Money Management (5 May, 2011) by Cirrus Media

The publication for the personal investment professional

www.moneymanagement.com.au

VOLUME REBATES TO BE GRANDFATHERED: Page 5 | RISK INSURANCE MARKET BOOMING: Page 12

Planner sentiment heading down By Mike Taylor

Table 1 Financial planner sentiment index 60 5353 40

6000

38 38

2424

16 16

20 -9

0 -20

1515

2929

32 32

-9

5500 5000

-3 -3

4500

-19 -19 -31 -31

4000

-36 -36

Proposed financial reforms announced

-40

3500 3000 11

Vanessa McMahon

Ap ri l

Fe b

De c

10 Ju ly 10 O ct 10

ay M

Fe b

De c

Ju ly 09 O ct 09

ay 09

Fe b

De c

08 Ju ly 08 O ct 08

Ap ri l

Fe b

-60

Source: Wealth Insights

“There was a significant negative impact on sentiment then, and I think we can expect a similarly significant impact in response to these latest proposals,” she said. McMahon said focus group work attached to her company’s adviser sentiment survey suggested the proposed two-year

opt-in arrangements would have a significant impact on many well-established planning practices which, while having moved to fee-for-service, had been heavily reliant on commissions. “The practices that I think will feel it most are those with long client lists on which there are plenty of orphans,” she said.

Commissions ban to shake risk market A SURVEY of life risk advisers has confirmed the Government’s Future of Financial Advice (FOFA) changes to commissions within superannuation will have a significant impact on not only the amount of risk they write, but also the structure of the industry. While it focused on a total ban on life risk commissions, the Beaton IFA Market Pulse Survey also indicated the dramatic impact the proposed FOFA changes were likely to have on the industry. The FOFA proposals involve banning commissions on life risk products within superannuation – both group and individually advised. The sur vey, released exclusively to Money Management, found that if life risk sales commissions were banned, 77 per cent

1515

23 23

39 39

ASX All Ordinaries Index

SENTIMENT among Australian financial advisers appeared to be heading down even before last week’s Government announcement about the Future of Financial Advice (FOFA) changes. According to the latest survey data released by Wealth Insights, adviser sentiment took a significant downward turn in April driven by a combination of factors including the Japanese tsunami and subsequent nuclear accident. However, Wealth Insights managing director Vanessa McMahon pointed to the manner in which adviser sentiment had declined when the Government first canvassed the FOFA changes on the back of the findings of the Parliamentary Joint Committee into financial planning in late April and early May last year.

Sentiment Index

Print Post Approved PP255003/00299

Vol.25 No.16 | May 5, 2011 | $6.95 INC GST

of respondents expected a decrease in the amount of life risk they wrote, with 61 per cent estimating the decrease could be in excess of 40 per cent. As well, the survey found that the advisers surveyed believed the banning of life risk commissions would result in widespread changes to the current market dynamics in the sector, as well as the competitive landscape and consumer behaviour. Importantly, the survey data noted that while life risk insurance represented on average 55 per cent of advisers’ new business remuneration, its contribution to total remuneration was almost equal to that of wealth management. The survey questioned 528 life risk advisers with the results being provided

to major insurance providers such as Asteron, AIA Life, CommInsure, Macquarie Life, OnePath and Zurich. A number of the advisers surveyed suggested a ban on commissions would result in changes to the insurance advice process, something that would require significant customer education. As well, it said many advisers had predicted a flight to retirement or a ‘mass exodus’ from the industry due to the challenges of selling insurance with a direct fee to endcustomers. It said advisers believed that the banks and the other big institutional players with big marketing budgets would dominate Continued on page 3

“From what they are saying, they will face real challenges in dealing with an opt-in.” McMahon said that while the first iteration of the FOFA proposals had driven down sentiment through the middle of last year, the actual state of the markets had been a greater influence through the closing months of

2010 and early months of this year. “As the markets rose, so did adviser sentiment,” she said. “Equally, the Japanese natural disaster plus uncertainty in the Middle East and North Africa and the continuing European debt crisis have played their part in driving down sentiment in March and April.”

Risk practices retain value

Alan Kenyon By Caroline Munro RISK insurance financial planning practices will continue to be highly valued despite the Government’s Future of Financial Advice (FOFA) announcement of a prospective ban on commissions on insurance held inside superannuation, according to practice valuation specialists and brokers. Kenyon Prendeville, Centurion Market Makers and Radar Results all agreed that risk practices continued to be highly sought after and valued over the last year. While there was still some uncertainty around the FOFA package, the general consensus was that risk

practices were safe. However, the announcement last week may have some impact on bottom lines, according to Centurion’s Chris Wrightson. “This will impact revenue for risk practices. However, since the risk commission ban targets superannuation-based insurance only and a quality risk practice will likely provide insurance outside of super, it may not be a major impact,” he said. “It will be interesting to see if more risk business is written outside of super when these reforms are implemented given that’s where a commission is still payable.” Kenyon Prendeville’s Alan Kenyon and Radar Result’s John Birt agreed buyers and sellers were relaxed that there would not be huge implications for risk practices, and that valuations had remained high over the first quarter of the year. Kenyon said many believed grandfathering provisions would not only ensure that valuations remained as they were but that certain components of a business would actually be valued more highly. Wrightson said that good risk practices with experienced quality risk writers would continue to be highly valued as there were relatively few risk writers. The ban on insurance commissions in super may also impact those advising Continued on page 3

Editor

Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Jayson Forrest Tel: (02) 9422 2906 jayson.forrest@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Angela Faherty Tel: (02) 9422 2210 angela.faherty@reedbusiness.com.au Senior Journalist: Caroline Munro Tel: (02) 9422 2898 Journalist: Milana Pokrajac Tel: (02) 9422 2080 Journalist: Ashleigh McIntyre Tel: (02) 9422 2815 Melbourne Correspondent: Benjamin Levy Tel: (03) 9509 7825 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Tim Stewart Sub-Editor: John Golledge Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2011. Supplied images © 2011 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

Average Net Distribution Period ending Sept '10 10,183

mike.taylor@reedbusiness.com.au

Beware a lean and hungry treasurer

ith less than a week to go before the Treasurer, Wayne Swan, hands down his fourth Federal Budget, the financial services industry should be wary of a Government that has spent the past four weeks reciting a mantra of fiscal austerity. While there is every indication the Government will use the Budget to eliminate some of the unintended consequences of past Budget decisions – such as its 2008-09 cuts to concessional contribution caps and the consequent difficulties with respect to excess contributions – the financial services industry should not ignore the fact it represents a substantial revenue milch cow. The industry needs to reflect upon its revenue-generating and collecting capacity in the context of a Federal Government that has already admitted current budget revenues are tracking well below what was expected, and in circumstances where forecasts in next week’s Budget are expected to confirm revenue from the proposed Mineral Resource Rent Tax will not be as great as originally expected. While Swan has openly canvassed ‘unpopular’ cuts in the Budget, cuts alone

“

While Swan has openly canvassed ‘unpopular’ cuts in the Budget, cuts alone will not serve to deliver the sort of fiscal bottom line a Government needs.

”

will not serve to deliver the sort of fiscal bottom line a Government needs to generate the longer-term political capital that will flow from delivering a return to surplus. With this in mind, financial planners and their clients would do well to consider those elements of Government policy

that have, from time to time, been described as either overly generous or economically difficult to sustain. They might care to reflect that virtually on the eve of the 2007 election of the Rudd Labor Government, former Prime Minister and Treasurer, Paul Keating, questioned whether the Howard Government’s so-called ‘Better Super’ regime, including transition-to-retirement, could be sustained through times of Budget adversity. “It remains to be seen whether the concessionality introduced by the Coalition for retirees over 60 can, in monetary terms, be sustained,” Keating said. “It is one thing introducing these things, but if you look at the long-run cost to the Budget, it is another thing sustaining them.” Keating is not a particularly influential character within the current Government, and while it seems unlikely that the Government will utterly remove a policy as popular and well used as the transition-to-retirement, that does not preclude it from tinkering at the edges to reduce the Budget impact. – Mike Taylor

ABN 80 132 719 861 ACN 000 146 921

Great value for More of your clients. We’ve lowered the minimum investment on two of our leading platforms, giving more of your clients the ability to benefit from lower fees and great features which may have previously been out of reach. The minimum investment for FirstChoice Wholesale Personal Super is now only $1,500, reduced from 100,000 – and FirstWrap Plus is now $20,000 reduced from $250,000. With these lower fees you and your clients still get all the features you’d expect plus a whole lot more on FirstChoice, including the fastest transactions in the platform market, great reporting, more flexible insurance and broad investment choice. To find out more, contact your Business Development Manager, call 13 18 36 or visit colonialfirststate.com.au/lowerfees

Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of interests in FirstChoice Wholesale Personal Super offered through the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (Avanteos) is the issuer of interests in FirstWrap Plus and FirstWrap offered through the Avanteos Superannuation Trust ABN 38 876 896 681. This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider the PDS available from Colonial First State before making an investment decision. Colonial First State and Avanteos are owned ultimately by Commonwealth Bank of Australia ABN 48 123 123 124 through the Colonial First State group of companies. Commonwealth Bank of Australia and its subsidiaries do not guarantee performance or the repayment of capital of Colonial First State or Avanteos. CFS2000/HPC/MM 2 — Money Management May 5, 2011 www.moneymanagement.com.au

News

Zurich to exit research house Lonsec By Mike Taylor ZURICH is expected to announce it is exiting its ownership in the research and ratings house, Lonsec, within the next few weeks. While the company late last Friday formally declined to discuss industry speculation, Money Management has had it confirmed that Lonsec has been entertaining bids from interested parties for at least the past few months. Lonsec will represent a rich prize for the winning bidder, with Money Management’s Rate the Raters survey having seen it rise to market dominance in both the funds management and financial planning dealer groups space. According to Money Management’s sources, the sales process would see Zurich exit both the research and funds

Shane Doyle

management elements of the Lonsec business, allowing the Swiss-based insurer to further concentrate on what it regards as its core businesses. The sales process around Lonsec follows on from recent structural and management changes announced by Zurich. The company announced in March that Zurich would be focusing on two distinct operating businesses, general insurance, and life insurance and investments – with two chief executives replacing the incumbent David Smith. Smith departed the Zurich business at the end of March and the company has been systematically moving to its new structure. Shane Doyle was appointed chief executive of the general insurance business, while the former general manager, Life Australia, Colin Morgan, was appointed

chief executive of Life Australia. Money Management understands that a number of bidders have emerged for the Lonsec business with names such as Mercer, Van Eyk and Morningstar having been canvassed. It is also understood that at least one former senior ratings house executive has been approached to provide consultancy support for one of the leading bids. It is not known whether senior executives of Lonsec have sought to mount a management buyout. Lonsec is currently structured to encompass a number of businesses including research and ratings, stockbroking, investment consulting and portfolio services. Lonsec partners with Money Management to deliver the annual Money Management Fund Manager of the Year.

Commissions ban to shake risk market Continued from page 1

the industry using TV and other mainstream media to influence consumers. On the question of an up-front fee-only model, the sur vey found that more than 70 per cent of respondents disagreed with the model, but that a number of advisers aged 65 and over supported the concept. Among the reasons

given for supporting the concept was that a feefor-service model would better protect clients down the track, with reduced premiums at times when they were needed most. Others suggested the fee-for-service model was better for clients in the medium to long term and would prove to be more transparent with less potential for bias.

Risk practices retain value Continued from page 1 on self-managed superannuation funds (SMSFs), although Kenyon said that his understanding was that SMSFs would not be pulled into the ban and Wrightson said there was no direct reference to SMSFs in Treasury’s information pack released last week. Wrightson conceded that a footnote revealed that the Government did see the ban in the light of the Super System Review, which proposed that “upfront and trailing commissions and similar payments should be prohibited in respect to any insurance offered to any superannuation entity, including SMSFs”. “SMSFs are superannuation, so on the basis that they were included in this area may have some impact since it is often higher insurance amounts that are written in SMSFs and this may have a revenue impact on risk practices,” said Wrightson. Kenyon said it was likely that in general some businesses would lose value after 2013 as a result of the reforms, and Kenyon and Wrightson agreed that those with a high exposure to corporate super would be hardest hit. Wrightson guessed that 20 to 30 per cent of planners who owned their own businesses would have corporate super exposure. www.moneymanagement.com.au May 5, 2011 Money Management — 3

News

Morgan Stanley Smith Barney sued for flawed advice By Chris Kennedy MORGAN Stanley Smith Barney is being sued by a Victorian family who allege they lost $400,000 due to flawed investment advice. The family was allegedly advised by Tony Emerton of Citigroup Wealth Advisers to take out a margin loan of $160,000 and invest it, along with approximately $240,000 the family had

borrowed to build their home, in the stock market, according to the family’s lawyer, Briohny Coglin of Maurice Blackburn lawyers. Citigroup Wealth Advisors came under the control of Morgan Stanley Smith Barney in 2009. “Mr Emerton recommended the couple use gearing and call options, and when the couple told

him they didn’t know about such things, Mr Emerton said he’d explain it when he was in Melbourne. This meeting and the explanation never took place,” Coglin said. Maurice Blackburn is alleging Citigroup Wealth Advisors breached its duty of care and the Corporations Act. “Between March 2007 and mid-2009, Ms Morton [the liti-

gant] regularly received calls from Mr Emerton seeking instructions to buy or sell shares. On each occasion, the couple followed Mr Emerton’s advice. The strategy was meant to use the profits from the shares to pay back the loans, but the shares went down and Ms Morton was left with a huge debt that she couldn't repay,” Coglin said. Morgan Stanley Smith Barney

noted that the substance of the matter occurred before Morgan Stanley took control of the firm in June 2009, and it was operating as Citigroup Wealth Advisors. “The allegations raised are denied by the firm and we are defending this matter,” a spokesperson for Morgan Stanley Smith Barney said. The matter is set down for trial on 16 November, 2011.

Managed funds remain positive By Caroline Munro

MOST managed funds saw a positive first quarter of 2011 despite natural disasters and geopolitical uncertainty, according to Morningstar senior research analyst Julian Robertson. Robertson noted that while markets continued to grapple with geopolitical tensions and the implications of the Japanese disasters, which created uncertainty, the performance in the first quarter across the growth asset classes showed investors’ belief in the strength and sustainability of the global recovery. However, he added that continuing volatility was to be expected. Morningstar has released its managed fund performance league tables for the first quarter of the year, which show that active Australian share fund managers in the ‘large growth’ and ‘blend’ categories struggled to beat the index, while the ‘value’ category only managed to beat the S&P/ASX300 Accumulation Index by three basis points. Australian small caps were driven down by the small resources sector, although Robertson noted that most fund managers beat the S&P/ASX Small Ordinaries Index nonetheless. He said other key findings were that international share markets outperformed the domestic market, rising 3.89 per cent. However, he noted, most international share fund managers lagged the index. Australian listed property outperformed the broader share market, with the average fund manager just edging over the index, he said. But the sector lagged global real estate investment trusts. 4 — Money Management May 5, 2011 www.moneymanagement.com.au

News

Pre-existing volume rebates to be grandfathered under FOFA By Mike Taylor

VOLUME rebate arrangements contractually existing before 30 June, 2012 will continue to exist under the Government’s Future of Financial Advice (FOFA) changes, under an agreement with the Government brokered by the Financial Services Council (FSC). FSC chief executive John Brog-

den confirmed the arrangement to Money Management, saying his organisation believed it had extracted an agreement that preexisting volume rebate arrangements would be grandfathered. As well, while the statement issued by the Assistant Treasurer, Bill Shorten, referred to any and all volume-related bonuses, it is understood this does not extend to arrangements between fund

managers and platforms – something that will ensure the continued existence of the pooled investment model. Commenting on the Government’s FOFA announcement, Brogden said he believed that it was broadly a fairer package than that which had been originally outlined by the previous Minister for Financial Services, Chris Bowen. However, Brogden expressed

concern at the decision to ban commissions with respect to all risk insurance within superannuation, describing the decision as “nonsensical” and likely to widen Australia’s continuing underinsurance problem. “If the Government has set out to achieve two objectives – higher quality financial advice, and more accessible financial advice – then it has achieved just one of those

outcomes because advice will undoubtedly become more expensive,” he said. The FOFA changes received a mixed reception throughout the financial services industry last week, with AMP Financial Services, MLC and NAB Wealth welcoming some elements but warning about the fallout from the ban on risk commissions within superannuation.

If seeing is believing, we don’t blink.

Mark Rantall

FPA outlines response to FOFA reforms

By Chris Kennedy THE Financial Planning Association (FPA) is concerned about the optin requirements and the banning of risk commissions within superannuation in the Government’s Future of Financial Advice (FOFA) reforms, but says a detailed examination of the reforms is needed to understand how they will affect consumers and FPA members. The FPA was awaiting detail in the draft legislation to understand how concerns about administration, penalties and consumer protection are addressed. The FPA said it continues to support insurance commissions until a valid alternative remuneration structure is available. FPA chief executive Mark Rantall said the decision to look at amending the original proposed FOFA reforms in regard to the expansion of intra-fund advice and the best interests duty, will apply welcome consumer protection measures in a consistent manner across the industry.

53 1

54 29

22 24 26

7 8

6 5

49 21

34 37

12 10

45 36

44 25

At Fidelity we don’t just pride ourselves on our in-depth analysis, but how often we conduct it. Every 90 days we review around 90% of the world’s largest companies, allowing us to continually refresh information on thousands of companies, helping us to avoid surprises. Does this discipline give us a better view? We certainly think so. 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 International and the Fidelity International and Pyramid logos are trademarks of FIL Limited. Company contact data is based on FIL coverage of the MSCI World Index as at 31 December 2010. © 2011 FIL Investment Management (Australia) Limited.

www.moneymanagement.com.au May 5, 2011 Money Management — 5

News

Concessional caps must be flexible: industry funds By Mike Taylor

Fiona Reynolds

INDUSTRY superannuation funds have weighed into the excess contributions caps issue, warning members of the dangers of breaching their concessional limits in the current financial year. Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said the risk

of exceeding the concessional cap had grown since the ‘before tax’ concessional caps were halved from July 2009, since many people were unaware of the changes. “It’s been estimated that more than 100,000 Australians – many of them unsuspecting – have breached their cap limits in the past few years,” she said. “While there is no doubting the benefit of

topping-up your super to ensure a better retirement outcome, there is also no doubting that breaching your cap limit can be an expensive mistake.” Reynolds said the AIST was urging the Government to provide greater flexibility in the coming Federal Budget for those who made voluntary concessional contributions to superannuation.

“One of AIST’s recommendations is that the ‘bring forward’ rule that currently applies to after-tax ‘non-concessional’ caps should be similarly applied to ‘concessional caps’,” Reynolds said. She said such a measure would provide more flexibility around the caps while also protecting people who might inadvertently breach their cap in any one year.

AMP announces new sustainable funds team By Chris Kennedy

AMP Capital Investors (AMPCI) will continue with its sustainable funds strategy under a new-look team, despite the departure of its head of sustainable funds, Michael Anderson, in March. The strategy as a whole was given an ‘avoid’ rating last week by Morningstar, with senior research analyst Julian Robertson saying that Morningstar would require more stability and clarity around the future of the funds to alter that rating. There was significant intellectual property tied to Anderson’s investment in the fund, and his departure in late March was closely followed by that of portfolio analyst Rahul Badethalav, creating uncertainty around future departures, Robertson said. AMP Capital senior research analyst Dr Ian Woods has taken over as head of sustainable and now shares responsibility for the fund with senior portfolio manager/analyst Will Riggall, who is now lead portfolio manager. Jonas Palmqvist, senior portfolio manager/analyst in the Capital team with responsibility for the financials sector, is also working with the Sustainable Equities team, according to AMPCI. Woods told Money Management that Anderson would continue his involvement with the sustainable team one day per week for the next few months to help transition his responsibilities. The AMPCI Sustainable Future strategy had around $2.3 billion in assets at 30 June 2010, according to Morningstar. 6 — Money Management May 5, 2011 www.moneymanagement.com.au

Have you been playing just one of our strings? Just as a musician needs four strings to perform at their musical best, you need access to a complete suite of investment solutions to meet the ﬁnancial needs of your clients. And what if you could ﬁnd all these solutions – cash, investments, margin loans and managed funds – in one place and from a company that epitomises service, reliability and trust? With the launch of Bendigo Wealth you can. Part of Bendigo and Adelaide Bank, Bendigo Wealth brings together Adelaide Bank, Leveraged Equities, Sandhurst Trustees and our new platform, Trinity3, to provide you and your clients with a complete solution that’s simple to explain and easy to use. With all our strings located exactly where they should be, orchestrating your clients’ investment strategies has never been easier. Find out more about Bendigo Wealth at www.bendigowealth.com.au, call your Business Development Manager or phone 1800 018 018. It’ll be music to your ears.

Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL 237879. (S33616) (03/11)

Incorporating

Proudly part of

News

Adviser liability still a major concern, says FPA By Milana Pokrajac

Deen Sanders

ISSUES surrounding adviser liability remain a concern and will be discussed during the next phase of Government consultation regarding investor compensation, according to the Financial Planning Association (FPA) deputy chief, Deen Sanders. The FPA has welcomed the Trea-

sury’s newly launched paper on compensation arrangements for retail clients, which suggested the creation of a ‘last resort’ compensation scheme and better administration of professional indemnity (PI) insurance requirements. However, Sanders said the association would be seeking a further discussion about the extent to which failed investments should

be blamed on financial advice given to the client. “You cannot be responsible for 100 per cent of the loss, because it’s usually a product failure that initiated the loss,” Sanders said. He said addressing this issue could be part of the solution to the rising PI insurance premiums, which were placing increasing pressure on advisers’ businesses.

“It’s increasingly a problem as licensees seek to offset the cost of their increasing PI insurance premiums by transferring that cost to advisers,” he added. The FPA is also concerned about the possible additional costs of establishing a last resort compensation scheme, as suggested by Richard St John – the author of the Government’s consultation paper.

East coast expansion for Plan B By Ashleigh McIntyre

There’s more than one way to retire

New retirement solutions with the right growth assets Over 29 years Legg Mason Australian Equities has progressively built a suite of solutions to match the needs of Australian investors. Our latest innovations, the Legg Mason Australian Equity Income strategy and the Legg Mason Australian Real Income Fund, are tailor-made for Australian retirees seeking income. Legg Mason Australian Equity Income strategy Invests in listed Australian shares and aims to provide a sustainable income for retirees with in-built inﬂation protection. Legg Mason Australian Real Income Fund Aims to achieve a sustainable yield by investing in listed property and infrastructure, as well as utilities – entities that can increase their own revenues in line with inﬂation.

Want to know more? Freecall 1800 679 541 or visit www.leggmason.com.au

Performance. Experience. Stability.

Legg Mason Asset Management Australia Limited (ABN 76 004 835 849 AFSL 240827) trading as Legg Mason Australian Equities is part of the global Legg Mason, Inc. group. Legg Mason Asset Management Australia Limited makes no guarantee of capital or income returns. This document has not been prepared to take into account the investment objectives, circumstances or particular needs of a person. Before investing you should obtain a copy of the Product Disclosure Statement, “PDS”. A Product Disclosure Statement is available for the Legg Mason Australian Real Income Fund and can be obtained by contacting Legg Mason Asset Management Australia Limited on 1800 679 541. The PDS for the Legg Mason Australian Equity Income Trust is expected to be available on 1 June 2011.

8 — Money Management May 5, 2011 www.moneymanagement.com.au

PERTH-BASED wealth management group Plan B has expanded its presence in the eastern states with the acquisition of a 33 per cent stake in Queenslandbased dealer group My Adviser. This $980,000 investment is the first in a series of three tranches that will see Plan B acquire the balance of My Adviser over the next two years. My Adviser is a network of 54 advisory businesses with around $1 billion of funds under advice and 122 authorised and corporate representatives based in Queensland, New South Wales and Victoria. Bryan Taylor, executive chairman of Plan B, said the agreement was in line with Plan B’s goal of further strengthening its eastern states representation and expanding the scale of its dealer services activities. “We have been looking for a client-focused organisation that helps build our coverage of the eastern seaboard, and My Adviser provides this exact opportunity,” Taylor said. Michael Summers, current managing director of My Adviser, said his firm was attracted to Plan B’s established credentials. “We selected Plan B to partner with us as we enter a very challenging period in the evolution of the financial planning profession,” Summers said. Summers will remain chairman of My Adviser during the acquisition period, while current deputy managing director Philippa Sheehan will step up to the position of managing director.

Equities Trading Gearing Debt Optimisation Portfolio Administration Tax Reporting Cash Portfolio Construction IPOs & Placements

We’ll help you grow from the middle up. You may not recognise our name. But as a leading provider of wholesale investment solutions, we’re already at the centre of more than 10,000 advisers and 400 dealer groups, as well as some of Australia’s largest ﬁnancial institutions. So why put us at the heart of your operation? Mostly because we can help you meet your clients’ increasing demands. From equities trading to gearing, portfolio administration and beyond, we can help broaden your oﬀering. And grow in this rapidly changing market. For more, call 1300 360 896 or visit coreservices.com.au

Disclaimer: Share trading through Core Equity Services is a service provided by Australian Investment Exchange Ltd (“AUSIEX”) ABN 71 076 515 930 AFSL 241400, a Participant of the ASX Group. Core Equity Services is a trademark of the AUSIEX. AUSIEX is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia (“the Bank”) ABN 48 123 123 124 AFSL 234945. The Bank and its subsidiaries do not guarantee the obligations or performance of AUSIEX or the products or services it offers. AUSIEX is not an Authorised Deposit Taking Institution and its obligations do not represent deposits or other liabilities of the Bank. This information has been provided for Australian Financial Services Licence holders only. Please consider the appropriateness of the information provided in the PDS/T&C’s in regard to your client’s individual needs and circumstances. Products under the Colonial Geared Investments brand are provided by the Bank. CSL0088/MM

InFocus ADVICE SNAPSHOT Aggregate claims against FOS members who provide investment advice services – 2006 to 2009

$124.4m Financial planning

$37.1m

Managed investments

$22.9m Stockbroking $5.4m

Other claims

$189.8m Total

Note: The above figures represent claims, not outcomes. Source: Financial Ombudsman Service

WHAT’S ON

FSC Post Budget Breakfast 11 May, 2011 Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney www.ifsa.com.au

FINSIA – A blueprint for ESG 17 May, 2011 Blake Dawson, Level 36, Grosvenor Place, 225 George Street, Sydney www.finsia.com

FPA May 2011 Seminar 25 May, 2011 Royal Canberra Golf Club www.fpa.asn.au

Money Management Fund Manager of the Year Awards 26 May Sheraton on the Park, Sydney www.moneymanagement.com. au/FMOTY

Financial Ombudsman Service National Conference 2 June, 2011 Melbourne Convention and Exhibition Centre www.fosconference.org/fos/

End of the ‘phony war’ on FOFA With the Government’s release of its Future of Financial Advice proposals, Mike Taylor writes that the financial planning industry now has a tangible target at which to aim its lobbying efforts.

t was a measure of the public posture adopted by the Assistant Treasurer, Bill Shorten, that he held his major media briefing concerning the Government’s Future of Financial Advice (FOFA) changes accompanied by “a victim of the Westpoint collapse”. It is also worth nothing that the minister’s announcement attaching to the FOFA changes specifically mentioned Storm Financial, Trio Capital and Westpoint. It must have been clearly in the minds of Shorten’s advisers that these three collapses provided a solid case for announcing the Government’s preferred position on the FOFA changes, particularly the banning of volume rebates and commissions with respect to risk in super as well as the implementation of a twoyearly opt-in. However, in circumstances where Storm Financial represented a fee-for-service operation and where many investors in both Trio Capital and Westpoint were self-directed rather than advised, advisers affected by the Government’s FOFA approach have every reason to feel their industry is being made the scapegoat for a wide range of ills, including inherent shortcomings in the Financial Services Reform Act and the regulatory approach undertaken by the Australian Securities and Investments Commission (ASIC). The chief executive of the Association of Financial Advisers (AFA), Richard Klipin, was absolutely right when he declared that, for his organisation, the release of Shorten’s FOFA announcement represented the end of the “phony war”. What Klipin meant was that after months of participating in the Government’s consultative processes around FOFA and haggling with Treasury officials about what might and might not be included in the ultimate legislation, the industry now has something concrete to aim at. The AFA, together with the Financial Services Council (FSC), the Financial Planning Association (FPA) and other organisations lobbied hard on the issue of opt-in, fiduciary duty and

10 — Money Management May 5, 2011 www.moneymanagement.com.au

“

I would think, however, that a number of those independents would be influenced by the impact these changes would have on planning practices in their electorates.

”

commissions related to risk insurance and, while the outcome announced by Shorten has been widely panned by planners, the industry managed to extract a number of key concessions from the Government. Foremost amongst those concessions was the grandfathering of volume rebate arrangements entered into before 30 June, next year, and the apparent continuation of rebate arrangements between fund managers and platforms. However, the greatest loss on the part of the industry, and one which appeared to blind-side the leading lobbyists, was the decision to ban all commissions related to the sale of risk products within superannuation. According to the lobbyists who discussed the issue with Money Management, the major industry organisations did not become aware of the Government’s intentions on risk commissions until little more than a week before Easter. What the Government can now expect is that the AFA and virtually all the other major industry organisations will direct their attention towards convincing Shorten to amend his approach banning all commissions relating to risk in super while creating some more flexibility around volume rebates. What the release of FOFA also signals is a formal beginning to the Parliamentary political debate, with the Opposition spokesman on Financial Services, Senator Mathias Cormann, making it clear to Money Management that the Coalition would be vetoing the package in its present form. He pointed out, however, that while the Opposition could not by itself force amend-

ments to the Government’s package, nor could the minister ensure passage of the legislation without the support of the independents. “I would think, however, that a number of those independents would be influenced by the impact these changes would have on planning practices in their electorates,” he said. In circumstances where the FPA and other industry organisations have already exhorted their members to lobby their local Member of Parliament with respect to the FOFA changes, Cormann’s assessment relating to independent members in the House of Representatives is probably right. In the heat which accompanied Shorten’s initial announcement last week, it was easy to lose sight of the fact that the overall FOFA package did not contain many of the measures originally outlined by the former Minister for Financial Services, Chris Bowen, before last year’s Federal Election. That was a package which canvassed annual opt-ins, a blanket ban on commissions and some tough requirements around fiduciary duty. That Shorten’s package contained some obvious compromises, prompted FSC chief executive, John Brogden, to reflect that the latest package was more balanced than that originally proposed by Bowen. Equally, Cormann also reflected that FOFA 2 contained elements which were less objectionable than FOFA 1 and it was possible the package ultimately introduced to the Parliament might be even more palatable than FOFA 3. With the “phony war” around the FOFA changes now over, the financial services industry will need to begin lobbying in earnest in the knowledge that, with the Greens gaining control of the Senate later this year, the best strategy is to achieve change either before the legislation is introduced or via amendments in the House of Representatives. What the industry can be sure about is that some elements of their lobbying will be strongly countered by the industry superannuation funds.

North, caters for your clients’ needs every step of the way

North Platform

Features at a glance

North supports your clients throughout the early stages of life: as they

• Managed funds

buy a home, raise a family and build their wealth – all the way through

• Direct shares

to retirement when they need both regular income and ongoing capital growth to ensure their nest eggs last the distance.

• Term deposits • Model portfolios

North protects your clients’ ability to generate future ﬁnancial wealth It also protects their accumulated savings as they approach retirement

• Award winning individual insurance options

(their ﬁnancial capital) by offering capital protection with upside potential.

• Optional guarantees

(their human capital) via Elevate’s award-winning insurance options.

• Straight-through processing • Competitive and ﬂexible pricing • Comprehensive online client and business reporting

Finally there is a platform that caters for your clients’ ﬁnancial needs at every stage.

Find out more about how North can help your clients and transform your business. Visit north.axa.com.au or talk to your business development manager on 1800 655 655.

Important information: This publication has been prepared for distribution to professional financial advisers only and is intended to provide general information. It is not intended to be distributed or made available to existing or potential investors. AXA Australia does not authorise the distribution of this publication to or use by existing or potential investors. It is not intended to take the place of professional financial and taxation advice and you should not take action on specific issues in reliance on this information. AXA Australia products will only be accepted on receipt of an online application form accompanying a current Product Disclosure Statement (PDS). This information is provided for persons in Australia only and is not being provided for the use of any person who is in any other country. north.axa.com.au North Service Centre GPO Box 2915 Melbourne VIC 3001. Telephone: 1800 667 841. Wealth Personal Superannuation and Pension Fund ABN 92 381 911 598. Trustee: N.M. Superannuation Pty Ltd ABN 31 008 428 322 AFS Licence No. 234654. Member of the Global AXA Group.

Risk Insurance

A market in bloom Janine Mace examines the risk insurance industry and discovers a buoyant market set for continued growth. “IT’S a great business to be in, with double-digit growth predicted for years to come.” When you hear financial services professionals talking about those sorts of figures, you know there is plenty of money being made. And that is clearly the case when it comes to Australia’s life risk sector. Far from being a dull market where little happens, life risk is facing some dramatic challenges and changes – even if many are the result of its current success. As Deloitte par tner, Paul Swinhoe, explains: “Insurance is still a rapidly growing market and there is no end to that in sight. It is growing at 10 per cent per annum and so it is a very attractive market to be in.” The latest figures from Plan For Life Actuaries & Researchers support this view, with the risk market enjoying solid growth and experiencing a 13.4 per cent increase in inflows over the 12 months to 30 September 2010. Within the total market, the individual risk lump sum sector (term life, total and per manent disablement, and trauma) saw inflows rise 11.7 per cent, while inflows in the individual risk income market (income protection, sickness and accident, and business expenses) grew 10.8 per cent. Growth in the group r isk market was even more

Key points • The life risk market is enjoying sustained

growth, which is partly explained by the underinsurance problem in Australia. • The large customer base has led to fierce competition in the sector from providers, leading to pressure on prices. • Technology is playing a large role in the market, making transactions and underwriting decisions much faster. • Regulators are demanding that product providers observe higher capital requirements. dramatic, with inflows jumping 17.6 per cent on the back of strong business growth, according to Plan For Life. Although these figures paint an attractive picture, it is not without its challenges. One of the biggest of these is the wave of regulatory change facing the market. “We are at a very interesting point in the cycle,” says MLC head of advice product for insurance, Sean McCormack. From the Future of Financial Advice reforms to new capital provisioning and accounting standards, there is potential for a dramatic reshaping of the industry. “We are just seeing reform and regulatory change everywhere at the moment.

Some of it in the advice area, some in the capital space and some in the regulatory area,” McCormack says. “This is pulling the life business in many directions at once,” explains Zurich Life Australia chief executive officer, Colin Morgan. “There is an emergence of multiple trends all at the same time and there is a lot going on.” These forces are making old distinctions less relevant, according to OnePath insurance head of product and marketing, Gerard Kerr. “The boundaries between group, direct and retail are blurring a little. Limited advice will blur things and bring it closer to direct and telesales, while in group they are lifting their offer too and that is bringing it closer to the retail market,” he notes.

Competing for the dollars

One trend in life r isk that nobody disputes is its competitiveness, with everyone seeking to grab a slice of the action. “The market environment is leading to renewed competitiveness across all channels. We expect to see the advised market experience a good growth rate, but we could see better growth rates in other channels,” McCormack says. Morgan agrees: “We are seeing 10 per cent growth year-on-year in the retail

Table 1 Total risk premium inflows – 30 September 2010 $ million

Year ended Sept 2010

Annual growth

Marketshare

Year ended Sept 2009

Marketshare

National Australia/MLC Group

1,406.9

11.4%

15.3%

1,262.9

15.6%

CommInsure Group

1,144.5

-7.0%

12.5%

1,231.0

15.2%

OnePath Australia Group

1,131.3

12.0%

12.3%

1,010.2

12.5%

Tower Group

1,103.1

40.7%

12.0%

783.8

9.7%

AIA Australia

806.6

18.2%

8.8%

682.5

8.4%

AMP Group

805.2

20.3%

8.8%

669.6

8.3%

AXA Australia Group

697.7

5.2%

7.6%

663.1

8.2%

Suncorp Group

677.3

5.4%

7.4%

642.8

7.9%

BT/Westpac Group

450.1

10.2%

4.9%

408.2

5.0%

MetLife Insurance

255.8

-0.1%

2.8%

256.2

3.2%

Others

712.3

43.6%

7.8%

496.0

6.1%

Total

9,190.8

13.4%

100.0%

8,106.3

100.0%

Source: Plan for Life Actuaries & Consultants

12 — Money Management May 5, 2011 www.moneymanagement.com.au

market, while in direct it is 15 per cent,” he says. The growth is keeping insurers working hard to improve their product offerings. Both Zurich and MLC have upgraded their online services, while AIA Australia has launched WeCare, a phone and email support service. Advisers have benefited from many of the improvements. “There has been an increased focus on IFAs [independent financial advisers] and refreshed product offers to the IFA space,” McCormack notes. An example is BT’s new IFA endto-end solution, BT Protection Plans, which provides immediate decisions on applications with no signatures required, real-time access to client information, an in-house chief medical officer and tele-claims assessment. In the group market, competition is fierce. “Group insurance has been driven hard by super fund consolidation and the drive for membership and this has led to very competitive pricing,” Morgan notes. Swinhoe agrees: “Group is growing faster and is highly competitive to the point where some concerns have been expressed about it,” he says. Despite this, nobody expects the

Risk Insurance

current competition to disappear any time soon. “The consolidation that has recently occurred has not led to a reduction in competition in the life market and it remains highly competitive,” McCormack says. “The success of some of the newer entrants in the past few years has shown you can gain market share in life risk quite quickly. We don’t see a lessening of competition ahead.” In fact, the continuing underinsurance problem will reinforce competition. “There is still a significant underinsurance problem, and while that exists there will be a competitive drive to capture those segments. There are seven million Australians insurance has failed to reach, so if we can capture a small part of that, growth prospects are good,” McCormack says.

Pressure on pricing

The competition has also led to strong pressure on pricing. “In both the group and retail market it is very competitive in terms of pricing. There are some very sharp margins coming out at the moment,” McCormack says. This is particularly the case in the

Colin Morgan group market, Morgan notes. “ The pr icing power of industr y funds is leading to members getting better benefits. This is good for industry funds and members, but for insurers some big bets are being made.” He is concerned about the potential impact of several years of bad claims experience – something that may be behind the Australian Prudential Regulation

Authority’s (APRA’s) close interest in the group market. “I can’t see pricing in group going much lower, as the big contracts now have incredibly low margins.” Although price pressure is strong in group, it is reducing in individual risk, Morgan says. “In retail insurance there has been significant downward pressure on prices – especially on mortality rates – but I don’t expect to see the same downward pressure as over the last five years. With trauma policies, we are seeing increasing claims rates due to better diagnosis and detection and this may lead to upwards pressure on pricing.” Despite the competition, further consolidation is not predicted and the recent AMP/AXA takeover is not expected to alter the market. “The AMP/AXA deal doesn’t overly impact the market as it is very competitive with enough players to keep it competitive,” Kerr says. However, the success of the merger is being keenly watched. “It will be very interesting to see how AMP and AXA come together as they are two very different organisations. AMP will be working hard to retain those adviser relationships

and others in the industr y will be working to pick them up,” McCormack says. Morgan thinks the deal will be good for competition and for AMP. “It needed open marketplace products outside its tied product range, so it could be a good match.” He believes additional mergers are unlikely following the takeover of Tower by the Dai-Ichi Life Insurance Company, as this deal removed one of the last nonbank owned insurers in Australia. “The strong will get stronger and the banks are always looking to increase their footprint in the wealth management market”. Kerr agrees the major banks are looking to take advantage of rapid growth in the life market. “The banks have said they see the wealth market as a growth opportunity and there are good opportunities to leverage off their client bases.”

Technology changes everything

Another major force buffeting the life market is technology. “We are seeing increasing use of technology by both advisers and insurers and Continued on page 14

www.moneymanagement.com.au May 5, 2011 Money Management — 13

Risk Insurance Continued from page 13 this is a very strong trend,” Morgan says. “The life insurance industry has been a slower mover in the emergence of straightthrough-processing, with online quoting and electronic underwriting only now appearing. There is a massive trend towards the use of technology and this will make insurance more accessible.” Kerr agrees: “The technology influence is massive. It provides an enabler to blur the lines between the different channels.” He believes it will help the industry reduce costs and improve efficiency. “Insurers need to figure out ways to help advisers do transactions quicker and give under writing and claims decisions faster.” This process is likely to accelerate, according to Morgan. “The banks are now investing massively in IT platforms in wealth management to enable increased access for advisers to get to their products.” Despite adding rules to underwriting engines, the impact of technology still has a long way to go, Kerr says. “We have not yet fundamentally changed how we do underwriting, or the claims process.” According to Swinhoe, insurers are also planning to improve their use of individual customer data. “This is particularly the case for bank-owned insurers, as they know a lot about their customers from their other transactions with the organisation and this information can be used to segment customers and improve underwriting. It can also be used to drive lead generation and streamline processes,” Swinhoe says. Life insurers are also responding to adviser demands for better administrative processes and more support. “In the retail market, product is one part of the puzzle. Technology, the relationship and ease of doing business with the insurer are all important too. Advisers are looking at the broader view, not just the product per se,” McCormack notes. This means helping advisers cope with an increasingly complex business environment, according to CommInsure general manager of retail advice, Tim Browne. “Assisting advisers to service their clients – especially in an opt-in environment – means we need to promote the value and service of advisers to clients.” McCormack agrees: “What policyholder retention strategies you have and how you help advisers in growing their business are increasingly important. Advisers are saying, ‘Product is important, but what else are you as an insurer willing to do to help me grow my business?’ This is very important now.” More weight is also being placed on client retention. “In the past 12-18 months there has been greater emphasis on loyalty and policy retention and this has led to the development of loyalty programs by some insurers,” Kerr notes. He believes with capital harder to access, business expenses have become more critical. “The value of retaining business has come to the fore as companies have had to manage the business with finer margins. They are seeing greater value in their existing books of business.” Another trend could be a move to improve product definitions. “Off the

“

The other aspect of the new capital regime will be to put a better risk culture into insurance. - Paul Swinhoe

”

Sean McCormack back of the natural disasters that have occurred, general insurers are moving to standardise definitions. It is possible to see the same questions being asked of life risk providers so consumers have greater certainty around what we offer,” Browne says.

Higher capital requirements

If all this is not enough, life insurers are also facing the imposition of higher capital requirements by regulators rattled by global financial crisis (GFC)induced disasters. “The new capital regime will have different impacts for different insurance companies. This is also why group is being scrutinised by the regulator very closely,” Morgan says. Although the industry is generally supportive of APRA’s moves to improve insurers’ capital provisioning, Browne believes there are concerns about the final outcome. “ The GFC proved Australian capital provisioning is good, but the regulators are looking at ways to make it even stronger. We are concerned,

14 — Money Management May 5, 2011 www.moneymanagement.com.au

however, that this may translate into increased costs to consumers.” According to McCormack, the APRA consultative process has worked well. “The worst outcome is that there is a requirement to increase capital substantially. We are pleased that APRA has heard our feedback and is willing to test and adjust its requirements.” The higher capital requirements are also linked to improved risk management. “The other aspect of the new capital regime will be to put a better risk culture into insurance – although it is good now – bringing risk management to the fore in decision-making,” Swinhoe explains. “This is going to change how management operates and will help head off something worse happening. It will make people put their decisions into the right risk framework.”

Impact of international changes

Although the local regulator may be willing to talk, international regulatory reforms may prove more problematic. Last year the International Account-

ing Standards Board published a proposed set of changes to insurance contract accounting designed to impose a single accounting standard on all insurers in all jurisdictions, which will apply to all types of insurance contracts on a consistent basis. The new accounting standard should make it easier for insurers to raise capital around the world, because their businesses will be better understood, Swinhoe says. However, although implementation has been deferred, the new standards will have a substantial impact on Australian insurers – especially bankowned companies. “In the early years, life insurance will be less profitable and a less attractive place for companies to put their capital,” he explains. “If insurers want more capital to grow and the returns are not so good in the short term, they could have problems accessing capital – particularly from their banking parents. Accounting standards don’t change the value of a business, but they can change the perception of it and that can make it hard to get capital.” Morgan agrees the impact could be huge. “It if takes place it will potentially have a big effect on Australian insurers, as deferred acquisition costing is used here a lot. That means contracts need to stay on the books for a number of years to allow smoothing of the profit streams.” Another less well-known problem for insurers is the March decision by the European Court of Justice to ban gender pricing in insurance contracts from December 2012. “This is massive for the industry, both for general and life insurance. The real danger is will it extend to other countries. This throws everything up into the air. It only takes a few people to drive it into another jurisdiction and that will have massive implications,” Morgan notes. MM

Stuart Randall Live TV Director

What can a live tv director teach us about life insurance? When it comes to making fast decisions, no one makes as many, or as quickly, as a live tv director. It’s a skill to stand in front of a wall of monitors, each with a different camera angle and make fast, considered decisions about which feed goes to air. We think accurate decisions about insurance cover should happen just as quickly. That’s why, when you apply for BT Protection Plans using our LifeCENTRAL+ quote and application tool you get an on-the-spot decision about your client’s cover. BT Protection Plans are now available stand-alone and on BT Wrap. To ﬁnd out more about LifeCENTRAL+ and to see Stuart’s story, visit bt.com.au/lifelessons

The Insurer of BT Protection Plans is Westpac Life Insurance Services Limited ABN 31 003 149 157. BT Portfolio Services Ltd ABN 73 095 055 208 operates Wrap. Before making a decision about BT Protection Plans or Wrap, you should consider the BT Protection Plans Product Disclosure Statement and Policy Document or the Wrap IDPS Guide, which are available from your adviser. You should consider whether BT Protection Plans or Wrap is appropriate for you.

Risk Insurance

Understanding underinsurance The recent natural disasters have highlighted the importance of insurance but, as Janine Mace discovers, the industry has a lot to do to tackle the underinsurance issue. FLOODS, cyclones, earthquakes and tsunamis have become the mainstays of TV news reports in recent months. While the general insurance business has borne the brunt of the disasters in terms of the bottom line, the life side of the business has not been immune. The intense interest in insurance is having a subtle influence on the life business, according to MLC head of advice products for insurance, Sean McCormack. “ We h a v e s e e n a n u m b e r o f r i s k events materialise and this has stressed the insurance industry and Australians are questioning whether they have e n o u g h p ro t e c t i o n – a n d t h e r i g h t protection – in place,” he explains. “The floods have led to stress on the general insurance business, but it has a l s o l e d t o i n c re a s e d i n t e re s t by consumers on the advised insurance

side. We have seen more openness to risk protection.” This is a welcome development in the face of Australia’s continuing underinsurance problem. According to the 2010 Lifewise/ NATSEM Underinsurance Report conducted for the Financial Services Council (FSC), 95 per cent of Australian families do not have adequate levels of insurance cover – a problem that is expected to cost the Australian Government $1.3 billion over the next 10 years. Although the life insurance sector has been working hard to raise awareness of the underinsurance issue, progress has been sluggish. OnePath insurance head of product and marketing, Gerard Kerr, sums up the general view on underinsurance: “It is a slow process. This will need to keep being worked on for many years.”

16 — Money Management May 5, 2011 www.moneymanagement.com.au

McCormack agrees the problem will not be solved easily. “There is no silver bullet. The industry is making progress but there is plenty of work still to be done. I am definitely optimistic, but there is no short-term solution. It will be solved by a whole range of solutions.” Howe v e r, Co m m In s u re g e n e ra l manager retail advice, Tim Browne, is more upbeat in his assessment. “There has been very strong industrywide advocacy of the underinsurance problem, and we have successfully

Lifewise leads the way

articulated to Treasury and the Government the critical role the insurance industry plays in addressing underinsurance,” he says. “The challenge now is to take that message and help consumers understand underinsurance and its importance.”

Fixing the problem

While progress has been slow, the growth of group cover is seen as a significant Continued on page 19

Lifewise, the Financial Services Council’s long-term public awareness campaign about the importance of life cover, is a major tool in the industry’s battle against underinsurance. The Lifewise campaign includes a dedicated website and insurance calculator to help consumers assess their insurance needs. Last year it launched a social media campaign to encourage some of Australia’s top consumer bloggers to spread the word about underinsurance. “Lifewise has been terrifically successful in reaching out to the media, and especially other parts of the media not usually connected to the insurance industry,” MLC’s Sean McCormack says. OnePath’s Gerard Kerr worked on the original concept for Lifewise, and he agrees it has been important in pushing the issue up the agenda. “Lifewise has been fantastic as an independent point of reference to help people find out more about insurance. It is channel agnostic, and about information. It is not a direction to buy,” he says.

Get on the right path with OneCare. At OnePath, we’re proud to offer award-winning insurance solutions that help people protect what’s important to them on their path through life. In 2010, we were awarded the Money Management/DEXX&R Adviser Choice Risk Awards Risk Company of the Year, the CANSTAR CANNEX 2010 Outstanding Value Life Insurance Australia Award for the second year running. And for the third consecutive year, we’ve also won the AFR Smart Investor Blue Ribbon Life Company of the Year Award.

OneCare We’re continuing to strengthen our award-winning OneCare insurance solution – a comprehensive and flexible insurance package, supported by market-leading technology and dedicated service. OneCare offers: • A wide range of discounts • An insurance solution for all family members • Market-leading features and benefits

OneCare Express Our smart inbuilt underwriting technology, OneCare Express, continues to deliver faster and more efficient straight-through processing. It also offers greater navigational freedom, an updated medical provider look-up and new calculation tools providing greater efficiencies.

OnePath (formerly ING Australia) is one of Australia’s leading investment, insurance and superannuation companies. To find out more, contact your Business Development Manager or visit onepath.com.au

onepath.com.au

OneCare is issued by OnePath Life Limited (ABN 33 009 657 176, AFSL 238341). This information is general advice only. Before making any investment decisions, an investor should consider whether this product is appropriate for them and consider the OneCare Product Disclosure Statement, available from onepath.com.au

Risk Insurance

Continued from page 16 step in the right direction. De l o i t t e p a r t n e r, Pa u l Sw i n h o e, believes that despite its limitations, group insurance is a key strategy for solving the underinsurance problem. “The growth of group has done a lot. It is probably still not enough, but at least people have something,” he says. McCormack agrees: “Progress is being m a d e, e v e n j u s t w i t h i n t h e g r o u p market and although it is just a basic level of cover, at least it is some cover.” Kerr believes the life industry needs to keep working on other strategies to achieve its goal. “Un d e r i n s u ra n c e w i l l o n l y b e resolved by lots of little things being done to solve it, such as increased advertising, higher default cover in i n d u s t r y f u n d s, i n c re a s e d a c c e s s t h r o u g h t e c h n o l o g y a n d c re a t i n g tailored solutions for different ways to interact with insurers,” he says. “We need to keep educating people and explaining the benefits of insurance. The worse thing we could do is stop talking about the problem,” Kerr says. T h e p r o p o s a l t o b a n i n s u ra n c e c o m m i s s i o n s u n d e r t h e Fu t u re o f Financial Advice reforms is seen as a major threat to progress, and life insurers believe it has the potential to derail future success. “The life business works on commissions at the moment. If people were asked to pay a fee up front, they probably would not pay it,” Swinhoe says. Colin Morgan, chief executive officer o f Z u r i c h L i f e Au s t ra l i a , b e l i e v e s banning commissions would create m a j o r p r o b l e m s f o r t h e i n d u s t r y. “Depending on the outcome, independent licensees and smaller practices

Gerard Kerr could find it difficult to operate, and this could lead to consolidation and people exiting the industry. It will be a challenge for the Government if they get things wrong, given the underinsurance problem,” Morgan says. Although Browne believes part of the solution to underinsurance is to clearly articulate the role insurance advisers play, he recognises that motivating consumers to take out cover is also important. “The industry has been concentrating on addressing and encouraging clients without existing adequate insurance to address those needs.” McCormack agrees education and motivating consumers outside the advised market is important. “I believe an opportunity exists to educate people, and we need to broaden out from advisers to have education from other sources.” De s p i t e i t s o bv i o u s a p p e a l , h e believes reducing prices is not the solution to underinsurance.

“Price is one of the lower order issues for people once they are in front of an adviser, and it alone will not solve the underinsurance problem. We need solutions that include default channels – such as group cover – and we also need to improve our offers to customers,” says McCormack. Pr o d u c t e n h a n c e m e n t s a re a l s o important. “The industry needs products to be simpler and easier to understand and the technology to make it

easier for consumers to get access to them,” Morgan notes. In Browne’s opinion, the life industry has been focusing its attention in the wrong place. “Too much time has been spent concentrating on clients with cover for their insurance needs in place and competing for that business.” Browne believes life insurers need to focus on finding new customers rather than fighting over those clients who already have some level of cover. MM

www.moneymanagement.com.au May 5, 2011 Money Management — 19

OpinionAdvice Clients assuming the centre stage Despite the current emphasis on FOFA, Ian Knox explains why it is that clients, not reform, should come first.

aving spent the last few weeks meeting with over 30 Independent Financial Adviser (IFA) practices, I openly acknowledge that a theme dominating the industry on the ground is the difficulty of winning new clients. This is the elephant in the room – not the fee-only financial adviser (FOFA) reforms or any other debate about the industry. After being battered by the GFC and a relentless industry funds campaign that undermines the value of advice, investor confidence in financial advice continues to wane. And even the non-aligned, exemplar advisers are feeling the pinch. Confidence is an all-consuming issue, and therefore one that is complex to address. Obviously volatile markets, losses in portfolios and low returns dent consumer confidence – but so too does the incessant and unnecessary industry fund advertising which, disappointingly, has recently restarted. The campaign destabilises the true

meaning of advice and is a self-serving fear campaign aimed at helping industry funds retain members so that they can grow their own business aspirations. In the end no-one wins. Australia needs economic growth, markets need confidence and investors need confidence in both the system and the advisory community. If the industry fund movement was legitimate in its campaign it would address its own challenges. This includes thousands of members leaving the funds to seek SelfManaged Super Funds (SMSF) solutions and thousands of members needing advice on issues other than what risk profile they should be invested in within the fund. Limited advice is something we will all pay for in the long run; it means just that – limited advice is limited in its value. A few years ago when limited advice was introduced, I listened to an industry fund adviser recommending a member move from a defined benefit fund to an accumulation

In the industry fund “sector we don’t hear a lot about the funds undertaking external reviews of their governance, their compliance obligations or their adherence to the Financial Services Reform Act.

”

option. The process guided the member out of a security blanket and into a marketrelated return with a different risk profile. All of this without a fact-find, a risk profile or regard for the member’s external wealth position, a position which inevitably includes a large single asset called property. From my observation it was a combination of poor direction and poor advice, both ungoverned from a regulatory perspective. But the adverts will still chip away at consumer confidence in the real system by

condemning it because of the dated commission argument which is now all but finished. The adverts would do better to focus upon what planners in industry funds can do to build retirement security and give fund option advice so that all members become more confident of the system. From a regulatory perspective, a licensed representative doing what the industry fund adviser did would result in remedial action being taken because the licence holder is obliged to supervise and monitor the quality of advice and ensure that a member’s circumstances are taken into consideration so that there remains a reasonable basis of advice. In the industry fund sector we don’t hear a lot about the funds undertaking external reviews of their governance, their compliance obligations or their adherence to the Financial Services Reform Act (FSRA) obligations. Perhaps the movement should reflect on this and lead by example, by adhering to and working within the same level of regulatory pressure as those everyday advisers they are so swift to criticise. Then we would see the true cost of advice being identified and paid for by the fund members whose requirements are not currently being met. Back to the confidence issue. It is unlikely

ACI0004/GPS/MM/R/4

Think

AMP Capital Global Property Securities Fund. It’s not just one of our products, it’s a product of thinking wide. Our global property securities team talks to our fixed income team because they know what’s happening in the property debt markets. It allows us to put a more accurate price on things like expansions, mergers and refinancing. Thinking wide is more than a philosophy, it’s what we’ve been doing for over 40 years. The results speak for themselves – the highest ratings of three of Australia’s most respected ratings agencies and performance of 1.91% p.a. above benchmark*. Think wide – it can help you, and your clients own tomorrow. To find out more speak to your Key Account Manager, call us on 1300 139 267 or visit ampcapital.com.au Past performance is not a reliable indicator of future performance. *On-platform (Class A) performance since inception 29 November 2004 to 28 February 2011. Out performance is after fees, before tax and assumes distributions are reinvested. Important Note: AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital) is the responsible entity of the AMP Capital Global Property Securities Fund (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, nor any company in the AMP Group guarantees the repayment of capital or the

20 — Money Management May 5, 2011 www.moneymanagement.com.au

we will see markets returning to normality in the near future as the long-term effects of the GFC reverberate and world economies continue to de-leverage. This means we have a genuine problem occurring in the structure of the advice industry because the long-term earning rate of, say, 8 per cent, looks like being below the return available after fees and charges from a term deposit without inherent equity risk. With confidence low and the cash rate likely to remain high because of Australia’s two-speed economy, planners may have to adopt new programs and shift the paradigm if they are to grow their practices profitably in the next few years. This issue is taking shape amidst a battle between the emergence of managed accounts as an alternative solution to managed funds and platforms. The difference between these options is a topic for a separate article. However, the point is that if the overall cost of the industry is too high, then advice, investment management or platform costs have to come down so that portfolio earnings after advice and fees are greater than cash rates. Now that’s confidence-inspiring. Advice is, of course, more than returns. Indeed, it is the backbone of the industry but is often positioned in the lowest part of the (so-called) value chain. This is because it is paid for via the manufacturers, these being the banks and insurance companies that own the platforms that pay the planners.

The battle of the managed accounts versus managed funds isn’t purely about cost, it’s about taking control, creating different value propositions for clients and forcing down the cost structure of parts of the value chain that should be commoditised (by the way, that is the platform market and managed fund operators that

deliver index returns with active fees). Today’s question in the minds of most planners should be all about the post-FoFA world. It’s how to go up the value chain (without conflict, preferably), how to maintain a sensible cost structure so that clients are confident with their future direction. It is also about creating value at the practice

level – not dealer level. This is a new phenomenon because in the past, dealerships were valued by virtue of the volume bonuses that lubricated them in return for distribution rights. Significantly, we allegedly have more than five IFA dealers for sale in Australia at the moment. This is quite extraordinary for a country that is the fastest growing and fourth largest superannuation system in the world today and with a Government committed to increasing the pool, together with a complex tax and super system that needs advisers. Finally, good planning practices achieve targets of 40 per cent EBIT (earnings before interest and tax). Why then would a dealership want to sell, one feels compelled to ask? It might be preferable to work out how to build a better model, perhaps because the outlook is the best of times, rather than the worst of times. In the post-FoFA world, it may emerge that dealer heads conclude that they need to be product managers to survive. Planners however, may determine that advice is more valuable than anything else in the chain and that a well-run small practice with a regular fee system in place is more valuable than a dealership value. Now there’s a thought, a structural change and, dare I say it, a role for managed accounts to play in helping the transition to occur. Ian Knox is managing director at Paragem.

wide.

performance of any product or any particular rate of return referred to in this document. While every care has been taken in the preparation of this material, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, ﬁnancial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document and seek professional advice, having regard to the investor’s objectives, ﬁnancial situation and needs.

www.moneymanagement.com.au May 5, 2011 Money Management — 21

OpinionInsurance

Protection inside super The lead-up to financial year end is usually seen as a time of opportunity for financial advisers to revise tax strategies with their clients. Jeff Scott explains why it is worth remembering that tax deductions are available for income protection premiums, both inside and outside of super.

raditionally, income protection policies were individually owned outside of superannuation. Since 1 July 2007, when Reasonable Benefit Limits (RBLs) were removed from super, there has been an increase in people taking life insurance through their super; and while term insurance (death cover) and total and permanent disablement (TPD) have been staples of many super funds, more people are now also placing their income protection cover within superannuation. In addition to this trend, there remains a significant opportunity for advisers to address the income protection needs of their clients, and highlight the related tax benefits. New research conducted for CommInsure has found that while 94 per cent of Australian workers have heard of income protection insurance, only 28 per cent have this cover. And what’s more, 57 per cent are not aware that income protection premiums are tax deductible. Your clients will be pleased to know that an individual who pays for the premiums with concessional contributions to superannuation, and a person who pays for income protection premiums outside super, are both entitled to a tax deduction – the main difference is that the concessional contribution to super is capped ($25,000 for

those under age 50 and $50,000 for those 50 and over for the 2010-2011 financial year), whereas there is no cap on the premiums paid outside super. It is important to know that individuals who pay for premiums with non-concessional contributions to superannuation would be worse off than a person who pays the same premium outside of superannuation. Income protection is treated as an ancillary benefit under superannuation. In these cases, there must also be a core benefit, such as death cover or retirement benefits within the fund, since a super fund cannot operate solely with the purpose of providing an income protection policy. Premiums for individually owned income protection policies outside of superannuation are normally fully tax deductible. A tax deduction is available for income protection premiums paid by the trustee of a super fund. Until March 2007, trustees of super funds could only receive a tax deduction for income protection benefits that provided a benefit period of two years or less. Since 28 March 2007, trustees of super funds have been able to claim tax deductions for income protection cover with benefit periods of longer than two years – to a retirement age of 65. Income benefits paid from an income

22 — Money Management May 5, 2011 www.moneymanagement.com.au

protection policy, whether through super or outside of super, are taxed at the individual’s marginal tax rate. So there is no difference at the payment stage. Income protection premiums through a super fund may be offered through group rate and may feature the same rate both for smokers and non-smokers, which may or may not be to your client’s favour. Inside super, the trust deed must allow the payment of a temporary incapacity benefit: • Both employees and self-employed individuals qualify for this benefit; • Benefits are based on an own occupation definition of temporary incapacity; • A member may be able to receive a partial disability benefit that replaces part of their income; • Benefits must be paid at least monthly as a non-commutable income stream (ie, not a lump sum); • A member would not be eligible for temporary incapacity benefits if they are receiving sick leave benefits, as this normally replaces 100 per cent of pre-disability income; and • Benefits can only be paid for the period of incapacity. Pre-disability income is not defined under super law. Pre-disability income may be the

income a client received over the past week, month, or year. Since there is no clarification, ambiguity exists. The problem is that if the client is unemployed, on sabbatical, on maternity leave, or a homemaker and not earning an income, then they may not be entitled to any benefits from the super fund even if they have been paying premiums for the cover. So the insurance company may still be liable to pay the benefit to the super fund, but the fund is not permitted to pay the benefit to the member. Income protection policies outside of super are not constrained by super law, aside from the terms and conditions of the policy document. Normally, pre-disability income is defined as the best 12 months of income during a particular period prior to disability (one year prior to claim, three years prior to claim, or two years prior to policy commencement). Income protection insurance allows Australians to protect their standard of living. While using superannuation to pay for premiums is appealing, individuals need to be aware of the potential limitations that exist regarding benefit payments and meeting conditions of release from the fund. Jeff Scott is the executive manager of business growth services at CommInsure.

OpinionChina The consumer revolution

The growth story in China is far from over, with Jonathan Wu pointing to the rise and rise of China’s second and third tier cities – all of which boast populations in excess of one million people.

or a long time, Beijing, Shanghai and Shenzhen have been the centre of media attention and the basis upon which China’s growth has been viewed as sustainable. However, while many great pictures of skyscrapers, bridges and highways have been shown at fund manager presentations over the years, these three cities make up only around 3 per cent of China’s population. So what is happening with the other 1.26 billion people that make up the ‘middle kingdom’? Most reside in the second and third tier cities, and of course, many who are still in the rural areas will

continue the biggest urbanisation story in human history. These future cities of China will be the key to sustainable growth for years to come. The second and third tier cities of China are by no means small. Currently, there are 160 cities with a population larger than one million. Europe only has 35 cities with a population over one million. The McKinsey Global Institute forecasts that by 2025, there will be over 221 cities with more than one million in population in China. These mini economies are slowly being linked through China’s rail system, which is a mix between high speed rail (HSR) and normal rail. For

example, the Wuhan to Guangzhou HSR (1,100km) has shortened the time required to travel between the cities from 11 hours down to three hours (what we call ‘time/cost compression’) allowing for greater productivity gains due to more free time to work. Moreover, it also encourages people to live further away from their work, as they now have easy access to efficient transportation while paying less for property prices outside of urban centres. The Hong Kong Trade Development Council released a study in 2008 looking at spending patterns for the population in China living in second and third tier cities. The growth in consumption from food to medical to appliances was staggering. Total consumer spending in the 18-year period has grown almost tenfold. This doesn’t even take into account first tier cities where spending power has been even stronger. Local retailers are seeing this as an opportunity, which is clearly reflected in their expansion models. For example, the sportswear company, Li Ning in 2008 opened 81 per cent of new stores in second and third tier cities. For Belle International, which is another footwear and sportswear company, revenue growth is 22.9 per cent first tier, 31.4 per cent second tier and 48.2 per cent third tier for 2008. Staying on the question of consumer goods, brands are becoming more important as part of the shopping experience – and overseas brands are also penetrating the market with mixed levels of success. One example is Louis Vuitton (LV), which entered 20 years ago and now has more than 15 boutiques spread across 13 cities. Not all brands can be successful, but because of LV’s tier-one consumer status, it can succeed. A study conducted by Asian Demographics in 2009 looked at the relative importance of ‘shop’ versus ‘brand’. Asian Demographics looked at 13 different consumer goods from automobiles to apparel, and asked one simple question: “Do you first decide which shop to buy at, or which brand to buy?” For automobiles, motorcycles, digital cameras and air conditioners, brand was more important for over 80 per cent of the surveyed population. So the question is, how is China managing to be such a powerful consumer nation – and especially out of second and third tier cities? Looking back to 2008, the government implemented a 4 trillion RMB stimulus package, which included providing universal healthcare, free education as well as the establishment of a government pension system. This allowed the regular mums and dads to unlock their savings and spend on the goods they previously were not comfortable buying because they didn’t have a welfare safety net. The analogy of human wants is simple. If a farmer’s child goes into the city to work and earns 10 times the income compared to if they stayed on the farm, and subsequently they come back to the farm each holiday season with a new pair of shoes, a brand name T-shirt or iPod to the envy of their friends, their friends will

wonder why they can’t achieve the same. Applying this theory to over 50 per cent of the 1.3 billion population of China, you realise how consumer power grows exponentially. In the same way that retail sales growth has been strong among the middle class, the other growing opportunity is property. While some commentators have continually portrayed a property bubble, there is a need to look at the hard facts rather than the emotionally driven headlines. The clear fact is that for the calendar year 2010, tier one cities accounted for only 5 per cent of China’s property sales by volume. And the other 95 per cent of properties sold were on average 75 per cent cheaper by price than tier one cities.

The power of China “moving into the future will be in second and third tier cities. ”

Consumers outside of tier one cities can afford to purchase properties in line with their living standard. The closest Western comparison is the United States, where you see Park Avenue penthouses in New York City sell for well over $20 million for 100 square metres in some cases, but in central Texas you wouldn’t need to pay that price because it simply doesn’t match the earning rate in that region of the US. Overall, as consumers reach higher levels of disposable income, and move into a ‘spend more, save less’ mentality, we identify the following areas which will have positive flow-on effects: real estate, transportation, power supply, roads, railway, consumer products, logistics and fast food industries. But most of these cannot be captured by simply buying global brands that have some exposure into China and adjacent southeast Asian economies, since they have and will continue to suffer the lag generated by declining levels of consumerism in the western world. The power of China moving into the future will be in second and third tier cities. Jonathan Wu is head of distribution and operations at Premium China Funds Management.

www.moneymanagement.com.au May 5, 2011 Money Management — 23

Observer

Searching for perfection Dominic McCormick explains why achieving true portfolio diversification in the current economic climate is a complex task.

aining true diversification for investment portfolios in the current environment is more challenging than ever. Ironically, this is despite there now being more asset classes, sub-asset classes and strategies available in investable form than ever before via hundreds of managed funds, listed investment companies and, increasingly, exchange-traded funds. The problem is correlations across asset classes are currently very high-moving in unison more than ever and particularly at the ‘crisis’ extremes when diversification is most needed. The ‘risk on/risk off’ mentality of

markets means that almost all asset categories – developed and emerging market equities, commodities, precious metals, currencies and many hedge fund strategies – seem to be rising or falling together, at least in the short term. Even within equity markets, the correlations between individual stocks and the indices in which they are grouped are back towards the historical highs of 2008. Only bonds seem to move in the opposite direction to this but even their value and diversification benefits are being questioned as markets become focused upon fiscal issues and longer-term inflation. As James Bianco of Bianco Research

24 — Money Management May 5, 2011 www.moneymanagement.com.au

recently commented at a Grants Interest Rate Observer conference, “Now we all know that, in a crisis, correlations go to one, but we didn’t know that in a recovery from a crisis they all go to one as well.” Why is this the case? Bianco suggests it is the intervention of governments and central banks and the maintenance of extremely low nominal and real interest rates – especially in the US – that has provided the speculative pool of capital that rapidly moves in and out of all asset classes. The line of least resistance in this environment is up. However, when a ‘risk event’ occurs, such as a sovereign debt problem or the recent Japanese earthquake, the selling urgency increases and all markets go into free fall, at least for a period. Unfortunately, this suggests that all markets could be in for some considerable pain when monetary policy in the US is eventually normalised at some point in the future. The basic premise of diversification is

we have built portfolios “thatIfare robust across a range of scenarios in the mediumto longer-term, then higherthan-normal short-term volatility is just something we have to live with.

”

simple. The ideal investment to add to a portfolio is one that achieves a good rate of return, above the client’s long-term objectives, but achieves this in a pattern different from most other investments in the portfolio, (ie, it ‘zigs’ when the others ‘zag’). Unfortunately, finding such investments is rather rare in the current environment. Of course, there is more to diversification than just adding together assets that had low correlations looking backwards from today. Diversification needs to be built around a more forward looking process – looking for assets and hedges that can help in a range of different economic scenarios, as I discussed in a previous article. However, even this approach may be of little use in protecting a portfolio from severe shorter-term fluctuations in a particularly highly correlated environment, such as the current situation. So, how should investors respond? One approach is simply to accept that in the short term these higher-than-normal correlations may continue; however, if history is any guide, they are unlikely to last. If we have built portfolios that are robust across a range of scenarios in the mediumto longer-term, then higher-than-normal short-term volatility is just something we have to live with in the current environment. It would actually be a mistake to react to these higher-than-normal correlations (and thus overall portfolio volatility) by taking too much risk out of a portfolio, since that risk reduction is likely to reduce the likelihood of meeting clients’ return objectives. During extreme volatility and crises there is a tendency for investors to be panicked into changes which adversely impact investment portfolios more than the crisis itself. David Swensen, in the 2010 Yale Endowment Annual Report, stated that, “During financial crisis, investors frequently shorten their perspective to an unreasonably short time horizon and often engage in counterproductive activities.” Of course, some take these arguments to the extreme and suggest that investors should largely abandon attempts to seek

wide diversification and simply accept that the main growth asset – equity markets – have significant risk. To the extent that investors are not prepared to wear that risk, they argue one should simply reduce the amount in equities and put that money in cash and short-term bonds. This is certainly simple but in my view it harbours two main problems: • Equity markets can witness major bear markets and extended periods (at times longer than a decade) where investors do not earn a positive return, or underperform cash. Thus, equity market risks are not always rewarded with higher returns, even over the long term; and • Sometimes (such as in parts of the modern developed world) the return on cash and bonds is extremely low and/or below the rate of inflation. Fortunately, the second point is not relevant to the current conditions in Australia, with some attractive interest rates available relative to current inflation. However, low returns on cash and bonds have occurred in the past and almost certainly will again. My primary concern is that the general uptrend associated with this higher-thannormal correlation of markets since the GFC is creating an environment where all major asset classes are becoming, or are at risk of becoming, overvalued and vulnerable, not just to savage corrections, but to major declines and bear markets dragging out over many years. Therefore, it is not moving together in the short term, particularly at extremes, which is the main concern, but rather that the rising tide currently lifting all boats will give way to a massive and extended storm that ultimately sinks all. Against this backdrop, some possible ways to gain true diversification away from this increasing risk are: • To invest more in cash or equivalents and wait for a better time to add exposure to risky assets; • To buy protection on these assets using derivatives or structured guarantees; • To invest more in skilful, more active

“

There is a fine line between identifying new assets that can add true diversification, and becoming enmeshed in fads.

”

funds that can be short or in cash (including, but not limited to, selected hedge funds); and • To explore further, and invest into, appropriate alternative assets and strategies. These responses are neither easy nor riskfree. Investing more in cash or equivalents can result in failing to meet portfolio objectives over the longer term if the investor is stuck in cash for long periods of time. There is also the problem of identifying when good value has returned to markets, since derivative or guarantee protection can often be costly, particularly at times of high market volatility. Investing in more skilful, active managers involves identifying truly skilled managers and this is, clearly, very difficult. The last response increasingly involves working harder in finding new alternative assets and strategies that have yet to be widely used by institutional and retail investors. The driver of higher correlation across asset classes and strategies is not just government intervention and low interest rates but also assets or strategies that are

discovered and included in institutional and retail portfolios, reducing diversification benefits markedly. For example, commodity investments using fully collateralised futures contracts were a great diversifier and provided good returns relative to spot prices before they were discovered by institutional and retail investors in recent years. The structure of futures prices where those further-out months trade at lower levels than the near- or spot-month (known as ‘backwardation’) used to provide an attractive ‘roll yield’ across many commodities. More recently, this structure has tended to disappear as financial investors have swamped the ownership of near-term futures contracts. Interestingly, those commodities that do not have futures markets have continued to have low correlations. Finding new alternative assets and strategies, and becoming confident enough to use them, can clearly be a major challenge. This is also because some of these alternative investments are illiquid, and while illiquid assets can offer good diversification (albeit partly because of the lower frequency of, and non-market driven, pricing of the assets), the GFC showed the downside, particularly for retail investors, of being too exposed to illiquid assets. In our view, a small exposure (probably no more than 10 to 15 per cent of a portfolio) to less liquid assets still makes sense, assuming of course that the expected illiquidity premium is appropriate. There is a fine line between identifying new assets that can add true diversification, and becoming enmeshed in fads. As Warren Buffett has noted, there is an inevitable trend in many pursuits, including money management: “First come the innovators, then the imitators and, finally, the idiots”. These days, staying out of the idiot camp is not enough – when there are too many imitators chasing an investment idea it will tend not to live up to either theory or history, once again highlighting that successful investment is a dynamic, evolving process, not a static one. Dominic McCormick is chief investment officer at Select Asset Management.

www.moneymanagement.com.au May 5, 2011 Money Management — 25

Toolbox Making FHSAs flexible Fabian Bussoletti explains how to increase the flexibility of First Home Saver Accounts.

roposed legislative amendments recently introduced into Parliament will, if passed, increase the flexibility of First Home Saver Accounts (FHSAs), making them far more attractive to eligible first home buyers. Under the current rules applicable to FHSAs, a minimum holding period must be satisfied in order to have money invested in a FHSA released for use on the purchase of a home. Typically, the current minimum holding period is satisfied at the earliest of the FHSA holder: • Having made a minimum contribution of $1,000 in at least four financial years (not necessarily consecutive); or • Exceeding the maximum account cap (currently $80,000) and having held the account in at least four financial years. Unfortunately, what this means is that under the current rules, where a home is purchased prior to the holding period being met, the money in the FHSA must be transferred to the individual’s superannuation or retirement savings account.

Proposed amendments

Under the proposed amendments – which will apply to homes purchased after the day the legislation receives Royal Assent – if a home is purchased prior to meeting the minimum holding period, the account will no longer be immediately closed. Instead, it will be retained as an inactive account which means it will be unable to accept further contributions – other than government contributions. As contributions will no longer be able to be made once a home has been purchased, the proposed amendments will deem contributions to be made for the purposes of satisfying the minimum

holding period requirement. The benefit of these proposed amendments is that an individual will be able to keep their inactive account open until they meet (or are deemed to have met) the minimum holding period. And, at that time, the money can then be released for payment to a genuine mortgage.

Case study one

In August 2009, Nina opened a FHSA. In that financial year she contributed $2,000 to the account. In July 2010 (ie, the next financial year) she only contributes $500. Then, in the 2011-12 financial year, Nina purchases her first home. Although Nina’s FHSA has been open in three different financial years, she has only contributed the minimum contribution of $1,000 in one of those years (being the 2009-10 year). Therefore, the account will need to be open in a further three financial years (with the acquisition year of 2011-12 counting as one of them) before the money will be released to go towards Nina’s mortgage. The years which will count towards the release conditions are 2009-10 (where $2,000 was deposited) and the following three financial years under the proposed deeming amendments. So, even though Nina will not be able to contribute any further money to her FHSA now that she has purchased her first home, she will be able to withdraw her money and put it towards her genuine mortgage from 1 July, 2013 (ie, the start of the 2013-14 year).

Case study two

After receiving an inheritance of $75,000, James opens a FHSA into which he contributes the full amount of his inheritance. The following financial year, James does not contribute any further funds to his FHSA.

Playing by the rules If an individual’s mortgage is less than their total FHSA balance, any remaining balance will be paid to their superannuation or retirement savings account. Also, if the individual FHSA holder purchases a first home in which to live, but sells the dwelling before the minimum account holding qualifying period has expired, the current rules will apply, and the money will be paid to their superannuation or retirement savings account. Due to the account earning interest and James receiving the maximum government FHSA contribution, by the end of the second year the balance in James’s FHSA is now $77,000. In the third financial year, James places a further $3,000 in his account. Later that same year, James purchases a home. Although James has only made contributions of $1,000 or more in two different financial years, he has reached the $80,000 maximum cap, and his account has been open over three financial years. As such, from the start of the following financial year, James will be able to use the funds in his FHSA towards the mortgage on his new home because he has reached

Table 1 Comparing FHSA timeframes Marginal tax rate

End of year four FHSA ($) Individual ($)

Difference (%)

End of year 10 FHSA ($)

Individual ($)

Difference (%)

16.5%

29,560

25,408

88,923

76,175

31.5%

24,767

71,806

38.5%

24,472

69,858

46.5%

24,138

67,702

Assumptions used: $5,500 personally contributed (after tax) at the start of each financial year. 17 per cent Government contribution is received at the end of each financial year. Earnings assumed to be 7 per cent per annum (fixed interest portfolio). All indexation is ignored. Home purchased at the expiry of 4 or 10 years respectively.

the maximum cap and his FHSA has been open in four financial years.

The benefits of FHSAs

With these proposed amendments set to provide greater flexibility to account holders, it also provides a timely opportunity to revisit the merits of using these types of accounts to help eligible individuals save for their first home. Two of the more attractive features of FHSAs are: • They enjoy concessional tax treatment similar to superannuation accumulation accounts. That is, investment earnings will be taxed at 15 per cent within the account; and • Currently, the first $5,500 contributed into a FHSA will attract a matching Government contribution of 17 per cent. However, unlike the superannuation co-contribution, the FHSA Government contribution is not means tested and is available to all individuals who are eligible to open and maintain a FHSA. So, for an eligible individual who is looking to save for their first home, how attractive will a FHSA be when compared to investing in their own name? From the results in table 1, we see that when a FHSA is used to save for an eligible individual’s first home, they provide a better alternative to simply saving in one’s own name, with the longer the investment time frame, the greater the benefit. Should the proposed amendments become law, creating greater flexibility for account holders, FHSAs are likely to receive a greater level of interest from eligible first home buyers as well as their financial advisers. Fabian Bussoletti is a senior technical analyst at AMP.

Great value for More of your clients.

We’ve lowered the minimum investments for FirstChoice Wholesale Personal Super and FirstWrap, giving more of your clients the ability to benefit from lower fees and great features which may have previously been out of reach. Contact your Business Development Manager, call 13 18 36 or visit colonialfirststate.com.au/lowerfees

Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of interests in FirstChoice Wholesale Personal Super offered through the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (Avanteos) is the issuer of interests in FirstWrap Plus and FirstWrap offered through the Avanteos Superannuation Trust ABN 38 876 896 681. This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider the PDS available from Colonial First State before making an investment decision. Colonial First State and Avanteos are owned ultimately by Commonwealth Bank of Australia ABN 48 123 123 124 through the Colonial First State group of companies. Commonwealth Bank of Australia and its subsidiaries do not guarantee performance or the repayment of capital of Colonial First State or Avanteos. CFS2001/STRIP 26 — Money Management May 5, 2011 www.moneymanagement.com.au

Appointments

Please send your appointments to: milana.pokrajac@reedbusiness.com.au

AUSTRALIAN Unity Investments’ subsidiary Lifeplan Funds Management has expanded its sales team with the appointment of three business development managers. Colin Falls will be responsible for adviser relationships across New South Wales and the Australian Capital Territory. He joins Lifeplan from Greening Australia, where he was responsible for corporate and national partnerships. He has also worked for Citigroup Financial and Bridges Financial Services. Jarrad Gray will cover adviser relationships in South Australia, Western Australia and the Northern Territory. He has 11 years of experience as a financial adviser and business development manager with firms like Bendigo and Adelaide Bank. Greg Bird has 24 years of experience in financial services and will manage adviser relationships in Victoria and Tasmania. He has worked in financial planning and compliance roles with Colonial First State and Commonwealth Financial Planning.

OLIVER Wyman has appointed Brad Clarke to its insurance and wealth practice as principal consultant. Clarke has over 15 years of financial services expe-

rience and will focus on further developing the firm’s strategy and operations business in Australia and Asia. Clarke comes from AMP where he ran the AFS product strategy team. Previously he has spent time as chief operating officer at Tyndall Investment Management and worked in senior strategic roles in the wealth and general insurance divisions of CommInsure and Promina (now Suncorp). Regional Insurance head Anthony Bice said Clarke’s skill set would further complement the company’s industry knowledge and expertise in strategy and operations in Australia.

FUNDS management group Aurora Funds has appointed Chrys Wickremeratne to the position of chief financial officer. The company stated the appointment of Wickremeratne would strengthen the management and oversight of the financial and risk controls of the group and its various investment schemes and mandates. Wickremeratne has over 18 years of experience in the financial services industry, specialising in corporate and trust accounting, operations, compliance and risk management for a number of global financial institutions.

Move of the week GUARDIAN Financial Planning has recruited former Commonwealth Bank national head of financial planning, Ian Anderson, to the role of business acquisition manager. Anderson will be responsible for helping the group reach its ambition of expanding its adviser network by 10 per cent per annum over the next three years. He will be tasked with developing business succession capabilities and solutions for Guardian’s

Most recently he worked as chief operating officer at Natural Capital Funds Management, before which he was a business unit manager in the Perpetual Corporate Trust’s investor services division.

UBS Global Asset Management (UBSGAM) has replaced one of the two portfolio managers who suddenly resigned from its small caps team last month, with another appointment on the way. Victor Gomes has been appointed new portfolio manager for the Australian Small Companies Fund and will co-manage the

adviser network and facilitating acquisition opportunities for the group at a corporate and practice level. Anderson has spent most of his career in corporate finance and business developments for companies, including Macquarie Bank, and has been involved in over 200 acquisitions of financial planning practices. He will be based in Sydney and will report to executive manager Simon Harris.

fund with Stephen Wood – the only remaining member of the previous three-person team. Gomes had moved from Selector Funds Management with 17 years of investment management experience. He also co-founded Hayberry Investments. Gomes will commence with the small cap fund on 9 May, with the head of UBSGAM, Ben Heap, saying the appointment would “strengthen the team and broaden its capability”. The company confirmed it will soon be announcing another appointment.

RISK and insurance adviser JLT

Opportunities ASSOCIATE ADVISER

Location: Melbourne Company: WHK Description: An opportunity has arisen for an associate adviser to join the WHK wealth management team on a full-time permanent basis. The successful candidate will be supporting two dynamic advisers. In this role you will be responsible for project managing the client review process on behalf of the advisers, including preparing agendas, portfolio updates and performance reports using COIN software. You will also prepare advice documents on behalf of advisers, including delegating the preparation of advice to a centralised advice team. A tertiary qualification is preferable, but not essential. Successful candidates will be working towards or will have completed a financial planner qualification. You will also have worked in a financial planning environment, with experience in client service, administration and basic advice preparation. For further information or a confidential discussion please contact Graeme Quinlan or Josh Pennell or visit www.moneymanagement.com.au/jobs

PARAPLANNER

Location: Melbourne Company: WHK Description: As a paraplanner you will join the

Ian Anderson

has appointed Julie Ring as the divisional manager for the Workplace Assistance Program. Ring is widely recognised as one of the leading workers’ compensation professionals in Australia, and has a great depth of experience in the industry across all aspects of Workers Compensation. She has also held senior management roles at CGU and GIO. Ring will be joining JLT’s customised risk consulting team, Echelon, to lead the implementation of their workplace assistance program (WAP) strategy, and management of all WAP services in New South Wales.

For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs WHK advice team, playing a key role in providing technical support to principals and advisers within our wealth management division. Specifically, you will be responsible for constructing complex advice documents and assisting with professional and operational support through research and modelling to support the provision of advice to clients. You will have at least two years of experience with high-net-worth clients across a broad spectrum of advice including selfmanaged superannuation funds, wealth accumulation, retirement planning and estate planning. Successful candidates will possess RG146 qualifications and ideally will be on their way to completing a Certificate of Financial Planning (CFP). For more information and to apply, visit www.moneymanagement.com.au/jobs

CLIENT REPORTING – ASSET MANAGEMENT

Location: Melbourne Company: Kaizen Recruitment Description: Our client is a leading asset management firm that currently has an exciting opportunity in its middle office team. The successful candidate will be responsible for the oversight of daily, monthly and quarterly client performance, attribution and investment reports in a timely and

accurate manner. It is essential that you possess exceptional organisational management skills to manage reporting deadlines for multiple clients. The ideal candidate will have over five years funds management experience, ideally from a client reporting background and will be comfortable engaging with front office portfolio managers. The additional focus of the team is expanding across the APAC region, which will lead to long-term career development opportunities. If you are interested in learning more about this position please contact Matt McGilton at Kaizen Recruitment on (03) 9095 7157 or visit www.moneymanagement.com.au/jobs

FINANCIAL PLANNER

Location: Canberra, ACT Company: Hays Recruitment Description: An Australian financial services institution is currently undergoing significant expansion. As a result, there is now an opportunity for a financial adviser with a proactive, professional and client-focused approach to join its team. The opportunity offers an excellent chance to be part of a larger yet still boutique structure, an attractive salary, highly appealing bonus structure and the opportunity to purchase equity. The scope of the role will see you providing comprehensive calculated financial advice and

be able to implement strategies covering superannuation, wealth creation, retirement planning and risk. Ideally you will have previous experience as a financial planner, a minimum ADFP, an extensive database and a desire to own and grow your own business. For more information and to apply, visit www.moneymanagement.com.au/jobs

FINANCIAL PLANNING CLIENT SERVICE MANAGER

Location: Sydney Company: Hays Recruitment Description: There is an exceptional opportunity currently available to join a well established financial planning firm located in Sydney’s eastern suburbs. As a client services manager you will be actively involved in the full financial planning process including liaising with clients, developing strategies, undertaking research, preparing comprehensive Statements of Advice and implementing recommendations. Successful applicants will have a proven background of working within the financial planning industry, ideally in a client service role. RG146 qualified, you will be seeking an opportunity to take ownership for portfolio of clients, ensuring the ongoing success of the business. For more information and to apply, visit www.moneymanagement.com.au/jobs

www.moneymanagement.com.au May 5, 2011 Money Management — 27

Outsider

A LIGHT-HEARTED LOOK AT THE OTHER SIDE OF MAKING MONEY

A moral outrage GETTING on Outsider’s good side can be quite easy – something like a new set of golf clubs usually does the trick – at least until he finds another reason to dislike his benefactor, which could be quite effortless, being the grumpy old fellow he is. And that would probably make him an unethical financial planner (if, God forbid, he ever decided to enter the field),

“

since the Federal Government has announced a prospective ban on soft dollar benefits exceeding $300. This means that enjoying most freebies, entertainment packages and gifts (provided by various parties who’d like to win over the hearts and minds of planners) will become unlawful as of 1 July, 2012. Outsider reckons this may dampen planners’ enthusiasm for travelling to

exotic destinations such as Hawaii, Las Vegas or Vietnam or attending prestigious sporting events payed for in full by fund managers and other generous benefactors. Unless they wish to settle for a regular plastic seat up the back of the stadium at a State of Origin match instead of a private suite or hitchhiking to a two-star Barossa Valley resort instead of flying to

five-star hotels around the world, Outsider would suggest planners lower their sights. However, Outsider has faith that inventive product providers will find new and non-conflicted ways of getting people on their good side once the prospective ban is put in action – and even if they don’t, he’s happy to reflect that soft dollar means nothing to grumpy old golf-playing hacks.

Out of context “Access and demand for financial advice will increase as super funds increasingly provide financial advice to members.” Industry Super Network chief executive David Whiteley gives his take on the benefits of the Government’s FOFA changes.

“When someone told me the other day that this one means only Ben Chifley and Paul Keating have handed down more Labor Budgets than me, I told them it probably says more about what this job does to your health than anything else.” Deputy Prime Minister and Treasurer Wayne Swan looked at the other side of political success while talking about the upcoming Budget in Queensland.

“Quick: what’s the biggest sector of the Australian economy?” While many of Crikey columnist Bernard Keane’s readers would’ve guessed the mining sector, Keane reminded his audience that the financial services sector is, indeed, the biggest industry by share of GDP.

Exercising caution HAVING always had the gift of the gab, Outsider knows all too well when it is best to say something and when it is best t o k e e p o n e’s m o u t h firmly closed. For example, when Mrs O dares to ask his opinion on her outfit’s tendency to make her look v o l u p t u o u s, Outsider has learned, gradually and over time, that certain things are best left unsaid. However it seems that he may be one of the f e w t h a t h a s re m e m b e re d t h e s e a g e - o l d lessons in times of

change and upheaval. When the Minister for Financial Services, Bill Sh o r t e n , a n n o u n c e d changes to the Future o f Fi n a n c i a l Ad v i c e reforms last week, the first instinct of many o rgan i s at i o n s wa s t o come out with pitchforks sharpened, placards waving and heckles i n t h e f o r m o f p re s s re l e a s e s s e n t o u t t o yours truly. Others chose a more subtle approach, preferring to praise the minister on the aspects they thought were a job well d o n e, w h i l e s u b t l y

The sultans of spin OUTSIDER vaguely recalls the large sums the old Bank of NSW paid to become Westpac. And he similarly has a dim memor y of how much the Commonwealth Bank paid to have a logo that looks something like a slice of Vegemite toast. So he is now wondering what Tower is going to pay to rebrand under its new owner, Dai-Ichi. Outsider knows that there are whole companies that devote themselves and their hourly charge-out rates to

‘rebranding’, and he can only imagine the concepts that have been conveyed to aghast directors in the Tower boardroom. Indeed, he is prepared to bet that at least some of those concepts have involved ‘marrying the old with the new’ and, of course, ‘dispensing with the old and going with a whole new look’. For the record, Tower began life in New Zealand in 1869 as a government department selling life insurance policies and pensions – and Tower

28 — Money Management May 5, 2011 www.moneymanagement.com.au

Australia Limited split from its kiwi origins some eight years ago. Outsider is not sure why the company was originally called Tower, but the original logo was a lighthouse and, conveniently enough, Tower’s Australian headquarters in Sydney’s Milsons Point is also adorned by a tower – so there is the connection. So if Tower is no longer going to be Tower, Outsider wonders what it is going to be. Will it become Dai-Ichi Australia? Will it become Tower Dai-Ichi? Or will it

adopt a ‘funky’ new name such as Hotpolicies, Echidna or Wombat? Outsider personally believes Tower’s new name should reflect the influence of its current chief executive, Jim Minto – something that might give rise to a range of options such as FreshMint or advertisements such as ‘At moments like these, you need…” Outsider understands that all will be revealed this week, and he can barely wait to see what the consultants produce.

suggesting that some improvements could be made – something Outsider likes to refer to a s ‘t h e l i m p - w r i s t e d approach’. T h e n t h e re w e re those who pursued the Clayton’s approach – otherwise known as the press release you send o u t w h e n y o u d o n’t actually say anything. Outsider has learned that sometimes the Clayton’s approach is best. It is often better to say nothing and appear a fool rather than open o n e’s m o u t h a n d remove all doubt.