these transactions have already occurred, a tax deduction cannot be claimed.

Example: Robbie (age 45) has taxable income of $31,000 per annum. On this income he will pay $2290 tax. If he makes a $1000 contribution to super and claims a tax deduction his tax will reduce to $2100. In this example, the $1000 of income (which Robbie ends up contributing to super) increased tax payable by $190, which is an effective tax rate of 19%. An overall tax saving is achieved by claiming the tax deduction and paying only 15% tax in the fund. Note: this example takes into consideration the impact of the low income tax offset. If the client is older and eligible for the mature age worker tax offset and/or the senior Australian tax offset, tax deductions may be effective to reduce taxable income to a lower threshold.

Clients should be referred to their accountant or tax agent to check their own personal taxation implications.

Before claiming a tax deduction the client must provide a section 290-170 Notice of intention to claim a tax deduction to the super fund trustee and receive a confirmation notice back from the trustee. This process is required in both public offer funds and self-managed super funds (SMSFs). All personal contributions are first classified as non-concessional contributions when received by the super fund. The status is only changed to concessional once the trustee receives the section 290-170 notification form. The notice can be obtained from the ATO

contributions against the relevant contribution cap into the following year. The contribution is assessed against the relevant cap in the year of allocation (not contribution) (ITAA97 sec 292-90(4)). If the client elects to claim a tax deduction, the deduction can be claimed in the year of contribution, rather than the year of allocation. This can help a client to claim a larger tax deduction in the first year to manage tax liabilities without creating an excess contribution.

Tip Before starting an income stream for a client, check whether: • personal contributions have been made in the current financial year, and • the client intends to claim a tax deduction, and • the section 290-170 form has been submitted and trustee confirmation received.

How can contribution reserves be used?

Contribution reserves are created when contributions are paid into a reserve rather than allocated to a member’s account. The strategic use of contribution reserves is limited because contributions must be allocated to the member’s account within 28 days after the end of the month in which the contribution has been made (SISR 7.08(2)).

What are the administration requirements?

Example: Taylor (age 58) makes a contribution to his SMSF on June 15, 2010. This amount is credited to the contribution reserve. The SMSF trustee must allocate this amount to Taylor’s account by July 28, 2010.

A strategic opportunity exists in an SMSF for contributions made in June that would otherwise create an excess contribution. These amounts can be paid into a contribution reserve and then allocated to the client’s account in July (but by July 28). This shifts the assessment of

Example: Taylor sold an investment property in November 2010 and realised a taxable capital gain of $100,000. He does not work during the year and does not receive any employer contributions. Taylor contributes $100,000 to his SMSF in June 2011. Taylor can elect to claim a $100,000 tax deduction in the 2010/11 financial year. The contribution is added to the contribution reserve. $50,000 is allocated to his account on June 15, 2011 and assessed against the concessional contribution cap for 2010/11. The remaining $50,000 is added on July 3, 2011 and is assessed against the cap for 2011/12. Provided he does not have any other concessional contributions in either year there is no excess contribution.

Deductible personal contributions can be an effective way to reduce tax payable, but it is important to break the strategy down into steps to ensure the person is eligible, the amount claimed as a deduction is tax-effective, and all administrative steps are followed. If any errors are made along the way, the client may end up paying too much tax or being ineligible for the deduction.

Louise Biti is a director of Strategy Steps, an independent company providing strategy support to financial planners - www.strategysteps.com.au

R O U N D TABL E

The real risk in FoFA

Professional Planner/CommInsure roundtable discusses the dangers posed to the industry if a workable alternative cannot be found to the FoFA proposal to ban risk commissions

ROUNDTABLE PARTICIPANTS JOHN BROGDEN, chief executive, Financial Services Council; TIM BROWNE, general manager – retail advice, CommInsure; GREG COOK, managing director, Eureka Financial Group; DANTE DE GORI, general manager – policy & government relations, Financial Planning Association of Australia; RICK DI CRISTOFORO, managing director, Matrix Planning Solutions; SIMON HOYLE, editor, Professional Planner; RICHARD KLIPIN, chief executive, Association of Financial Advisors; IAN SATILL, director, Special Risk Manager.

If we agree that under-insurance is an issue, and that the cost for the Government of under-insurance is an issue, it follows then that the ability of advisers to provide advice and HOYLE:

to sell risk products efficiently and profitably is also critical. That’s how it’s got to be done. So you look at the proposals in FoFA, and the one in particular about abolishing commission and you say, “Right, first of all, what conflict in the insurance business are they looking to abolish by getting rid of commissions? Where does the conflict happen?” - because they’re talking about conflicting remunerations being the thing they have to get rid of. What conflict in the risk business are they supposedly addressing? And secondly, how would it affect the economics of an advice business? How would you have to respond if commission were to be outlawed? DE GORI: That’s a great point about, in terms of, what would they be achieving if they get rid of commissions. What are they actu-

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ally trying to achieve and will they achieve it? Because it’s our experience that there is no real evidence of mis-selling in terms of insurance. I mean there is the question of churning, the perceived nature of churning because of the commission structure. Again, there is very little evidence of that and I think a lot of the product manufacturers have done a great lot of work in terms of trying to stop that, in terms of dealing with those advisers that are known to be churning. And I think that there is that perception, however. The FPA’s position, of course, is to continue to support commissions under insurance and the reason for that is because there is no obvious mis-selling, and also there are a lot of risks by removing commissions. I mean, that the commissions that are pro-

R O U N D TA B L E

Not sure, but it was regulated. From memory, I think it was about two-anda-half or three per cent of the premium times the term. Simple as that. No matter where you placed the business - so the only difference in the dollars was the fact that if, obviously Company A’s premium was higher, you were going to earn more. But I mean, you know, I don’t think anybody’s going to sell the highest premium in order to earn the most. But the rate of commission was standardised, absolutely standardised. There was little, if any, churning. And that’s a simple solution. HOYLE: Is it simple? SATILL: Absolutely. HOYLE: Who’s going to say what the level should be? SATILL: Well, it doesn’t matter. As long as the level is reasonable and sufficient for us to continue to run our businesses. You know, today every insurance company offers, to my knowledge, generally three rates of commission. They offer an upfront, they offer a level and they offer a hybrid. Some of them offer more than one hybrid. We write 98 per cent of our business in our practice on a hybrid basis, only because level is not high enough for us to sort of make a living. But the reason that we write it on hybrids is because of the fact that we don’t churn; we just do not churn. The ongoing commission on a hybrid is higher than that on an upfront, and we are building a business, I hope, that the Government doesn’t take away, and that’s a business based on an ongoing income stream. We need that income stream in order to provide our clients with an ongoing service and a high quality service. I personally think that those businesses that are continuing to write the majority of their business on an upfront basis either have very high standards of living, and therefore need the money for some reason, or churn it. And I don’t believe that you’re right, by the way, that the SATILL:

John Brogden

vided to risk advisers support the whole function from end to end. And then if you start removing that and charging clients in order to have all those different services provided, you may run the risk of obviously not having people actually provide the claim support at the end - increasing the claims, increasing disputes. And also the fact that people won’t get insurance cover in the first place. If you don’t have a commission structure to support that process, the planners then have a commercial risk, which I think the guys here can speak to more than I, about the fact that if a proposal doesn’t get through, who pays you for that whole process? You still have to go through the application processing, seeing the client, dealing with the underwriters, getting medical applications done, et cetera. So there’s a real risk there, I think, and so therefore we see a lot more negatives than positives in removing commissions and to be quite fair, we don’t know what the actual benefit is of removing commission, what they’re actually trying to achieve. SATILL: I think the conflict that they’re trying to get rid of is the differing commissions. So

there is conflict if you’re seen to be selecting the highest-growth commission going around. That’s easily fixed. But just if I may digress slightly and address Dante’s comments, because I’m not on the manufacturing side, but I think that if you say that there’s not much evidence of churning, I don’t think we’re in the same industry - because that is a big problem in our industry. We see it from the outside looking in, as an adviser. Often we see horrific stories, where advisers are churning, and what’s happened is that there might have been some medical condition happen between two events, and clients don’t get paid. So it’s a horrific problem and it’s something that the manufacturers can fix very easily. That’s my opinion on that. I’m originally from South Africa, which has always been a leader, if not the leader, in the world of life insurance. And about 22 years ago when I left the country it already had standardised commissions for many, many years and it worked perfectly and probably continues to work. BROGDEN: Are they industry regulated or government regulated?

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Richard Klipin

insurance companies are doing anything about those churners. I don’t think that they’re not doing business with them. I think that they still are courting them. BROWNE: I know for a fact that CommInsure have taken action against churners. However, I think the issue which has been raised here is the standardisation of commissions, which has been raised by a number of people. The challenge there is that if we were to look at standardising, we need to be very careful that it’s not perceived by consumer groups and by regulators as price collusion. SATILL: But it’s not. The price is different; it’s just the commission. BROWNE: I understand that. I’ve made it very clear that it’s perception. I see that there is an opportunity to work with industry groups in collaboration with regulators or the ACCC to have this conversation at some point in time. However, for us to look at doing it autonomously, without a collaborative effort with government and consumer groups, we just need to be cautious.

KLIPIN: What’s quite clear is that there are two or three issues when people look around the insurance market. One is that some of the big writers will move some of their book, they might move all the book, they might move some big

Dante De Gori

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cases, and that’s the churning issue. And there’s a very strong regulatory reason why you may want to do that; and you know with all the innovation we’ve had in the market place in the last five years, there are better products and services out now than there were five years ago. So why wouldn’t you want to help people benefit from that? The other issue is how do you get the manufacturers cooperating so that you can have your “hit list”; because if we turn off the tapes and just ask the question, “Who are the culprits?”, with a few other people in the room it wouldn’t be too hard to figure who they are, and you can then take action if you want. And what if you write a key-man policy with a hundred grand of premium, should it be fair - is it a reasonable expectation - that someone might make a hundred grand or 110 grand or 120 grand revenue out of it? So those are a couple of issues that when you look around, you go hey, people are justifiably concerned. If it hit the floor of parliament, people would be outraged by that kind of stuff.

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The way to do it is just set up a standard within the industry around risk insurance, and that’s this issue around commission levels, around churning, around larger cases. Pricing stuff consistently I think denies manufacturers the opportunity to compete. They can compete on price, they can compete on services, they can compete on features and benefits. Let’s not deny manufacturers the opportunity to compete, you know. Let’s not legislate this game out of existence. SATILL: On the large-case scenario, the way that the South African system works is that doesn’t happen, or almost doesn’t happen, and the reason is because as I said, the commission there, at that stage, was three per cent times the term. Invariably, you’ll find that the hundred grand case is an older life, so it could be 55 years old. So it’ll be a 10-year term, times three per cent. You’re only going to earn 30 per cent, not 100 per cent. So it doesn’t happen as much. BROGDEN: Whenever we talk to our members, who are the life insurance industry, bar a couple of very small players, about remuneration, you get everything from “no commissions” to “don’t touch it” and all in between. There is no conformity of opinion in the industry, which makes it very hard. And it’s not even as if there’s 49 per cent for one view and the rest are split up. I mean there’s sort of 10 per cent for [every] view right along the line. And maybe it’s the nature of the industry as well; it’s a closed shop in terms of putting ideas on the table in those areas. It’s quite interesting. It is interesting that there is no uniformity of opinion in terms of what the future might look like in remuneration, particularly if the Government were - and I don’t think they will - just to walk out and ban commissions overnight. Yet with that threat hanging over our heads we still don’t have an option B that we can move to in a uniform position. It just doesn’t exist. SATILL: You’re right, and that’s a big prob-

Tim Browne

lem. I think it’s partially because life companies, each have their own agenda. And I think, with respect to Tim, and he knows my opinion on this quite clearly, is that you’ve got the four big banks, who are the four largest insurance companies, and quite honestly, if risk insurance commissions were banned, I don’t think that they’d be too upset because they have the resources to employ this horde of small, low-salaried advisers. I’m not saying that they are necessarily for it - except for one, I think, is. But the independents…are now going very strongly into the direct marketing side, and I think it’s because they see, because they are scared of commissions being banned, and they don’t have sales forces. So I think that there’s too many agendas out there. BROGDEN: But if your position is correct, what that’s saying is that there is no alternative to commissions in advised [provision of risk products], so let’s get out of that and go to group and direct, which is frightening, which is basically saying we’re entirely dependant on one revenue stream and we have no idea how to replace it if it changes tomorrow.

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SATILL:

Well, we can’t allow it to change, is

the point. HOYLE: But the second part of the question I wanted to ask about the remuneration issue is how it changes the economics of a business. If commission goes, how do you react? How do you respond? What happens? SATILL: It’s a killer. You know, we are one of the larger risk specialist practices in the country, to my knowledge. I think we would probably survive. But the average adviser out there I reckon would do - you guys might know - what, two new cases a month there? The average Joe, you know, if he were charging a fee, he couldn’t survive. Just couldn’t survive. HOYLE: Is that right? COOK: Yeah. It wouldn’t kill my business but I don’t argue the fact that it would have a big impact on practices generally. I think my business is fairly typical. We’ve got a sort of hybrid between holistic financial planning and risk advice; I think about 35, 40 per cent of our revenue last year was from risk advice and we do charge some fees in that area. But the vast majority is commission. It’s the renewal commission from a

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Rick Di Christoforo

hybrid contract, some of which I wrote 18 years ago, back in my youth. Presumably existing income would be grandfathered, I would imagine. But even if it wasn’t, I would survive. CHRISTOFORO: Ian, can I pick up something that you said earlier on, because you were talking about the negatives of commission, and Richard was talking about the rate at which commission is paid. I think there’s two possible conversations, and maybe something that’s been fully explored at the FSC end, is that the difficulty that is going to come into play when you talk about institutions is: How much do we pay? I think the concern around churning is what commission structure or remuneration structure in any framework encourages people to churn? And if there’s a preponderance of upfront, then clearly those people who are predisposed to do so will do so. If there’s a preponderance of hybrid or level, which is what you’re doing, Ian, there’s less of a likelihood because they’re basically building a business in a way that says, “Well, my core function is actually ongoing service to my

clients.” So I mean maybe there is a conversation to have to integrate the two. We’re either going to have a discussion that gets a rational plan B or it may well be taken out of our hands. If we agree that plan B is a better

Greg Cook

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option then we need to address both things: The mechanism by which it’s sold, as well as the level. HOYLE: Well, we’ve got Richard, John and Dante here representing three key bodies. What work are you guys doing, what work could you guys put your heads together and do on this “Plan B”? BROGDEN: Well, internally we’re doing some work on a mirror image of the member’s super chart. We’re looking at a member life charter with respect to remuneration. So we’ve been working on that. I’ve been there 12, 14 months; we’ve been working on it from day one. BROWNE: I’m involved in that committee, and by creating that forum I’m actually seeing a convergence of views. So maybe the initial starting point was a large number of significantly different views. Creating that forum has allowed the different stakeholders within the industry to sit down and work through the details, and I can see that that is leading to what will be a consensus point of view from a representative group from right across the industry: bank-owned, non-bank-owned insurers. I think it’s a really very positive step.

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Ian Satill

BROGDEN: The interesting thing is we’re

framing this whole debate in the rest of FoFA, which is the abolition of commissions on superannuation - so, black to white. I guess what the industry is saying is you can’t go from black to white, or white to black. There’s just no ability to do that. There has to be a middle ground, if there is to be change. And I think the question is, do we promote a mid-ground or do we respond to a call for change? BROWNE: But as far as the industry framing the argument, you can’t do it. Well, clearly the Government has the authority to be able to do it. Where I think we need to frame our argument is the consequence of doing that, not only for us as an industry, and I grant that for some sections of the industry banning commissions would be catastrophic. It wouldn’t be bad, it would be catastrophic. My concern is [that] the consequence of that for the Australian consumer would be absolutely devastating. A very significant number of Australians would be left in precarious positions that would ultimately lead to them encountering a terrible financial position at the same time that

they had a horrific disablement or death in the family. And that’s why the industry is focused on this issue. We understand that there are implications for us as an industry, but we need to elevate the argument to make sure that our concerns are concerns that go hand in glove with Australian society. I think about the work that we’ve done over the last 20 years. The work that we’ve done that we can take the greatest pride [in] is the work that we’ve done on behalf of the clients. I believe that the true heritage of our industry is that heritage that hasn’t come from mergers and acquisitions, that hasn’t come from takeovers, it hasn’t come from product development. The true heritage of our industry is [that] in the event that a tragic event occurs in the lives of our clients, we as an industry have been able to step in and provide some sort of solace. And our key challenge, but also opportunity, is to collate and communicate those stories in a rational, powerful and convincing way. KLIPIN: I think there’s greater strength in let’s get our act together collectively, rather than

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let’s try and play each other off and see who’s going to come out on the top of the pile. SATILL: Just one other point, and I know in the scheme of things it’s small, but it’s close to my heart. Because we have a unique practice in Australia, which I mentioned places cover on impaired life. So that’s the three or four per cent of Australians who actually can’t get cover, get declined by the insurance companies. You know, those with mental history, diabetics, heart disease, cancers and et cetera. That’s our area of expertise. Now, the amount of work that we’ve put into that, there is no way that 80 per cent of them could afford to pay us for what we do if there were no commission. BROGDEN: And the fascinating thing is, I don’t think there’s a public uprising about commissions. And it’s hard to pinpoint systematic failures in the industry, although I’d agree with the possible exception of churning. What concerns me about churning is it drives up cost. SATILL: And that adviser’s not a professional. Doing it for the wrong reasons. BROGDEN: Yeah. But it just makes it more expensive. Like any product, the more affordable, the bigger the take-up, the better the outcome. Everybody wins, the more insurance we sell. Everybody wins. KLIPIN: The way we manage the message becomes important because yes, there is some churning and yes, there are some large cases that I’ve heard get the average person’s income twice in one hit, but they are few and far between, and I’d rather - if we’re going to allocate resources, spend time and energy - focus on how do we lift penetration of insurance…rather than going after the so-called bad guys.

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Minding your own business Recent clarification by the Australian Taxation Office has been welcomed by SMSFs wanting to run a business. Bryce Figot explains

n ongoing question for SMSF trustees has been whether or not they are able to run a business within a super fund. Few SMSF trustees have been aggressive enough to run a retail shop. However, many have wanted to engage in real estate development that might constitute a business. The Australian Taxation Office (ATO) have recently provided a very positive clarification. Background - why everyone had a funny feeling

The starting point is the case of Scott v Commissioner of Taxation (No 2), a 1966 High Court decision. Here, Leslie Scott, in addition to practising as a lawyer, had large interests in land, both in buying and selling and in letting to tenants for rent. He also engaged in these real estate activities through private companies. Scott arranged for a superannuation fund to be formed. The fund members were Scott, his wife and his parents-in-law. Over five years, the fund received approximately £5,500 of contributions yet its assets grew to £59,869. The judgment does not detail the exact extent of the trustee’s activities. But it is made clear that the massive growth in fund assets was “not made by investing in the ordinary way” and was instead mainly due to profits made by dealings in land, involving subdividing and selling the land off in allotments. These dealings were financed through borrowed monies (superannuation funds could borrow in those days). It was accepted that the fund’s activities constituted a business.

Bryce Figot

The High Court found that the fund had been established merely as a continuation of Scott’s activities outside of the fund. The High Court ultimately concluded that profits made by buying land with borrowed money and selling it were not income of a fund and that the fund was not actually a superannuation fund. Coupled with this, there have been many cautionary comments from the ATO over the years. These comments never expressly banned SMSF trustees from running a business. For example, from the National Tax Liaison Group Superannuation Sub Committee minutes for a meeting held on 26 October 2005: “[T]here is nothing in the legislation to prevent it. However, there are potentially a

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number of issues in carrying on a business that might lead to contraventions of the SIS Act and regulations (such as the sole purpose test), or the borrowing of money. As each case must be considered on its own merits, the Tax Office cannot give a more definitive answer.” Interestingly, there is a little-known ATO ruling that implicitly accepts that superannuation fund trustees can run businesses. Taxation ruling TR 93/17 considers the income tax deductions available to superannuation funds. It states that “a superannuation fund that carries on such a business may rely on the second limb of section 8-1, which covers expenditure necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income”. Naturally, this ruling is also tempered with comments like, “superannuation funds are generally prohibited from undertaking speculative activities or carrying on an active business such as operating a retail shop, motel or primary production business”. High court developments — Word Investments

At the risk of over-simplifying, the 2008 High Court decision of Word Investments Limited v Commissioner of Taxation considered whether a company that ran a business met the charity equivalent of the sole purpose test. The company ran a funeral business charging clients a commercial margin of profit. Profits were then donated to another entity that clearly was a charity. Effectively this raised the question of whether the ends justified the means. Four out

SE LF- M ANA G E D SU PE R

of five judges answered in the affirmative, holding that the company’s activities were charitable because they were carried out in furtherance of charitable purpose. Although not expressly a superannuation case, Word does have implications for superannuation funds. Namely, it lends support for the view that SMSF trustees running a business meet the sole purpose test if the business profits are retained in the fund to pay for things like retirement benefits.

‘Coupled with this, there have been many cautionary comments from the ATO over the years’

Positive clarification from ATO

The ATO have released a page on their website titled: “Carrying on a business in a self-managed superannuation fund.” It can be found at: <http://ato.gov.au/print.asp?doc=/ content/00241937.htm>. It makes the following points: Firstly, when determining compliance with the SIS provisions, it is the activities of the trustee that are examined rather than whether a business is being carried on by the SMSF trustee. A strict standard of compliance is required under the sole purpose test. If an SMSF trustee carries on a business, the ATO will examine the activities closely to ensure that the sole purpose test is not breached. Again, Word lends support to the view that the ends can justify the means. So provided the activities are profitable and profits are being retained in the fund, the sole purpose test should be met. Secondly, the ATO have said they will scrutinise situations such as: • Where the SMSF trustee employs a family member. The ATO will look at things like the stated rationale for employing the family member and the level of salary or wages paid. Naturally, this is a more flexible position than the blanket ban on employing anyone whatsoever that many conservative advisers have been

implemented for their SMSF clients. • Where the business carried on by the SMSF trustee has links to associated trading entities. This can be a concern because many builders often want to develop real estate through their SMSFs. That being said, this is not a blanket ban but merely a flag that the ATO will scrutinise. Naturally, such SMSF trustees must be very careful not to acquire assets from related parties, et cetera. • Where there are indications that SMSF assets are available for the private use of related parties. Finally, the ATO remind us of all of the key regulatory provisions, including: • The need for an investment strategy that has regard to all the circumstances of the SMSF. • The prohibition on lending money or providing any other financial assistance to SMSF members or their relatives. Although being employed is arguably financial assistance, the earlier ATO comments suggest that it can be allowable provided that the level of wages paid is reasonable and justified. • The prohibition on SMSF trustees acquiring assets from related parties of the SMSF. The ATO has expressed their view on this topic in more detail in self-managed superannuation

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fund ruling SMSFR 2010/1. Broadly, if an SMSF trustee contracts with a related party entitling the SMSF to the performance of a service by the related party, then where performance of service is the substance of the transaction, the acquisition of the performance of a service is allowable, even if small assets are also acquired (for example, tap washers). However, acquiring the big-ticket items (for example, ducted air-conditioning) would not be allowable. It is important that these items are purchased directly by the SMSF trustees and merely installed by the related party. The website guidance is positive. However, as always, common sense should still prevail. SMSF trustees wanting to generate funds for retirement et cetera in a way that might constitute a business must be particularly mindful to comply at all times with all regulatory provisions.

Bryce Figot is a senior associate at leading SMSF law firm DBA Lawyers Pty Ltd (www.dbalawyers. com.au). Bryce can be contacted at bfigot@dbalawyers.com.au

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The only constant thing is the pace of change Developments in the self-managed super fund space are frantic, and show no signs of letting up. Tony Negline highlights some of the recent key changes

ecently, I was asked if many changes have been announced since March 2010 in relation to self-managed super funds (SMSFs). The short answer is - absolutely! The following is the first of two articles briefly detailing some of the changes. Clearing house rules: Legislation acknowledging that employer contributions to certain authorised clearing houses satisfy compulsory super obligations has passed Parliament. This policy is still not fully implemented. Trauma insurance inside super: The ATO issued a final self-managed super fund determination, which details how a SMSF might be able to own a trauma insurance policy. Federal Budget 2010: At least four changes are relevant for SMSFs: • The Australian Taxation Office (ATO) will be able to detail if a super contribution will be an excess contribution prior to issuing a formal tax assessment for excess contributions. • The Government will permanently reduce its co-contribution for eligible non-concessional contributions to 100 per cent of a person's contribution. The maximum Government cocontribution will remain at $1000. • Super funds will be permitted a tax deduction for terminal medical condition insurance. • For capital protected products, the benchmark interest rate will be increased for new contracts entered into after Budget day. Changes to super gearing laws: Several changes have been made to the super gearing laws with effect from July 7, 2010. The most important changes are that a holding trust can

‘In June the Cooper Review made 18 recommendations to the Government about SMSFs’ only hold a single acquirable asset (or the same assets with the same value) and that the asset cannot be improved whilst held in the holding trust. In September 2010 the ATO released five interpretative decisions about various super gearing issues. Enduring Powers of Attorney (EPoA): The ATO released a finalised SMSF ruling on this subject. Some key changes were made about the use of EPoAs, especially if a SMSF has a corporate trustee. Henry Tax Review: In May 2010, the Government announced four changes when it released the Henry Tax Review. These changes are not officially legislated, so precise details are unknown. • From July 1, 2012 the Government will refund some of the contributions tax for people with “adjusted taxable income” less than $37,000. • Also from this date, individuals aged over 50 with less than $500,000 in superannuation will have a concessional contribution threshold of $50,000. • From July 1, 2013 the Super Guarantee

will begin to increase, ultimately reaching 12 per cent in the 2019/20 financial year. • Also in July 2013, the maximum age for Super Guarantee will increase from 70 to 75. In June the Cooper Review made 18 recommendations to the Government about SMSFs, which haven’t been officially accepted. Also in June many superannuation and income tax related thresholds were indexed. In July we had four changes: • The Government introduced legislation into Parliament which will permit a super fund to acquire assets from another super fund, and not breach the super law which prohibits super funds from acquiring assets from related parties when a couple are formally separating. This same legislation also contained changes for tax deductibility of permanent disability insurance premiums. This proposed legislation was cancelled because of the election. It has now been reintroduced into the new Parliament. • The ATO released a document about SMSFs running businesses. After years of rejecting the idea that a self-managed super fund could run a business, the ATO now say that it is technically possible. • The Tax Office released a document which shows the administrative process it will follow to disqualify an SMSF auditor for poor quality work. • The Government announced that, due to poor performance in financial markets continuing, in 2010/11 account based pensions would be permitted to pay themselves half their normal annual income amounts. In March the National Tax Liaison Group (NTLG) Super Technical sub-committee met.

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Tony Negline

Among other things, the following items were discussed: • 10 per cent assessable income test to work out if a person is eligible for a tax deduction for personal super contributions when leave entitlements are expected to be paid in June but are paid in July of the following financial year. The ATO have said that in their view the leave entitlements will apply to the 10 per cent assessable income test in the financial year in which they are received, even when the entitlements relate to a previous financial year. • Can a portion of an asset be segregated between non-pension and pension assets? Most SMSFs do not bother with segregating assets between pension and non-pension assets because it can be an administrative hassle. The ATO have said that if segregation is used then an asset can be used in both phases of a super fund. • Must a death benefit be paid as a single lump sum payment for anti-detriment death benefits? The ATO has long argued that in order

for the anti-detriment payment to be payable, the death benefit has to be paid as a single lump sum. • Binding death benefit nominations (BDBNs) versus reversionary pensions. The question dealt with can be pretty well summarised as, “Who gets access to the loot first?” It's a really good question and no doubt there would be lots of different opinions in the super industry about the better view. The ATO made the following comment: “There are no SIS Act or SISR [that is, the SIS Act's regulations] provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death. “While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3, the Commissioner is of the view that those provisions do not have any application to SMSFs. It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust. “If the governing rules of a SMSF authorise a death benefit nomination, the trustee must follow the fund’s rules and the general trust law and any other legislation which may be relevant. “Notwithstanding those observations, the ATO's view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary, must be paid to the reversioner. It is only where a trustee may exercise its discretion as to which beneficiary

is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.” In my view this is a very clever response. It shows yet again the importance of the wording of a super fund's trust deed. It also indirectly shows, yet again, the concern most people should have about relying on general compliance and catch-all clauses to run their super fund in between trust deed upgrades. In June the NTLG Super Technical subcommittee met again. The following interesting items were discussed: • Acquisition of assets from related parties. In the ATO's view, SMSFs are not permitted to acquire in-house assets from members unless those assets are company shares or units in a unit trust. • Registering changes to trustees. The ATO points out that when a super fund needs to appoint a new trustee then there may need to be a Deed of Appointment given to the respective State or Territory's Registrar-General (or equivalent). Care should be used in this area. Perhaps it also shows, again, the advantages of using a corporation to act as trustee • Conversion of the geared unit trust to a non-geared unit trust. The ATO says that it is possible for some geared unit trusts, which were exempt from the in-house assets test, to be successfully converted into a non-geared unit trust and remain exempt from the in-house assets test. Again, care should be exercised here and good advice taken. It's funny that most people would have assumed that not much has been happening in the SMSF regulatory world!

Tony Negline is general manager, corporate strategy at SUPERCentral - www.supercentral.com.au. He is also the author of A How to Book of Self Managed Superannuation Funds. Details about the book are available at www.atcbiz.com.au/smsfstore.php

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recruitme nt

Financial planning emerges as a viable career Paul Barrett says the industry is getting its message across about the value of advice, and is starting to attract high-calibre recruits

have been encouraged recently by signs that our messages about the value of financial advice are being understood. This has been demonstrated most clearly by the recommendation of the Cooper Review to make advice a compulsory element of MySuper, and by Minister Bowen’s statement that “longer term challenges such as the ageing of the population, as well as recent events such as the global financial crisis, underscore the need for quality advice”. Furthermore, in a paper prepared for the Institute of Actuaries of Australia, Andrew McKee stated that the “combination of complexity and materiality generates demand for advice, and therefore ensures that financial advisers are, and will remain, a crucial and valuable ‘lynchpin’ in the financial services market”. It is important that we persevere with the message so that consumers understand the value of advice, and more choose to access it. It is becoming increasingly clear that we also need to promote the value of advice to graduates and those choosing careers. The paths that most advisers followed into planning are no longer available. The future supply of financial planners needs to be attended to now, as barriers to entry continue to rise

as planning progresses to professionalism. Minimum standards of education are a good example. The FPA have suggested that by 2015, all new entrants who wish to become financial planners have as a minimum a tertiary qualification in financial planning. Furthermore, they suggest that by 2012 all newly qualified professional financial planners should undertake at least one year of full-time supervised work in client-facing activity before being able to hold themselves out as a financial planner. Whilst only recommendations at this stage, they represent a substantial increase in complexity and time required, compared to the obligations under RG146. Consequently, we need to ensure that potential candidates are motivated to begin the journey now. Financial planning, unlike the accounting profession, currently lacks a clear career path. In addition, the nature of financial planning is changing. The client relationship is changing from one where planners provide information to one in which they must convey understanding. The measures of quality advice are moving from process and documentation to comprehension, delivering engaged investors who understand their financial situation and the content

Paul Barrett

of their plan. Finally, there seems little doubt that future financial planners will be subject to a more onerous legislative environment, including the potential for regulatory intervention in relation to remuneration. The FPA, via the Future Financial Planner Council, is aware of these pressures and is active in promoting financial planning as a career. Last year we launched a blog site to uncover what a career in financial planning is all about, targeting those studying courses related to financial planning. Kane Piper was appointed as our “blog star”. He regularly posts interviews with leading personalities from the planning world and blogs about his experiences and interactions with planners. Also included in the website are financial planning job opportunities and upcoming events. Visit the site at

http://www.iplan2.com.au/index. html. Incorporated in the site is a guide to becoming a financial planner. This guide points out that financial planners can make a difference and empower people; financial planning is a career that provides tremendous variety, and is well rewarded and remunerated. It also outlines potential career paths from administrator to business owner or senior manager. As the value of advice becomes more widely recognised, we must make certain we promote financial planning as a career, ensuring that the quality and quantity of planners is sufficient to meet demand.

Paul Barrett is general manager of advice business for Colonial First State

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P R A C T I CE MANA GEMENT

Different need not mean difficult Is there someone in your life who is difficult to deal with? A client? Someone you work with? Don’t worry, says Martin Mulcare - you have plenty of company

ll of my clients can think of at least one person with whom they have a strained relationship or who simply “rubs them up the wrong way”. This is not surprising when you think about the wide variety of character types that inhabit this planet. You may be able to choose your friends - but what happens when the relationship is not of your choice and is important for business or other reasons? The differences between you and your “difficult person” are likely to be quite deep - perhaps very different values and beliefs - and they are likely to manifest themselves in unsuccessful communication experiences. The premises for this column are: • The relationship with your difficult person has some significance for you. • You are not happy with the current state of your relationship. • Your difficult person is not going to change their communication style. Hence, perhaps sadly for you, the conclusion from these premises is that if there is going to be an improvement, it will be up to you to change, at least something, in your personal interaction. Let’s start with your mindset towards this person, and from this point on I will refer to your difficult person as your “different person”. You see, I don’t think that they set out to be difficult. I think it is more likely that they are just different. So, let’s be specific about the differences in their communication style (and I will leave differences in values for another day). Think about each of the following aspects and assess your style relative to theirs: • The use of gestures and body movement, including personal space. • The pace of words and the frequency (and duration) of pauses. • The volume of speech and the range of pitch as well as volume.

Martin Mulcare

• The use of eye contact. • The type of language and the articulation of words. • The energy employed in the communication. • The level of interest in detail. • The preference for the written word compared with the spoken word. Now please identify the aspects for which the contrast is greatest between you and your different person. I suggest that a subtle modification to your style to better match their personal style will, consciously or sub-consciously, appeal to them and improve your communication. For example, if they speak slowly and carefully, pausing often, then this could be frustrating and annoying for quick-thinking or quick-speaking people. If you accept that this is their (legitimate) personal style, then you might experiment with slowing down your speech and inserting a few pauses. Please don’t overdo it, lest

it appears to be mimicry or worse. However, a subtle modification may reduce the chances that they are thinking you are always in a hurry and talking without thinking. Am I suggesting that you should change the real you? Of course not - I am simply suggesting that your communication, and your relationships, may benefit from some flexibility around your natural style. This principle extends to email communication. If their emails seem curt and unfriendly (for example, no “dear”, no sign-off, little punctuation) it may be that they value brevity and task-focus more than you. If so, it probably annoys them that you are wasting keystrokes typing “kind regards”. Perhaps you can modify your next email (just to this person), cut back on your people-focus and see what happens. The key principles are to be aware that people are different, to be aware of your own preferences and to be willing and able to modify your style to better suit them. If your different person bothers you, it may provide a hint that there is something about you that you are not satisfied with. Alternatively, if their ideas seem way out and unrealistic and you think that they are “off with the fairies”, maybe you are, consciously or not, concerned with your lack of creativity. For whom are you a difficult person? If you really would like to improve the relationship with your difficult (I mean different) person it will be up to you to make the first move. One way is to identify what is different about your communication styles and subtly modify yours. These are the best of times to practise flexibility in your communication in order to achieve quality relationships you can enjoy with even more people. Martin Mulcare can be contacted on martin@scat.com.au

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The three- to seven-year itch A survey of more than 40,000 clients reveals that as your relationship passes the three-year mark, you’re most at risk of being dumped. Rod Bertino explains

ne of the key insights to emerge from a recent analysis of our CATScan data was that the clients who have been with their adviser for between three and seven years could represent a very real business risk for many practices. Our data shows that those clients in the three- to seven-year duration band are less satisfied with their adviser’s performance, across all nine of the key service delivery areas covered by the CATScan, than their peers who have only recently joined the practice or those long-term clients who have been with their adviser for seven or more years. This is perhaps not that surprising when you consider the normal client relationship lifecycle. In the early days, advisers are actively engaged in the comprehensive fact find/discovery process and are intent on fully understanding the needs and wants of their new client. Through the creation of personalised financial plans and/ or the restructuring of product holdings and investment portfolios, advisers get the chance to continually showcase the depth of their technical acumen and professional expertise. At the other extreme, those who have been clients for seven or more years in some ways become almost “rusted on”. While great care must be taken never to take these long-term clients for granted, the relationships are usually very strong and the service delivery expectations are well known and well managed. You know them well, they know you well and provided there are no unforseen surprises to shake this confidence, things normally progress quite smoothly. However, the very nature of the relationship is different with the clients in the three- to seven-year bracket. The initial euphoria that comes from putting together a new financial strategy may now have worn off and there may

not be a need to regularly buy and sell investments, update the level of protection cover or change policy providers. It may also have been some time since these clients have met face-toface with their adviser; and unless the ongoing practice communication program is extremely effective, they may be feeling a little “unloved” and starting to question the promises that were made when they first joined. So what can advisers do to mitigate the risk these mid-term clients pose? Of course it is always dangerous to generalise, and each business is unique and hence the challenges and solutions will vary between practices, but in general, three key themes emerged from the analysis of the mid-term clients in our CATScan data warehouse.

the various elements of their review procedures and agonised over the content and layout of their review reports, clients continually tell us advisers often lose sight of what is most important - the client! We hear all too often from clients that while their adviser is very good at investment updates and product evaluations, in their mind, this does not equate to a client review. First and foremost (and at the risk of stating the obvious), in the client’s eyes, a client review must be centred around the client. It should be all about them - their family, their business, their goals, their dreams and their aspirations. While their money and their policies are obviously important, they should not be the sole focus of the review. 3. Position, position, position

1. Continually remind them what you do.

Clients sometimes mistakenly assume that if there has been no action recommended, their adviser has done no work. Advisers need to continually remind their clients of all the things they do for them, even if the individual benefit to them is not immediately obvious. Also, clients don’t always remember the depth and breadth of solutions you may be able to deliver. Case studies and third-party testimonials are a great way to educate clients on enhancements to your service suite or to reposition existing products that may now be appropriate. 2. Conduct client reviews, not just investment updates.

The review appointment is the ideal opportunity for advisers to re-engage with their mid-term clients, and as we stated in a previous edition of Professional Planner, while many practices have invested countless hours examining

As anyone in real estate will tell you, positioning is paramount. It is also absolutely essential for clients with around five years of tenure - advisers need to make sure they remain visible and top of mind. They need to continually “touch” these clients throughout the year and importantly, ensure all their communication pieces are personalised and relevant (blanketed, shot-gun communications often do more harm than good). Practices should also leverage a range of different communication vehicles and not rely solely on emails or letters; and don’t ever underestimate the power of just picking up the phone! In closing, all of us at Business Health would like to extend our very best wishes for the festive season. We hope you enjoy spending some time with those closest to you and return fully recharged for what promises to be another exciting ride in 2011. Rod Bertino is a partner and director of Business Health - www.businesshealth.com

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P R A CT I C E MANA G E M E N T

The year of living precariously Peter Switzer says anyone hoping for a relatively stress-free year has been sorely disappointed

or financial planners, the year 2010 would have to go down as “the year of living precariously”. Sure 2008 was the year of living dangerously, especially if you were trying to keep your clients from going to cash after the collapse of Lehman Brothers. And 2009 was the comeback year. But this year has been overloaded with challenges to worry about. Not surprisingly, the stockmarket has not delivered this year. We started on January 4 at 4864.9 and at the time of writing we were at 4689; and so we are still under water. However, many analysts, such as AMP Capital Investors’ Shane Oliver, who I interview on my Sky Business program, believe we will see the S&P/ASX 200 at 5000 before the year is out. (I hope so, or I will have a big meal at Machiavelli to pay for, after a bet with one of the country’s best bond traders!) Let me relive the dramas that the bears, the short-sellers and the media doomsday merchants worked with this year to stop us resting our heads anxiety-free. We actually had a pretty good start with the market peaking at 5001.9 on April 15.

The first trigger for the crisis of confidence was the debt pickle the Greeks found themselves in. This later gave rise to a new unfair and nasty acronym - PIGS - which stood for the debtladen economies of Portugal, Italy, Greece and Spain. Rumour has it that this insulting tag came from a UK economist who stumbled on this new name for the Club Med economies, which left out Ireland. If potentially unmanageable debt was the criteria for being a part of the PIGS, Ireland should have been there. This led to concerns over Euro-debt issues broadly, and then Euro-bank worries, which were KO’d eventually by the EU coming up with an overdue rescue package and a series of bank stress tests. To keep the markets spooked, a US hedge fund manager, Jimmy Chanos, kept warning his group of influentials that China had a housing bubble that was set to burst. This was later made worse by China attempting to slow down their boom, which made some expert economists predict that the economy could slow down to six per cent growth. They were wrong, as per usual. After Europe and China dealt with the

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threats to the progress of the stockmarket, along came the double dip drama for the US economy. Economic data did go off the boil but you can never trust a couple of months of data and you can often exaggerate a projected trend in the short term. The Yanks were slowing down and the US consumer had gone missing in action but US company reporting season had come in miles better than expected. Putting it all together, it created a September to remember which rolled into a “Roctober” where the market has gone from 4413.3 on the open in September to 4689, at the time of writing - that’s about an 8.7 per cent gain across the historically scariest months of all for the market. This has been helped by the Federal Reserve’s “promise” to go to a second round of quantitative easing - QE2 - which has put the threat of a double dip recession to bed, once and for all. However, just as we thought it was safe to load up on stocks for the most nervous clients, the Yanks have manufactured a mortgage mess over foreclosures. Banks have been accused of acting illegally and could face lawsuits from big investors who bought mortgage-backed securities and $US80 billion of mortgages may have to be repaid. Of course this is the worst-case scenario dreamt up by the prophets of doom and could be a big stumbling block for the market, but my bet is that the US banking system will weather it.

Peter Switzer is founder of fee-for-service financial planning firm Switzer Financial Services and hosts SWITZER on Sky News Business Channel, Monday to Thursday at 7pm & 10pm. Visit www.switzer. com.au or email: peter@switzer.com.au

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Forever blowing bubbles One thing we know for sure is that every bubble bursts. Ron Bewley looks at the ballooning price of property

s the prospect of a double dip fades away, it seems some foreigners are getting a bit restless - or is it jealousy? Australia was one of the handful of developed countries to walk through the GFC - helped very much by China, which hardly missed a beat from its stellar growth path. So why is the International Monetary Fund (IMF) telling Australia to get its house in order? Why is the rating agency, Fitch, stress-testing Australian banks for the fall-out from a burst property bubble that it is not even predicting? To top it all, the US Congress just voted to “punish” China for not doing the right thing in its economic policy formation. Imagine the Australian parliament having a vote to “punish” the US for causing the GFC! On second thoughts, I couldn't face Rob Oakeshott's speech. A bursting property bubble would hurt our home-loan-dependant banks and their stock prices. With the banks representing more than a third of our equity market, the direct impact on the ASX 200 would be massive - not to mention the indirect effect on companies through their inability to lend. Goldman Sachs just came out with a note stating there is no property bubble in Australia but homes are over-valued by up to 35 per cent (I hope you understand that one). Fitch doesn't think there is a bubble but wants to stress-test the banks for one anyway. Treasury and

had no chance of keeping up with the payments in a downturn. But will people in Australia just default on payments? We are virtually at full employment, with rates at the low end of anything we could consider normal. So most people are better off than when they took out the loan. Indeed, rates were probably higher for most people when they took out their loans. What can, and may, happen is that property prices go nowhere for a while, as I show in Chart 1. That's how prices have evolved in Source: ABS Cat 6401.01 and 6416.0 spliced and derived this country since WWII. I rememthe Reserve Bank of Australia don't home-ownership - for whatever ber publishing a paper on Propreasons - is the thing to do. But think there is a bubble either. erty Price Plateaus in 2003 - the property bubbles have burst around last time the bubble story did the The thing that gets me is that the world. Are we different? We it is not possible to determine what rounds. Brisbane had an 11-year have a few things going for us. We value property should be unless plateau from about 1992, as prices do not have an over-supply in the you are prepared to assume there only just kept up with inflation. big cities. Paul Keating has recently are no disequilibria. Home values Sydney had a seven-year plateau, been on about creating higher are determined by demand and et cetera. It’s because no one really density living in Sydney to cope supply. Speculation - or a little knows what a property is worth with the demand. Immigration has over-exuberance of the purchasers that they bid prices up a little too just slowed to a quarter of a million far. No one wants to sell at a loss, (disequilibrium) - can cause bubpeople in the latest 12 months. bles; but the only way to effectively so prices tend not to fall much; Where do they all live? determine relative property prices but they do not increase until the Most people have substanis to set a benchmark. As with inflation erodes the previous overtial equity in their homes - often scientific experiments, you need a pricing. Simple. through a 20 per cent deposit and control group to measure what is Perhaps it is not a great time to capital gains since purchase. So, if going on. buy property for short- to mediumprices were to fall, say, 20 per cent, So with whom should we term speculative purposes. But if compare ourselves? California, with most people would still have equity you need somewhere to live, just all its State Government debt prob- and so something to fight for. After stay calm when you bid. all, unlike in America - the banks lems, non-recourse (throw-thewill make up any shortfall by going keys-away) home loans? Greece? after any other assets you have - it's Iceland? Ireland? Spain? The prices in Australia are what called bankruptcy! Ron Bewley is executive director of In the US, 100 per cent loans they are because the buyers think Woodhall Investment Research www.woodhall.com.au were being granted to people who it is such a great place to live; and Chart 1: Index of Inflation-Adjusted Established House Prices

6 BILLION REASONS WHY COMMISSIONS SHOULD BE AXED. Over the last four years, financial planners have been paid $6.5 billion in superannuation commissions, according to Rainmaker Research.* That’s a lot of money. And consider this. Together, fees and commissions can add up to a year’s salary over the working life of an average wage earner. You’ll find all the facts in Supernomics, a special research report produced by Industry Super Network. It exposes the market failure within Australia’s superannuation system, and also offers ways to address them. To download a free copy, go to industrysupernetwork.com/supernomics Rainmaker Consulting, Commissions Revenue Report, April 2010. www.industrysupernetwork.com/document-library/publications * Commissioned by Industry Super Network, a division of Industry Fund Services Pty Ltd ABN 54 007 016 195 AFSL 232514.

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Coming, ready or not Investors need to factor in new building energy efficiency requirements before making decisions on buying property, says Dug Higgins

y the time you read this article, the second step in the Building Energy Efficiency Disclosure Act 2010 (the Act) - part of the Australian Government’s Commercial Building Disclosure program - will be in place. November 1, 2010, marked the beginning of the transition period where a large slice of the securitised property industry (including listed A-REITs and wholesale/retail unlisted property funds) have to bite the bullet on mandatory disclosure of energy ratings on the majority of the buildings in their portfolios. Going forward, this is set to have a material impact on the operations of property trusts, particularly for those in the unlisted retail fund space. Here, we take a look at some of the issues that investors and their advisers will need to take into account when holding exposure to this asset class or making new investments in this asset class. In a nutshell, the Commercial Building Disclosure (CBD) program is the national framework designed to improve the energy efficiency of Australia’s office buildings. The program operates under the Act (which commenced in July 2010) and will become fully enforced on November 1, 2011, when all sellers and/or lessors of commercial office space of 2000 square metres or more will be required to obtain and disclose a valid Building Energy Efficiency Certificate (BEEC). A BEEC is valid for a 12-month period and must be publicly accessible on the online Building Energy Efficiency Register. The key plank to BEECs is the National Australian Built Environment Rating System (NABERS) - a performance-based rating system for existing buildings which assesses a building based on its measured operational impacts

Dug Higgins

on the environment. NABERS ratings work on a star system and are awarded on a scale from one to five. While a NABERS rating may be obtained for a range of operations (energy, water, waste and indoor environment), it is the NABERS energy rating which is being used for the purposes of the Act. While the requirement for a BEEC will not be mandatory until 2011, the 12 months from November 1, 2010 are a transition period where sellers and lessors of office space must disclose their NABERS energy rating, rather than the full BEEC. As part of this disclosure the NABERS rating must also be included in any advertising material for the sale or lease of eligible office space. At present, several issues are visible. Firstly, it’s not certain that all those required to report under the Act from next year will be ready to do

‘Implementing disclosure obligations means energy efficiency becomes one of the deciding factors around commercial sales and leasing’ so. At this point, indications are that only around 50 per cent of the owners of CBD office properties have had NABERS ratings assigned - so the assessors are going to be busy. But the main question from the point of view of owners - and by default, investors, given the level of investor participation in the sector - is what will be the impact of mandatory disclosure? Implementing disclosure obligations means that energy efficiency becomes one of the deciding factors around commercial sales and leasing operations. This by default will influence the value of transactions at both levels. Up until now, where seeking ratings and disclosing them has been mostly voluntary, there was emerging evidence that energy-efficient buildings attracted a premium in the property market - which is not unexpected, given that investors expect to see a return from “greening assets”.

M ANA G E D FU N D S 1 0 9

Recent studies show a split in the market between buildings with a higher NABERS rating versus a lower one. Indications are that buildings with an above-average NABERS rating (three to five stars) were valued at a premium compared to buildings that were rated below the NABERS average (two-and-a-half stars or below). Results have indicated that effective rents may be up to 6 per cent higher and capital values up to 18 per cent higher in energy-efficient buildings. Vacancy rates and tenant retention also improve in highly rated buildings. While the level of hard data is still somewhat limited, indications are good (if you have the right assets, that is). So why does this have particular relevance to the unlisted retail property funds sector? When we examine the NABERS registry of rated buildings there are currently more than 500 ratings in place. Of these, more than 50 per cent relate to the assets of the major A-REITs and unlisted wholesale property funds. This is not a surprise given that broadly speaking these funds tend to have higher-quality assets in their portfolios, compared to their smaller unlisted cousins that are the domain of retail “mum and dad” investors. NABERS-rated buildings in this category number only 42, or less than 10 per cent of the current register. Analysis of the top 200 unlisted retail funds by size shows that they currently own 181 commercial office properties nationally, nearly all of which are likely to be eligible under the Act. Based on the actual number of vehicles, including

those outside the top 200, the real number will be far higher. Given the average quality of the properties in these portfolios, the longerterm viability of the unlisted retail property funds sector is facing a significant threat. The institutional level managers who have a presence in the retail space - being Stockland, Investa and Charter Hall - make up the bulk of those with rated properties, along with cameo appearances from some other managers who are likely to be a long way down this road already. However, it is likely that significant work remains. Going forward, it will be vital that investors carefully scrutinise the sustainability measures being proposed by smaller investment managers, and consider the implications for the future performance of portfolios. Increasingly, as the number of highly-rated buildings in the market increases, the emphasis on a premium for high achievers is likely to change to a discount for poor outcomes. As tenant and buyer expectations change, regarding the levels of sustainability incorporated into the spaces they occupy, those properties that cannot compete run the everincreasing risk of becoming environmentally obsolete. The outlook for lower-quality assets is not by any means hopeless, as the returns on some retro-fitting projects are well worthwhile. However, this comes at a cost that some unlisted retail portfolios may find difficult to bear, given other extraneous circumstances facing the sector. While the implementation of the Act and the BEEC as they cur-

rently stand has not been without controversy and has met with some strong resistance from industry regarding fine-tuning (and with good reason), the fact is that the basic concept looks here to stay. While there has been very positive feedback from global participants that the Australian NABERS system is world-class, this doesn’t necessarily mean it’s as good as it could be. We can expect further adjustments in due course and indeed some of these are already underway. In addition, the Government has indicated that mandatory disclosure under a similar system will be levied on other commercial building types around 2012. All in all, the concept of buildings with poor energy ratings incurring a discount in the marketplace

is not a new one, with Zenith and many other industry participants having expressed these thoughts for some years. Now, however, it’s crunch time. How the sales and leasing market plays out over the next 12-18 months will be very illuminating. At the very least, investors and advisers will need to consider the implications of the quality of any commercial property portfolios they are exposed to. Given that real estate is a long-term asset class (particularly in unlisted funds), considering how well they are future-proofed is vital in maximising value.

Dug Higgins is a senior investment analyst at Zenith Investment Partners www.zenithpartners.com.au

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P R O P E RT Y

Winners and losers in this economic rebound Australia is well into recovery mode. But there are mixed blessings within different parts of the economy. Frank Gelber explains

n the GFC-induced downturn, it was precautionary saving - by households and by businesses - that caused the weakening of growth. Afraid that they had borrowed too much, and afraid of unemployment, households cut spending. Companies, anticipating recession and subject to a credit squeeze with higher interest rate margins, went into cost-saving and cash-preservation mode. But that was offset by the continued strength of construction as we finished off projects begun before the GFC hit and by strong government stimulus. Domestic demand growth fell below 1 per cent in 2008/09 with GDP growth just over 1 per cent. We had a short and shallow downturn, not the widely feared recession. It’s not just that we’re lucky. Australia didn’t suffer the same problems that caused financial crisis and recession in much of the developed Western world. Accordingly, there was no financial crisis in Australia - just a credit squeeze. And we won’t experience the long and difficult recovery in store for many other developed countries. For Australia, it’s back to business as usual. Already the economy is well into recovery. Employment has rebounded, boosting household income. Households are cautiously letting go of the purse strings. Housing was boosted by low interest rates. We’ve seen the beginning of a recovery in profitability as demand recovers, but business investment remains subdued.

‘The recovery is not uniform across sectors. There will be winners and losers’ The economy paused for breath through the middle of the year as early and quite aggressive rises in interest rates hit households. Housing and retail sales appeared to run out of steam. But employment continued to grow strongly. Mind you, there will be more rises in interest rates before this is over. And that will eventually damage parts of the economy. But, before that, we expect a resumption of growth, with strong employment driving rising household income and expenditure. And the housing upswing has further to go. The recovery is not uniform. Different parts of the economy will experience mixed blessings associated with the different drivers of growth. A primary driver of growth will come from the minerals sector as it struggles to supply rapidly expanding demand from China. Strong

profitability will underpin the next round of minerals investments and that’s what will drive economic growth, both in the regions and sectors that service that investment. Mind you, it’s growth in investment, not a high level of investment, which drives growth in the economy. And we’re already set up to service the current high level of net investment. So stimulus to the economy won’t be as great as during the first phase of investment last decade. Nevertheless, strong investment through the middle of the decade is already locked in. A second driver will be the high dollar, which, in effect, is part of the transmission mechanism for a major shift of labour and capital to the minerals sector. Strong minerals prices and incomes, the high interest rate differential, and the strength of the economy attract the inflows of funds that are underpinning the strength of the Australian dollar. And that’s the downside for the economy. It’s not parity that’s the big deal. That’s just a milestone. As far as I’m concerned, anything over US80c is a disaster for the competitiveness of domestically produced tradeables - both exports and import-competing goods and services. Over US90c is a catastrophe. And parity - we’ll lose another tranche of the domestic tradeables sector in this episode. Mind you, there are winners and losers from a high dollar. The losers include agricultural

P R O P E RT Y

incomes, tradeables manufacturing and tradeable services in the tourism industry, education and business services sectors. The winners include importers, including overseas travellers, retailers, consumers buying cheap imports and importers of capital equipment. A third driver is interest rates. As the recovery proceeds, we’ll soon run into labour constraints, and then capacity constraints. Already, we’ve run through the RBA’s warning light of 3 per cent employment growth. The real problem will come as demand-inflationary pressure takes earnings inflation above 4.5 per cent. Interest rate rises have a long way to go. Three years from now we expect cash rates to be around 7 per cent and housing interest rates above 9 per cent. That’ll choke off the housing market and have an impact on household disposable incomes in the variable rate mortgage belt. A fourth driver is government expenditure strong now, but set to be cut sharply as the logic of “fiscal responsibility” takes over the budget processes of governments around Australia. My fear is that the medium-term impact will be on infrastructure spending and capacity. Meanwhile, the short-term question is whether private investment will come through quickly enough to offset the decline in public spending. In this environment, we have seen, and will continue to see, mixed outcomes for different industry sectors around Australia. The minerals sector is booming, with prices at levels allowing a 40 per cent profit margin. Exports are picking up at last as the investment boom finally adds to production capacity, as infrastructure allows its shipment and as the agricultural sector recovers from drought. Importers of goods, services and capital equipment are doing extremely well as the rising dollar reduces their costs and takes pressure off their margins, and as import penetration rises at the expense of local import-competing indus-

tries. The consumer recovery, albeit modest, plus the high dollar are boosting retailers. Even though growth is relatively subdued, retail margins remain high, underpinning profitability. Australian banks, despite their bearishness, came through the GFC relatively unscathed and are now reversing their over-provisioning for bad debts. You’d think they’d be a little embarrassed at how well they are doing while many of their customers are still doing it tough. And they remain aggressive about perceived risk. We’ve effectively given them a franchise, and that should entail responsibility to households and industry. The banks can’t just be money-making machines. The construction sector, having done really well out of hasty government construction projects, is now entering a tougher phase until growth comes through. Businesses remain in cost containment /cash preservation mode, affecting the business services sectors. And, of course, the dollar is playing havoc with the competitiveness of domestically produced tradeables - apart from minerals - both export and import-competing. That’s hitting the manufacturing, tourism, education and some services sectors, and affecting prices for agricultural produce. Overall, we can’t expect growth to continue at the same rate as it did through the past decade. Firstly, continuation of the investment boom - now that investment has risen to levels at which we are adding significantly to net capital stock means lower growth in investment and a lower contribution to growth in the economy. We’ve already seen the growth required to service a high level of investment. The alternative, an end of the boom, would mean a fall in investment and a negative shock to growth. But, with this next round of projects locked in, sustained activ-

111

ity with moderate growth is ensured through the middle of the decade. Secondly, capacity and labour constraints will inhibit our ability to grow. The downturn began at an unemployment rate of under 6 per cent. Even if, as we expect, employment growth were to slow, a year or two from now we’ll be running into tight labour markets, wage pressure and demand inflationary pressure. The question is, where will growth take place? With the resources boom continuing to require a switch of resources to enable it to take place, the high dollar and the impact on the competitiveness of domestic tradeables is operating to facilitate the process. Hence we can expect competition for labour to continue to take resources from manufacturing, from agriculture, from tourism, from education and business services to service the growth of minerals. The outlook is for strong growth over the next five years. But, while solid in aggregate, the recovery is not uniform across sectors. There will be winners and losers. And the boom won’t last forever. In all the kerfuffle about policy and the argument over income shares, we should be careful to prepare for the day when the minerals boom ends.

Dr Frank Gelber is director and chief economist of BIS Shrapnel.

112

P R I VAT E BAN K ING

Engaging the next generation Alan Shields explains how private banks are tackling the issues thrown up by an aging client base

ccording to ABS statistics, approximately 13 per cent of Australians were aged 65 and above - retirement age - in 2008, and a further 11 per cent were aged between 55 and 64. Among the Australian high-net-worth (HNW) population, however, that proportion is likely to be much higher. The Australian Private Banking Council (APBC) estimates that approximately 44 per cent of HNW individuals (HNWIs) are aged 65 and above and an incredible 81 per cent are aged over 55. HNWIs are therefore likely to be looking at long-term strategies that will address their needs in retirement and their families’ needs beyond this. Providing for the long-term needs of clients and building up a relationship with their families provides multiple benefits for private banks, both aiding in account retention over the long term and providing for the current client’s needs. Among HNWIs, there is interest in products and services that will provide for their families after they are gone. The feeling of security is an important aspect that private banks can provide; and looking after the needs of the family can be a very effective way of doing this. Estate planning and philanthropy are two key offerings that should form part of any private banking or wealth management service. Estate planning - helping with the unknown

It is staggering that approximately 50 per cent of HNWIs with less than $5 million in investible assets, and 25 per cent with more than $5 million, currently have no estate plan in place, suggesting that private banks have an enormous opportunity to address the long-term wellbeing of clients and their families. In a recent APBC HNW survey, 21 per cent of those aged 65 and older stated that they would be likely to use Will and estate plan-

Figure 3: Likelihood of using will and estate planning if offered by private bank 65+ 55-‐64 Under 55

Source: RFI

54%

13% 11% 8% 13%

43% 30%

20%

19% 7%

40%

33%

60%

15%

15% 7%

17%

80%

13%

Percentage of private banking clients by age

ning services if their private bank offered them, compared to 22 per cent of those aged 55 to 64 and 30 per cent of those aged under 55. The fact is that many HNW individuals simply do not understand the importance of a robust estate plan, so private banks also have a role to play in educating clients. Philanthropy - helping clients give their money away

Philanthropy can also be a valuable way for a private client service provider to continue relationships with the client’s family, while offering them financial education. A private philanthropic trust can be directed to a cause with personal significance for the client, allowing the private bank to tailor its service to the client’s specific needs. For a private bank, establishing philanthropic funds for clients enables it to build an ongoing relationship with clients’ children and provide them with education. Philanthropic funds are also set up in perpetuity, which means that they need to be managed - for a fee - in perpetuity.

100%

1 -‐ Not at all likely 2 3 4

5 -‐ Very likely

vate banks build multi-generational relationships with their clients’ families and provide services to assist inter-generational wealth transfer. These service offerings are important for HNWIs, and will help build relationships between private banks and families that will lead to long-term partnerships. Some of the service offerings that can smooth the wealth transfer process include estate planning as well as the establishment of philanthropic trusts. The primary advantage of these services is that they can be used to engage and educate the next generation of HNWIs.. Private banks need to ensure they have the capabilities to offer these types of services - either in-house or via professional referral partnerships. It is also important to communicate with the client about their needs, and to educate them on the benefits of different options as they plan for their future. This process is in turn valuable for building client relationships, and an opportunity to involve the next generation in planning and decision-making, ultimately laying the groundwork for the future.

Tackling the obstacles

As their clients age, it is important that pri-

Alan Shields is research director for Retail Finance Intelligence (RFI) - www.rfintelligence.com.au

P hil an thropy

113

A life of its own Financial planners can help clients structure their charitable giving so it continues long after the clients have gone. Simon Hoyle explains

he philanthropic sector’s pin-up foundations, the Ramaciotti Foundations, this year celebrated 40 years of giving to biomedical research. Vera Ramaciotti set up two foundations in 1970, following the death of her brother, Clive. They were seeded with an initial sum of $6.7 million, split equally between the foundations, realised from the sale of the Theatre Royal and some adjacent properties, in Sydney. Today, the Clive and Vera Ramaciotti Foundations, administered by Perpetual, have assets of more than $52 million, and over 40 years have made grants of more than $48 million. Andrew Thomas, general manager of philanthropy at Perpetual, says the Ramaciotti Foundations are a clear example of how a client’s urge to act philanthropically can have benefits that last well beyond the client themselves. Foundations are theoretically set up in perpetuity. An important contributor to the Ramaciotti Foundations’ ability to continue to give has been the investment strategy they have adopted. Although the foundations are by nature conservative, they are able to take a long-term view and still hold a reasonable exposure to growth assets. Thomas says that had the foundations invested in term deposits only, “there would have been no growth in the corpus of the money, and they would have distributed $400,000”. “The trusts now average $2 million a year that they distribute,” he says. “It’s important to have a long-term investment strategy. “Because you have that ‘infinite’ time horizon, you still need to have a low-risk portfolio, but you can have exposure to growth assets.” The term “foundation” is a catch-all term

that includes trusts and both public and private ancillary funds (the Ramaciotti Foundations are trusts). Thomas says that today, private ancillary funds (PAFs) are the vehicle of choice. There is considerable help available to financial planners who want to advise clients on how to set up and administer a PAF. Perpetual offers help, for example, and about two

months ago Social Ventures Australia (SVA) launched a service aimed specifically at financial planners. The SVA service is “modular” in its structure, meaning planners can use as much or as little of SVA’s expertise as they want or need, and only pay for what they use. Thomas says there are “some financial planers who are very good at thinking about philanthropy for their clients”. “But a great many financial planners don’t think about it enough, and don’t give their clients enough time to consider it. “It’s not a decision that a client makes quickly, to irrevocably give away a significant part of their wealth. It’s a decision that takes considerable time to come about. “Advisers need to be aware of that, and they

need to take their clients on a ‘journey’, to explain what that might mean, not just to them [the client] directly, but to their family members and to the community generally.” In some respects, philanthropy is a difficult issue to raise with clients. First of all, it’s seen as a “soft” issue. Second, as Thomas points out, it might be anathema to a financial planner, who has assiduously helped clients accumulate wealth, to suddenly turn around and tell them how to give it away. But as Alan Shields explains on page 112 of this edition of Professional Planner, there are some good long-term business reasons for treating philanthropy seriously. There are certain “tells” - to borrow a term from poker - that planners can be on the lookout for. Thomas says it could be “that they already know about their clients’ giving, from their tax returns”. “It could be that they know about their family situation,” he says. “It could be the client has had an issue… so there are certain topics that come up just in knowing and understanding your client that you could hook into philanthropy. “The easiest way to raise it, when you have the opportunity, is to give examples of what other people are doing.” The Ramaciotti Foundations are an obvious example, but there are others, too. And a key selling point, Thomas says, is the opportunity for the client to put their name to something. “Many people who are interested in giving something back will give back at a much greater rate if the family name is attached,” he says. “It’s not simply about writing a cheque; it’s about understanding what that cheque is going to achieve.”

114

T he Fi nal W ord

Ferrari, models and Tricky Dicky Some things were sent to try us. In fact, most things were sent to try us. Dixon casts an eye over a few of them

oday we delve into the “What Really Annoys Me” file or, as a colleague prefers to describe it: the "Shit List". I could write about the state of the industry or the latest noises coming out of Canberra - where Bill Shorten has taken the reins - but to be blunt, it would only bore you, and make me cranky. No, what we need is an opportunity to rail pointlessly and with joyous futility against those things and those people that really get up our noses. If you agree or disagree with any of these things, or if you have something you’d like to add to the list, you can send an e-mail to info@ conexusfinancial.com.au - I won’t read it, because I don’t care, but the guy whose job it is to read those e-mails will have to. And it might make you feel better - that’s what we’re about today. So, the Shit List it is: 1. People who say something is “seven times less” or “10 times less” (or some other “times less”) than something else. As in: “The public values financial advice at $300, ten times less than it costs to deliver that advice.” What they mean is, it is one-tenth of what it costs to deliver it, not ten times less. Say the cost of advice is $3000. One times $3000 is $3000. And 10 times $3000 is $30,000. I’m not a genius, but I know $300 isn’t $30,000 less than $3000. 2. People who stick the suffix “-gate” on the end of a word, to suggest a scandal or cover-up. Stupid, stupid, stupid. We know the convention arises from the name given to the so-called Watergate scandal that brought US President Richard Nixon down; but that’s only because a break-in occurred at a building that happened to be called the Watergate building. Nixon was deposed as president because he was a crook and a liar. But every time you stick “-gate” on the end of something, you’re actually telling us you think Nixon was taken down by

Dixon Bainbridge

water. Also, that you’re an idiot. 3. That weathergirl on the Today Show on Channel Nine. It’s early. Stop shouting at me. 4. That weatherman on the Today Show on Channel Nine. It’s early. Stop shouting at me. (For quality weather forecasting, see the ABC’s Graham Creed. Class.) 5. Helicopter managers. You know the kind: You can hear them coming from some distance off. They get louder as they get nearer; they hover over the top of everything and create havoc - lots of hot air and noise - and then they disappear, leaving us to clear up the mess. There’s one in every office; if you don’t know who it is in your office, it’s you. 6. Collingwood (the AFL team, not the suburb). Ferrari (the Formula 1 team). Manchester (United, the football team, not the city). Nothing more really need be said. 7. Anyone who makes a living out of how they happen to look, rather than what they can do or what they have learned. Yes, I’m talking

about you, Naomi. And you, Jennifer. And … no, the list is too long. Truly, what is there to respect about an ability to walk in a roughly straight line and to (for the most part) keep your clothes on? Jerry Seinfeld summed it up best: “What is this goofy walk that all the models do? You know that walk? Down the runway, like they really have to go somewhere. You know how they’re all wiggly, all full of importance and attitude. And when they get to the end and they look around and go, ‘Well, I guess I’ll just go back’.” 8. People who express distance as time. As in: “How far is it to where the kids play tennis?” And the answer is, “About 50 minutes”. This happened just the other day. Turns out that in their case they live in the country and 50 minutes equals 70km. In my case 50 minutes equals 10km. Boffins say Einstein proved that time and distance are interchangeable; and he liked to prove this by turning up to business meetings five kilometres late. 9. Referring to some hapless starlet on the fast-track to rehab, or to a sportsman who couldn’t keep it in his pants, as being at “the eye of the storm”. What they mean to convey by this is that the over-indulged, under-disciplined individual in question is at the centre of a controversy, generally involving some sort of recreational substance abuse or a recreational person. In fact, the eye of a storm - especially of a cyclone or a hurricane - is a place of almost preternatural peace and calm. Typically, there’s not a cloud in the sky. There’s no rain, and there’s certainly no wind. That’s what the “eye” of a storm is. It’s quite different from, say, the “teeth” of a storm - being there really is as bad as it sounds. 10. Running out of space to finish mak Dixon Bainbridge, Professional Planner’s resident curmudgeon, can be contacted on info@conexusfinancial.com.au

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