Money Management (August 11, 2011)

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The publication for the personal investment professional

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FPA LABELS CHOICE SWITCH CAMPAIGN HYPOCRITICAL: Page 4 | TIME FOR APRA TO BE ACCOUNTABLE: Page 13

Government’s ISN favouritism draws criticism

By Mike Taylor THE Federal Government needs to start treating the Industry Super Network (ISN) and other elements of Industry Fund Services as what they really are – elements of a vertically integrated financial services conglomerate, according to the chief executive of the Financial Planning Association, Mark Rantall.

Rantall has told Money Management he has been disturbed by the ability of the ISN to pass itself off as a “consumer champion” when, in reality, it was the lobbying arm of what amounted to a vertically integrated conglomerate containing a bank, a funds management arm, a financial planning arm and superannuation products.

He claimed the multifaceted nature of the ISN and other groupings falling under the

Mathias Cormann Industry Funds Services umbrella meant they were being double-counted as stakeholders providing input into key Government policy decisions.

Rantall’s comments follow on from statements he made late last month claiming the Industry Super Network was mounting an

attack on financial planners as part of a broader strategy to gain dominance of the financial planning market.

His concerns about the amount of influence exerted by the ISN were reflected in comments by the Shadow Assistant Treasurer and Opposition spokesman on Financial Services, Senator Mathias Cormann, who said the Assistant Treasurer and Minister for Financial Services, Bill Shorten, had allowed the Future of Financial Advice (FOFA) legislative agenda to be hijacked by the ISN. Discussing the original bipartisan recommendations of the Ripoll Inquiry, Cormann said: “Bill Shorten and the Gillard Labor Government allowed the agenda to be hijacked and in effect delayed by the ISN and the union movement”.

Heckles rising over Investment Trends report

“Let me be very clear here upfront. Industry super funds play an important role as part of the overall superannuation industry.

They have a particular business model, focusing on a particular value proposition, which meets the needs of many Australians.

However, the key here is that changes to the financial services and superannuation policy framework should be competitively neutral. They should not be designed to impose the industry super fund business model on the whole industry, or to help provide a competitive advantage for one segment of the market against another,” he said.

“For somebody who says he is committed to removing conflicts from the financial advice industry, Bill Shorten seems particularly unaware of the need to manage the conflicted situation

he finds himself in when making policy judgements in relation to financial services and superannuation policy issues,” Cormann said. “The ISN was not able to convince Bernie Ripoll and his inquiry that there should be a mandatory yearly or biennial opt-in, or a ban of commissions on risk insurance – inside or outside super.”

The chief executive of the Financial Services Council, John Brogden, also questioned the credentials of consumer group Choice, often aligned with the ISN, in terms of its stakeholder influence in the FOFA debate referring to its commercial involvement in the so-called ‘Big Bank Switch’.

He said the Choice involvement meant the group had a number of key questions to answer, particularly with respect to commissions and conflicts of interest.

By Benjamin Levy

Value of scoped advice outweighs price

INDUSTRY platform providers have come out swinging against a recent Investment Trends report suggesting they are not delivering on their direct share platform offerings.

Investment Trends’ recent Planner Direct Equities report found that while 61 per cent of advisers used platforms for their direct share exposure, only 16 per cent of users found the offering to be “very good”.

New gaps in the platform offerings are emerging in share research, timelines of data and pricing, according to the report.

But platform providers such as BT Financial Group bristled at the suggestion, saying they had spent a vast amount of money over the past three years improving the trading ability of their direct share offering.

BT Wrap users have access to bulk trading capabilities and same day trading abilities, lowering costs and saving time for advisers, said head of BT Wrap Chris Freeman.

Freeman also rejected suggestions they didn’t have enough research available for advisers.

Tailor-made watch-lists of certain stocks can be made for advisers, as well as email alerts on ASX related news, he said.

“We’ve got better market and company information,” he said.

Share research was widely available for advisers from other areas as well,

LEADERS of some of the industry’s largest dealer groups have attempted to map an approach to pricing scoped advice, but key cost differences have emerged between the groups.

The issue arose in a panel discussion on scoped advice at the Financial Services Council’s (FSC) annual conference last week.

AMP director of financial planning advice and services Steve Helmich told the audience that cost would not be an issue for consumers when they were shown the value of advice. Helmich gave an example of an AMP Horizon’s Academy practice that charged $150 for scoped advice on budgets and cash flow, $440 for a single simple piece of scoped advice, and $660 for a more complex single piece of scoped advice.

Speaking to Money Management, Helmich emphasised that the cost of scoped advice would be set as per the terms of engagement with the client.

A recent Investment Trends report suggested that consumers wouldn’t pay more than $270 for scoped advice provided by a super fund.

Scoped advice should only be costed through discussions with consumers to determine what was a fair and reasonable fee for each particular piece of advice, according to MLC general

Chris Freeman Freeman said.

“Research is like a commodity, you can get that anywhere,” he said.

Online broking companies such as Bell Direct offer research and trading abilities for just $15, while Westpac Broking and Commonwealth Online Securities also offer research at a low cost.

Many dealer groups also provide their own research in partnership with different brokers.

Macquarie Adviser Services’ head of insurance and platforms Justin Delaney insisted that interest in direct shares was growing thanks to the rich capability they provide.

“The role of the platform has been pure administration, providing custodial services, reporting and access to trading.

I think the level of functionality provided Continued on page 3

Steve Helmich manager Greg Miller.

If scoped advice was broken down into a single advice strategy each time, it would help drive down the cost of that advice, he said.

The cost of the advice should rise or fall according to how complicated the advice was, he said.

In the FSC discussion, Miller said scoped advice should be seen as an introduction to holistic financial advice.

However, ANZ Wealth general manager of advice and distribution Paul Barrett said research showed a customer wouldn’t pay more than $300 for scoped advice, and dealer groups should find ways to make 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: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Cadet Journalist: Angela Welsh Tel: (02) 9422 2898 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: Marija Fletcher Sub-Editor: Lynne Hughes 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.

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Class order removal a relief

I

f the Australian Securities and Investments Commission’s (ASIC) guidance document on scalable advice should be welcomed for one thing, it should be welcomed for the manner in which it proposes to remove the class relief granted to superannuation fund trustees relating to provision of intra-fund advice.

By proposing to withdraw the class order relief, the regulator has clearly signalled it believes there should be a level playing field with uniform obligations imposed on those providing ‘scaled advice’, whether they are financial planners, accountants or superannuation fund trustees.

While much was made of the 2009 Government-backed decision to provide a class order allowing superannuation funds to provide ‘intra-fund’ advice, it ultimately proved to be little-used by superannuation fund trustees, with most opting to go down the route of more holistic advice.

One of the key elements of the ASIC approach to scalable advice is that it suggests the obligations imposed on those providing the advice will also be scalable with respect to the suitability of the advice for the client and the level of

2 — Money Management August 11, 2011 www.moneymanagement.com.au

“

Financial advice, delivered from no matter what quarter, should be subject to a uniform legislation and uniform regulation.

”

inquiry and analysis required.

However, the ASIC paper is silent on the issue of a ‘best interests’ test – something that has been raised as an issue of concern by the Financial Planning Association (FPA).

Given the potential complexity of the issues, the FPA is probably also right to be concerned about topics such as transition to retirement, Centrelink and retirement planning to be included within the broad gamut of scaled advice.

ASIC needs to be careful to ensure that the level playing field it will create by removing the class order relief granted to superannuation funds will not again be distorted by allowing too much scope

for invention within the definition of scaled advice.

Then too, financial planners and others should note that the ASIC documentation makes frequent reference to the legislation that will evolve out of the Federal Government’s Future of Financial Advice (FOFA) changes.

Implicit in those references is that whatever recommendations the regulator may have made within the discussion paper, the ultimate shape of the new scalable advice environment will depend on the content of the legislation the Assistant Treasurer and Minister for Financial Services, Bill Shorten, ultimately introduces to the Parliament.

It is to be hoped, however, that the minister and his advisers have made themselves fully familiar with the ASIC discussion paper and, not least, its proposed removal of the 2009 class order relief. Financial advice, delivered from no matter what quarter, should be subject to uniform legislation and uniform regulation.

As superannuation funds move further and further into the competitive delivery of financial advice, they must be made to play by the rules.

– Mike Taylor

News

Mixed response to FSC’s stance on churn

By Chris Kennedy SOME segments of the industry say the Financial Services Council’s (FSC) stance to proactively reduce the practice of insurance policy churning by advisers will not have the desired effect, while others say it is unnecessary – although it has also generated some support.

FSC chief executive John Brogden last week proposed a ban on takeover terms, and a two year responsibility period on policies with commission clawback if policies were cancelled in that period.

Director of risk focused licensee Synchron, Don Trapnell, said the two year responsibility period puts onerous pressure on the income generating capacity of the adviser, and has the potential to penalise advisers who aren’t doing the wrong thing.

“It’s not necessarily a matter of rewriting

business that causes a case to lapse; everybody presupposes that advisers are out there churning over business on a regular basis,” he said.

But market conditions and market pressures should be able to regulate the industry, he said. The ultimate beneficiaries of the terms suggested by the FSC will be the life companies, he added.

Speaking from a personal point of view, Col Fullagar from RI Advice said that a two year responsibility period is probably not the answer.

“The answer, in part, lies with life offices giving greater credence to remuneration systems that reward the right activities,” he said.

You can’t blame advisers for receiving an advantage from facilities put in place by life offices, he said.

The life offices currently have systems in

place that allow them to identify which advisers are abusing the current system, and Fullagar asked why the life offices don’t look to speak to those advisers and put corrections in place.

This could include only making available level commissions if lapse rates exceed a certain level, paying a higher rate of remuneration to advisers doing the right thing with the increase being funded by those who are not.

“If the current system was properly addressed, the need for Government pressure to move risk insurance to fees may not be as necessary. This would then enable advisers and their clients to make a choice as to what is better - fees or a commission structure that rewards sustainable activities,” Fullagar said.

An Asteron survey on the topic sent to around 5,000 advisers quickly generated over

300 responses, with more than half stating that removing takeover terms would not reduce churn. However, two thirds of advisers believed the two year responsibility period would reduce churn.

Asteron’s executive manager, national sales, Mark Vilo, said there was a perception that advisers are being penalised due to the churners but that the issues weren’t necessarily being resolved.

Advisers in the survey suggested reducing up-front commissions or looking at different responsibility periods for different types of commissions. For example, up-front commissions could incur a two year responsibility period, but on a hybrid commission it could be less, and less again for those on level commissions.

Asteron general manager Jordan Hawke supported the ban on takeover terms and described the move as a “great first step.”

Heckles rising over Investment Trends report Continued from page 1 by our platform is very comprehensive,” Delaney said.

However, Delaney admitted they could do more in terms of evolving research and trading services for advisers using the platform.

Investment Trends senior analyst Recep Peker suggested that the number of planners using platforms for direct shares has plateaued. “The number of advisers using platforms is unchanged from last year,” he said.

Morningstar co-head of

fund research Tim Murphy said advisers tended to complain about direct shares on platforms because platforms were originally designed for managed funds, which have a different structure.

They weren’t really designed for trading securities on live exchanges.

Some platforms have addressed that situation better than others, but it varies, Murphy said.

Platforms had been ploughing money into their structures and were at different stages of success, he added.

Value of scoped advice outweighs price Continued from page 1

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scoped advice available under that amount.

“Most of the research that we have done indicates that $300 is the paying threshold. So therefore, we have to be under that. One of the people on the panel said that most planners would charge more than that and people would pay – I disagree with that. I think there is a fundamental problem – the advice value dilemma, where people will only pay $300.”

Mercer member services and advice leader Jo-Anne Bloch also questioned the costs of scoped advice that were suggested during the session.

There was a real reluctance among super fund members managed by Mercer to pay extra for advice related questions, particularly within super, Bloch said.

If the member asked an advice question unrelated to super, they would be happy to pay, but they were very reluctant to pay for advice related to their super when they were already paying for their actual super, Bloch said.

“Our experience through our call centre and our seminar where we do deliver scaled advice indicates it’s really hard to charge extra,” she said.

It was also administratively inefficient to add the bureaucracy to charge for it, Bloch added.

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News Is Choice guilty of fees hypocrisy?

FPA weighs in on CHOICE switch campaign

By Chris Kennedy

THE Financial Planning Association (FPA) has criticised CHOICE’s partnership with the Big Bank Switch campaign, calling it hypocritical.

“We believe this campaign is hypocritical of previous arguments made by CHOICE against commission payments to financial advisers,” FPA chief executive Mark Rantall said.

“CHOICE has argued over many years for the banning of commissions and supported the [Industry Super Network’s] position on getting rid of ongoing and asset based fees for providers of financial advice, however it is apparent that the Big Bank Switch campaign does just that,” he said.

“CHOICE has admitted to receiving a referral fee from this campaign, whilst at the same time continuing to be one of the most vocal opponents of commissions paid to financial planners. CHOICE is displaying double standards on payments to those providing financial advice.”

CHOICE director campaigns and communications Christopher Zinn told Money Management that he had expected criticism from the planning industry, but CHOICE’s argument had always been against poorly-disclosed commissions and volume-based payments.

He said it is hard to understand how the referral fees CHOICE stands to receive are comparable to the trailing commissions

received by financial planners.

“We’ve structured this in a way that removes conflicts of interest. We haven’t released all the details because the registration process is ongoing until August 14 and then the negotiations will take place,” he said. After that date full details would be announced he said.

“CHOICE could not be more conscious of the allegations of a conflict of interest and appreciates why the FPA put out a release talking about apparent double standards. We intend to demonstrate why there is no conflict but unfortunately can’t do that yet.”

He added that the referral fees will be used to fund the current campaign and any fees received above that will be used in future campaigns to benefit consumers.

“There is no comparison in this case to financial advice because CHOICE is just a referrer,” he said.

But Rantall told Money Management that having consumers pay commissions, and with referral fees going back to CHOICE, it was no different to the financial planning case.

“We would call on CHOICE to fully disclose what they are receiving and where the money is going and to not accept commissions or referral payments. They should have their readers opt-in every year, the same as they’re calling for from financial planning, and close this massive double standard,” he said.

Greg Cook

By Mike Taylor ONE of the harshest critics of commissions and asset-based fees, the consumer group, Choice, may be engaging in similar conduct via its endorsement of, and relationship with, One Big Switch.

That is the concern of Eureka Financial Group managing director Greg Cook, who said that while he believed the One Big Switch concept was novel and welcome, if it resulted in consumers getting better value from their mortgagee, it raised key questions for Choice.

He said that, as he understood it, Choice had not just promoted and endorsed One Big Switch, they had “partnered” with them – something which, while not publicly disclosed, “indicates some kind of financial relationship”.

“If that’s so, let me be the first to welcome Choice to the financial services industry,” Cook said.

However he said his concern was not so much any perceptions of conflict of interest, but what might emerge as a “gob-smacking conflict in policy position”.

Cook claimed that as well as being opaque rather than transparent, the relationship appeared to be at “complete odds with the decade-long position of Choice in financial services policy”.

“Choice’s Christopher Zinn and the industry super cohort decry commission payments, fees calculated as a percentage, trail commissions, and any volume rebates,” Cook said. “However on the face of it, here there seems to be a cocktail of all these, but not only that, in the more dangerous area of mortgage and investment lending.

“If this is the case, it is amazing how easily their firm principles wilt when it comes to actually implementing a business model,” he said. “On that basis, I now wonder, will Choice follow the financial planning profession and bring their remuneration policy into the 21st century?”

FSC moves to Industry backs Shorten concession on risk in super reduce churn

John Brogden

By Mike Taylor THE Financial Services Council (FSC) has moved to reduce churn in the life insurance industry via a uniform approach to commissions.

The FSC’s approach has been unveiled by the organisation’s chief executive John Brogden at its annual conference on the Gold Coast today.

Brogden pointed to ongoing concern around the level of policy churn and said he believed the initiative would go some way towards addressing the problem.

The announcement came just hours after the Assistant Treasurer, Bill Shorten, announced the Government was prepared to cede ground on commissions on individually advised risk products within superannuation.

Brogden said the FSC had moved to develop a binding standard to stop churning.

He said it was intended to have agreement around the binding standard by 2012 for implementation with the FOFA legislation.

Brogden said the standard would help meet the best interests test.

THE financial planning industry has welcomed a signal from the Assistant Treasurer and Minister for F inancial Ser vices, Bill Shorten, that the Federal Government is prepared to cede ground on the blanket banning of commissions on risk products sold within superannuation.

Shorten used an address to the Financial Services Council (FSC) annual conference on the Gold Coast to declare the Government was prepared to shift ground on the banning of commissions on individually advised risk products within superannuation.

In doing so, the minister acknowledged the lobbying efforts of the FSC and the Financial Planning Association (FPA), but specifically

excluded the effor ts of another planning industry organisation which was widely assumed to be the highly vociferous Association of Financial Advisers (AFA).

Notwithstanding the minister’s exclusive omission of his organisation, AFA chief executive Richard Klipin welcomed Shorten’s announcement, but said the next move by the Government needed to be a shift on its stance with respect to the two year ‘opt-in’ provision.

However, Shorten made it clear that while the Government was prepared to shift ground on individually advised risk commissions, it was totally committed to the two year opt-in, which he regarded as the minimum that could be expected of advisers.

He said that where com-

Bill Shorten missions on individually advised risk products were concerned, the Government was prepared to concede some ground on the basis of submissions received from the industry, particularly the FPA and the FSC. The minister’s statement was welcomed by the executive director of the FPA, Mark

Rantall, who said he believed Shorten’s announcement was a direct result of lobbying by the FPA. He said that while the FPA had not been overly vocal about its lobbying role, it had nonetheless been working closely with the Government to achieve a change in the position with respect to the banning of commissions on risk in superannuation.

The minister’s announcement has also been welcomed by the Coalition, with Federal Opposition financial services spokesman, Senator Mathias Cormann, saying it always represented a bad idea and something which had been adopted by the Government at the behest of the industry superannuation funds.

HSBC Australian advisers safe HSBC says its financial advisers in Australia are safe, despite massive job cuts by the organisation overseas.

In the latest interim report from HSBC Australia, retail banking and wealth management is up, while the bank’s assets grew by 13 per cent.

Wealth management also increased, with a pre-tax profit increase of 35 per cent to $35 million in the first half of 2011.

According to chief executive Paulo Maia, the marked growth was due to HSBC expanding its debt capital markets, project and export finance, loan origination, and lever-

4 — Money Management August 11, 2011 www.moneymanagement.com.au

aged acquisition finance teams.

With the bank expected to cut up to 30,000 jobs in Europe and other parts of the world, HSBC has told Money Management that the bank is committed to growing their presence in Australia along with the wider Asian market.

“HSBC Group is reviewing its business for long-term efficiency and reallocation for sustainable growth and evaluations are still underway,” a bank spokesperson said.

“We will continue to invest in our business and attract and retain the best talent in key markets.”

Paulo Maia

News

Maher critical of Government inaction

By Mike Taylor THE Federal Government has been taken to task for causing consumer uncertainty by taking an undue amount of time to deliver a new legislative framework covering the financial services industry.

The accusation of undue delay was levelled by the chairman of the Financial Services Council and Group Head of Banking and Finan-

cial Services at Macquarie Bank, Peter Maher.

Maher used his opening address to the FSC annual conference on the Gold Coast to lament the on-going consumer uncertainty attached to the Government’s prolonged legislative deliberations around the Future of Financial Advice (FOFA) change, and the recommendations of the Cooper Review.

He said the Government’s

approach had led to industry uncertainty about the future of the financial services industry and the parameters within which companies would need to operate.

“This uncertainty is affecting consumer confidence in our industry,” Maher said.

He also claimed recent research had indicated the Government’s approach was undermining consumer perceptions of the value

good financial advice could add to their ultimate outcomes.

Notwithstanding its concerns about the Government’s approach, Maher said the FSC would be strongly supporting the Government’s push to lift the superannuation guarantee from the current nine per cent to the envisaged 12 per cent,.

“We will be supporting the Government’s endeavours to make this happen,” he said.

Peter Maher

Snowball reviews its client services

By Milana Pokrajac SNOWBALL is undertaking a detailed review of its customer relationship management system, client administration and reporting platforms, which the group said was part of Project Best Advice.

As part of its participation in Shadforth’s Project Best Advice, Snowball is establishing its Best Advice Centre of Excellence, which the group said would ensure all aspects of adviser services are focused on delivering value to clients.

Snowball’s client strategy suppor t ser vices, including technical experts and databases, would work together at a national level to support the expansion of the project, the dealer group said.

Project Best Advice was established by Shadforth in 2006 and it encompasses all aspects of client service delivery, from adviser support systems through to compliance, client experience considerations and marketing.

Snowball’s Best Advice Centre of Excellence, which followed the Snowball/Shadfor th merger, would be led by head of best advice Sally Manion, and chaired by managing director, Tony Fenning.

Manion said the project would appeal to groups of practice principals who want to focus on delivering “quality strategic advice rather than being part of a product distribution network”.

It will shor tly be expanded to include the Snowball Outlook and Western Pacific adviser networks.

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www.moneymanagement.com.au August 11, 2011 Money Management — 5

News Why advisers are wanting property advice

BT announces restructure

By Chris Kennedy BT Financial Group has announced a restructure driven by a desire to earn more of Westpac customers’ superannuation, investment, advice and insurance business, and as a result of Future of Financial Advice (FOFA) changes.

The restructure will include a new bank distribution and insurance division to be run by general manager Mark Smith; as well as a new business transformation division to be led by general manager

John Shuttleworth, which will focus on designing and building the next generation wealth platform.

A new superannuation and investment business will bring together BT Super for Life, Corporate Super and the BT Wrap and Asgard platforms with Westpac’s investment businesses including Advance Asset Management, Ascalon and BT Investment Management. This division will be headed up by general manager David Lees.

Westpac will also bolster its private wealth under Jane

Watts to focus on the banking and wealth management needs of high-net-worth customers of Westpac Private Bank, St. George Private Clients and Bank of Melbourne Private.

There are no structural changes to the advice business led by Mark Spiers which comprises Westpac Financial Planning, St.George Financial Planning, BankSA Financial Planning, Bank of Melbourne Financial Planning and Securitor, although Westpac stated the unit will add 140 planners over the next three years.

By Andrew Tsanadis

Mark Spiers

Hourly fees bad for business THE way planning practices charge for advice will be key to how well they deal with Future of Financial Advice (FOFA) regulations – and charging an hourly rate is definitely not the answer, according to Elixir Consulting business coach Stewart Bell.

Pricing comes down to how you charge, when you charge and what you charge – and the options for how you charge are hourly fees, flat fees and asset-based fees, Bell said at a recent Association of Financial Advisers (AFA) roadshow.

Of those three you should take hourly fees off the table straight away because they’re not good for business, they reward inefficiency and clients don’t like them, he said.

“The last thing you want is a client not picking up the phone because they’re worried what you’re going to charge them,” he said.

In terms of when you charge, some planners do a discount upfront, which can send the message the true value of the advice is

in the ongoing implementation rather than in the upfront plan. The two prevalent models are an all-inclusive annual retainer, or a restricted offer that includes an annual

6 — Money Management August 11, 2011 www.moneymanagement.com.au

review and a newsletter, but extra services such as additional reviews and Statements of Advice cost extra.

In terms of what you charge, it’s very important to put a value on your advice, he said.

“It’s not about time, it’s about expertise, the difference you make to a client – charging by time doesn’t recognise that,” he said.

FOFA will actually create significant opportunities for those who move early, he said.

“My view is that when fees are positioned correctly, when it’s clear what they’re for and what they’re linked to, and when trust is present in a relationship, then fees are rarely an issue,” he said.

Bell said FOFA is less about radical change and more about evolution. It is simply pushing through changes that would have happened eventually anyway, and for those planners who are waiting for the details on FOFA there is already enough detail to be making a start, he said.

WITH more and more investors wanting access to property investment advice, the expertise required is often beyond the scope of most financial advisers.

Melbourne-based real estate agency Next Level Property (NLP) is providing such a partnership service to advisers by locating, purchasing and managing investment properties.

Joint director Andrew Oscari from NLP says they look closely at not only the criteria set by the financial adviser but that of the investor as well. “ We under take the full proper ty purchase from selection to an investment cash flow forecast to sourcing appropriate finance if that is required,” Oscari says.

“Next Level Property also continues to manage the property and tenancy on behalf of the investor.”

Oscari also says that NLP assumes responsibility for liability for property advice, ensuring there is no risk to the adviser’s financial services licence or professional indemnity cover.

Despite the fact that the Reserve Bank of Australia has stated that housing prices have “softened” over the last few months, NLP says interest in residential and commercial property investment by private investors and self-managed superannuation funds is strong.

News

Knowledge the key to using SMAs?

By Mike Taylor RATINGS house van Eyk has pointed to the value of separately managed accounts (SMAs), but has warned that financial planners and their clients need to understand the flexibility and tax benefits could come at a cost if they are not used properly.

Referring to recent survey data

Strong A$ and soft markets hit CBA

T H E s t re n g t h o f t h e Au s t ra l i a n d o l l a r a n d softening equity markets have impacted the funds position of the Commonwealth Bank, according to the latest d a t a re l e a s e d t o t h e Au s t ra l i a n Se c u r i t i e s E xc h a n g e ( A S X ) l a s t week.

The bank announced that funds under management (FUM) for the June quar ter stood at $197 billion, a 1.3 per cent decline largely attributable to the appreciating Australian dollar and falls in investment markets, with the ASX200 down 4.8 per cent and the MSCI World (AUDF) index down 3 per cent over the quarter.

However, the bank said retail net flows were up for the quar ter due to strong flows into the FirstChoice and Customs Solutions platfor ms, while wholesale products were impacted by the outflow of shor t-ter m cash mandates.

The ASX announcement said that FUM at 30 June stood at $149 billion, down 1.9 per cent for the quarter.

It said insurance inforce premiums were up 3 per cent for the quarter to $1,640 million with growth across all business lines.

released by Investment Trends, van Eyk senior analyst Briana Lam said the type of investment strategy used in an SMA and how it was implemented determined the success of an individual portfolio.

She said SMAs were better suited to a concentrated portfolio of a smaller number of stocks, to reduce turnover and to keep transaction costs and tax liability as low

as possible.

“We think investors should be aware not all investment strategies are suited to an SMA-style product,” Lam said.

She said that while the ability to easily deviate from a model portfolio when investment opportunities arose was seen as a strength of SMAs, it could also be a weakness.

“Time lags and lack of monitor-

ing of portfolios by fund managers can lead to returns in an SMA deviating from the manager’s model portfolio,” Lam said. “Differences can also arise from SMAs not having access to certain investments like initial public offerings, or some transactions taken by SMAs may be too small for a platform provider to process.”

Comparing boutique SMAs to

those marketed by large fund managers, the van Eyk analysis said neither was clearly superior.

Boutiques often have a better handle on the implementation issues surrounding the product, but larger providers often have better resources and greater access to sources of investment and market information, the analysis said.

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blackrock.com.au/advisers ^Gross performance excludes fees and charges and assumes the reinvestment of all distributions. *Net performance of Class D units (min investment $5,000) since inception to 30/06/2011 and assumes the reinvestment of distributions. It does not take into account the effect of taxes. Inception date is 4/7/05. # MSCI World ex-Aust (hedged) is not the benchmark for this Fund but is used to indicate the performance of broader global equity markets (hedged in AUD). The Benchmark for the Fund consists of a weighted average of returns for a composite of 36% S&P 500 Composite Total Return), 24% Financial Times/S&P Actuaries World Index ex-US (Total Return), 24% Merrill Lynch Government Index GA05 (5 year Treasury Bond) and 16% Citigroup Non-USD World Government Debt Index. Issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230523 (BlackRock). BlackRock is the responsible entity of the Fund. A PDS for the Fund is available from BlackRock.

You should consider the PDS in deciding whether to acquire, or to continue to hold, the product. This is general information only and does not constitute financial product advice. The information doesn’t take into account an individual’s financial circumstances. An assessment should be made as to whether this information is appropriate for an individual and consideration should be given to talking to a financial adviser before making an investment decision.

www.moneymanagement.com.au August 11, 2011 Money Management — 7

News Advice headed to more specialisation

By Chris Kennedy THE financial adviser of tomorrow will become increasingly adaptable, technologically focused and specialised, according to the Association of Financial Advisers vice president, Adam Smith.

It will be very important to get the balance right to run an efficient business, he said, and this means becoming more process driven, more disciplined and more focused. Process helps to demonstrate value, which in turn helps you position fees and build efficiency, he said.

Efficiency will also come from a turnkey business model, where all staff have their own positions and know what they need to do, enabling the adviser to focus on his duties, Smith said.

Innovation, particularly in the area of technology such as applications for smart phones and iPads, will also be key, he said.

For example, Smith said he uses his iPhone at the end of every client session to take a photo of the whiteboard and mail it to the client so they have a visual record, and he also emails it to software

By Mike Taylor

provider XPLAN for the client records.

The advisers of tomorrow will also have a thirst for learning, Smith said, but added that the important thing is not how many letters an adviser has after their name, but how well they can transfer their knowledge to clients.

“It’s not just about what you learn, it’s how you use it,” he said.

“Advisers will also become increasingly specialised as the industry becomes more complex,” he said.

“The world is getting faster, more complicated and more litigious,” he said, and added that it will be hard enough to keep up in one area without trying to be an expert in multiple areas.

SMSF borrowing shifts to financial assets

By Tim Stewart A MULTIPORT survey of 1,600 selfmanaged superannuation funds (SMSFs) has found trustees using limited recourse borrowing arrangements moved away from property and towards financial assets in the June quarter.

Multiport found that since the March quarter there had been a 4

APRA warned on secrecy provisions and MTAA Super

per cent move towards financial assets.

Multiport suggested that the increase in financial asset borrowing could be attributable to the current lull in the stockmarket, with aggressive trustees looking to leverage their holdings in anticipation of a recovery.

Another factor noted by Multiport was the shorter and less complicated

process involved in borrowing for financial products, as opposed to property.

As at 30 June 2011, property loans made up 52 per cent of SMSF trustee borrowing and financial asset loans made up 48 per cent.

Fourteen per cent of the funds surveyed in the Multiport research are currently utilising a borrowing arrangement.

A SENIOR Liberal Senator believes the Australian Prudential Regulation Authority (APRA) cannot avoid answering questions about its handling of MTAA Super based on the secrecy provisions of its governing legislation.

Tasmanian Liberal Senator, David Bushby, has confirmed to Money Management that after failing to extract answers from APRA during Budget Estimates earlier this year he had sought advice from the Clerk of the Senate about the regulator’s reference to the secrecy provisions in sidestepping answers to his MTAA related questions.

In a column published on page 13 of this week’s edition of Money Management, Bushby said he is concerned that APRA “appears not to understand the public benefits of accountability of regulators such as itself, to Parliament, which provides a vital oversight role of such organisations in a well functioning democracy.

“It is also labouring under the misapprehension that it could be in breach of its Act if it provides the Senate with answers to some of the questions that I placed on notice. The fact is, that answering such questions would not be a breach of its Act,” Senator Bushby said.

“The Clerk of the Senate has provided advice that states that any APRA evidence to the Parliament has the protection of Parliamentary privilege. Furthermore, the Clerk advised that: “It is well established that a general secrecy provision [which the APRA statute has] does not prevent the provision of information to a House or committee of the Parliament in the absence of an express statement to the contrary. In other words, the inquiry powers of the Houses are not affected by secrecy provisions”.

Senator Bushby said he believes APRA needed to go back to its code of conduct and reassess its accountability statements.

“If its regulated entities treated APRA the same way APRA appears to be treating its parliamentary oversight body, APRA would be incapacitated as a regulator,” he said.

DKN announces write downs; decreased inflows

ASIC bans unlicensed Sydney director

DKN has announced a $21 million write down to the carrying value of goodwill in its accounts in a statement to the Australian Securities E xc h a n g e, w h i c h t h e company said would have no impact on a proposed acquisition by IOOF. Together with an underlying net profit after tax, DKN anticipated a full year loss of $14 million, subject to audit.

The total funds under administration in its platform and product solutions divisions was up by 8 per cent over the 12 months from 30 June 2010 to $8.02 billion, although positive inflows saw a 40 per cent drop compared to the previous year to $300 million.

“These figures reflect lower investor confidence, uncertainty arising from impending regulatory changes and the loss of one medium-sized wealth management practice from the network,” DKN stated.

DKN also announced that investments were made in two additional practices through its equity partners division, while seven new associates were added to its Lonsdale dealer group network, bringing the total to 117 practices.

Five new practice associates were contracted to purchase solutions from Lonsdale and six existing practice solutions associates were contracted to purchase additional solutions throughout the year, DKN stated.

A SYDNEY director has been banned permanently by the Australian Securities and Investments Commission (ASIC) for operating a financial services business without an Australian Financial Services (AFS) licence.

Erin Watson was a director of Home Equity, and remains a director of Home Mortgages Australia and Credit Limited.

Between March 2007 and February 2008 Watson met with potential investors, dealt with clients and signed agreements

8 — Money Management August 11, 2011 www.moneymanagement.com.au

By Andrew Tsanadis

entered into by Home Mortgages Australia.

ASIC deter mined Watson deceived clients by advising them to invest in property and finance company US Mortgage Giant and that the investments were ‘watertight’.

She then lodged misleading documents with ASIC that US Mortgage Giant was a legal entity and a significant shareholder of Home Mortgages Australia.

The investigation also found that from September 2006 to March 2008 Watson used clients’ monies to pay her home loan,

family members, and other clients of Home Equity and associated companies.

Watson has the right to apply to the Administrative Appeals Tribunal for a review of ASIC’s decision.

ASIC Commissioner goes to FOS AUSTRALIAN Securities and Investments Commission (ASIC) commissioner Shane Tregillis has been appointed chief ombudsman of Financial Ombudsman Services (FOS).

Tregillis rejoined ASIC in May 2010 after eight years with the Monetary Authority of Singapore where he was a deputy

managing director.

Tregillis will take up the Melbourne-based role this September when he leaves his current position later this month.

ASIC chairman Greg Medcraft applauded Tregillis’ role as commissioner.

“Shane worked on some of ASIC’s most important projects

through their most crucial times, including supervision of ASX following the successful transition to ASIC in August 2010,” said Medcraft. “He will make a superb Chief Ombudsman at FOS.” ASIC deputy chairman Belinda Gibson will assume Tregillis’ responsibilities.

News

Dealer groups looking for a quiet exit

Challenger focuses on business development

By Milana Pokrajac

By Chris Kennedy RECENT industry upheaval has resulted in plenty of small and medium sized dealer groups looking for a quiet exit through a sale to an institution, according to Equity Trustees head of wealth management Philip Galagher.

EQT has been approached more than once a week by groups who are looking for an institutional owner, he said.

“A lot of them can see that there are advantages in the vertical integration that an institutionally-owned dealer group can put in place,” he said.

They may not necessar ily want to get involved with a bank, but are looking for an institution such as EQT that does have some involvement in the advisory side and has some other interests that could be beneficial in terms of cross selling and so on, he said.

EQT has been open about the fact that if the right deal comes along they would be interested, and that would most likely be a group that fits in with EQT’s focus on the high net worth (HNW ) client space, Galagher said.

The group would also be likely to look only at “squeaky clean” groups that had already been operating a fee for service model for some time.

EQT was targeting growth in the next three

Philip Galagher to five years, both through establishing its own brand and through an agency structure but most of that growth would likely come through acquisitions, he said.

According to Galagher, the synergies from a trustee company’s point of view are not just from the advisor y side, but the fact that frequently HNW clients will want estate planning and to review their wills, which is an area EQT already focuses on.

A MONTH after hiring Cathryn Franks as national boutiques sales manager, Challenger has added a further five business developers to its team.

Prior to June 2011, Challengers business development managers (BDMs) were tasked with marketing both Challenger’s annuities as well as managed fund products, but greater specialisation would help grow the b o u t i q u e ’s b u s i n e s s a n d enhance client service relationships, Franks said.

Dario Conte has joined the company as a BDM and will be servicing financial advisers in NSW and ACT. Former State Street Global Markets analyst, Jeremy Butterworth, will be in charge of business development in SA and WA, while Marietta Gibbs will be based in Queensland.

Also based in Queensland, Claudia Faundez will work alongside Gibbs. Gibbs was a finan-

cial planner, with a background in Australian equities markets and managed funds, having prev i o u s l y w o r ke d a t Av i v a Investors and OnePath.

David Livera had made an internal move and would operate as a senior BDM in Victoria, having previously managed both annuities and boutiques at Challenger. He will now focus solely on boutique funds.

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CFS2030/HPC/MM www.moneymanagement.com.au August 11, 2011 Money Management — 9

News

Despite MTAA questions, APRA rated ‘excellent’

By Mike Taylor DESPITE being the focus of some criticism by parliamentarians and others relating to its handling of MTAA Super and other issues, the Australian Prudential Regulation Authority (APRA) has released a stakeholder survey which it says produced “an excellent result”.

The survey, commissioned by APRA and conducted by the company, Australian Survey Research (ASR) canvassed the views of 563 regulated entities and 150 “knowledgeable observers” and represented a follow-up on a similar survey conducted in 2009.

According to APRA, of the 45 items rated in the survey, only two

scored below neutral, translating into the regulator receiving 75 per cent positive responses.

“Overall this is an excellent result and further endorsement of APRA’s prudential framework and approach to supervision,” it said. “Regulated entities agree that APRA has had a positive impact on their industry.”

The regulator claimed the survey

had revealed that its strengths were the impact of its framework and guidance material as well as its staff’s adherence to its values.

It said the areas that had scored lower included the cost impact of regulation, particularly for small entities, and harmonisation across regulators and across standards.

The survey analysis said that

across the survey views had differed considerably between industry groups, but with no overall pattern to differences.

It said there were considerable differences between the scores given to APRA by the so-called “knowledgeable observers” and the entities it regulated, with the regulated entities likely to have scored APRA lower.

Bendigo practice becomes newest ipac equity partner

New super risk measure to help consumers compare funds

By Chris Kennedy

By Ashleigh McIntyre

RETIREINVEST Bendigo has rebranded as Flack Advisory and switched licensees to Charter Financial Planning to become the latest ipac equity partner, after 22 years with RetireInvest. ipac has taken a 50 per cent stake in the practice that includes three advisers in a total of 12 staff and manages $270 million on behalf of clients. ipac chief operating officer Eric Gibson said that while equity partnerships usually tend to be about a 10-year term, there was no set duration and a shorter or longer term could be negotiated.

There is also no reason why principal George Flack could not continue to work in the practice once ipac takes the remaining stake, he said. Two of ipac’s original equity partner principals still work for the group on a part-time basis, he added.

“George Flack is a highly regarded adviser and business owner. His intimate knowledge of social security has delivered enormous value to his clients and grew the practice to be one of the most successful at RetireInvest,” Gibson said.

Flack, Money Management Financial Adviser of the Year in 1996 and 2004, said he felt it was important to

start looking at his longer-term retirement planning goals, although at 58 he said he still planned on working in the practice for another 12 years. An active volunteer fire fighter who competes in amateur and professional athletics, Flack said he does not view 65 as a ‘Chinese wall’.

Flack said there had been a resurgence of morale among the staff and in business through the door, and now there was greater certainty around the practice’s future.

“Clients now have certainty that the business will continue, the staff will still be there, the premises will remain the same, there is a visible succession plan in place, and the practice will be able to ensure other qualified professionals come in to replace the planners who move on,” he said. “[Clients] won’t be orphaned, they won’t have to go out there and search for somebody else to have as a planner that they have to learn to trust again.

“Areas like social security are more complex than they have ever been.

The partnership with ipac will give us fresh ideas to run the practice better, support for acquisitions to fast-track growth, and provides a certain future for our business,” Flack said.

10 — Money Management August 11, 2011 www.moneymanagement.com.au

SUPERANNUATION funds will soon have to provide consumers with greater transparency around investment risk with the introduction of a new industry guideline.

The Association of Superannuation Funds of Australia(ASFA) and the Financial Services Council (FSC) have created a Standard Risk Measure to enable consumers to better understand the investment risk in an option they have chosen.

Investment options are to be labelled with one of seven risk bands, ranging from ‘very low’ to ‘very high’.

The bands are based on the estimated frequency of negative returns for the strategy over a 20year period, with ‘very low’ expected to have less than 0.5 negative returns, while ‘very high’ would have 6 or more.

FSC chief executive John Brogden said the Standard Risk Measure would help consumers to make better informed, confident decisions about their superannuation.

“Having a clear understanding of risk is just as important as being aware of fees or returns,” Brogden said.

He added that the new measure will enable consumers to “compare apples with apples” when looking at different investment options.

ASFA chief executive Pauline Vamos said the measure will also help trustees approach risk disclosure on a consistent basis and assist fund managers to better understand trustees’ requirements.

Pauline Vamos “The release of this guidance paper is a key part of the increased transparency in ‘true to label’ reporting that consumers will see from the current superannuation reform process,” Vamos said.

The methodology for determining an investment option’s rating will be supported by a structured review process, with both APRA and the Australian Securities and Investments Commission (ASIC) reviewing the operation as part of their normal activities.

From June 2012, APRA will require superannuation funds to identify and disclose, on a standardised basis, the risk of negative returns over a 20year period for each of their investment options.

The measure came about in response to a request from the Australian Prudential Regulation Authority (APRA) that the FSC and ASFA work together to develop guidance for super fund trustees on complying with risk disclosure.

News

Financial planning jobs show steady growth

By Ashleigh McIntyre THE number of advertised financial planning roles has increased 17 per cent year-on-year, showing stronger demand for financial planning staff as firms continue to recover from the global financial crisis (GFC).

The latest eJobs Recruitment Specialists market commentary found advertised financial planning roles rose by 4.5 per cent nationally over the last three months to 31 July, with Queensland (44 per cent) and South Australia (21 per cent) leading the way.

Victoria experienced a slight increase of just 3 per cent, while New South Wales went backwards by 3 per cent.

The state lagging the furthest behind was Western Australia, with job advertisements falling by 17 per cent.

The report said the fact that numbers fell

in July 2010 and rose in July 2011 suggested stronger demand for staff this financial year. It also said there was no evidence of increased candidate supply, but rather a tighter candidate market.

For the first time, eJobs also undertook a survey of paraplanners and found that 70 per cent of respondents were no longer acting as paraplanners.

The main reason for this was the result of career progression (often into a financial adviser role) as well as remuneration, legislation and job recognition factors.

The report found that the majority of candidates who wanted to move on to other roles had to change firms in order to progress, more often than not to a bank.

It found that many paraplanners also found their way into education and compliance positions with dealer groups and banks.

ICA urges Government to reduce flood risk

By Angela Welsh MANDATORYflood cover will not solve the problem of repeated flooding to at-risk areas, the Insurance Council of Australia (ICA) has warned.

ICA chief executive Rob Whelan urged the National Disaster Insurance Review to consider regulations to reduce risk to properties in flood prone areas so that homes are not lost in the first place.

“Forcing all Australians to pay extra to subsidise policy holders will neither fix the issue nor will it stop disaster events such as those we recently saw in Queensland and Victoria,” he said.

Given that 7 per cent of Australian properties are currently in flood-prone areas,

Whelan said the Government would have a hard time selling an increase to the 93 per cent of Australians who are not in areas at risk of flood damage.

The ICA warned that mandatory flood cover would increase the cost of living for all Australians, or force them not to insure at all.

In its submission to the Natural Disaster Insurance Review, the ICA called on the Government to protect consumers.

“The Federal Government and COAG [the Council of Australian Governments] need to reach an agreement on national land policy for homes constructed on floodprone land,” Whelan said.

“The real issue here is that the same areas flood on a

persistent basis and we need to prevent this getting worse by better regulation,” he added.

Whelan said a compromise needed to be reached that prohibits the construction of residential property on at-risk land unless there is strict enforcement of development controls that reduce the risk to less than a 1:100 year return period. “We need to treat the cause, not the symptoms,” he said.

The ICA urged the Government to use some of the $5 billion in stamp duty and fire service levies each year from insurance consumers. “The funds are there,” Whelan said. “All it takes is the political will to address the real problem.”

CBA launches property investment game

By Milana Pokrajac THE Commonwealth Bank of Australia (CBA) has launched an online property investment tool that simulates real-time exposure to the property market, meaning users do not have to put their own capital at risk.

Investorville, which combines real data with gameplay, was designed to educate potential investors about property investment and remove common misconceptions about the market, the bank said.

CBA general manager for consumer marketing Mark Murray explained that buying an investment property can seem daunting for many people, and that Investorville allowed users to “try before they buy”.

“The properties and data are reflective of the Australian property market and the types of properties available,” he added.

Investorville targets existing homeowners who might feel insecure about buying an

investment property, as well as those who already own one, Murray said.

At the same time, property experts called for investors to “leave their ego at home” when investing in property, because it could help their portfolio grow faster.

Kevin Lee of Smart Property Adviser said many are seduced by an impressive address instead of sound investment fundamentals.

Lee claims this was driven by the “desire to impress”.

“Generally speaking, these ‘dinner party’ properties end up being massively negatively geared. Negative gearing to this extent is not a smart strategy and it’s the number one reason why so many Australians own only one investment property,” he added.

Lee believes affordability is the most important consideration when investing in property, because both tenants and buyers would be easy to find.

Broaden skills to get the job

By Andrew Tsanadis ACCOUNTANTS and auditing professionals will need to develop broader skills in order to secure a job, according to the latest Clarius Skills Index (CSI) from Lloyd Morgan Accounting Talent Specialists.

The CSI is the only measure of underlying demand and supply of skilled labour in Australia.

According to the latest results, the demand for wider skills is being driven by the uncertainty that exists around Australia’s economic conditions, particularly the imminent introduction of a carbon tax, which in itself will increase demand for accountants with skills in auditing and risk analysis.

Paul Barbaro, Executive General Manager of accounting and finance specialists for Lloyd Morgan, said the Index report was in line with the recent approach by employers in the accounting industry to hold back on hiring during uncertain times.

“The current global economic situation and uncertainty about our own economy has resulted in employers pulling back on their hiring intentions, with an increasing shift towards employing short-term contractors rather than full-time employees,” he said.

June quarter results from the Index show an oversupply of approximately 2,300 accounting professional and 300

auditors – the closest tension between supply and demand of skilled labour in a decade, according to Lloyd Morgan.

Barbaro pointed to the stringent reporting financial and corporate governance requirements that most organisations are subject to as another factor that has placed a “great strain” on the need to take on more skilled and experienced industry professionals.

He said auditors will be among the highest sought after professions within the overall accounting industry over the next five to 10 years.

“In the area of tax, particularly tax law, we have seen an increase in demand across many sectors as clients continue to seek high level talent from a diverse background,” he said.

Inquiry into the Collapse of Trio Capital The Parliamentary Joint Committee on Corporations and Financial Services is inquiring into the underlying issues associated with the collapse of Trio Capital.

The committee is particularly interested in how the collapse affected people who invested in self-managed superannuation funds. The committee will also look into the role played by financial advisers, the state of the general regulatory environment, and the appropriateness of information and advice provided to consumers.

Submissions are required by 19 August 2011, and can be made online at the committee’s website or by email to: corporations.joint@aph.gov.au. Further information is available at: http://www.aph.gov.au/senate/committee/ corporations_ctte/index.htm; tel: (02) 6277 3583.

Please note that submissions to inquiries become committee documents and are made public only after a decision of the committee. Persons making submissions must not release them until they have been published by the committee. The prior publication of a submission will not be protected by parliamentary privilege. If you want information on how to make a submission, guidance to witnesses appearing before committees, or what parliamentary privilege means visit www.aph.gov.au/Senate/committee/wit_sub.

AG48672

www.moneymanagement.com.au August 11, 2011 Money Management — 11

SMSF Weekly Tighter SMSF regulation unwarranted: Mackay

By Damon Taylor THERE has been insufficient trouble within the self-managed superannuation fund (SMSF) sector to warrant significantly tighter regulatory restrictions.

That is the analysis of Quantum Financial Advisers director, Tim Mackay, who said he could not see the justification on experience to date.

“Personally, I can’t see it,” he said. “There has been this incredible growth over time, and yet we haven’t seen a material number of SMSFs get into trouble.

“Yes, some do, but we haven’t had problems over time despite that spectacular growth,” Mackay continued. “So to make that jump from growth to trouble, I’m

just not sure that one necessarily leads to the other,” he said.

And though he admitted that there would always be new trustees who were not prepared for the responsibilities starting an SMSF entailed, Mackay said it was incumbent upon the industry and incumbent upon the Australian Taxation Office [ATO] to make sure that appropriate education was in place.

“The industry is already helping on the education side,” he said. “Some of the accounting bodies are putting out some free online education resources that people can read and educate themselves with.

“It’s a bit like a self assessment that takes place before they even consider an SMSF set-up, and it

can give them an indication as to whether it’s suitable for them in their current circumstances.”

Yet not all financial planners dealing with SMSFs on a regular basis are as convinced that troubles of this nature will not arise, or even that they have not arisen already.

Merideon Wealth Strategies principal Mark Rattigan said that his business had probably closed down more SMSFs than it had opened in the past few years.

“It’s a big issue,” he said. “A lot of people go into it blindly and don’t understand what their responsibilities are. We know that from talking to people who have small balances, or we ask them why they’ve got a SMSF and they can’t give us any reason for it.

Tim Mackay “It might be that their accountant told them to do it, or it got set up as part of their business structure or something like that,” Rattigan continued. “So we actually

Retail versus Group comparisons not clear cut GROUP insurance within superannuation does not necessarily hold a competitive advantage over what can be achieved in the retail environment.

That is the conclusion of Merideon Wealth Strategies principal, Mark Rattigan, who said that making comparisons is not necessarily a simple question of black and white.

“Depending on the situation, I actually find that most of the time the group level covers aren’t necessarily more competitive than what SMSF members can get elsewhere in a retail environment,” he said. “A lot of times it comes down to underwriting issues, so if they’re unable to get cover somewhere else or they’re a smoker, the group cover tends to be more competitive or better.

“But when we actually do full comparisons and things like that, we find that, all else being equal, they can actually get cheaper cover through their SMSF or individually than they can through their group cover anyway,” he said.

Rattigan said that this was particularly the case for non-smokers and the insurance premiums that were subsequently available on that basis.

“A lot of the group covers do smokers’ rates, so for non-smokers,

we often find that it’s cheaper to redo their insurance through a retail offering, because they’re not subsidising the smokers’ rates,” he said.

“The other thing we’re finding is the ability to link covers inside and outside super can be an attractive feature,” Rattigan said.

“So you can get policies where you can link trauma cover and own occupation TPD [total permanent disability] covers to covers inside your super fund, which then gives you the ability to get the discounts on those because they’re riders rather than standalone policies,” Rattigan added. “So across their whole insurance suite, if you have stand-alone trauma cover or own occupation

cover in your own name and your group cover from your previous industr y fund, you’d tend to be paying more than you would be if you could group them all and link them all together,” he said.

For Rattigan, customisation of insurance cover is another definite advantage.

“Normally, with group cover you’ve only got group and your occupation’s TPD, and some limited salary continuance options and things like that,” he said. “So the ability to have full cover and to tailor it to your own needs is significant.

“The other thing with group covers is that a lot of them decrease in value as you get older, whereas a lot of people may want to have fixed levels of cover,” Rattigan continued.

“So what I find is that the people who are going into self-managed super funds tend to want to take a bit more control of their situation.

“And as a part of that, you’d hope that their advisers would be covering off on this as well. You’d hope that they’d understand more about what their needs are and what their desired outcomes are than people in an industry fund who tend to have a passive approach to their insurance and their retirement,” Rattigan said.

More certainty in corporate trusteeships CORPORATE trusteeships w i t h re s p e c t t o s e l f managed superannuation f u n d s o f f e r m u c h m o re c e r t a i n t y, a c c o rd i n g t o specialist trustee company, Clime Super.

C l i m e Su p e r g e n e ra l manager Darren Katz last week extolled the virtue of corporate trusteeships over individual trustees saying corporate trustees do not die, while when individual

trustees eventually did die, i t re s u l t e d i n a t i m e consuming rearrangement of affairs.

He said the death of an individual trustee created the need to re-register all of

12 — Money Management August 11, 2011 www.moneymanagement.com.au

an SMSF’s assets and office bearers.

“With a corporate trustee, the assets of the fund are transferred seamlessly to the remaining members of the fund,” he said.

spend quite a bit of time talking about what the advantages and disadvantages are, and whether they actually need the responsibility of having a SMSF to meet their goals.”

Rattigan said that following the global financial crisis, a number of people set up SMSFs online without really knowing what their responsibilities were – or would be.

“So, in my mind, there’s no doubt that we could end up with more breaches and more compliance issues,” he said. “Because even now, we’re finding that people who have been passing audits for 10 years, or have an accountant, are still not necessarily running a compliant fund,” Rattigan said.

Reporting season to provide pointers

By Mike Taylor WITH Australia’s publicly-listed companies about to enter the so-called ‘reporting season’, CMC Markets has suggested that while some good value may be found, investors need to exercise some caution.

CMC Markets chief market strategist Michael McCarthy said last week the Australian bourse had been recently weighed down by international issues such as a potential China slow-down, European and US debt issues, along with local concerns such as the high Australian dollar and consumer reluctance to spend.

“Depressed share prices have attracted many investors to companies which are looking like good value now on their price to earnings ratios and dividend yields, but whether their earnings are sustainable will determine their value as an investment,” he said.

He believes the reporting season, which will carry through the next four or five weeks, will provide some valuable insight into earnings sustainability.

He said that for investors it would also be important to be on the alert for companies and industries displaying earnings growth, as this will be a major factor in share price growth.

McCarthy said the past 12 months have seen analysts downgrade earnings forecasts across the board as optimism about a global recovery had faded to concern over mixed economic signals.

“The good news is, for the most part, any surprises have already been captured in those downgrades so the surprises are likely to be better than expected earnings, albeit with a few exceptions,” McCarthy said.

InFocus SMSF SNAPSHOT Breakdown of SMSF trustee borrowing over the June quarter

52

%

Property loans

48

Financial

% asset loans

How this compares to the March quarter:

Holding APRA to account As controversy continues to swirl around industry fund MTAA Super, Tasmanian Liberal Senator David Bushby argues it is time for the Australian Prudential Regulation Authority to step up on the question of accountability.

U

nder the APRA Act 1998 our prudential regulator must develop and publish a code of ethics. With this obligation, the Australian Prudential Regulation Authority (APRA) is perhaps unique among Federal agencies. I have taken the opportunity to peruse this code, and it is a wellformulated governance statement that could be made to apply to other agencies. This is important if our Federal regulatory agencies and their management are committed to making their organisations look and feel like a modern corporation working under listing rules and securities regulations, which have dramatically changed for the better during the past decade.

One of the quite commendable statements in the APRA code is in relation to accountability: • We hold ourselves to at least the same standards that we expect of regulated entities.

• We welcome independent scrutiny, and respond promptly to aspects of our performance that are identified as needing improvement.

In the past few years and months there have been a number of articles in Money Management on one of our major superannuation funds, the MTAA. These articles have reported to readers matters relating to the fund’s governance and regulation, and the role that APRA might or might not have played. I would add that Money Management has often reported on other funds and financial institutions, especially when regulatory concerns have arisen. I can remember AMP, Zurich and MLC being the subject of enforceable undertakings following regulatory action by our twin peak regulators (ASIC/APRA) and the regulators making public statements on these outcomes. Furthermore, the public release of this information informed the market, and the institutions in question went on with their business.

It is important that the media cover such issues just as the media does for our banks and other financial institutions. After all, for most

“APRA appears not to understand the public benefits of accountability of regulators such as itself, to Parliament, which provides a vital oversight role of such organisations in a well functioning democracy. ”

Australians, superannuation is their largest asset after their family home. Also, the media needs to report on what is happening in the community and its economy, and this in turn acts as an automatic regulatory control over those bodies that have been assigned the task of protecting other people’s money. The role of the media on a day-to-day basis is not dissimilar to that of the continuous disclosure regime that makes companies divulge to the market any material matters which might impact their business or underlying shareholder value.

Having read some of the MTAA articles, I decided to ask APRA some questions – 11 in all – at the June round of Estimates on the matters that Money Management has reported. Six weeks later I received its answers. To say the least, I was somewhat deflated when I read the regulator’s response. In relation to nine of the questions, APRA advised it would provide no answer whatsoever. APRA said it was precluded from doing so under the secrecy provisions of its parent Act. The questions were hardly earth-shattering or

market busting probes. They included how much APRA had paid for a consultant to review MTAA, and what powers it had conferred.

Another question (not answered) related to what options APRA had when it had concerns about a particular fund’s governance arrangements. Yet another question was even more general, since it related to APRA’s in-house regulatory capability and whether its resources were sufficient to conduct investigations of this type.

What concerns me in relation to APRA is that it appears not to understand the public benefits of accountability of regulators such as itself, to Parliament, which provides a vital oversight role of such organisations in a well functioning democracy. It is also labouring under the misapprehension that it could be in breach of its Act if it provides the Senate with answers to some of the questions that I placed on notice. The fact is that answering such questions would not be a breach of its Act. The Clerk of the Senate has provided advice that states that any APRA evidence to the Parliament has the protection of parliamentary privilege. Furthermore, the Clerk advised that: “It is well established that a general secrecy provision [which the APRA statute has] does not prevent the provision of information to a House or committee of the Parliament in the absence of an express statement to the contrary.

In other words, the inquiry powers of the Houses are not affected by secrecy provisions.”

Of course, there are accepted and clearly understood circumstances under which an entity such as APRA can avoid answering questions in parliamentary forums, generally related to public interest. But APRA did not seek to invoke any of those exceptions.

APRA needs now to go back to its code of conduct and reassess its accountability statements. If its regulated entities treated APRA the same way APRA appears to be treating its parliamentary oversight body, APRA would be incapacitated as a regulator.

4

Swing towards

% financial assets

Source: Multiport

What’s on

AFA: Practice Management Roadshow 19 August 2011 – Gold Coast Southport Yacht Club, Main Beach, Qld www.afa.asn.au/profession_eve nts.php

FINSIA Workshop: Trends in Debt Financing 23 August 2011 The Ivy, George St, Sydney www.finsia.com/events

FSC Professional Series: Policy & Research Briefings 23 August 2011 FSC offices, Level 24, 44 Market Street, Sydney www.ifsa.com.au/events/events -overview.aspx

FPA Seminar: Building a More Referable Business 24 August 2011 Wesley Conference Centre, Pitt St, Sydney www.fpa.asn.au/events

MFAA Event: NSW Broker Symposium 31 August 2011 The Sebel, Parramatta www.mfaa.com.au/event_calendar.asp

www.moneymanagement.com.au August 11, 2011 Money Management — 13

Share trading and direct investments

The right platform?

As managed fund inflows struggle to return to pre-GFC levels, share trading and direct investments became increasingly popular with retail investors over the past couple of years.

Financial planners seem to prefer platforms as a tool to manage direct investments and Benjamin Levy examines why this is the case.

N

o investment trend is permanent. Yet for now, there is no end in sight to the growing popularity of direct shares and exchange traded funds (ETFs). Direct share trading has continued to increase in funds under management over the last year as investors seek out more control, more flexibility, and more value for money. Industry research house Investment Trends has predicted that 40 per cent of new client funds will be placed into direct shares within the next three years, up from 28 per cent in 2011.

Platforms, the primary source for most planners wanting access to direct share investments, are benefiting from

this growth. BT Wrap saw their direct share investments on the platform jump from $4.2 billion in June 2009 to $7.1 billion in June 2011. While the amount of funds under management as a proportion of total platform assets only rose from 16.2 per cent to 17.5 per cent during the same period, it is still a significant amount.

But some advisers are concerned that platforms are not delivering enough with their direct share offering, an accusation hotly disputed by the platform providers.

While managed funds have continued to decline as direct equities gain in s t re n g t h , E T F s a re c o n t i n u i n g t o

14 — Money Management August 11, 2011 www.moneymanagement.com.au

expand, combining benefits from both s e c t o r s a n d p r ov i d i n g a s o u rc e o f competition to direct equities.

More control, more efficiency

“There’s no question for me that people are taking increasing ownership of their retirement portfolio. They’re more hands on and switched on with it, and t h a t’s n o t g o i n g t o g o a w a y,” s a y s Andrew Bird, Australian executive director of online portfolio management company, Sharesight.

Self-managed super fund (SMSF) investors, who are more sophisticated and involved, are one of the main interest groups involved in direct share

trading. With investments in any superannuation account being long-term accumulation assets, direct shares will play an important role within SMSF portfolios for many years.

The main driver of interest in direct shares among SMSF investors, and for financial planning clients, is more control and flexibility over investments, Bird says.

“People are going to be better educated and more hands on with their investments, I think, and that tends to support direct equities,” Bird says.

A significant amount of the direct share trading growth on BT Financial Group’s BT Wrap is driven by the SMSF sector.

Australian Securities Exchange.

“I expect that to increase, so certainly from the trend we see by talking to advisers, they talk about increased appetite from their clients to add equities to the platform,” Delaney says.

Cheaper for planners

Key points • Most planners use platforms to access direct investments.

• SMSF investors are the main group involved in direct share trading.

• 40 per cent of new client funds will be placed in direct equities, research shows.

“If someone has enough investment dollars to warrant a self managed super fund, typically they’re going to be more sophisticated in terms of investment criteria, and therefore more interested in shares,” says head of BT Wrap, Chris Freeman.

The portion of direct shares on BT Wrap is growing both as a proportion of total assets and in terms of absolute numbers, Freeman adds.

Direct equities traditionally represent around a third of the assets on the Macquarie Wrap platform.

“The use of direct equities continues to increase and interest in them continues to increase,” says Macquarie Adviser Services head of insurance and platforms, Justin Delaney.

According to Delaney, Macquarie has the highest proportion of equities on their platform compared to the rest of the Australian market, with investors able to access every stock listed on the

“Reporting and optimisation of the portfolio can be a lot easier with direct shares, and they can be cheaper to manage and administer depending on how you do it,” according to Bird.

Using direct shares means that advisers often deal with 20 to 30 stocks in a client’s portfolio instead of a handful of investment funds. Once you multiply that by your number of clients, a pile of paperwork becomes a mountain and a once-simple process can seem overwhelming. However, the extra work is often illusory.

“If you’re organised, a lot of the work is fairly mechanical record keeping rather than complicated issues, which I think sometimes gets lost in the debate about wrap platforms and reporting and everything,” Bird says.

Investment Trends indentified a clear attraction towards cost saving measures in its 2011 Planner Direct Equities Report. In a multiple question survey in the report, 58 per cent of financial planners said they recommend direct shares to their clients because it was cost effective, according to senior investment analyst, Recep Peker.

The platforms are also aware of cost concerns among clients and are taking measures to lower transaction fees. BT implemented bulk trading capabilities last year to improve efficiency for advisers, allowing them to bulk buy shares for up to 25 client portfolios at once.

Freeman indicated at the time that planners were struggling to service large numbers of clients and simultaneously manage costs.

One of the barriers to building direct equity portfolios on the platform was a high administration burden involved in trading shares across a diverse client base, Freeman said last year.

Andrew Bird adviser was significant,” Delaney says.

However, there have been accusations that some platforms are failing to deliver on their direct share offerings.

Only 16 per cent of financial planners who use platforms said the direct equities offering was ‘very good’, according to Investments Trends’ report.

Furthermore, the number of planners using platforms appears to have plateaued. No extra planners are using platforms for direct investments than what has already been recorded in previous years.

Platforms have improved their offering by fixing shortcomings, but new problems with share market research,

timelines of data and pricing are emerging, Peker says.

However, providers are vigorously defending their role against questions of discontent.

“We spent a lot of money over the last three years improving our equities funct i o n a l i t y b e c a u s e we s a w t h a t a s a growing trend,” Freeman says.

“The big thing for us – and this is from adviser feedback – is that advisers using our models are saving up to 2.5 hours on portfolio rebalancing compared to doing things manually,” he says.

BT has improved its access to information, with tailor-made watchlists and same-day trading also being available to advisers.

OnePath’s wholesale administration wrap platform, Oasis Asset Management, launched a new online direct share trading facility last year to combat concer ns that advisers didn’t have enough control and had to deal with perplexing systems.

The feature allows advisers to hold a separate Holder Identification Number for each client and maintain control of t h e i r s h a re h o l d i n g s, a c c o rd i n g t o OnePath head of superannuation and investment platforms, Mike Pankhurst.

Macquarie also worked on removing the cost concerns that worried advisers and clients.

Continued on page 16

Platform offerings prove popular

Platform providers are the principal benefactors of any growing interest in direct equities trading. Around 60 per cent of financial planners use an investment platform for the share exposure, with the other 30 per cent relying on an online broker, according to Investment Trends research.

Pooling all your direct investments in one place and letting the platform take care of the administration is no doubt what lures most planners to the platforms.

Macquarie’s Delaney said the group realised that many advisers were toying with the idea of using equities on platforms, but they were unsure about the perceived high costs of doing so.

The company ran research indicating that advisers would be able to service 40 per cent more clients on average with direct equity trading on a platform than if they left the direct equities off the platform. “ The efficiency of having equity managed through the platform for an www.moneymanagement.com.au August 11, 2011 Money Management — 15

Share trading and direct investments

Continued from page 15 However, Delaney acknowledged that they could do more to evolve research and trading services for advisers.

Despite most signs pointing to platforms as the optimum direct investment management tool, Morningstar co-head of fund research, Tim Murphy, said advisers tended to complain about platforms because they don’t have the right structure.

“Platforms in general were designed with managed funds in mind, they weren’t really designed for trading securities on live exchanges,” he says.

“Some platforms have addressed that situation better than others, but it varies across the board,” Murphy says.

With ETFs and direct shares becoming more popular, platforms have been ploughing money into their structure, b u t t h e y a re a t d i f f e re n t s t a g e s o f success.

But Investment Trends’ claims of gaps in market share research among platforms ring hollow. Share research is widely available, with online broking companies such as Bell Direct offering research and trading abilities for just $ 1 5 , w h i l e We s t p a c b r o k i n g a n d Commonwealth Online securities also offer these services to advisers at a slightly higher price of $20.

Fre e m a n d e n i e s t h a t t h e re i s a problem with platforms’ provision of share research.

“Research is like a commodity, you can get it anywhere,” he says.

“Most advisers are part of dealer g r o u p s, a n d t h e y h a v e t h e i r ow n re s e a rc h a re a s t h a t h a v e d i f f e re n t arrangements with different brokers, who also provide their own research. So I don’t think research is much of an issue,” Freeman says.

Whatever the criticisms, platforms can take comfort in the fact that they are the favourable investment management tool in the sector.

“If you tell advisers that there was only one place for direct share trading and what should it be, then investment platforms do come out on top slightly,” Peker says.

Direct shares vs managed investments

Investors have a nasty habit of abandoning one investment solution in favour of another when things don’t go their way in the short term. The disillusion with fund manager performance during and immediately after the global financial crisis (GFC) has continued to force a shift away from managed funds towards more transparent solutions like index funds and ETF’s, and direct equities are riding that wave all the way to the top.

In a multiple choice question from the Investment Trends direct equities report, 58 per cent of financial planners said they used direct equities because they’re transparent.

“If I’m just holding managed funds, my clients don’t see what’s in them, but by holding direct shares they understand

what they’re holding, and there’s no fund manager to pay, its only whatever fee I’m charging,” Peker says.

Managed fund investments also have a lag time between the end of the financial year and when they distribute their final distributions, which can be frustrating for advisers unable to tell their clients how much money they are receiving.

“That’s a significant issue, certainly for a lot of advisers, because they can’t close off the investments often until September or October [after the financial year],” Bird says.

Managed funds typically contain multiple layers of fees that take away from the final return for the investor.

Management expense ratios (MER), buy/sell spreads, internal portfolio transaction costs, performance fees, arranger fees and platform shelf fees all a d d u p, a n d m a k e m a n a g e d f u n d s increasingly opaque and expensive.

A natural benefit of transparency is that bad shares can be easily indentified and sold off, according to Godfrey Pembroke principal consultant, David Benney.

A more active managed fund with 100 per cent total fund turnover each year will also incur more capital gains tax (CGT ). While a less active fund can

If you tell advisers that there was only one place for “direct share trading and what should it be, then investment platforms do come out on top slightly. ” - Recep Peker

Justin Delaney lower its CGT, knowing whether it is a more active fund or not won’t be possible until after the end of the financial year, Benney wrote.

Direct shares, on the other hand, can have their CGT and franking credits controlled.

“Managed funds typically invest in d i re c t s h a re s a n y w a y t o g e n e ra t e returns, so the end investment is often the same stock,” Benney added.

However, only a minority of investors believe they can get a better deal through direct shares than through managed funds, according to Freeman.

There has been a bit of disillusion with active fund managers who have had performance issues since the GFC, he says.

Good fund managers that are delivering above benchmark returns are still taking significant amounts of money, Freeman adds. The bulk of BT Wrap’s investments are managed funds, as well as a significant amount in cash and term deposits.

16 — Money Management August 11, 2011 www.moneymanagement.com.au

The best way to increase an investor’s investment potential is by increasing your tax benefits, and the tax optimisation structure within direct equities that the platforms offer is pulling advisers into the sector.

BT Wrap has just released a new tax optimisation functionality, in which advisers can set a default method of calculating tax on each transaction to minimum gain. Advisers are also warned about incurring capital gains tax on any transaction less than 12 months old.

“I wouldn’t underestimate the impact of tax, because in a flat market, after tax investment returns means better value for clients,” Freeman says.

“Tax management can give you significant benefits in terms of direct shares as opposed to other investments,” he adds.

ETFs

Direct equities don’t have a monopoly on transparency and simple products.

ETFs have seen growth of 70 per cent every year over the last three years since

the end of the financial crisis, according to an ETF report released by Tria Investment Partners.

The value of the ETF sector is meant to jump by nearly $2 billion by the end of the year, according to a Russell Investments analysis of ETF market trends.

For advisers who don’t want to move too far away from managed funds but still want to have the benefits of direct equities, ETFs can provide a unique blend of characteristics found in both sectors.

“ETF’s are interesting because they’re a sort of a hybrid between managed investments and direct equities. I think the plain vanilla type ETFs give you the benefits of both worlds, because they give you the ease of holding and record keeping everything in stocks but let you achieve the diversification and easy asset allocation that you can get with a fund,” Bird says.

ETF provider Australian Index Investments (AII), which was launched in May Continued on page 18

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

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Share trading and direct investments Continued from page 16 2010, owns six sector specific ETFs in financials, financial ex-REITS, industrial, development mining, resources and energy, corresponding to sectors established by Standard and Poor’s.

Much like macro investing, AII’s multi-sector approach to ETF investment means clients can split their funds up and overweight to certain sectors based on their performance.

“If you buy the broad benchmark, it’s very difficult to overweight and underweight, you’ve just got to take the whole lot,” says AII chief executive Annmaree Varelas.

No t o n l y h a s t h e f i n a n c i a l c r i s i s caused a significant shift in investor’s appetite for liquidity and transparency, but the incoming Future of Financial Advice regulations will also spur continued investment in ETFs, according to Varelas.

“The current moves by many of the f i n a n c i a l p l a n n i n g g ro u p s a t t h e moment to a non-commission payment future means you see them looking for cheaper products and a product that is easily accessible - and that’s where ETFs come into their own, because they are a lot cheaper than traditional managed funds,” Varelas says.

Splitting their ETF products among

“I think all those specific cases that ASIC raised were self directed investors who weren’t trading ETFs in the way that they should be traded. ” - Tim Murphy

Chris Freeman sectors like industrial, resources, energy and mining also ensures that the shares are even more liquid and high volume than investors have come to expect.

Statistics provided by AII found that ETF trade volumes were up 3.6 per cent over the last 12 months to June, while the market cap for the ETF sector increased by 33.7 per cent over that period to $4.6 billion.

The 12 month average value of ETF trading also increased by 14.7 per cent.

However, ETFs may not be as popular as they are made out to be. While the

18 — Money Management August 11, 2011 www.moneymanagement.com.au

sector has grown by $ 4 billion up until this year, managed funds grew by more than $1 trillion at the same time. It is a miniscule amount comparatively. “ T h e re’s a l o t o f t a l k a b o u t t h i s product at the moment, and a lot of education going on, but the actual amount of money going into ETFs from Australian advisers still isn’t big. If you define popularity by chatter, they’re pretty popular, if you define it by actual money trading hands, it’s not so popular yet,” Murphy says.

This product has also come under increasing criticism from researchers

and regulators in the industry.

The Australian Securities and Investments Commission (ASIC) recently raised concerns that retail client orders for ETFs were not being appropriately priced.

A number of times orders for index ETFs were placed well away from the value implied by the underlying index, resulting in an increase in pre-emptive actions against the practice, ASIC said.

Tr i a In v e s t m e n t h a s a l s o b e e n warning investors to research their ETFs before choosing them.

T h e e m e r g e n c e o f i n c re a s i n g l y complex and risky structures means that investors and advisers should do their homework first, the company warned.

Howe v e r, Mu r p h y d e f e n d e d t h e product against ASIC’s claims, saying that most of the regulator’s issues came about as a result of inexperienced share t ra d e r s a n d w e re a c o n c e r n w h e n investors traded any direct stock.

“I think all those specific cases that ASIC raised were self directed investors who weren’t trading ETFs in the way that they should be traded,” Murphy says.

“It just comes down to understanding if you’re going to trade ETFs with the best trading or implementation method. In the scheme of things, it is a fairly miniscule proportion of what goes on.”

OpinionInvestment Global energy needs power up Increasing demand for energy combined with limited supply sounds like the perfect investment equation. However, as Mark Hume explains, it’s not without some risk.

A

s populations rise, economies strengthen and living standards improve, the long-term demand for energy is expected to increase.

The trajectory of rising energy consumption is likely to be dictated by the pace of economic growth and demographics in emerging markets. Many of these countries, which are relatively low energy consumers today, are likely to see their demand for energy rapidly accelerate.

Meeting this future demand presents a major challenge that requires a cohesive and stable global energy policy, which draws upon all sources of energy supply. If sufficient capital is not encouraged to flow into the global energy industry, the underlying growth capacity of the global economy could be constrained.

A number of recent events have highlighted the persistent risks that face the energy industry. The global financial crisis of 2008, the Macondo oil spill in the US Gulf of Mexico in 2010, the political contagion that swept through Africa and the Middle East, and the devastating earthquakes witnessed in Japan earlier this year are just some recent examples. These risks are extremely difficult to accurately forecast and their consequences are equally difficult to quantify. It is this situation that highlights the importance of portfolio diversification: not just at the country level, or by commodity, but by company as well.

Figure 1

Demanding times

More people with more money tend to consume more energy. Since 1970 the world’s population has almost doubled to seven billion people and the world’s primary energy demand has risen 120 per cent. By 2050, the global population is forecast to increase by up to four billion people (see figure 1).

The level of global urbanisation is also expected to rise from 50 per cent today to around 70 per cent by 2050. In India and China alone, more than 300 million people are forecast to move from rural to urban areas over the next two decades. Put another way, the world’s energy industry will need

World population

Population, billions

10 8 6 4 2 2000 Low

2010E

2020E

Medium

2030E High

2040E

2050E

Constant

Source: BP Statistical Review of World Energy 2010, UN Population Division,World Bank, Colonial First State Global Asset Management estimates.

Figure 2

Population and primary energy demand

0.25

% 2010 Total

0.2

19%

The energy challenge

The scale of the future energy challenge is perhaps best illustrated by the disparity in energy use and population levels between the US, China and India.

In 2010, the US consumed 19 per cent of the world’s primary energy despite making up only 4 per cent of the world’s population.

By contrast, China and India combined consumed 24 per cent of the world’s primary energy, while comprising 37 per cent of the global population (see figure 2).

Developing economies

12

1970

to accommodate the urbanisation of a country the size of the US.

20%

19%

17%

0.15

Economic growth in developed economies has slowed in recent years – a situation which is allowing developing countries to rapidly close the income gap in absolute terms. As relative wealth in developing countries rises, so does the increase in energy intensity. Increasing populations, wealth and urbanisation drove primary energy consumption levels in developing countries past those of their more developed counterparts in absolute terms for the first time in 2009 – a trend which continued during 2010.

These structural changes will have important implications for global energy supply – not least from a competitive perspective as less developed economies seek to diversify their own energy sources both domestically and internationally. In short, geopolitical relations will play an increasingly important role in shaping the future path of energy demand and economic prosperity.

Earthquakes, oil spills and politics

0.1 4%

0.05

4%

0 China

India Population

US

Primary Energy Demand

Source: BP Statistical Review of World Energy 2010, UN Population Division, Colonial First State Global Asset Management estimates.

Despite increasing demand and limited supply, navigating global energy markets is not without risk.With virtually all of the world’s spare crude oil capacity located across Africa and the Middle East, crude oil prices rose dramatically following the political contagion that swept through the region earlier this year.

Geopolitics has been, and will remain, a central risk to the energy industry.

Furthermore, with two-thirds of the world’s oil reserves located in predominantly Muslim countries and two-thirds of the world’s oil consumed in predominantly Christian societies, religion could also amplify future supply risks.

Up until the tragic events at the Fukushima nuclear power plant in Japan, nuclear energy was expected to play an important role in meeting future energy demand while shifting to a lower carbon footprint. The resulting uncertainty in the nuclear industry, most recently with Germany announcing it will phase out nuclear power by 2022, has caused a significant share price reaction in many nuclear-related stocks.

Although this will almost certainly lead to a slowdown in new capacity construction, it is expected that nuclear power will play an important role in meeting the world’s longer term energy needs. However, nuclear energy will only form part of the solution.

Meeting the world’s energy needs will require input from all energy sources and so commodity diversification remains key.

Operational risk is also an important factor to consider and even large, well-diversified companies can be exposed to significant and unpredictable risks. At its worst, BP’s market capitalisation fell by almost one hundred billion US dollars following the Macondo well blowout in 2010. Diversification and risks cross more than just geographic boundaries and commodity prices.

Supply vs. demand

The global energy industry faces significant and persistent challenges. On one hand, the long-term outlook for primary energy consumption remains robust, anchored on economic growth, urbanisation and population growth, particularly from emerging markets. If left unchecked, the current supply options will struggle to keep pace with underlying consumption growth, which is already being felt in global oil markets.

On the other hand, from a supply perspective there is no silver bullet. Nuclear energy remains under a cloud following the tragic events at the Fukushima nuclear reactor in Japan. Geopolitical risk across Africa and the Middle East has unmasked the fragility in global oil markets and their ability to cope with resurgent demand. Furthermore, the BP-operated Macondo well blowout underlines the significant risks that are taken by the industry on a day-to-day basis.

In short, risks are prevalent and often unpredictable across the global energy industry, despite the supply and demand fundamentals. Navigating these challenges can be fraught with risk but can be mitigated through appropriate diversification across a high quality global portfolio of investments.

Mark Hume is a senior equities analyst in Colonial First State Global Asset Management’s global resources team.

www.moneymanagement.com.au August 11, 2011 Money Management — 19

OpinionSMSFs

Keeping the concessions Too much attention on the details can mean forgetting about the fundamentals. David Court traces the intricate eligibility rules applying to SMSFs and the consequences of not meeting those rules.

T

here are many ways in which to save for retirement – from complex structured investments to keeping cash under the mattress. Superannuation is one of the most popular retirement savings vehicles due to two main drivers: • It comes with significant taxation concessions; and • Employers have superannuation obligations to meet in relation to their employees.

In each case, a key requirement is that a ‘complying superannuation fund’ is involved.

So just when will a superannuation fund be (or, of more concern - not be) a complying superannuation fund? Let’s

take a look at how the process works for a typical new superannuation fund wanting to qualify as a self-managed superannuation fund (SMSF). Similar (but not identical) rules apply to other classes of superannuation funds.

Qualifying as an SMSF

A good starting point is to determine whether a fund is an SMSF. To be an SMSF our fund must: • Be a superannuation fund; • Have fewer than five members; and • Have each member as either an individual trustee of the fund or the director of a corporate trustee (and vice versa).

Somewhat surprisingly, only about 30 per cent of SMSFs have corporate trustees.

20 — Money Management August 11, 2011 www.moneymanagement.com.au

Further, a member cannot be an employee of another member (unless they are related) and no trustee or trustee director may be remunerated for acting in that role.

Most of these requirements are relatively easy to understand and monitor. However, if an SMSF failed to meet those requirements then it would (after a six-month grace period) revert to being a ‘standard’ superannuation fund – and would need to comply with a number of different regulatory provisions.

But what technically is a superannuation fund?

Superannuation funds

A superannuation fund is defined in the Superannuation Industry (Supervision) Act

1993 (SIS Act) as an indefinitely continuing fund that is a “provident, benefit, superannuation or retirement fund”.

These terms are not defined further, and therefore take their ordinary and natural meaning in the context in which they appear. There were a number of court cases that considered these terms back in the 1960s and 1970s when they were being used in the taxation legislation applying to superannuation funds in those times.

However, as long as an SMSF has the sole purpose of providing retirement or death benefits then there is not much doubt that it will, at least, be a superannuation or retirement fund.

An SMSF will be indefinitely continuing as long as it is not established for a fixed term. The fact that the trust deed has a termination or perpetuities clause in it, does not prevent the fund being indefinitely continuing. As an aside, it should be noted that the legal rules against

With the long term decline in corporate funds, the “superannuation industry is increasingly dividing between public offer funds and SMSFs. ”

Australian super fund Although the criteria is complicated (see section 295-95(2) of the ITAA 1997), being an Australian superannuation fund essentially means that SMSFs continue to be managed in Australia, have assets in Australia and a majority of its assets or benefit entitlements are held by active members who are Australian residents.

It is possible to lose this status relatively easily if the members (or a majority of them) leave Australia for an extended period. Accordingly, the trustee should be wary if any members of an SMSF express a desire to leave Australia for an extended period.

Having made sure that an SMSF is a resident regulated superannuation fund, we need to consider the compliance test.

The compliance test

perpetuities do not actually apply to regulated superannuation funds (section 343 of the SIS Act).

So, we have a superannuation fund that meets the SMSF requirements. How do we ensure that it is complying?

Being a complying superannuation fund

Becoming a complying superannuation fund actually involves much more than merely complying with the operating standards.

An SMSF will be complying for tax purposes (and hence for superannuation guarantee contribution purposes) if it is a complying superannuation fund for the purposes of section 45 of the SIS Act. Under that section, an SMSF is complying if it has received a notice under section 40 of the SIS Act stating that it is a complying superannuation fund and has not subsequently received a notice stating otherwise.

Under the same section of the SIS Act, the Australian Taxation Office (ATO) may give a notice that an SMSF is a complying superannuation fund. However, under section 42A an SMSF can only be a complying superannuation fund if it is a “resident regulated superannuation fund” for a particular year of income and has

not contravened a compliance test.

So how do we make sure that our SMSF is a resident regulated superannuation fund?

Resident regulated super fund

To be a resident regulated super fund, an SMSF needs to be both regulated and Australian. This means that we need to drill down even further.

Regulated super fund To be a regulated superannuation fund, section 19 of the SIS Act requires SMSFs to have either a corporate trustee or have a sole or primary purpose as the provision of old age pensions. One or both of these requirements would be reflected in the trust deed for our SMSF. Further, our SMSF’s trustee must have elected to the regulator that the SIS Act is to apply to the fund. Making this election is a relatively straightforward form-filling exercise that must occur within 60 days of establishment of the fund.

Assuming that our fund’s trust deed is worded appropriately and the elect i o n m a d e, w e n e e d t o c o n s i d e r whether our SMSF is an Australian superannuation fund.

To meet the compliance test, SMSFs must not have contravened certain regulatory provisions during the year of income. It is beyond the scope of this article to consider these compliance requirements themselves.

However, if our SMSF did contravene an applicable requirement, it can still be complying if the ATO is prepared to overlook the contravention.

Failing that, the ATO would issue a notice of non-compliance and an SMSF would cease to be a complying superannuation fund. Such a notice can apply to one or more financial years.

The issuing of a notice of non-compliance is actually a fairly rare occurrence – only 185 notices were issued by the ATO in the 2009-10 financial year, up from 99 in 2008-9. Given the severe consequences of being made non-complying and the ATO’s ability to overlook contraventions (either because they are trivial or have been rectified), the ATO seems to issue a non-compliance notice only as a last resort in serious cases.

Interestingly, the Cooper Review has recommended that the ATO be given the power to issue administrative penalties against SMSF trustees on a sliding scale reflecting the seriousness of the breach.

The penalties would be payable by the trustees personally and not from the assets of the fund. This would give the ATO a range of penalties to impose on SMSF trustees who contravened the regulatory requirements, rather than the existing ‘all or nothing’ nature of the noncompliance notice. The Government has indicated that it supports this recommendation, and it is likely that such a system will be introduced at some point in the future.

However, for the time being, assuming

that our SMSF does not receive a notice of non-compliance then it will receive a notice of compliance and will, therefore, be a complying superannuation fund.

The effect of losing complying status

As mentioned above, once an SMSF has received complying status it will generally continue to have that status until the ATO notifies it that it is non-complying.

Keep in mind that our SMSF could also lose its complying status if it ceased to be a superannuation fund or if it lost its status as an Australian super fund.

The consequences of becoming noncomplying are quite onerous. Obviously, an SMSF will no longer be eligible to receive SG contributions (although there are ‘safe harbour’ provisions for employers affected by this situation) and will lose its tax concessional status (so that, for example, its income will be taxed at 45 per cent rather than 15 per cent).

Further though, our SMSF will, upon becoming non-complying, have to pay additional tax equal, in effect, to all of the tax concessions that it has received in the past. This amount can be quite large for a fund that has been in operation for some time. There is also the possibility that the ATO may impose interest charges and other penalties, depending on the nature of the contraventions that occurred.

One ‘non-consequence’ of being noncomplying is that our SMSF is still regulated under the SIS Act and must comply with the requirements of that Act.

Room for improvement

Tracing our way through the legislative provisions above reveals a fairly convoluted and unnecessar ily technical process for establishing an SMSF (when compared with establishing a company, for example). Further, this article has not addressed the actual operating standards that regulate the activities of our SMSFs, and which create their own set of issues.

The Cooper Review recognised this issue, and recommended that the legislation covering SMSFs be included in a separate division of the SIS Act or even be given its own legislation. With the long term decline in corporate funds, the superannuation industry is increasingly dividing between public offer funds and SMSFs. The time might soon come when it makes sense to recognise an SMSF as a unique type of entity rather than just a small version of the generic superannuation fund.

David Court is a lawyer with Holley Nethercote commercial lawyers.

www.moneymanagement.com.au August 11, 2011 Money Management — 21

Observer

Bonds caught in the slipstream Many experts look at the bond market as an indicator for future inflationary changes. Dominic McCormick argues recent events, particularly in the US, prove otherwise.

A

t a recent investment seminar, a fund manager at a large institution said he wasn’t worried about inflation developing as a problem in the US because their bond rates remained well behaved at close to historically low levels. In my view, this is flawed thinking on a number of levels.

Firstly, the bond market’s record of anticipating major changes in the inflation outlook is a pretty poor one. When inflation in the US began a long decline from a peak of almost 15 per cent in 1980, it took years for bonds to recognise that the trend had changed and to more fully reflect it. The same was true of the prior rise in inflation from the late 1960s, through the 1970s. Bond rates generally only slowly follow big increases or decreases in inflation, they don’t anticipate them.

This is not a forecast, but if inflation were to begin moving significantly higher in coming years, don’t bother waiting for predictive signals from the bond market. By the time they are reacting to it, you can be sure that inflation is already a major problem.

Secondly, in recent times US bonds have hardly represented a free market, devoid of government or structural distortions. The most obvious intervention has been the two programs of quantitative easing where the US Federal Reserve has become the largest purchaser of treasury debt. But even outside this there are also some structural rigidities in the US treasury market, particularly around the requirements for certain institutions (including banks, insurance companies and other government authorities) to hold ‘risk free’ AAA-rated treasury assets, irrespective of price. Then there has been the massive build up of overseas reserve holdings of US treasuries, particularly by the Chinese who need to put the US dollars generated by their massive trade surpluses somewhere.

The fund manager’s thinking above is indicative of a widely held view that the market for bonds is broadly efficient and their prices do a good job of discounting/anticipating the future. Given

the distortions described above and the past record of bond markets anticipating major turning points, this view is seriously misplaced.

Credit risk

Thirdly, and perhaps more importantly in the current environment, it is not just inflation that is a big determinant of government bond rates. Increasingly credit/default risk is a major factor determining the level of even sovereign bond rates. While to date this has been a driving factor mainly for peripheral Europe, it increasingly looks like a story coming to other highly indebted countries like the US, UK and Japan.

Perhaps most alarmingly, the events in peripheral Europe have shown how quickly this perception of credit risk can change and dramatically impact the level of bond rates within weeks or months. One only has to look at a graph of 10 year bond rates of various peripheral European countries to see this in action. Greek bonds moved from 8.5 per cent to 12.4 per cent within a few months in 2010, while Irish bonds rose from 11.3 per cent to 13.7 per cent and Portuguese from 10.6 per cent to 12.9 per cent most recently. All three 10 year rates were around 5 per cent in mid-2009. Even Italian and Spanish bond yields haven’t been immune, surging more than 1 per cent over a few weeks recently.

Could this happen to other bond markets of highly indebted countries, even when they are major economies? Why not?

Australia has been better placed because our sovereign debt levels are much lower and the absolute level of 10 year bonds rates has been relatively high. Still, Australian 10 year bond rates are now around 5 per cent and the current government is not inspiring confidence in the foreign holders that own the majority of these bonds.

Government bonds

In my view, one of the dumbest investments currently for the long term is a global government bond index product. The more debt a country owes the bigger weighting it has in the index. For example, Japan, Europe, the

22 — Money Management August 11, 2011 www.moneymanagement.com.au

US and the UK make up almost 95 per cent of one of the commonly used indexes, the Citigroup World Government Bond index.

The yield on this index is a little over 2 per cent per annum.

Of course you pick up the interest rate differential through currency hedging which currently adds a few percent per annum to the low ongoing yield, but this will not protect you from serious capital losses if there is a significant move up from the current low level of bond rates in these countries. This is also assuming that none of the underlying countries default, which is far from certain these days. Investing in this type of fund reminds me of the proverbial “picking up pennies in front of the steamroller”. Still, this hasn’t stopped many global government bond index funds, or low tracking error funds, ranking highly amongst the various research houses.

Global impact

In many respects, it is the US bond market that is critical because it has become a key lynchpin of global financial markets. US treasuries are the world’s ‘risk free’ rate, the asset that most other assets are priced off, one of the most liquid markets globally and the collateral used for many transactions.

A major downgrading of US bonds whether formally by rating agencies or informally by the markets requiring much higher yields - would have a massive impact, not just on investment portfolios, but on the global financial system itself. Indeed, this impact would likely be much more significant than the dramatic increase in bond rates in the 1970s. It would leave the global financial system somewhat rudderless and in search of other riskless assets and benchmarks. Risk premiums across all asset classes would likely rise at least for a period until markets adjusted to a radically different environment, in which the position of the US as the reserve currency and centre of the global financial system would be challenged.

This is not some apocalyptic fantasy. The political circus over raising the US debt ceiling is demonstrating just how difficult real progress to actually decrease the US

public debt burden and move to a sustainable long term fiscal track will be in the US. It is easy to conclude that the only thing that will really bring about the necessary major hard decisions is a market crisis. That is, holders will lose confidence in US bonds and the market will start demanding significantly higher rates. However, as has been shown in the European situation, this rise in rates can actually accentuate the crisis as the higher cost of debt makes balancing the budget even harder.

Some say this won’t happen because China, which owns US$1.6 trillion in US debt, would never let the value of its reserves be so badly impacted. This is wishful thinking. The Chinese alone don’t set the price of bonds and in any case have been gradually working towards deploying their reserves into other investment areas.

US bonds rates

Could we therefore see a dramatic rise in US bonds rates where, from current low levels – below three per cent on the 10 years - they double or even triple over a period of weeks, months or a few years? It certainly cannot be ruled out as one possible endgame for the current dilemma.

It is true that as one of the lower taxed

countries globally, the US could solve its fiscal issues over time with some hard decisions. It also has greater flexibility than most given that all the debt is in their own currency and they can also help ‘manage’ the debt by currency debasement and inflation.

However, these latter solutions are not good ones for holders of bonds, as they will lead to very poor real returns.

The investment portfolio implications of big moves in the US and other bond interest rates would be profound. When something perceived as ‘risk free’ fails or severely disappoints, it has a much bigger impact than failure of those areas already perceived to be risky. Investment implications would include: - De-rating of other financial assets, including shares, as bonds eventually become more attractive at higher interest rates; - A period of uncertainty, which would lead to investors chasing other ‘safe haven’ or lower risk assets. Possible candidates would include the corporate debt of the world’s largest, safest companies, the few available lowly indebted governments and various hard assets such as gold, and - Continued risk aversion among retail investors in particular who would stick to

the safety of cash and term deposits despite low returns.

Arguably, some de-rating of shares has already occurred, as investors grow cautious over the various macro risks – including, but not limited to, sovereign debt – even if these problems/risks have not been fully reflected in certain bond markets at this point.

What about the positive arguments for US bonds? Deflation is still a risk. Why couldn’t US bond rates go much lower – even to the 1 per cent rates of Japanese 10 year bonds? Also, bonds are already a very ‘out of favour’ asset amongst institutional investors, so from a contrarian point of view doesn’t this make them attractive?

Anything is possible and an extended Japanese-like deflationary situation cannot be ruled out. However, the US clearly has been much more aggressive in fighting deflation than Japan ever was. And unlike Japan, a significant component of US bonds is owned by foreign investors who are likely to be less loyal when the going gets rough.

Finally, because many bond markets are not operating in a truly free market, one should discount arguments suggesting that the negative investor sentiment towards them is causing them to be priced at attractive values. Arguably, many of the US (and other)

“

In my view, one of the dumbest investments currently for the long term is a global government bond index product.

”

bonds are being held and bought for noninvestment reasons (e.g. quantitative easing, AAA rating, trade imbalances, etc.) rather than as a judgement of whether they offer good value.

On balance then, the medium to longterm bullish case for bonds is weak and would only be realised in the narrowest of scenarios. In any case, the gains to be realised are relatively small compared to the potential losses in the more adverse scenarios.

However, there is no certainty that the negative scenario for US bonds, even if ultimately proven correct, will play out in the near term. The US public debt has been growing for 30 years, why would markets lose confidence now?

Crisis time

Having said that, there are a number of reasons why a crisis may be close at hand.

Firstly, it is only in the last year that peripheral Europe has shown, for the first time in more than half a century, the firsthand market consequences of a loss of confidence in developed country sovereign debt. Markets have a tendency to extrapolate the experience of one country to others with similar characteristics, at least over time. Secondly, the ratings agencies, criticised for their slow reaction and inherent conflicts in previous corporate and structured debt failures, are losing patience and keen to demonstrate their newfound objectiveness.

Government bonds generally, and US bonds particularly, were an asset class that in hindsight, you wanted to own a lot of in 2008. Increasingly, the signs are that not only will these bonds not deliver in the next crisis but also that they could well be at the centre of it. Investing via the rear vision mirror, which is the essence of passive/index investing, has never been so dangerous.

Dominic McCormick is the chief executive officer of Select Asset Management Limited.

www.moneymanagement.com.au August 11, 2011 Money Management — 23

OpinionSMAs SMA benefits weighed up Lin Ngin looks at how SMAs operate and explores some of the features and benefits on offer as well as some of the current limitations.

S

eparately managed accounts (SMAs) have emerged in the Australian market over the past decade, although they have a longer track record and enjoy greater popularity in the US market. SMAs can be seen as an evolution of the platform business and share some of the benefits of master trusts and wraps (such as ease of reporting), while providing investors with a number of new benefits, most visibly the ability to hold assets directly in the

investor’s name (as opposed to being held in the name of the platform).

What is an SMA?

An SMA can be seen as a further development of the platform. Rather than holding units in managed funds, an SMA is able to bypass the managed fund structure and hold the same underlying investment portfolio, but in the name of the investor rather than the platform.

Typically, the SMA provider will offer

Snapshot of differences between IMAs, SMAs and Managed Funds Feature

IMAs

SMAs

Managed Funds

Portfolio management

Customised portfolio construction

Client retains beneficial ownership

Minimises portfolio rebalancing

Internally geared mandates

Fees tailored to investments

Access via a product disclosure statement

Low minimum investment

Corporate actions administered

Tax reporting

Transparency

Ability to view underlying shares

In specie transfers

Avoid embedded capital gains tax

Netting of transactions

Exclude stocks from portfolio

Tax efficiencies

24 — Money Management August 11, 2011 www.moneymanagement.com.au

investors a ‘model portfolio’ in order to construct the underlying investment portfolio. This model portfolio can be passive in nature (such as an index like the ASX20) or can be actively managed by a fund manager. Where it is managed by a fund manager, the investment strategy driving the model portfolio may be the same as, or close to, an existing managed fund product.

Benefits of SMAs

SMAs have a number of benefits over other investment platforms as a result of investors directly owning underlying investments. These include: Tax efficiency In a standard managed fund, normal trust accounting often creates a disconnect between the realised capital gains/losses generated by the underlying portfolio and the capital gains/losses actually distributed or attributable to each investor. For example, where one investor lodges a redemption and causes a managed fund to realise some capital gains/losses, the capital gains/losses are distributed equally amongst all investors. An SMA avoids this situation as each investor owns their own portfolio rather than holding units in a common fund alongside other investors.

Tax efficiencies are also evident where investors seek to change managers. A change of manager in a direct managed fund investment would involve redeeming units (crystallising capital gains/losses) and purchasing units in a new fund. In an SMA, investors would only need to trade securities where there is a difference between the new and old model portfolios, potentially reducing the

amount of realised capital gain/losses that may be generated.

Lastly, SMAs allow investors to be more tactical in the way trades are executed. For example, where a change in a model portfolio may cause capital gains to be crystallised, investors may be able to offset the gain by also selling a security that has unrealised capital losses. In a managed fund, investors have no ability to tactically trade to minimise the impact of capital gains.

Tax reporting In a managed fund, the fund’s tax reports need to be generated and finalised before tax reports for each individual investor can be produced. In an SMA, as individual investors own their underlying portfolio, tax reporting should occur in a more timely fashion.

Transparency Investors in managed funds typically do not have timely access, or have limited ability to view the underlying investments. In an SMA, investors have full transparency of investments they are holding.

Customisation Implementation of changes in model portfolios may be tailored for each individual investor. This is generally possible where the SMA implements the model portfolio, as opposed to a manager. Examples of customisation may include screening some model portfolio stocks on ethical grounds. In a managed fund, such specific tailoring would not be possible as investors simply own units in a fund.

Current limitations

While some of the main benefits have been outlined, a number of limitations

currently exist.

These include: Limited manager choice Investors in managed funds typically have a wide choice of products offered by fund managers. For example, in the area of large cap Australian equities, Lonsec provides research on more than 30 fund managers offering products in the Australian market; there are also a large number of managers that Lonsec does not research. In the SMA space, a much smaller universe of managers is available to provide model portfolios. In the case of some of the smaller SMA service providers, the lack of recognised managers providing model portfolios is a significant limitation.

Reticence on the part of some managers may be linked to concerns over the leakage of a manager’s intellectual property.

Lonsec also notes that some differences in opinion exist in regard to the management fee, which may add to the lack of managers providing model portfolios. Some industry participants believe the manager’s fee should be lower than the equivalent fee in a managed fund (due to the manager’s lower costs from only providing model portfolios rather than managing and administering a fund), while there is a view that the fee should be higher (to compensate for the possible leakage in intellectual property).

tion of the model, may contribute to a divergence in the performance of a model portfolio and its equivalent managed fund.

Australian shares focussed SMAs have been particularly active in offering model portfolios in the Australian equities space, but less active in other asset classes. As a result, the SMA platform in itself is not a single solution for investors. That said,

Lonsec notes that some providers, for example Aviva, currently integrate their SMA platform with their main wrap platform, providing a single account, which contains SMA model portfolios and managed funds. While this allows for consolidated reporting, investors still remain unable to benefit from the advantages of SMAs in asset classes like international equities at this time.

Differences from Individually Managed Accounts (IMAs) IMAs are managed accounts w h e re t h e f u n d m a n a g e r’s investment decisions are made in conjunction with investors’ s p e c i f i c n e e d s a n d re q u i re ments. Effectively, investors have their own personal fund manager acting on their behalf.

Due to the labour intensive n a t u re o f I M A s, m i n i m u m i n v e s t m e n t s a re t y p i c a l l y

upwards of $500,000.

SMAs are managed accounts where the investment decisions are made entirely independently of an investor. Investors may also find they have some control over filtering the available stocks and assets invested into, but the portfolio management remains independent of investors.

Lin Ngin is a senior investment analyst at Lonsec.

Limited model portfolio choice Lonsec notes that the model portfolios on offer are predominantly concentrated and large cap in nature. The reason for this is that shares in these portfolios would be the most liquid and easiest to execute and implement.

However, this means that investors are not currently able to access small cap and other strategies within an SMA framework.

Execution Risk Execution risk is a major factor in assessing the effectiveness of an SMA provider. Any lags in the transmission of model portfolios from managers to the SMA provider, and any delays in implementawww.moneymanagement.com.au August 11, 2011 Money Management — 25

Toolbox Care needed with contractor classification Clients who run businesses should be extremely careful in classifying those they engage as contractors, as the wrong decision can result in many unfavourable outcomes, writes Mark Gleeson.

D

o you provide recommendations to clients who are contractors or use contractors in their business?

The term ‘contractor’ can be misleading and clients who do not understand the rules can be liable to significant penalties under state and federal laws. Employer clients may incur non-tax deductible charges, including administration and interest penalties, if less than the required super guarantee amount is not paid for contractors who qualify as employees.

Good advice ensures clients satisfy their legal obligations, avoid unnecessary expenses and focus on running their business. Similarly, clients who are contractors may actually be considered employees and an opportunity may arise to establish super guarantee entitlements for them.

Why does it matter if a person is an employee?

If a person is an employee, by using the process below, in most situations they are entitled to have super guarantee paid for them and their salary is subject to Pay As You Go (PAYG) withholding. If a person is

a contractor, super guarantee and PAYG withholding obligations do not apply.

You should also consider the relevant state or territory laws to identify any payroll tax and workers’ compensation cover obligations. These laws may have different tests to determine when contractors are considered employees.

When is a contractor an employee?

Although clients may call themselves or others contractors, it’s important to consider how it is defined in the legislation. For superannuation and tax law purposes, a contractor could be considered an employee in either of the following two circumstances: 1. A person works under a contract that is wholly or principally for their labour. If the terms of the contract pay the person for the performance of their labour and skills and they are not paid to achieve a specific result then it will most likely be a contract wholly and principally for the person’s labour.

2. A person whose contractual relationship is defined by an employee/employer relationship, rather than as a contractor.

Key indicators consider the relationship

based on common law and the Australian Taxation Office (ATO) guidance. These indicators are outlined in the table below.

Other factors may be relevant to establish whether the relationship is an employer/employee or contractor relationship. For example, a person could be considered an employee if the principal has the right to dismiss the person, or the principal provides benefits (e.g. annual leave) or the person is required to wear a uniform. The balance of all indicators must be considered to determine the relationship, rather than any one indicator alone.

If an individual performs work for another party through a company or trust, there is no employer/employee relationship between the individual and the other party. This is because the company or trust (and not the individual) has entered into an agreement with the other party.

However, the individual may be the employee of the company or trust.

If there is any uncertainty to a client’s employee/contractor status, the client should refer to a tax adviser. Alternatively, the ATO decision tool on its website can assist.

What does the case law tell us?

If you consider the employee/contractor issue for your clients, you can prevent possible court cases from arising, such as those outlined below.

In Hollis versus Vabu Pty Limited, bicycle couriers were engaged in the running of its business and were treated as if they were contractors.

The High Court decided that because Vabu had considerable scope to exercise control over the performance of the couriers’ activities, such as the allocation and direction of the various deliveries, that they were employees. In addition, the couriers were also required to wear uniforms in carrying out their duties. The High Court noted the distinction between an employee and contractor is rooted in the difference between a person who serves their employer and a person who carries on a trade or business of their own. Accordingly, the couriers were not running their own business, nor did they have independence in how they conducted those activities.

Even though the couriers were paid per delivery, rather than per time period engaged, it was considered to be consistent with an employment arrangement.

The couriers owned their own bicycles, bore the expenses of running them and supplied many of their own accessories.

Although it may be argued they provided the necessary tools and equipment, the High Court considered that the tools/equipment should be significant and required great skill or training for the individual to be considered an independent contractor.

A more recent case, On Call Interpreters and Translators Agency (On Call) versus Commissioner of Taxation, highlights how businesses should carefully apply the employer/contractor determination for each individual. In this case, On Call engaged interpreters and translators and treated many as contractors. The Federal Court found that while some were running their own business, others were not. The test applied by the Federal Court was whether an individual had a business and whether the work was being performed in and for the business of that person. Those considered employees did not have clients in sufficient numbers or operations to suggest they were operating a business.

Conclusion Table

Contractor or employee?

Key indicator

More likely to be employee

More likely to be a contractor

Terms of contract

Employee is more likely to respond to job advertisement or agency

Contractor is more likely to advertise services to public

Employee more likely to work for one employer

Contractor is free to work for others

Control over work

Employer has control over employee in how the work is performed

Contractor has more control in how the work is performed

Results

Employee more likely to be paid by reference to hours worked, rather than specific results achieved

Contractor more likely to be paid by referring to results achieved

Power to delegate

Employee generally expected to perform work personally and cannot delegate tasks

Contractor may arrange for some or all of the work to be delegated

Risk

Employee is not generally liable for costs of injury or defects of work (employer is generally liable)

Contractor is generally liable for costs of injury or defects of work

Tools and equipment

Employee does not generally provide tools and equipment

Contractor provides tools and equipment

26 — Money Management August 11, 2011 www.moneymanagement.com.au

Clients who run businesses should be extremely careful in classifying those they engage as contractors. The wrong decision can result in non-tax deductible expenses, such as the superannuation guarantee charge, and may end in costly, protracted court cases. Alternatively, if your client is currently treated as a contractor you may be able to establish that an employer/employee relationship exists and allow the client to receive additional benefits such as superannuation guarantee and workers compensation cover.

Mark Gleeson is the technical services manager at OnePath.

Appointments

Please send your appointments to: angela.welsh@reedbusiness.com.au

JUST weeks after MLC picked talent from AXA North’s senior ranks, one of its own executives, Chris Weldon, has moved to IOOF to head platform products.

IOOF had recently reviewed the structure of its product team, deciding to reinforce the platform team and appoint Weldon to strengthen the company’s presence and service delivery to the IFA market.

Weldon’s move came weeks after MLC poached AXA North’s senior executives, recruiting Paul Strutton, Michael Tobin and Remi Buchenez, as well as former national development manager for AXA’s Financial Advice Network, Chris Matlock.

Weldon spent 10 years in the financial services industry and had recently worked on the launch of MLC Wrap.

Prior to MLC, he spent four years at Aviva where he was tasked with the development of its services and products to independent advisers.

IOOF general manager for distribution, Renato Mota, announced the appointment, adding the company was attracted to Weldon’s experience in both platform and IFA markets.

MERCER has appointed Cara Williams as the global head of its

wealth management consulting service.

Williams, who will continue to be based in London, has been the global chief operating officer within Mercer’s investment consulting business for the last six years. Her responsibilities included managing the day-today operations, budgets and business strategy.

Prior to joining Mercer, Williams worked in business development and client management roles at Merrill Lynch and CDC Investment Management Corp.

The new appointment follows significant client expansion and business growth in Australia.

“The appointment of Cara Williams and recent client growth has allowed Mercer to consolidate our presence as an adviser to the wealth management industry and to provide varied and comprehensive solutions for a broad range of clients,” said Brian Long, Mercer’s head of wealth management consulting in Australia and New Zealand.

TAL Limited has added two new directors to its Board, Roger Garrett and Japanese national Tatsuya Yasukawa.

Garrett spent the last 13 years

Move of the week AUSTRALIAN Securities and Investments Commission (ASIC) commissioner Shane Tregillis has been appointed chief ombudsman of Financial Ombudsman Service (FOS).

Tregillis rejoined ASIC in May 2010 after eight years with the Monetary Authority of Singapore where he was a deputy managing director.

Tregillis will take up the Melbourne-based role this September after he leaves his current position later this month.

ASIC chairman Greg Medcraft applauded Tregillis’ role as commissioner.

“Shane worked on some of ASIC’s most important projects through their most crucial times, including supervision of ASX following the successful transition to ASIC in August 2010,” said Medcraft. “He will make a superb Chief Ombudsman at FOS.” ASIC deputy chairman Belinda Gibson will assume Tregillis’ responsibilities.

as head of life for Munich Reinsurance Group, from 1997 until his retirement in early 2011. He has a strong actuarial and reinsurance background, having previously worked at NZI Life and NZI Bank in New Zealand, before moving to Australia.

Yasukawa is presently managing director of TY Japan Consulting, a company he established in 2003 to provide corporate advisory and consulting services to Australian companies wanting to do business in Japan, and vice versa.

Yasukawa has spent a large part of his career in investment banking and has also had several years experience in property

Opportunities SENIOR FINANCIAL PLANNER Location: Melbourne Company: Terrington Consulting Description: A progressive financial services firm is seeking a qualified senior financial planner to join their respected team.

Specialising in the provision of holistic financial services strategies to new and existing clients, the successful applicant will be passionate about delivering the tailored solutions to accommodate client needs. You will be responsible for servicing existing client requirements, proactively seeking new business opportunities and contributing to the strategic direction and success of the Adelaide team.

DFP 1-4 are essential for this position and CFP qualifications are highly sought after. The successful applicant will be remunerated at an extremely competitive level and have access to a lucrative commissions scheme.

For more information and to apply, please visit www.moneymanagement.com.au/jobs or contact Emily on 0422918177 for a confidential discussion.

FINANCIAL PLANNER Location: Sydney Company: St. George Description: St. George is seeking a financial planner to join its wealth business. The benefits of this role include a structured career path, an established client base, referrals, and practice

investment and development. He has worked with the Industrial Bank of Japan (now Mizuho Bank) and SG Warburg (now UBS), both in London and Tokyo.

The new appointments bring the number of TAL’s board members to 11, chaired by Rob Thomas.

A MONTH after hiring Cathryn Franks as national boutiques sales manager, Challenger has added a further five business developers to its team.

Dario Conte has joined the company as a BDM and will be servicing financial advisers in NSW and ACT. Former State Street Global

Shane Tregillis

Markets analyst, Jeremy Butterworth will be in charge of business development in SA and WA, while Marietta Gibbs will be based in Queensland.

Also based in Queensland, Claudia Faundez, will work alongside Gibbs. Gibbs was a financial planner, with a background in Australian equities markets and managed funds, having previously worked at Aviva Investors and OnePath.

David Livera had made an internal move and will operate as a senior BDM in Victoria, having previously managed both annuities and boutiques at Challenger.

He will now focus solely on boutique funds.

For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs

management support with access to coaching, tools and business planning support services.

St. George also offers training and development, including an induction program, development days and mentorship programs.

To be considered for this role you will require an ADFP (modules 1-6 minimum), at least 2-3 years’ experience as a financial planner, strong negotiating skills, a proven track record of achieving high sales targets, excellent technical knowledge, along with professional presentation and communication skills.

For a confidential discussion, please call Liz Giltaine on (02) 8219 8963 and to apply, visit www.moneymanagement.com.au/jobs

ASSOCIATE ADVISER/ SENIOR PARAPLANNER Location: Melbourne Company: FS Recruitment Solutions Description: An independent financial planning business dealing with high net worth clients is now seeking an experienced associate advisor/ senior paraplanner to join their team. This established business has been in operation for 25 years.

As an associate advisor you will be responsible for the construction of comprehensive statements of advice (SOAs), ranging from wealth accumulation strategies to SMSFs, direct equities and managed funds.

Although your role is very technical, you must

27 — Money Management August 11, 2011 www.moneymanagement.com.au

also have excellent communication and presentation skills as you will be very heavily involved in some client meetings.

To be successful in this role, you will have significant paraplanner experience within a professional environment where you have produced tailored sophisticated SOAs. For me information, please visit www.moneymanagement.com.au/jobs or contact Kiera Brown, principal consultant, FS Recruitment Solutions: kbrown@fsrecruitmentsolutions.com.au or 0409 598 111.

FINANCIAL PLANNING PARTNER Location: Adelaide Company: Terrington Consulting Description: A national financial planning firm is interested in meeting professional and qualified financial planners who either own their own client base or are able to tap into existing networks to build a profitable book of business with the support of an outstanding support structure and product suite.

If you are an existing advisor, the company offers the immediate opportunity to benefit from a proven business model with the assurance that your valued client base will be purchased by the business when you are ready to exit. In addition, our client is able to play a key role in succession and exit planning – providing you with the peace of mind that your client base will

be guaranteed brand and service continuity.

For more details about this position, and to apply, please visit www.moneymanagement.com.au/jobs or contact Emily on 0422918177 or email emily@terringtonconsulting.com.au

PARAPLANNER – STOCKBROKING/ FINANCIAL PLANNING FIRM Location: Melbourne Company Name: FS Recruitment Solutions Description: An opportunity has arisen for an experienced paraplanner to join the financial planning of an established stockbroking firm. As a paraplanner in this organisation, you will be responsible for providing outstanding one-onone support to two advisers, creating a wide range of statements of advice.

In return for your efforts you will receive extensive support and training as well as generous untapped opportunities to advance your career within financial planning.

To be successful in this role you must have a minimum of 12 months experience writing SOAs, and will have completed a DFS, preferably with a degree in commerce, business or finance.

For find out more about this opportunity, visit www.moneymanagement.com.au/jobs or contact Kiera Brown: kbrown@fsrecruitmentsolutions.com.au or 0409 598 111.

www.moneymanagement.com.au August 11, 2011 Money Management — 27

Outsider

“

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

Need for speed OUTSIDER’s curiosity was piqued by an invitation to ‘Speed Date with Financial Specialists’ at the Association of Financial Advisers (AFA) Roadshow in Orange.

Had he been attending that leg of the event, he may have been tempted to see what all the fuss was about – albeit with a small degree of trepidation.

Not due to any feelings of intimidation of course, but more because he knows that he is such a tremendous catch that Mrs O would no doubt be rightfully concerned about some young filly making off with him.

On closer inspection, Outsider must admit he was a little disappointed the event was pitched not so much as a chance to hook up with sultry financial services types and bond over a mutual disapproval of FOFA, but more an opportunity to meet the local MP,

Out of context

and spend some quality time with some AFA-chosen ‘subject-matter experts’.

When Outsider followed up details of the event on the AFA’s website (purely out of curiosity, naturally), he was then directed to the brochure for the AFA’s following event, ‘Football for Futures’.

Outsider was somewhat impressed with the way the AFA managed to link speed dating, football and financial services. If he had known the industry was this much fun, he might have jumped ship in his early days of reporting.

What’s more, Outsider is reliably informed that he would have been free to attend as many financial speeddating events as he liked, young fillies or otherwise. Apparently because “no woman is that silly”, whatever that means.

“I do think we are moving quite quickly (on legislative reform) like the gestation period of the sperm whale - which I read somewhere is 16 months.”

Assistant treasurer, Bill Shorten

tells the Financial Services Council

(FSC) conference the Government is on the job.

Escape from New York OUTSIDER has vivid memories of that pre-cursor to the global financial crisis – the sub-prime loans debacle in the US, and so he was more than a little interested to hear that the new chairman of the Australian Securities and Investments Commission, Greg Medcraft, had front-line experience with those events.

Giving something of a fireside chat on the opening day of the Financial Services Council conference on the Gold Coast last week, Medcraft outlined his background and the many years he had spent in New York – still his favourite city.

But what really caught Outsider’s attention was that Medcraft had spent a good deal of his time working in the area of structured products, which set your ageing

correspondent wondering how familiar the now ASIC chairman might have been with collateralised debt obligations (CDOs).

Whatever the case may have been, Outsider also noted that Medcraft got out of that particular area of the US financial services industry in 2007 – suggesting he was either very astute or very lucky.

Discussing his chairmanship of ASIC, Medcraft left Outsider and many others in the FSC conference audience with the clear impression that he salted away a healthy nest egg during his New York days and was giving something back to the community by heading up a regulator.

Outsider only wishes he was quite so comfortable and quite so fortunate with respect to timing.

Keeping up appearances NOT that he is sensitive about the subject, but Outsider usually does not choose to disclose his exact age. All he is willing to acknowledge is that his birth certificate seems to have taken on a somewhat yellowish tinge.

Long has passed since yours truly had a full head of hair, a mouth full of his own teeth, an Adonis-like physique, and a façade that was as smooth as a baby’s behind.

The years (along with intermittent alcohol and nicotine consumption) have done their bit. Outsider does not take any joy in saying that, while he has been told numerous

times that he looks astonishingly good for his age, his looks are not what they were a decade ago.

However, it appears that many of the financial services types have a far greater reluctance when it comes to acknowledging the effects of Father Time.

In fact, it seems many are not even prepared to admit that their looks have shifted even the tiniest bit since 1995, given that some of the headshots regularly appearing in various publications have not been updated in what seems an age.

Flicking through the pages of

28 — Money Management August 11, 2011 www.moneymanagement.com.au

Money Management the other day, Outsider noticed a picture of a certain industry figure who yours truly knows for a fact is a grey fox now, but the headshot regularly appearing in Money Management remains that of a dashing young man.

Outsider would suggest to this fellow that he either update his photo, or begin to risk not being recognised at conferences and key networking events. He would also argue that providing a photo more than three years old for publication amounts to misrepresentation, and should be a punishable offence.

“We can’t balance the budget on the backs of the very people who have borne the biggest brunt of this recession.”

US President Barack Obama adds alliteration to his public address now that the House of Representatives and the Senate have passed the debt ceiling bill.

“You can go Green, if you want to back a colour as a political credo.”

Shorten teases the Greens as a party name, at the FSC conference.