Money Management (August 18, 2011)

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Vol.25 No.31 | August 18, 2011 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

FOFA STOCKBROKING COMMISSION BAN ILL-CONSIDERED: Page 4 | EXPLORING THE INDEX FUND UNIVERSE: Page 14

Confidence waning as FOFA looms

By Mike Taylor

Figure 1:

THE Government’s Future of Financial Advice (FOFA) proposals combined with the long delays in delivering the actual legislation have served to drive down confidence among Australian financial advisers, with some so concerned, they are thinking of exiting the industry altogether.

That is the bottom line of new research conducted by Wealth Insights, which has revealed a dramatic slide in planner attitudes to the FOFA changes over the past 12 months to a stage where 65 per cent of advisers now expect their businesses to be either worse off or significantly worse off under the new regime. Of that group, 4 per cent have indicated they would likely be closing or selling their businesses.

Confirming similar, but less formal, research undertaken by Money Management more than a month ago, the Wealth Insights data has also revealed that only one in five planners think there will be no negative

Planner sentiment

Effect of the Proposed Reforms on Business If the proposed reforms take effect will your business be better-off or worse-off?

3%

7%

Much better-off (2%) Better-off

PLANNING practices looking to expand are finding it increasingly difficult to source funding, as banks tighten their lending criteria amid economic and regulatory uncertainty.

Before the global financial crisis (GFC), Capital Advantage director Matt Taylor – who specialises in cash flow lending to planners – worked on the assumption that if a practice carrying no debt wanted to acquire a business of the same size, it should have no trouble obtaining a 100 per cent loan.

“Now I’ve changed that ratio,”

5%

18%

16% 24%

Same

6%

Increase Stay the same Don't know

Don't know (2%)

39%

49%

6%

Worse-off

65 percent of advisers expect their businesses to in a be worse situation after the reforms take effect, up from 33 percent last year.

48%

Drop a little

25%

Drop a lot

73 percent of planners expect their business revenue to decrease if the proposed reforms take effect.

27% 12% 4%

May 2010 May 2010

4%

June 2011

Much worse-off Probably close/sell business

June 2011

Source: Wealth Insights

revenue implications for their business flowing from the FOFA changes.

Commenting on the research findings, Wealth Insights managing director, Vanessa McMahon, said planners were not only

Business loan approval criteria tightens

By Tim Stewart

Effect of the Proposed Reforms on Business Revenue If the proposed reforms take effect, how will it affect your business revenue?

Taylor said. “The business now needs to be twice as big as the other business and carry no debt to feel confident that the bank will support the application.”

On the lower end of the scale, he said, banks were looking to have physical property rolled into the structure of the loan as security. However, funding was still being made available to larger practices because they were seen as less of a risk, Taylor said.

A spokesperson for Westpac denied the bank had altered its lending criteria since the GFC, Continued on page 3

deeply concerned about the implications of the FOFA changes for their businesses, but had indicated a deep antipathy towards the Government and the man tasked with implementing the changes, the Assistant

Treasurer and Minister for Financial Services, Bill Shorten.

“A year ago, some planners were being dismissive of the changes actually being implemented, but now they are seeing it as a reality,” she said.

“The devil was always going to be in the detail, and the detail is now coming out – and planners do not like what they see,” she said.

Referring to the 65 per cent of advisers who believed they would be worse off or significantly worse off as a result of the FOFA changes, McMahon said this compared to just 33 per cent of planners who were asked the same question at the same time last year.

“The difference is that a year ago they thought it was a hypothetical, but today it is becoming a reality with dealer groups urging them to make sure they’re ready,” she said.

McMahon said that irrespective of the Minister indicating that the Government Continued on page 3

INDEX FUNDS

Index appeal FINANCIAL planners have already started to focus on costs as a result of the proposed Future of Financial Advice reforms package, which market participants and commentators claim could boost the appeal of indexing over the next few years.

Following the switch to the fee-for-service adviser remuneration model in the United States, Australia has seen real growth in exchange traded fund take-up.

Both advisers and investors in Australia were disappointed by the performance of managed funds during the global financial crisis and are now on the hunt for savings. Lower fees and a simpler fee charging structure offered by index funds might just accommodate current adviser needs.

To read more about the index fund sector and adviser take-up, turn to page 14.

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.

All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2011. Supplied images © 2011 Shutterstock.

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Client reassurance essential in hard times can certainly “helpPlanners their cause if they are

I

f Australian financial planner sentiment is to follow the patterns of the past decade, then the global markets melt-down experienced in the opening days of August is likely to have seen sentiment drop to levels not seen since the darkest days of the global financial crisis.

W h a t w e k n ow a b o u t f i n a n c i a l planner sentiment is that it is inevitably a reflection of client sentiment, which in turn, is closely aligned with the state of the markets. Indeed, an analysis of planner sentiment over the past decade suggests that the highs and lows track very closely the upward and downward movements in the ASX 200.

Ever y now and then, there occur major market events which take ordinary investors well beyond their comfort zones and which place greater demands on the relationship between planners and their clients.

Thus, whatever the mood of financial planners, they ought to have been ver y busy over the past few weeks providing reassurance and counsel to clients. Some of that contact ought to have been face-to-face, but very often phone and email contact will have sufficed. At the very least, clients should have been provided with an email

being heard by their clients, even if they aren’t seen.

”

appraisal of market conditions and the planner’s (or dealer group’s) analysis.

If planners, when analysing how they handled the opening weeks of August, did not make contact with a significant number of their clients via any of the above means, then they must ask themselves whether the Government has a point with respect to imposing the twoyear opt-in arrangements contained in its Future of Financial Advice (FOFA) proposals.

While the Assistant Treasurer and Minister for Financial Services, Bill Shorten, has signalled the Government’s

willingness to rethink its ban on individually-advised risk commissions within superannuation, he remains adamant that the two-year opt-in does not represent an unreasonable expectation in terms of the relationship between planners and their clients.

Extreme events such as the 1987 share market crash, the global financial crisis and this year’s early August market meltdown must therefore be regarded as something of a litmus test with respect to whether planners have the sort of ongoing relationships with their clients which preclude the need for opt-in.

While it is broadly accepted within the financial planning industry that the a d m i n i s t ra t i v e b u rd e n s a n d c o s t s involved in meeting the proposed optin requirement will be considerable, planners will struggle to sustain their arguments in the absence of being able to show they are appropriately communicating with their clients, and the more so during extreme market events.

Overcoming client lethargy represents one of the major cost factors in opt-in, but planners can certainly help their cause if they are being heard by their clients, even if they aren’t seen.

– Mike Taylor

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News Confidence waning as FOFA looms Continued from page 1 might alter its approach to banning commission on individually advised risk products within superannuation, planners had indicated they remained bitterly opposed to the two year ‘opt-in’.

“They see their businesses as assets they have built up for potential sale,” she said.

“They therefore see FOFA, Vanessa McMahon the two-year opt-in, and the changes to volume rebates as affecting the underlying value of their businesses,” she said.

Business loan approval criteria tightens

Opt-in would magnify market dangers - Rantall

By Mike Taylor THE market volatility of recent weeks has provided a prime reason why ‘opt-in’ represents bad policy with significant unintended consequences, according to Financial Planning Association (FPA) chief executive, Mark Rantall.

At the same time, Rantall has challenged claims by the Australian Securities and Investments Commission that a failure to implement optin might result in consumers paying for advice they don’t receive because of asset based fees.

He said such claims by the regulator – contained in an answer to a Parliamentar y question – were “nonsense”.

The FPA chief executive made it clear that the close relationships

which existed between planners and their clients were vital at times of market extremes, such as during the Global Financial Crisis and in recent days.

Rantall said it was the ongoing relationship between financial planners and their clients that enabled planners to act immediately in such circumstances and to provide advice and reassure clients, enabling them to make rational decisions.

“The proposed opt-in requirement could put at risk planners’ ability to provide a critical response during crisis situations and market uncertainty,” he said.

Rantall said clients should be given an annual opportunity to opt out of their relationship with their planner, but there were too many consequences associated with opt-in,

Mark Rantall including inadvertent exposure to investment risks such as superannuation contribution cap breaches and unmanaged investments.

Continued from page 1

although he did add that Westpac’s target market was primarily experienced planners who were aligned to larger and more stable dealer groups.

National Australia Bank director of financial planner banking, Shane Kirsch, said his bank had not changed its approach to lending since the GFC. “We’ve been lending to the planning industry in excess of eight years now, and our policies and frameworks haven’t changed through the peaks and the troughs,” Kirsch said.

But Forte Asset Solutions director Stephen Prendeville agreed with Taylor that there had been a retraction in the lending market.

“The finance is still available – it’s just more difficult to get than before.

And the reason is that [the banks] want to see a lot more due diligence conducted,” he said.

Prendeville added that the stricter lending policies were perfectly prudent, and a good thing for everyone involved.

When it came to the reasons behind the tightening of the criteria, Prendeville said the biggest factor was the economic environment.

However, he also pointed to the upcoming Future of Financial Advice (FOFA) proposal to ban commissions as a potential threat to revenue streams.

Prendeville added that practices that had gone fully fee-for-service were

Shane Kirsch likely to be viewed as better managed and more robust.

“There would be even more confidence if that feefor-service is a set fee and not fund linked, because then the recurring revenue isn’t held hostage to the economic environment,” Prendeville said.

Radar Results principal John Birt said that the GFC coupled with the regulatory reforms had been a “double whammy” for the lending market. He added that the compliance required by the FOFA regime would add extra costs to practices, cutting down revenues.

In an attempt to help its aligned practices adapt to the FOFA environment, ANZ has launched its Practice Funding Facility, according to ANZ general manager for advice and distribution, Paul Barrett.

“The ANZ Practice Funding facility is a strong endorsement of our confidence in the quality and potential of our extensive adviser network,” said Barrett. www.moneymanagement.com.au August 18, 2011 Money Management — 3

News

FOFA’s stockbroking commission ban ill-considered

By Chris Kennedy A BAN on stockbroking commissions proposed in the Government’s Future of Financial Advice (FOFA) reform package will be detrimental for the industry and have unintended consequences, according to the Stockbrokers Association of Australia.

The impact of such a ban has not been fully considered in the framing of FOFA reforms, according to the association’s official submission.

The stockbrokers argue the ban should not apply to direct equities because the

commissions are paid directly to the broking firm by the client, rather than by the product issuer, on a per-transaction basis, meaning the payments are essentially a fee for service model already. Payments are also fully disclosed and product neutral, the submission noted.

The issue of churning by stockbrokers has also been grossly overstated, with clients protected from the practice by Australian Securities and Investments Commission (ASIC) market integrity rules, Australian Securities Exchange (ASX) operating rules, as well as the Corporations Act, the

submission stated.

The association said its proposals are in line with regulations in the UK and Europe, where similar reforms don’t cover direct equities.

The submission advised that any proposed ban in stamping fees would cause difficulties for Australian companies raising capital, and therefore reduce opportunities for investors and damage Australia’s potential to grow as a financial centre.

Stockbroking firms providing services to the clients of licensed intermediaries should also not be caught by the FOFA ban

OnePath urges keeping it simple

By Andrew Tsanadis SIMPLE approaches often work best for financial planners dealing with clients, according to OnePath national technical manager, Graeme Colley.

Presenting OnePath’s top investment and tax strategies for the 2012 financial year in Sydney, Colley said it’s often the simple approaches that work best in order for financial planners to provide clients with the right advice.

“The use-by date from some strategies has expired, but new approaches are appearing in the dawn of the new financial year," he said.

According to Colley, one of the difficulties facing financial specialists is a misunderstanding of contribution caps on superannuation funds.

It’s a misunderstanding that allows clients to fall into the trap of unwanted tax on their final super payout.

“What we’re seeing in many financial practices is that clients end up paying excessive contribution tax

Graeme Colley simply because they’ve gotten wrong advice,” he said Currently, the non-concessional contribution (NCC) cap is placed at $150,000 per year, but Colley said many clients aren’t aware that unless they make it clear to the tax office that the extra contributions being made to their super fund aren’t a NCC, they

may have to pay an excessive contribution tax.

Late reporting of excessive NCCs is another issue that may result in a client being heavily taxed once they hit retirement.

“Once the contribution has been paid, in most cases you won’t be able to get it back from the tax office,” Colley said.

“One way members can reduce their super tax is by simply changing the title of their extra contributions from non-concessional to concessional in their tax notice.”

Another issue raised at the briefing was the need for clients to be aware of the difference in insurance premiums when consolidating super, particularly when it comes to issues of cover.

“It may be that while you were covered for Total and Permanent Disability in one fund, you may either not be covered in the other, or may be covered for considerably less” Colley said.

‘Kidults’ call on baby boomer parents to help fund first home

By Angela Welsh ONE in five baby boomers still expect to help their ‘adult children’ buy their first home, a RaboDirect survey has found.

“With the news of sharemarkets tumbling globally, Aussies are rightfully anxious about the stability of their superannuation,” RaboDirect general manager Greg McAweeney said.

“Baby boomers have enough to be worried about, without added concerns about dipping into their super to help their kids buy their first home,” he added.

The bank’s National Savings and Debt Barometer also found that among those aged less than 40 who intend to take out

a home loan in the next few years, just over half (51 per cent) are not currently living with a partner, suggesting they will take on the loan themselves.

At the same time, more than one third of Gen Y (35 per cent) said they can’t afford to buy a house without assistance from their parents.

“With the first baby boomers reaching 65 this year, and many of them moving into retirement, there’s likely to be increasing pressure on parents to dip into their retirement savings to fund their ‘Kidults’ first home,” McAweeney said.

The concern here is that making such a commitment in an unstable economic environment may drive each generation

Greg McAweeney further into debt, he said.

McAweeney urged Gen Y and their parents to talk about their finances and expectations honestly to avoid financial stress.

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

because the advisory relationship remains between the client and intermediary, and fees are charged on a fee for service basis and are transparent and product neutral, the submission stated.

The association also said it had not been properly consulted in the same way other segments of the industry had. The association complained that the release of draft legislation is now imminent, and there had been no period allowed for policy discussion, with the only communication provided to stockbrokers coming from an FAQ on the FOFA website.

PFS consultants become directors FOUR senior consultants at actuarial and financial services consulting firm Professional Financial Solutions (PFS) will become equity partners and directors of the firm.

Martin Fitzpatrick, Thach Huynh, Rebecca Johnstone, and Simone Knight have already contributed an enormous amount to the firm and will now be joining the leadership team, according to existing directors Doug Drysdale and John Newman.

Fitzpatrick joined the firm in 2002, and has expertise in superannuation, financial modelling, IT systems, and risk management – consulting to superannuation funds, industry associations, and government entities.

Thach Huynh joined the firm in 2001, and provides specialist financial modelling and valuation advice on remuneration, employee benefits, and the development of products and projects, including mergers and acquisitions.

Rebecca Johnstone specialises in the development of policy, stakeholder relations, and strategic advice to industry associations and professional bodies, and has been with the firm since 2008.

Simone Knight advises on governance, risk, and compliance matters, facilitates workshops on strategic planning and risk, undertakes performance evaluations of superannuation trustee boards, and joined PFS in 2005.

intouch adds state sales manager ONE stop shop financial services provider intouch Finance has appointed Matt Ninness as sales and distribution leader for Northern NSW. The appointment forms part of intouch’s stated push into rural and regional Australia, with the company also recently opening three new branches in Port Stephens, Albury and Cobram in Victoria.

“We already have principals operating in Tamworth, Port Stephens and Tuggerah on the Central Coast, and we plan to have another 6 operating by the end of the year,” said chief executive Paul Ryan.

A Taree branch will open next week, and Ninness’s focus for new branches will be on areas including Port Macquarie, Coffs Harbour, Lismore, Ballina, Armidale and Singleton, Ryan said.

“The appointment of Matt to deliver on our growth plans means he will be recruiting local principals from Newcastle, all the way to the border, and

then inland to Armidale, Singleton and the Hunter Valley,” he said.

Ninness has spent the past 7 years as a mortgage broker and lending manager in the Newcastle area, according to InFocus.

“Matt not only knows the lending and financial services game, but he knows what it is like to be selfemployed. It is a tough gig and you need support – we are delighted to have him join the intouch team,” Ryan said.

News

Share market losses could be tax deductible

By Milana Pokrajac

ACCOUNTING firm RSM Bird Cameron has provided some good news for investors incurring losses on the Sharemarket, saying that if a person can demonstrate they are a ‘share trader’ rather than a ‘share investor’, they will be allowed to claim a tax deduction for losses on the share market.

RSM Bird Cameron director of tax services Rami Brass pointed to rules

Businesses waiting longer to be paid

By Mike Taylor THE squeeze is on, and many businesses are failing to pay their bills on time, according to new research released by debtor finance specialist company, Bibby Financial Services.

The survey – the Bibby Small Business Barometer – conducted on over 200 small businesses in Australia at the end of June, found that 42 per cent felt their customers were resor ting to excuses for slow payments, and that as a consequence of receiving late payments, 25 per cent of small businesses were experiencing serious cashflow shortages.

Commenting on the data, Bibby Financial Services managing director Greg Charlwood said late payment was a serious problem for small businesses in Australia, with many struggling to meet liabilities on time and many contending with non-payment.

The survey found that 52 per cent of small businesses that deal with big companies and government clients are frustrated with slow payments, and when considering outlook for payments ter ms, small businesses remain pessimistic.

Charlwood said 38 per cent of small businesses were expecting the length of time they had to wait to be paid to increase fur ther in the coming quarter – something that would place considerable pressure on cashflow management.

which do not allow an individual share investor to claim a tax deduction for losses on the sale of shares.

However, share traders would find their losses are deductible and can be offset against ordinary income such as salary and wages, Brass said, adding there was no hard and fast rule set by the Australian Taxation Office (ATO) to describe a ‘share trader’.

“There are a number of ATO rulings and case law which try to

define who is a share trader,” Brass said.

The factors that indicate a person is a share trader include the profit making purpose of the activity, regular and routine engagement in trading, and the existence of a business plan, among other things.

“The greater the volume, repetition and capital employed where the person displays a high level of professionalism in carrying out share trading activities, the more

likely the person is a share trader,” Brass said.

However, it is important a person trading shares obtains advice from a tax agent before deciding they are a share trader, he added.

Brass also pointed out that while investors cannot claim a tax deduction on losses from the sale of shares, interest on borrowings to acquire shares is tax deductible, and can be offset against the person’s taxable income.

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www.moneymanagement.com.au August 18, 2011 Money Management — 5

News CFS and CommInsure challenged in CommBank result One million lodge

By Mike Taylor THE Commonwealth Bank has recorded a healthy full-year result with statutory net profit after tax rising 13 per cent to $6,394 million, but its wealth management divisions have struggled in difficult market conditions.

Announcing the result to the Australian Securities Exchange last week, Commonwealth Bank chief executive Ralph Norris described it as “a good, solid result in what has been a difficult year”.

However, the challenges facing the wealth management industry were made evident in the result, with its wealth management profit down 9 per cent over the previous year and with CommInsure, in particular, facing challenges.

While the Commonwealth’s analysis pointed out that underlying profit after tax for its wealth management division was up marginally, cash net profit was actually down by 9 per cent “mainly due to the unwinding of mark to market losses on the Guaranteed

Ralph Norris Annuities portfolio in the prior years”.

It said that Colonial First State had recorded a 1 per cent decline in cash net profit after tax, while CommInsure recorded a 20 per cent decline in cash net profit after tax, with net underlying profit after tax down 11 per cent.

The brighter note was provided by Colonial First State Global Asset Management which recorded a 6 per cent increase in cash

net profit after tax.

CommInsure managing director Paul Rayson said CommInsure’s full year result represented a combination of a growing insurance business and an investment business in long-term run off.

“Importantly, the benefits of structural changes to the business and enhancements to our products are beginning to be realised,” he said. “In particular, the improved flexibility and affordability of our insurance policies is expected to deliver further improvements for our operations in the 2012 financial year,” Rayson said.

The bank also pointed to its cautious approach to the year ahead, saying that in recognition of the continued uncertainty in the economic and regulatory outlook, it had elected to retain high levels of liquidity, standing at $101 billion as at 30 June.

Looking over the horizon, Norris said that ongoing offshore instability continued to impact the domestic economy, and had the potential to place further upward pressure on wholesale funding costs for domestic banks.

Two-stage retirement creating new opportunities for financial planners

By Andrew Tsanadis EQUITY Trustees (EQT) says two-stage retirement is creating new service needs for the financial sector.

Phil Galagher, head of wealth management at EQT, said the financial sector must not only focus on the retirement of baby boomers, but that of elderly retired Australians as well.

“The needs of more elderly retirees are quite different from those of active retirees and have to be factored in by service providers,” Galagher said.

“For example, the number of Australians aged over 85 has doubled as a percentage of the total population in the last 20 years, and at the same time

increased in numbers by over 170 per cent,” he said.

Equity Trustee’s announcement comes on the back of the Productivity Commission’s inquiry report into the aged care system.

It also follows EQT’s acquisition of two advisory businesses specialising in the aged care sector, Lifetime Planning and Tender Living Care.

“The number of Elderly Retirees is only going to increase further as Australians live longer and baby boomers grow older,” Galagher said.

Galagher said that the needs of less active retirees are not as well served as baby boomers, but trustee companies are well placed to deliver such resources

Phil Galagher to an already strained sector of financial services.

“Trustee companies have been doing this type of thing for years, so we are used to arranging

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

such support for clients,” he said.

“We are familiar with responding to client needs when they still take an interest in their affairs, setting up financial arrangements to reflect their wishes, and then acting under enduring power of attorney when they are no longer capable,” Galagher said.

Galagher said that providing such services to the elderly will see significant and immediate growth at EQT. “There will be a corresponding increased demand in specialist financial services and hands-on assistance to manage the affairs of people, either no longer able to be, or not interested in being, involved themselves,” he said.

tax return online in just five weeks

By Angela Welsh MORE than one million people have already lodged their tax return online using e-tax, the Australian Taxation Office’s (ATO’s) free tax preparation and lodgement service.

This brings the total number of lodgements since the launch of e-tax in 1999 to 16 million, tax commissioner Michael D’Ascenzo said.

“Continued improvements to the e-tax program and the introduction of the pre-filling service made it a popular choice for over 2.5 million self-preparers last year,” D’Ascenzo said.

Last year around 72 per cent of e-tax users chose to pre-fill their return, allowing users of the service to partially complete their tax return using information the ATO has received from employers, financial institutions, Government agencies and other third parties.

D’Ascenzo cautioned it remains the responsibility of the individual to review the information downloaded to ensure its accuracy.

This year, the ATO has already collected over 50 million pieces of third party information for the pre-filling service. New information includes parental leave payments, employee share schemes, tax-free government pensions, foreign employment income and information to help determine eligibility for the education tax refund.

In addition, information on share disposals, provided to the ATO by share registries, has also become available as a trial.

Most of the pre-filling information is expected to be accessible by mid-August, but e-tax users can subscribe to the alerts service, which will send a notification via short-message-service (SMS) or email when the information becomes available.

The ATO recommends that e-tax should only be downloaded from www.ato.gov.au/etax, to protect privacy and guard against scams.

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News Planners should not fear advice technology

By Mike Taylor DEALER groups and financial planners have nothing to fear from the push by industry funds to provide advice to their members, according to a director of advisory technology firm, Provisio Technologies, Cameron O’Sullivan.

O’Sullivan said superannuation funds were now clear leaders in pushing advice technology and were taking steps f o r w a rd i n t e r m s o f a c h i e v i n g t h e Government’s aim of providing advice to the general public – something that

would not have happened without the use of technology.

Claiming dealer groups and planners had nothing to fear from the move by the industry funds, O’Sullivan said it re p re s e n t e d a v a l u a b l e s e r v i c e t o members who would usually miss out on advice altogether.

“The advice services implemented by the super funds reach the bulk of the population who have never seen a financial planner, and are unlikely to ever do so,” he said.

“In most cases this is providing the

most basic advice, which would not impact on the majority of financial planners,” O’Sullivan said.

The Provisio Technologies director said the same tools could also benefit financial planners who might also wish to engage with clients online.

“All planners and dealer groups have a reasonable number of clients with relatively simple advice needs, and automating some of those processes can free up more of their time and lower the cost per client of providing advice,” he said.

Cameron O’Sullivan

NAB cash earnings grow

Cameron Clyne NATIONAL Australia Bank (NAB) has reported unaudited cash earnings for the June quarter of $1.4 billion, despite what it describes as challenging operating conditions.

At the same time, its wealth management businesses appeared to remain in positive territory in the face of investor nervousness.

In a June quarter trading update released to the Australian Securities Exchange last week, the big banking group said net flows into its MLC and NAB Wealth businesses were positive, despite continued weakness in investor confidence and low discretionary flows across the sector.

It said funds under management (FUM) fell marginally during the quarter as weaker markets resulted in negative investment returns, although retail FUM market share was stable.

Commenting in the quarterly update, NAB chief executive Cameron Clyne described “considerable challenges, including Australia’s multi-speed economy, subdued system credit growth, and fragile consumer confidence”.

Clyne also referenced concer ns about US economic growth and European sovereign debt.

Discussing MLC and NAB Wealth, he said operating conditions had been challenging, with some weakness in equity markets, and that there had also been a further increase in insurance claims.

SPAA demands last resort access

By Andrew Tsanadis SELF-MANAGED Super Fund Pro f e s s i o n a l s’ A s s o c i a t i o n (SPAA) says fraud and theft is not limited to superannuation, but all Australian investors.

SPAA made its announcement at its Technical Conference in Sydney after a Parliam e n t a r y Jo i n t Co m m i t t e e inquiry into the collapse of Trio Capital.

SPAA CEO Andrea Slattery said the last resort compensation scheme afforded to APRA regulated funds should also be afforded to all investors irrespective of the financial service provided.

“Under the current regime, some investors are compensated while others are not, and we don’t believe that’s right,” said Slattery.

“We acknowledge that SMSF investors have made a consensus decision to make their own

Andrea Slattery investment decisions, but that should not mean they are left to fend for themselves if they lose money due to the criminal acts

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

committed by someone else,” she said.

SPAA said the scheme would w o r k by p l a c i n g a l e v y o n different industry sectors, as well as product providers. The levy would be dependent on past events and would not be imposed on any individual investors.

S PA A a l s o b e l i e v e s A S I C should be doing more in terms of reviewing and monitoring i n s u ra n c e p o l i c i e s h e l d by Australian Financial Services (AFS) licensees.

SPAA suggests a standard policy which would drive scale among insurers and ultimatel y p r ov i d e b e t t e r c ov e r f o r clients.

“Standardising insurance policies would help to plug the significant gaps where clients f i n d i t d i f f i c u l t t o re c e i v e compensation in cases of professional negligence,” Slattery said.

Equities cheaper now than during GFC

By Tim Stewart AUSTRALIAN equities are trading at a 30 per cent discount compared to bonds, making the stock market look cheaper now than it did during the global financial crisis (GFC), according to new research

by Credit Suisse.

The research found that the ASX 200 is trading on a one-year forward price to earnings ratio (PE) of only 10.7 times, compared to the 10-year average of 13.4 times.

Credit Suisse said the discount on equities was almost as large now as it was during the Greek crisis or the GFC, and almost as big as it was after the ‘dot-com’ bubble burst in 2000.

The research found that, at wor st, the Australian market is fair value. That is, when a ‘through the cycle’ approach is taken (as opposed to looking at actual or forward earnings) the market is trading at a PE of 15 times, which is in line with the long-term average.

The bottom line, according to Credit Suisse, is that u n l e s s i nv e s t o r s s e e a worse crisis than the GFC or the dot-com bubble on the horizon, then equities are now genuinely cheap.

However, the research also pointed out that with economic growth slowing s h a r p l y, C r e d i t S u i s s e expected substantial earnings per share (EPS) downgrades. As a result of EPS numbers tracking down, the market PE will rise, making shares look less cheap.

Given its attractive valuation of the Australian market, Credit Suisse said it planned to accumulate equities. Its preferred method to capture beta (ie, mirror the ASX 200) was to invest in banks, since Australian banks are trading on low PEs and are offering high dividend yields (currently 7.5 per cent). Additionally, Australian banks are much better placed when it comes to the prospect of rising funding costs than they were prior to the GFC, Credit Suisse said.

News

Global jitters highlight value of advice: AFA

By Milana Pokrajac THE current global financial jitters highlight the value of financial advice, as clients lean on advisers to guide them through difficult times, according to Association of Financial Advisers (AFA) president, Brad Fox. Fox called on the industr y for calm, and to focus on clients and the fundamentals.

“When everyone around the world is losing their heads, the role of

advisers is critical; they are the guides and coaches providing a steady hand, a cool head and wise counsel that keeps clients on their financial journey – despite the turmoil in markets,” Fox said.

The AFA chief executive officer Richard Klipin agreed, saying the market scare also illustrated why opt-in was “poor policy”.

“In a world where opt-in exists, consumers will be left out in the cold at times like these,” Klipin said,

adding the antidote to opt-in was to strengthen opt-out in financial services guides, statements of advice, annual statements and correspondence with clients.

“Clients should have the option to opt out if they no longer want to receive the services of a financial adviser,” he said. “Just as they have the option to opt out of the services provided by the likes of CHOICE, unions and all sensible membership organisations,” Klipin said.

Valuations a burden for SMSFs

By Chris Kennedy SELF-MANAGED super fund (SMSF) trustees should not be forced to do a full valuation on direct property holdings every year, according to the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).

As part of the Government’s Stronger Super reforms, it was recommended the Australian Taxation Office should, in consultation with industry, publish valuation guidelines to ensure consistent and standardised valuation practices; and also that the Government should legislate to require SMSFs to value their assets at net market value.

But SPAA chair Sharyn Long raised concerns that performing a full valuation could place an onerous and unnecessary burden on SMSF trustees, potentially adding up to $10,000 in extra costs per year.

All stakeholders can agree that property holdings should be recorded at market value, but

there is an issue where it becomes cost prohibitive, she said.

Long proposed that full valuations be done every three years, or when required due to market movements, along with an annual review or market appraisal.

It is more crucial for an Australian Prudential Regulation Authority (APRA) regulated fund to have constantly updated values for holdings in order to know how to credit members, compared to a SMSF trustee having constantly updated valuations within a fund, she said.

SPAA chief executive Andrea Slattery also raised concerns that if off-market transfers are banned for SMSFs, as proposed

by Stronger Super reforms, it would create an uneven playing field for different types of funds.

“We believe quite strongly that the SMSF market would be discriminated against if offmarket transfers were brought on-market,” she said.

Four alternative strategies retain 5 star rating – S&P

By Andrew Tsanadis

The measure should not be adopted at all, but if it is, then small APRA regulated funds should also be included, she said.

If there are concerns that some trustees are improperly adjusting the value and timing of off-market asset transactions to maximise tax benefits, then the time frame for such transfers to be completed could be cut to five business days rather than 30 to 60 days, she said.

Brad Fox

CFS Wholesale Equity Income, K2 Australian Absolute Return, Platinum International and Platinum Asia have all maintained a 5 star rating in Standard & Poor’s (S&P) latest report on the alternative strategies equity sector.

S&P rated 38 strategies in total, upgrading three, downgrading one, affirming the ratings of 29, and assigning five brand new rankings.

The ratings for alternative strategies were divided into three peer groups – Beta Variable, Market Exposure and Market Neutral.

S&P Fund Services analyst Michael Armitage said the variable beta peer group continued to show its strengths in cushioning investors, particularly on the downside.

“We noted a majority of managers in that group rotating net exposures to relatively low levels in recent periods as a reflection of their forward assessment of sideways and uncertain markets, at a time where returns to cash were also relatively

attractive," Armitage said.

Armitage went on to say that regular improvement of risk management staffing, protocols, and systems at certain firms has raised the bar for the sector as a whole.

"We have noted a number of managers making what we would consider positive changes to product features, such as around prime brokerage and custody arrangements, valuation protocols for hardto-price securities, or performance fee calculations,” he said.

The report determined that Aviva Investors and K2 Select International Absolute Return be upgraded from 3 to 4 stars, while Pengana Global Resources went from 2 to 3 stars.

Rated for the first time, four CFS FC funds and Merricks Capital Equity Fund were awarded 4 stars.

Meanwhile, Lodestar Australian Strategic Share Fund – the only fund to be downgraded as part of S&P’s alternative strategies equity review – dropped from 4 to 3 stars.

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Challenger Managed Investments Limited ABN 94 002 835 592, AFSL 234 668 (CMIL) is the responsible entity and issuer of interests in the Five Oceans World Fund ARSN 117 060 769 (Fund). This advertisement is not intended to be financial product advice and does not take into account any person’s investment objectives, financial situation or needs. Accordingly, investors should consider these matters, the Fund’s product disclosure statement (PDS) and its appropriateness to them before making an investment decision. The PDS is available from www.challenger.com.au and should be considered prior to making an investment decision. Five Oceans Asset Management Pty Limited ABN 90 113 453 160 , AFSL 290 540 is the Fund’s appointed investment manager. www.moneymanagement.com.au August 18, 2011 Money Management — 9

News

Govt told to end financial services uncertainty

By Mike Taylor THE Federal Government has been placed on notice that it must end the legislative and regulatory uncertainty impacting the Australian financial services industry.

It has been told that nearly four years of uncertainty has given rise to significant commercial impacts for the industry.

A succession of speakers told the Financial Services Council (FSC)

annual conference on the Gold Coast that legislative uncertainty had been impacting the industry for nearly four years and that it was time to act.

At the same time, the Government was also urged to immediately refer the status of default superannuation funds within modern awards to the Productivity Commission.

Among those making the calls were the chief executive of the FSC,

AUI acquires Investa property funds business

By Chris Kennedy AUSTRALIAN Unity Investments (AUI) has entered into an agreement with Investa Property Group to acquire the responsible entity for its retail funds business, the group announced, boosting AUI’s property fund funds under management (FUM) to almost $2 billion.

This includes the Investa Diversified Office Fund (IDOF), the Investa Fifth Commercial Trust (I5CT) and the Investa Second Industrial Trust (ISIT), which collectively hold more than $430 million FUM with 12 office and industrial buildings across Australia.

The transaction arose because Investa decided to focus on its listed wholesale core funds, the Investa Office Fund and Investa Commercial Office Fund, which are worth more than $4 billion, AUI stated.

AUI’s general manager – property, mortgages and capital markets – Mark Pratt, said key retail funds management staff from Investa will join the AUI property team.

AUI will look at ways to enhance liquidity for investors in the funds, which have performed well, he said.

“We believe it is a particularly opportune time to expand our office property activities, as our view is that core CBD office markets will continue to perform well due to sustained employment levels and lack of new developments, providing excellent opportunities for investors,” he said.

Scott MacDonald, chairman and chief executive officer of Investa, said AUI met all of Investa’s stringent evaluation criteria.

“We believe AUI has strong capability and the experience to continue to deliver on fund objectives, and will manage the funds in the best interests of unitholders,” he said.

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

John Brogden, the organisation’s chairman, Peter Maher, the Opposition spokesman on financial services, Senator Mathias Cormann, and a succession of industry executives.

Brogden set the tone for the industr y’s concerns when he pointed out that while the FSC supported reform, it was important to remember that there had been no systemic failures within the Australian financial services industry

through the Global Financial Crisis.

For his part, Maher said the ongoing uncertainty in the Australian regulatory environment was extracting a price.

However, the Assistant Treasurer and Minister for Financial Services, Bill Shorten, signalled to the conference that the industry would have to wait up to a further month before the first draft of the legislation relating to the Future of FinanPeter Maher cial Advice changes was tabled.

News

Market volatility creates ‘flight to cash’

By Tim Stewart NERVOUS investors are moving into cash and term deposits as the result of uncertainty in the stock market.

ME Bank’s National Consumer Call Centre recorded a 6 per cent rise in enquiries about term deposits on Friday 5 August, following the largest fall in the US Dow Jones Industrial average since

December 2008 the night before.

The chair of the Self-Managed Superannuation Fund Professionals’ Association of Australia, Sharyn Long, said she was not surprised that there had been a move by investors towards term deposits, since investors in the pension phase are particularly vulnerable to sudden downwards movements in equities. She added that the move to term deposits may well be

quicker this time around, compared to the reaction at the end of 2008 at the height of the global financial crisis.

ME Bank group executive for brand, product and distribution Ian Hendley said he couldn’t say for certain if the increase in enquiries was linked to the stock market crash, but “it would be logical that people are looking for a haven for their money”.

Commonwealth Bank general manager for deposit and transaction products Anthony Hughes said his bank had seen a 15 per cent increase in term deposit lodgements on Friday 5 August, as compared to the previous Friday.

Hughes added that the increase was certainly evidence of a “flight to cash”.

A Westpac spokesperson said that Westpac had seen a moderate

increase in term deposit enquiries since Wednesday 3 August, adding that the bank believed consumers would hold off from making their investment decisions over the next few days.

A spokesperson for ANZ said that while it didn’t see a notable increase in term deposit enquiries on Friday, the bank had seen a significant increase in term deposit enquiries over the last few months.

Bill Shorten

Tighter rules on reverse mortgages

By Mike Taylor THE Federal Government has moved to tighten the rules around reverse mortgages, asking older Australians and other interested stakeholders to comment on draft legislation which would impose statutory protection against negative equity and tougher disclosure requirements.

The Assistant Treasurer and Minister for Financial Services, Bill Shorten, described reverse mortgages as being different to other credit products and therefore requiring laws that took account of their unique characteristics.

“With these new measures, older Australians can have greater confidence when using these products and will be able to make better choices,” he said.

As well as imposing statutory protection and greater disclosure, the new legislation also requires lenders to follow a series of steps before acting on a default.

Shorten outlined the risks inherent in reverse mortgages as being interest rate risk, property value risk and longevity risk.

He signalled the Government would also be acting to increase protections around home reversion schemes. www.moneymanagement.com.au August 18, 2011 Money Management — 11

SMSF Weekly SMSFs called to embrace new SuperStream measures

By Milana Pokrajac

Peter Burgess

SELF-managed super funds (SMSFs) have been called to embrace new data transfer standards for rollovers and e m p l oye r c o n t r i b u t i o n s, which will be introduced as p a r t o f t h e G ov e r n m e n t’s SuperStream measures.

The Government is expected to introduce new mandatory data transfer rules which will apply to super funds and

some employers from 1 July, 2013.

Sp e a k i n g a t t h e S M S F Professionals’ Association of Australia (SPAA) Technical Conference in Sydney, technical director Peter Burgess said SMSFs should not fear new measures.

“SuperStream will reduce the time it takes to rollover funds and process employer contributions,” Burgess said.

“Ensuring all rollovers and

employer contributions must be accompanied by mandatory sets of data will eliminate the need for SMSF administrators to chase up missing data and undertake time consuming reconciliation processes,” he added.

It is also expected SuperStream will require SMSFs to have access to the Internet, and a bank account which can accept electronic fund t ra n s f e r s – re q u i re m e n t s

deemed by SPAA as reasonable.

However, Burgess said in a sector as large and diverse as SMSFs, there will be some funds which will not have the capacity to accept data in an electronic form.

“We will continue to work with Government to ensure the new data transfer standards will not impose unreasonable restrictions on these funds," Burgess said.

Volume requires auditor competency tests

More tax office scrutiny comes with SMSF control

By Damon Taylor

By Robin Bowerman

IN the Government's Super System Review released on 30 June 2010, selfmanaged super fund (SMSF) auditors were stated to be the one facet of this superannuation sector most relied upon by the Australian Taxation Office (ATO) to manage SMSF compliance.

SMSF auditors were considered 'the cornerstone of existing SMSF regulatory framework' and, as such, the implementation of minimum competency levels and auditor registration was a key recommendation.

And such initiatives are necessary, according to Ron Phipps-Ellis, Audit Partner at BCS Super Auditors, if only because of auditor numbers.

“It’s necessary because of the large number of SMSF auditors conducting what are quite large super fund audits per annum,” he said. “And while I’m not saying there are auditors who are acting incorrectly, I do think that they’re probably not all sufficiently competent to be doing selfmanaged super fund audits in the manner that’s required,” Phipps-Ellis said.

Asked whether a mandated requirement of auditor registration would signal a reduction in the number of auditors currently servicing the SMSF sector of superannuation, Phipps-Ellis agreed it was indeed a likely scenario.

“That could definitely happen, but it could be a good thing for the industry,” he said. “Independence is also going to be a very big issue in the next year or so.”

“And where the industry goes with these things is going to be really interesting for those accounting practitioners dealing with SMSFs,” Phipps-Ellis said.

THERE are many good reasons to set up a selfmanaged super fund (SMSF), with greater control over investments and lower costs topping the lists of most investor research reports.

However, shouldering the compliance burden of a superannuation trustee or responding to an audit request from the tax office perhaps does not have quite the same popular appeal.

But they are just as real, and SMSF trustees should be aware that the tax office – in its role as SMSF regulator – is stepping up its efforts over the next 12 months to ensure that more funds comply with superannuation and tax law.

The Australian Taxation Office’s (ATO) Compliance program for the next financial year, released this week, indicates a clear willingness to strip wayward funds of their complying status for breaches ranging upwards from repeatedly failing to lodge annual returns.

It’s interesting that the compliance program notes that 70 SMSFs were declared non-complying in 2010-11. At first glance, 70 funds may not seem many, considering that 445,000-plus funds are in existence.

However, a non-complying fund can lose almost half its assets in penalty tax. If a fund is made non-complying, the market value of its assets – less any non-concessional or undeducted contributions – is taxed at the highest marginal rate. In wealth creation terms, that is the nuclear strike option, and to be fair, one the ATO does not exercise lightly.

In other words, the penalty for being declared non-complying is typically devastating for all members of an SMSF, including those who do not take an active role in their fund’s affairs.

So being declared a non-complying fund is the one thing you really want to avoid as an SMSF trustee.

The latest Compliance program warns that the ATO’s SMSF focus in 2011-12 includes: • New funds to check whether their trustees are participating in illegal schemes to gain early access to super savings.

• Related-party transactions, in part to ensure compliance with the five per cent limit on inhouse assets.

Art valuers promote SMSF services A NEW service provider segment has entered the self-managed superannuation fund (SMSF) equation, with ar t experts now promoting their services with respect to valuing artworks, antiques, collectables and jewellery.

One of the first to offer a service to SMSFs has been Victorian auctioneer and valuer, Warren Joel, who has suggested services such as his are needed for SMSFs seeking independent valuations of their assets, and the disposal of those assets.

“As fund managers are required to revalue the art in the SMSF funds annually at the end of each business year, and with substantial costs involved in selling art, individuals and corporate investors alike must seek expert advice on the artworks and collectables in their funds,” Joel said.

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

• Unrectified contraventions of superannuation law which had been brought to the attention of fund trustees by a fund’s approved auditor.

• The performance of approved auditors of SMSFs – the regulator threatens to disqualify auditors that “pose an ongoing risk”.

The tax office is right to focus on trustees participating in scams to get early access to super – that is a blatant abuse of the system.

Last year, the ATO audited more than 920 individuals and 31 scheme promoters, and as a result raised almost $14 million.

However, the other area of focus for the ATO in regards to superannuation in the year ahead, is likely to have a much broader impact on ordinary employees. The tax office also has a role to play in protecting super fund member rights by checking that companies are paying the correct amount as super contributions.

A number of businesses will struggle with cashflow or other financial pressures at various times, which can sometimes result in withholding super contributions. Employees will typically notice if salary doesn’t turn up in their bank account, but it may take a lot longer for someone to notice that money has not been paid into a super fund – the long-term nature of super and the fact it is locked away does not encourage close monitoring.

Yet in the past five years, the ATO says its compliance activities have resulted in about $1.3 billion in extra super contributions being collected on behalf of employees.

That is a significant amount of money, but it also points to the need to be vigilant with super contributions.

Robin Bowerman is the principal of corporate affairs and market development at Vanguard Investments Australia.

InFocus OPINON SNAPSHOT A survey of chief executives from Australia’s 31 leading wealth management companies found that:

95%

believe the measures relating to infrastructure in the Federal Budget fall short of encouraging enough investment

94%

support the development of an ‘Asian Region Funds Passport’ to improve access to the regional hub

I’m talking softly, he’s carrying a big stick Assistant Treasurer, Bill Shorten, has pointedly excluded the Association of Financial Advisers from those who convinced the Government to concede ground on risk commissions in superannuation but, as Mike Taylor writes, lobbying games are not quite so simple.

W

hat works best in lobbying Governments? A carrot or a stick?

If the words of the Assistant Treasurer and Minister for Financial Services, Bill Shorten, are to be taken as a measure, then he responds more to blandishments than barbs.

In an address to the Financial Services Council (FSC) annual conference on the Gold Coast earlier this month, Shorten offered an olive branch by indicating the Government would be revisiting its proposed ban on risk commissions in superannuation and would, very likely, allow commissions to be applied to individually-advised risk products.

In doing so, the minister attributed his amenability on the issue to the efforts of the FSC and the Financial Planning Association (FPA), and not to the efforts “of another planning organisation”.

All those listening to Shorten’s speech promptly came to the conclusion that the “planning organisation” in question was the Association of Financial Advisers – the industry group which had been most publicly strident in opposing not only the blanket ban on risk commissions in superannuation, but also the Government’s Future of Financial Advice (FOFA) proposal for a two-year opt-in.

Indeed, any reading of the pages of Money Management over the past three months will reveal that while the FSC and the FPA had publicly and very clearly declared their opposition to the two-year opt in and the ban on risk commissions in super, it was the AFA which was persistently making the headlines by denouncing the Government’s approach and exhorting planners to lobby individual members of parliament.

The FPA had also encouraged its members to lobby their Parliamentarians on the FOFA issues but, otherwise, its approach was far more circumspect. It was obvious that FPA chief executive, Mark Rantall, was focused on lobbying as a key route to achieving the much-needed concessions.

It was therefore hardly surprising that, in the

“

Whatever Shorten’s motivations may have been, he has left absolutely no doubt in anyone’s minds that the Government is determined to enshrine a two-year opt-in requirement into the legislation that finally emanates out of the FOFA changes.

”

wake of Shorten’s announcement to the FSC conference, Rantall laid claim to a large part of the credit for having extracted what represents a key concession from the Government on risk in super.

AFA chief executive, Richard Klipin was also at the FSC conference and, having heard the minister’s remarks, was making no apologies for his organisation’s approach, perhaps on the basis that, notwithstanding the minister’s remarks, many of his members attributed the breakthrough to the AFA’s comparatively hardline approach.

Sensibly, the minister’s concession was probably owed to both the measured approach adopted by the FPA and the FSC as well as the hard-line approach of the AFA. Then, too, there were the cynics in the industry who suggested that Shorten, a former national secretary of the Australian Workers’ Union, had utilised one of the oldest union negotiating tactics of taking away something precious to the industry so that he could give a part of it back.

Whatever Shorten’s motivations may have been, he has left absolutely no doubt in anyone’s minds that the Government is deter-

mined to enshrine a two-year opt-in requirement into the legislation that finally emanates out of the FOFA changes.

That legislation is now not expected until early next month, a time-table which suggests that Parliament may be heading for its 2012 winter recess before the legislation has seen debate in both the House of Representatives and the Senate.

And it will most certainly be the House of Representatives where the most animated debate will occur, particularly around opt-in with both Shadow Treasurer, Joe Hockey and the Opposition spokesman on Financial Services, Senator Mathias Cormann, reiterating in the past two weeks that the Coalition will not be supporting the FOFA legislation in its current form.

NSW independent, Rob Oakshott, is also reported to have indicated he has concerns about the proposed legislation. Tasmanian independent, Andrew Wilkie, is also understood to have some issues that he wants to see addressed.

Although Shorten has indicated the Government might be prepared to allow commissions to remain on individually-advised risk products, many in the financial services industry are reserving judgement until they see the Government’s formal position enshrined in the draft legislation.

For the AFA, the fact that Shorten is a junior minister (outside of Cabinet) in a minority Government means that it has less to fear than did the Housing Industry Association, which was harshly critical of a Federal Labor Government back in the late 1980s. When Labor was returned to office at the subsequent Federal Election, HIA officials found themselves getting less access to ministers than those representing competitor organisations, such as the Master Builders Association.

Given the state of the polls, the finelybalanced Parliament and the time-table for the next federal election, the AFA seems to have little to fear from using barbs rather than blandishments.

80%

believe Asia would provide a key source of growth for Australia’s financial services industry

70%

say the industry needs to invest more in infrastructure

44%

were confident of this in last year’s survey

15%

have confidence in Australia’s approach dealing with an ageing population

Source: Financial Services Council (FSC) and PwC

What’s on PortfolioConstruction Forum – 2011 Conference Australian Technology Park, Redfern, Sydney 23-25 August 2011 http://portfolioconstruction.com .au/conference

FPA Event – Breakfast with Senator Mathias Cormann, Shadow Minister for Financial Services and Superannuation 8 September 2011 RACV Club Melbourne www.fpa.asn.au/events

Australian Consumer Finance Forum 2011 Sofitel Sydney Wentworth 22 September 2011 www.lendingconference.com.au

AFA Event – Australian Microcap Investment Conference 18-19 October 2011 Sofitel Melbourne on Collins www.afa.asn.au/profession_eve nts.php

ASFA 2011 National Conference and Super Expo 9-11 November 2011 Brisbane Convention & Exhibition Centre www.superannuation.asn.au

www.moneymanagement.com.au August 18, 2011 Money Management — 13

Index Funds

Exploring the index fund universe

The index fund space, while staying strong through market volatility, has been busy developing new and exotic products. Janine Mace takes a closer look at the sector, its new variations and life after ETFs. They certainly aren’t vanilla any more. That’s the key conclusion you draw when it comes to index funds these days.

Far from being simple ways to capture the market return, index funds are busy developing exotic new flavours and an interesting range of new names. Liquid alternative beta, non-price weighted, minimum volatility – you name it, and there seems to be an index fund to match it.

As a recent State Street Global Advisors (SSgA) report noted: “In recent years, indexation has moved beyond market capitalisation to exploit market themes through approaches such as value based indexation and minimum volatility indexation.”

It’s all a long way from the plain vanilla index fund that replicates a straightforward

index like the S&P/ASX200.

These days, many index funds are far from simple, and while many of these new varieties are yet to arrive in the retail space, providers are busy eyeing up their potential.

Fund inflows remain strong

Although these new products represent a fresh approach to index investing, inflows into traditional index funds remain strong.

This is largely due to the popularity of indexing in the wake of the global financial crisis (GFC) and is a trend repeated in most developed markets, according to Vanguard Australia principal, corporate affairs and market development, Robin Bowerman.

“Coming out of the GFC, we have seen

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

strong inflows and adjustments around index funds. This has been driven by advisers and clients being disaffected by active fund performance during the GFC,” he says.

The disillusionment has resulted in inflows into both managed index funds and their listed cousins, exchange traded funds (ETFs).

Susan Darroch, SSgA Australia’s head of global structured products, agrees indexing remains popular. “Generally, we are seeing continuous inflows into index funds. We are seeing growth in both index products and asset inflows.”

One of the newer kids on the block, Realindex Investments, has also seen strong inflows, according to its chief executive officer, Andrew Francis.

“Index funds in general have held up in

terms of flows over the past couple of years.

Financial planners are looking for simplicity, transparency and lower cost solutions, so this has fed demand for index funds across the board,” he explains.

Another market observer who has watched with interest the growing popularity and sophistication of index funds is Standard & Poor’s (S&P) director of fund services, Paul O’Connor.

“Six to seven years ago the index fund market was mainly about broad market exposure index funds, but with the increased use of indexing we are seeing providers of index funds expand their products. We are seeing increasingly sector specific index funds, or ones with a yield focus to capture the higher dividend payment stocks on the ASX, or with a tailored emerging market base such as the BRIC countries or thematic stocks,” he explains.

However, despite the arrival of new products, most inflows are into traditional broad based index funds.

“If you look at the indexing universe,

Index Funds to offer much more tailored index offerings. Also, index funds investors like to quickly buy in and out of markets, so these new funds are appealing as they are very transparent and liquid,” he says.

One of the major growth areas has been in liquid alternative beta funds, which replicate the risk/return of fund of hedge fund products.

“Given the fees charged, they are quite compelling compared to hedge funds,” O’Connor notes. At around 1 per cent, plus a 10 per cent performance fee, the new funds are about half the price of a fund of hedge funds.

“We are seeing growing institutional investor interest and increased education in the retail sector about these products,” he explains.

We think the “fundamental index approach makes sense in shares, and it also makes sense in fixed interest. It is an area we are looking at with interest.

”

- Andrew Francis

assets are mostly still in the broad based vanilla funds,” Bowerman notes.

“Other people come into the space, but if you look at ETF index funds, 85 per cent of them are in broad based index funds – as they should be,” he says.

New variations launched

The popularity of traditional index funds has not stopped providers launching new funds. As Bowerman explains: “People are going into the spaces they can see have succeeded overseas.”

In the institutional market, new funds have been launched to cater for demand from major investors such as industry funds looking for ways to provide their services to members at a lower cost.

This has seen new index strategies such as valuation tilt find a ready market.

“We are seeing a lot of investors now who are considering indexing who would not have before, due to these new products. There is increased sophistication in the indexing market and this is reflected in new offerings and users,” Darroch says.

Susan Darroch O’Connor agrees many of the latest offerings are in response to investor demand – particularly at the institutional level.

“There is increasing use of tactical asset allocation and dynamic asset allocation, so this has encouraged providers

Darroch believes there is interest in the new products as they offer advisers and investors a fresh approach for portfolio construction. “Alternative beta options can include different things such as adding a valuation tilt to the portfolio.

Previously, you would have needed to go to an active manager to do this and it would have been expensive,” she says.

Another product which has taken off is fundamental indexing, which utilises the Research Affiliates Fundamental Index methodology to select and weight companies according to their economic footprint. In Australia, the Realindex funds have clocked up $2.8 billion in funds under management since their launch through Colonial First State in 2008. (Currently, US$50 billion worldwide is invested using fundamental indexing.)

“Indexing in general has had a big surge in growth, and non-market cap has been a big part of that,” Francis explains.

“Fundamental indexing does not replicate market performance and is part of the growth of alternative beta or nonprice weighted indices. There is a lot of development and interest in this area,” he says.

He believes fundamental indexing is appealing for advisers not keen to blindly follow the market cap approach.

“There will always be a place for market cap funds as some investors want that, but we believe overall it is not necessarily the best long-term solution. There

is growing traction in non-market cap index products,” Francis says.

Other asset classes such as fixed interest are also likely to get the fundamental index treatment.

“Within the fixed interest index space, the main indices are based on market capitalisation, and therefore the countries with the highest debt make up most of the index. We think the fundamental index approach makes sense in shares, and it also makes sense in fixed interest.

It is an area we are looking at with interest,” he says.

Francis expects fundamental index funds to continue growing. “They are easy to understand and do not have the same issues with funds under management limitations as some of the other non-market cap strategies.”

Volatility no handicap

Although most active managers are quick to point to the current share market volatility and uncertainty as a time when stock-pickers will shine, index fund providers are unconvinced.

As Bowerman notes: “Vanguard in the US offers both active and index funds, so we are agnostic about it. It is not so much a market timing issue, but more about the right portfolio construction for the particular investor.”

Francis agrees market volatility is not an issue. “It comes back to what the client is looking for,” he says.

“Financial planners like the simplicity, lower turnover and lower price of indexing, so they are still interested in indexing despite the current volatility. It is not about market conditions, it is about your philosophy on investment and market efficiency,” Francis says.

Darroch believes indexing suits volatile conditions due to its diversification benefits. “An index fund is more diversified than an active fund, so it offers more diversification protection in volatile markets,” she says.

“It is not necessarily the wrong time to be invested in index funds in volatile markets. An index fund goes down at the same level as the market, but active managers can perform better – or a lot worse – than the market,” Darroch says.

O’Connor agrees: “I believe it has a strong role to play in a portfolio across the economic cycle. Active management is a zero sum game, and it is important to remember it is about how much research you are prepared to do into the managers you select.”

Darroch also points to the importance of selecting skilful managers. “You have to think you can pick the manager that can get the decision right. With indexing, it could be a less volatile ride than with an active manager.”

Like many other indexing advocates, she believes the two approaches are not mutually exclusive. “You could have the core indexed and then choose a manager that you think will outperform as a satellite, or have a minimum volatility play to reduce volatility and risk in the portfolio.”

Given the current state of the markets, Darroch cites the availability of index products designed to deal with this.

“Indexing can provide a minimum Continued on page 16

www.moneymanagement.com.au August 18, 2011 Money Management — 15

Index Funds Continued from page 15 volatility portfolio, so this is a great tool for when markets are very volatile – but at lower fees than active management.”

Choosing an investment philosophy

Most supporters of indexing believe the suitability of the approach depends on an investor’s views about markets.

“You need to have a philosophical view on markets and whether they are efficient or not efficient,” O’Connor explains.

He points out that in the US there are “very different levels of efficiency in various markets and this influences the ability to outperform by a manager”. In the heavily researched S&P500 market, for example, it has proved very difficult for managers to outperform, while the reverse is true in the small caps market.

This is the key finding in the latest Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA). It found over the five years to 31 December 2010, more than 60 per cent of all active funds failed to beat their respective benchmarks, with the exception of active Australian smallcap equity funds.

“Recently there has been a risk on/risk off environment in markets, and this leads to idiosyncratic risk not being as well rewarded as it has been historically,” O’Connor says.

By way of example, he points to the financials sector, where the value disper-

sion of stocks has not been as significant in the pricing of individual stocks as during stable market conditions.

“Active managers can see a lot of value in some sectors, but over the past three and a half years they have not been rewarded for identifying stocks that offer that. In the current investment conditions, it has been difficult for active managers to outperform,” he explains.

O’Connor believes the next SPIVA report will reinforce this view. “I expect the next one to show it has been a challenge for active managers, as there has been a risk aversion spike. Managers taking on idiosyncratic risk have found it difficult, as people tend to sell the whole market in these types of conditions.”

Life after ETFs

Given the hype surrounding the dramatic growth of ETFs in the Australian retail market, the question arises of whether there is still a role for managed index funds.

Or will their sexy listed cousin consign them to the product dustbin? Most experts are convinced there is still a place for managed index funds.

Francis believes ETFs are just another product offering. “They are no better or worse, just a choice. ETFs are doing exactly the same as managed funds. They are just a new way to access the index.”

The two types of products can comfortably sit together, Darroch says. “In some places a managed fund is better, and in others the

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

Robin Bowerman ETF is more appropriate. A client who wants to dollar cost average or make regular contributions is not right for ETFs, as the brokerage is so expensive. In this situation, a traditional unit trust can be a better option.”

However, she recognises ETFs can be better suited to certain situations. “An ETF may be a short-term investment play on resources or financials, as you can do it quickly and easily,” she says.

Francis feels managed index funds have some clear advantages as they “offer certainty as you get the closing price of the market, versus with the ETFs, where the price depends on when you trade the ETF

and the spread they are trading at”.

Managed index funds are unlikely to disappear, according to O’Connor. “There is still a place for these in the portfolio. The more tailored index funds probably have more use for investors interested in active asset allocation, but there will always be a role for all types of index funds.”

From the adviser perspective, it is not an either/or situation, according to Francis.

“Both will continue to be used in portfolios.

It depends on how the financial planner’s business is set up and established.”

It also depends on the size of the investor. “For bigger institutional investors, they can often get a traditional unit trust product cheaper than an ETF, so that may suit them better,” Darroch notes.

Vanguard does not see the two vehicles as incompatible, according to Bowerman.

“It is important to remember ETFs are index funds. ETFs are a trading mechanism but they are an index fund. In Vanguard, it is a class of units within our Australian equities share fund,” he explains.

Bowerman believes ETFs are bringing in a new class of investors who like indexing, but prefer the listed approach. “The popularity of ETFs is helping to grow the indexing marketshare. People can now choose whether they are going through the managed index fund or ETF door,” he says.

“Some people will move to ETFs from managed funds due to cost, but it is more likely that they are attracting new people,” Bowerman says.

MM

Index Funds

Reforms to boost indexing appeal Financial planners have already started to focus on costs as a result of the proposed Future of Financial Advice reforms package, which could significantly boost the appeal of indexing over the next few years. Janine Mace reports.

ALTHOUGH the disappointing performance by active managers during the GFC may have been the first spur to advisers to take a serious look at indexing, the Future of Financial Advice (FOFA) reforms package may be what really gives indexing the inside running.

As Vanguard Australia’s principal, corporate affairs and market developm e n t , Ro b i n B owe r m a n e x p l a i n s : “Financial planners felt active management did not deliver, so they opted to buy the market. Now the FOFA reforms are driving structural change to fee-forservice and we are seeing quite a shift to index funds as this takes away the payment distortion and increases the shift to an asset allocation emphasis.”

He believes this will only increase in the next few years.

“As advisers move to fee-for-service, there will be more of a shift to index funds due to their lower cost and asset allocation benefits,” he said.

The development mirrors a similar trend in the US when fee-for-service was first introduced, explains Bowerman.

“It changes things and the question becomes what is the right thing for the client. The best asset allocation becomes the key.”

He believes FOFA will drive major changes in the investment side of the business.

“With the FOFA reforms, more financial planners are using direct equities to invest, so they are also driving the growth in the ETF market,” Bowerman said.

Standard & Poor’s director of fund services, Paul O’Connor, expects to see

greater use and acceptance of index funds in the Australian retail space as advisers come to terms with the new reform and investment environment.

“Financial planners need to reiterate their value proposition, and the core plus satellites approach using indexing is an increasingly important part of that,” he notes.

Searching for savings

Susan Darroch, State Street Global Advisors (SSgA) Australia’s head of global structured products, echoes Bowerman’s comments about the US experience.

“As the US moved towards a fee-forservice environment there was a real correlation to the take-up of ETFs in that market. It led to a very noticeable increase in ETF inflows.”

She believes the current focus on cost is having a significant impact in the retail market and is helping boost the appeal of indexing.

“Fees have become a focus and that has definitely helped with the acceptance of indexing in the market.This is particularly the case in the booming ETF market.

“Cost is a very big issue, as most managed funds charge 70-100 basis points, whereas it is 28.6 basis points in our SPDR STW fund. This is a huge difference for retail investors,” she notes.

Darroch claims the cost differential has been a major reason behind the popularity of ETFs. “We are definitely seeing an influence on ETFs and a growth in the Australian market for ETFs due to this cost emphasis.

As the financial planning industry moves from commission to fee-for-service, it will help the ETF market to grow,” she says.

“There is a real push for lower costs and this will help growth overall in the index market.”

O’Connor is another who believes the emphasis on cost due to FOFA and the lower investment return environment is making indexing more popular in the retail market.

“The financial crisis has led to a focus on fees and indexing is a cheap way to grab market beta. If world markets are setting into a growth pattern, then it can be a good way for investors to get access to that cheaply,” he explains.

“It has been a core area and one of the main reasons why investors have considered the use of index funds. The impact of FOFA and fee-for-service is likely to be a further kicker for index funds and ETFs,” O’Connor said.

As advisers focus on costs, the aftertax benefits of index funds are also becoming impor tant, according to Realindex Investments chief executive officer, Andrew Francis.

“That is where most index strategies have a natural level of competitive advantage versus a high turnover strategy. There is a smaller advantage in the superannuation and pension sectors, but in high tax brackets there can be a significant difference in the outcome for the investor,” he explains.

Darroch agrees: “By their nature, index funds are much more tax effective than an active portfolio.”

She believes there is growing interest in after-tax returns and this is highlighted by the launch of the FTSE after-tax series of indices. (An ETF based on one of these indices is already in the planning stage.)

“In this market, there is definitely an after-tax focus, and this can be seen in the FTSE indices,” Darroch notes.

Sophisticated strategies

Against this background, advisers are becoming increasingly sophisticated in their use of index funds.

According to Bowerman, the institutional strategy of core plus satellites is now gaining ground in the retail market.

“Institutional investors have been using it to lock in beta and to ‘de-risk’ the portfolio and then use satellites with high performance managers to capture alpha. Five years ago, the debate was about indexing versus active, but now financial planners have figured out that core plus satellites can be the best approach,” he explains.

“Financial planners have worked out they don’t need to be the best stockpickers, but rather, it is about developing well-constructed portfolios,” Bowerman says.

Paul O’Connor Francis agrees: “Core plus satellites is getting a lot of traction with planners now, although the particular use comes down to the individual clients and their goal and situation.”

This acceptance is seeing advisers use core plus satellites strategies both within asset classes and across the total portfolio. It also fits neatly with Australian investors’ love of shares – particularly in the SMSF market.

“SMSF investors are very comfortable with developing a direct Australian equities and cash portfolio and then using ETFs to buy additional exposure,” Bowerman explains.

“They are less comfortable with international equities, so they are using ETFs to get global exposure for their portfolios.”

Advisers are also using a core plus satellites strategy with strongly performing active managers.

“We are seeing advisers blending the Vanguard International Equity share fund with the high conviction Platinum International Equities fund for this asset class,” Bowerman notes.

According to Darroch, the flexibility of the core plus satellites approach is behind much of the growth in the ETF market, because it can be used in different ways with different indices.

“Satellites are now not just an active fund, but they can also be a satellite that focuses on a different index. The core could be a standard pure replication index fund, and then you have minimum volatility satellites, or a valuation tilt satellite. It is about looking at the overall investment objective and putting all the pieces together,” she explains.

O’Connor believes the use of core plus satellites in the retail market echoes the trend in the institutional market of focussing on single manager, sector specific investment funds.

“Twelve years ago most retail dollars were into diversified funds, but we are seeing increasing use of sector specific funds now and the trend is the same in the index market,” he says.

MM

www.moneymanagement.com.au August 18, 2011 Money Management — 17

OpinionInsurance When boring is beautiful Many inconsistencies currently exist between different insurers in their trauma policy wording, especially when it comes to policy lapsing and reinstatement.

Col Fullagar finds this can often cause planner confusion, losing them credibility when clients seek more information.

I

nsurers are forever looking for a strategic advantage over their competitors and they seek to lay claim to these socalled points of differentiation in as many different areas as possible.

Some see speed as their advantage – which probably translates to “If we make a mistake, we will make it faster than other insurers”. Others regard their documentation as a point of differentiation, which means “Advisers may dislike all application forms but they dislike ours the least”.

The truth is, however, that not all strategic advantages require insurers to be different. There are occasions when being the same, albeit seen as somewhat boring, could of itself be the strategic advantage insurers so desperately crave.

In the process, insurers may provide to advisers and clients the clarity and surety they too desperately crave.

The issue of sameness comes up from time to time, with a perennial contender being trauma insured event definitions. In regards to this particular matter, however, the client and adviser value add may be less than assumed, with the cynic being forgiven for suggesting that consistent trauma definitions would simply mean all would be equally incomprehensible.

There are, however, areas within risk insurance where consistency would bring a clear advantage to all parties, and two of the most important of these are in the area of lapsing and reinstating of policies.

Lapsing

If insurance premiums are not paid, the policy will eventually lapse out of force and cover will end. The purpose of insurance is to provide financial protection, so therefore the loss of this protection is an event that deserves to be taken seriously.

Typical policy wording in regards to policy lapsing would be: “If any premium is not paid within 30 days of its due date, your policy will lapse and no benefits will be paid.”

According to the policy, if a premium due on 1 January is not paid, the policy will lapse on 31 January. Of course, if that was what was consistently said, and what consistently occurred, this article would end right here.

At least one insurer states: “If a premium is not paid when due, we will cancel the policy 30 days after we give you notice of cancellation in writing.”

While the 30 days is consistent, the date from which it applies may not be, ie, the 30 days dates from when the notice is issued rather than when the premium is due.

Another insurer states: “A period of 60 days of grace is allowed for the payment of each premium …”.

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

And yet another leaves those not legally qualified guessing by stating: “This policy will be cancelled and cover will cease if a premium is not paid in full by the date that it is due to be paid and after providing you with notice as required by the applicable laws”.

All this would be sufficiently complex for the adviser and the client, but not only do they need to contend with differing policy wording, they also need to bear in mind the insurer’s systems-generated notice and lapse process.

Sadly, for the client and the adviser, what is stated in the policy and what occurs in reality are not necessarily in alignment.

Several insurers were asked to provide details of their formal lapse procedure.

Insurer No.1

• 20 days before the due date a premium notice is generated; • 10 days after the premium is due an overdue notice is generated; • 31 days after the overdue notice is produced, a final overdue notice is sent out; and • 10 days after the final overdue notice is generated, a policy lapse letter is sent out.

In other words, the policy lapses 51 days after the premium due date.

Insurer No.2

• 30 days before the due date a premium notice is generated; • 13 days after the premium is due an overdue notice is generated; • 14 days after the overdue notice is generated, a final overdue notice is produced, except for direct debit which is created after 18 days; and • 30 days after the final overdue notice is generated a policy lapse letter is produced.

In other words, the policy lapses either 57 or 61 days after the premium due date, depending on the method of payment.

It is possible the adviser will receive copies of these notices, but consistency of procedure and delivery in this area was not checked.

No doubt, if questioned as to the reason for their particular lapse cycle, each insurer would respond “That’s just the way the system is programmed”. But if this is the case, is there any reason why the cycle, instead of being 30 – 13 – 14/18 – 30 days, could not be programmed as 30 – 15 – 30 – 15 days, which might be easier to remember?

Many advisers have horror stories they could relate about unintended mix-ups that occur when a client changes banks, moves from one address to another, or notification is simply not received. When something does go wrong, one can only be left wondering what an adviser is forced to say to the client who calls and asks: “How long do I have to pay my premium?”.

The safety conscious adviser would be tempted to respond: “Well it is hard

to say; let me have someone call the insurer and see what their particular lapse cycle is”. In doing so, the adviser will no doubt maintain safety at the cost of credibility.

Is there any reason why insurers could not get together and agree on a consistent lapse cycle between each other?

And surely the lapse cycle does not have to alter based on the mode of premium payment. How much safer and simpler would life be for the adviser and the client and how many lapses generated by misunderstandings could be avoided?

Reinstatement of policies

Having failed to appreciate the unique lapse cycle of their particular insurer, a client finds they need to reinstate their insurance.

Contact is made with the adviser who in turn contacts the insurer. The consistent response from the insurer is that a reinstatement form will need to be completed but … And it is what comes after the “but” where further issues can be encountered, ie, the matter of collection of premium arrears.

Prior to considering the practices of

for the client “andSadly, the adviser, what is stated in the policy and what occurs in reality are not necessarily in alignment.

”

premium might be adjusted upwards slightly.

Several insurers were asked what their company policy was in regards to the collection of premium arrears on reinstated policies. Their responses are transposed into the above example.

Insurer 1: Premiums are collected from the date of lapse to the next paidto date, ie, February to June inclusive.

Insurer 2: Premiums are collected for the three months preceding reinstatement, ie, March to June inclusive.

Insurer 3: All premium arrears are collected, ie, January to June inclusive.

Insurer 4: Sufficient to pay the next premium due, ie, June.

Insurer 5: Two months premiums are collected, being the unpaid premium that caused the lapse and the next premium due, ie, January and June.

Insurer 6: “We tackle this a bit on a case by case basis depending on the adviser, how long the policy was in force, etc.”

Winner of the “Logic Award” is Insurer 5, with Insurer 6 applying least logic to its policy.

Again, consider the adviser and the client. Realising a lapse has occurred, the adviser contacts the client and arranges for the reinstatement form to be completed. The client then asks, “What arrears do I need to pay?”.

Once more, the safety conscious adviser would be tempted to respond: “Well it is hard to say. Let me have someone call the insurer and see what their policy is in regards to this”. This results in further loss of credibility.

At T. Rowe Price, we believe our independence sets us apart. It’s why we’re free to focus on our most important goals— those of our clients.

Call Darren Hall on (02) 8667 5704 or visit troweprice.com/truth.

Summary

insurers, the logical position will be considered.

For example, a premium is due on 1 January. It is not paid, however, cover continues through to 31 January by virtue of the 30 day period of grace. If claim occurred during this period, the outstanding premium would be deducted from any proceeds payable.

On 31 January, however, the policy lapses and cover ends.

If the policy is reinstated – for example, on 31 May – logically, premiums should only be collected for the period when cover applied (ie, January). It would make sense to also collect the next premium due in June.

The exception to this would be in regards to level premium policies where the maintenance of the original level premium rate is based on the assumption that all premiums are paid. Thus the insured might be given the choice of paying premiums from the first unpaid to the date of reinstatement or alternatively, the level

The credibility of the financial services industry takes a hit every time there is a dispute between the insurer and the insured.

One of the surest ways of guaranteeing a dispute is to have inconsistencies that lead to a lack of clarity and surety as to the position of the affected parties.

There may or may not be merit in having consistency in trauma insured event definitions, but the difficulty of getting agreement between all insurers in regards to these complex definitions is possibly the reason the exercise has not yet been tackled.

It would, however, be difficult to imagine two more fundamentally important areas of risk insurance protection than the ability to maintain insurance in force and to reinstate it if it lapses.

The relative ease of obtaining a consensus in these areas might possibly encourage insurers to get some practice here and move onto more complex issues later.

Having said that, there are in fact other areas between lapsing and reinstatement, and trauma insured events definitions that need attention.

Col Fullagar is the national manager, risk insurance at RI Advice Group.

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www.moneymanagement.com.au August 18, 2011 Money Management — 19

OpinionInsurance e h t g n i m a r f e R challenge of e c n a r u s n i r e d n u The insurance industry has a long way to go to convince consumers that their lives are worth insuring, according to Michael Paff.

T

here is an old statisticians’ anecdote that says “if you stick your head in the oven and feet in the freezer, on average you feel pretty good”. While Australians have a similar approach to life insurance, the reality of the situation is that we are more at risk of getting burnt.

A new Rice Warner Actuaries report, Underinsurance in Australia, highlights that while the “underinsurance gap” is being addressed in part, the insurance industry still has a long road ahead in raising community awareness and encouraging consumers to take positive action on this issue.

While the industry continues to see a rise in the average sums insured for life insurance, they have yet to emphasise the importance of how the other types of personal insurance - total and permanent disability ( TPD), trauma and income protection - need to be effectively packaged with life insurance to provide the best protection solution.

The unfortunate truth is that if consumers don’t understand or haven’t been educated on the relevance of different personal insurance options, they will be even less likely to purchase them. Rice Warner research shows that life insurance is the most understood form of personal insurance by consumers - resulting in 83 per cent of eligible Australians having their average need met. However, there is a sharp fall in consumer awareness and take up of other offers, demonstrated by the fact only 22 per cent of Australians have adequate TPD and 24 per cent have income protection cover*.

From these figures we can ascertain that the challenge to the industry not only lies with addressing the underinsurance gap,

but also considering the needs fulfilled by the ‘living insurances’ - namely TPD, trauma and income protection.

The great news is that Australians are living longer. According to the Australian Bureau of Statistics the average life expectancy for males and females born in 2007-09 will rise to 79.3 and 83.9 years, respectively**. However, Australians are increasingly living with impaired lives - is this any surprise given the increasingly stressful lives each of us live?

One area where these effects continue to emerge is through the increased prevalence of mental health issues. On average, one in three women and one in five men will suffer an anxiety disorder in their lifetime***. AMP estimates that 10 per cent of all their customers disclose some form of mental health condition at underwriting.

This also translates through to the claims experience, with 19 per cent of all income protection claims paid in 2010 due to a mental health condition.

The unfortunate outcome of this is that customers perceive they are covered once they have life insurance, even though it will not protect them in many circumstances.

Addressing customer concerns

AMP recently conducted some research into our current and past customers to better understand how they view life insurance. The following are three key insights we identified: 1. Price per unit – Customers view trauma, TPD and income protection as too expensive in comparison to life insurance.

What this means is that we haven’t educated consumers on ‘the cost of risk’. The startling reality is that if all Australians had personal insurance, then for every one death claim we pay before age 65, we expect

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

to pay one and half TPD claims, three trauma claims and thirty one income protection claims. The increased cost represents the relative risk to them.

2. Underestimating the worst case scenario – Customers largely remain ignorant of, or significantly underestimate, the worst case scenario. Many may believe that their savings and family support are appropriate risk mitigation strategies. Illustrating the impact of this is a statistic from AMP’s income protection claims with age 65 benefit periods, where the average period of disablement is five and a half years. Had these customers only taken out a two-year benefit period, they would have remained without an income for an additional three and a half years. More importantly, would their savings have supported them for this period?

3. Creating and maintaining relevance – Where a financial planner is involved, the client attaches a clear and immediate need for cover. However, this relevance can diminish over time as children leave home and the mortgage is paid off. Customers generally don’t re-establish and broaden their view of how the life insurance products can continue to protect them as their needs change, for example protecting their retirement goals or the purchase of an investment property.

Forming a solution

From an AMP perspective, I can see that there are two key ways to address this industry problem. One is to look at existing insurance customers who need to consider the benefits of living insurance, and the second is to look to address Australians who are disengaged and have no personal insurance cover.

Increasing the level of cover for living

insurance benefits needs to be achieved through a comprehensive approach to education, advice and improved access.

This will help customers make an informed decision, understand its relevance and easily obtain cover.

Through the annual statement, the industry also has numerous opportunities to connect with the customer. Yet how often do we send communications that only reinforce the renewal premium, as opposed to promoting online calculators to re-assess needs, or even stories that bring to life the value of insurance? It would even help to provide a projection of the income protection monthly benefit to age 65 representing the potential advantage to the customer, easy execution of increases and additions online, or even the promotion of other cover types.

More often than not we make it a simple price based re-buy or cancel decision. The bigger challenge remains with those consumers who are non-users of life insurance products.

If we contrast against the general insurance industry, they have done a much better job in personalising the insurance offer. The customer has a tangible representation of what they are protecting, and the concept of selecting an excess for their car or home allows them to rationalise what risk they are willing to take on.

Interestingly, most car policies have an excess of under $1000, while the average consumer without income protection is essentially carrying an excess of $500,000 for that risk. As an industry, we have the responsibility to better highlight these risks and educate on the protection value life insurance offers.

The reality is that our biggest competition actually sits outside of our industry, namely the consumption of other goods and services that are a priority purchase.

As an industry that largely distributes our products through financial planners and employers, we have to some degree lost the close contact with our customers and the insight this can provide.

While we know current customers reasonably well, how well do we understand non-users of our products, or even the next generation of consumers? There is a need to spend increased time understanding the needs of non-users so we can better develop segmented niche products designed and marketed specifically at certain customer groups such as stay at home parents.

Such offers are going to be critical if as an industry we aspire to address the protection needs of all Australians.

Michael Paff is AMP director of wealth protection products *Rice Warner Actuaries, Underinsurance in Australia: A Research Report on the gap between the life insurance needs of Australian consumers and the amount of cover they hold, June 2011 **Australian Bureau of Statistics, Australian Social Trends March 2011, Life Expectancy Trends – Australia (4102.0) ***Australian Bureau of Statistics, National Survey of Mental Health and Wellbeing: Summary of Results, 2007

ResearchReview Researchers name their top quant analytics

Research Review is compiled by PortfolioConstruction Forum in association with Money Management. This month, PortfolioConstruction Forum asked the research houses: Which are the top five quant analytics that practitioners should always consider, and why? And how much credence does your firm believe quantitative measures should be given in analysing a fund?

Lonsec

The top five analytics used by Lonsec are: • Absolute Return – the point-topoint change in a fund’s total value (assuming cash distributions are reinvested) over a defined period. For periods greater than one year, the geometric average (compound annual growth rate) is calculated.

• Excess Return – the difference between a fund’s absolute return and its benchmark return for a given period.

Often referred to as alpha, positive excess return implies outperformance versus the benchmark.

• Standard Deviation – calculates how much the intra-period (typically monthly) absolute return varies from its average over a defined period (annualised for periods greater than one year).

It is commonly used to represent the risk associated with a fund.

• Outperformance Ratio – the percentage of months over a defined period (one year or more) where excess return is posi-

tive. Also calculated for ‘up markets’ and ‘down markets’ (defined by the monthly movement in the fund’s benchmark).

• Worst drawdown – the largest cumulative ‘peak to trough’ decline in a fund’s total value over a defined period (one year or more). Unlike absolute return, the value is not annualised. Its analysis provides an indication of a fund’s riskiness and the extent and frequency to which investors may have to tolerate drawdowns.

Qualitative factors generally account for 80 per cent of the Lonsec rating for most mainstream asset classes, while quantitative factors account for 20 per cent. Quantitative analysis allows greater insight into how funds perform in various markets and whether they have performed according to stated investment objectives. We consider additional quantitative factors to those above, and each factor’s contribution to the 20 per cent weighting may vary depending on asset class or strategy.

Mercer

In researching the quantitative aspects of a fund’s performance, we think the following data analysis should be considered: • Return data – gauges how a manager's process performs under different market conditions and how a manager may vary its process. This includes factors such as monthly or quarterly excess return, rolling one, three, five and 10-year returns, up/down market returns, returns during specific periods of market stress and sector or style influence.

• Risk data – gauges how well a manager understands and controls various sources of risk in a portfolio and, combined with return data, provides a better understanding of the overall risk efficiency. How risk data is used depends on how the portfolio will combine with others in a client’s overall scheme. Examples include volatility, tracking error, beta, sector/stock contribution to active risk, duration, spread duration, net exposure, gross exposure, leverage, portfolio turnover, days to trade to cash and

currency exposure.

• Portfolio data - particularly useful in sizing up how well the investment process described matches up with the resulting portfolio and what risk and style factors are at play. Clients should consider analysis of equity portfolios firstly, to quantify how aggressively the manager positions the portfolio relative to its benchmark; secondly, to identify what types of bets the manager takes in an effort to outperform its benchmark, and the relative importance of these bets; and, thirdly, to quantify the different types of style biases in the portfolio. Examples include: stock, sector, style or market risk exposures, consistency of style or risk exposures versus itself and peers.

Quantitative analysis is necessary, but it is not sufficient to analyse a fund on its own. Mercer devotes most of its research effort to the qualitative aspects of the analysis. Essentially, quantitative analysis is used to answer questions that arise during the qualitative review of a fund.

www.moneymanagement.com.au August 18, 2011 Money Management — 21

ResearchReview Standard & Poor’s Fund Services

The most critical quantitative metrics for advisers are those that relate to the manager's achievement of its investment objective:

Table Objective

Risk measure

To match the return of a specified benchmark Tracking error versus the benchmark To outperform a specific benchmark

A high information ratio

To maximise risk-adjusted performance

A strong Sharpe ratio relative to similar funds

To preserve capital for investors

Value at risk (VaR) measure

The top five measures Standard & Poor’s Fund Services (S&P) considers are detailed below (all use rolling three or five-year periods to avoid ‘end point bias’).

• Standard Deviation – the degree of fluctuation in a portfolio's return. The higher the standard deviation, the greater the magnitude of fluctuations from average return. Standard deviation assumes that returns are normally distributed, which limits its use for investments with unusual return distributions.

• Tracking Error – the standard deviation of excess return.

Tracking error assumes returns are normally distributed. It combines upside and downside risk. Consider an index fund that has no excess return relative to its benchmark when measured over a long period, but that produces an annualised tracking error of 10 basis points (0.1 per cent). If the benchmark returns 10 per cent per year, the fund's return should be between 9.9 per cent and 10.1 per cent (10 basis points on either side of the 10 per cent benchmark return) in 68 per cent of the observed one-year time periods (one standard deviation). Tracking error is also commonly used to assess an index fund’s success in matching its target index.

Active managers that are closely tied to a benchmark might describe expected deviation from the benchmark in terms of tracking error. It is less directly relevant for actively managed funds, although used in calculating the information ratio, which is often employed in comparisons of active managers.

For benchmark-unaware funds, standard deviation relative to peers or market is more appropriate.

• Information Ratio – the risk-adjusted return versus a benchmark, being excess return divided by tracking error relative to the benchmark. This is typically used to measure a manager's skill versus peers. An actively managed fund that has 100 basis points of excess return and 200 basis points of tracking error relative to its benchmark would have an information ratio of 0.5. All else being equal, higher information ratios are preferable.

• Sharpe Ratio – how much return is being obtained for each theoretical unit of risk, being an asset's excess return versus a risk-free asset divided by the standard deviation of returns. Sharpe ratios can be negative if the asset underperforms the risk-free asset. In the longer-term, it generally falls in a range from 0 to +1 - the higher, the better. This can be used to compare investments across asset classes with similar liquidity and valuation characteristics.

• Value At Risk – a portfolio's worst results over a given period, derived from a fixed percentage of the worst observations – the worst 1 per cent or 5 per cent, for example – or a fixed number of those observations. S&P uses it to assess strategies in the alternatives sector. If the worst annual return for the stock market in the past 50 years was -45 per cent, the stock market’s one-year value at risk based on roughly the worst 1 per cent of observations is -45 per cent. It’s a useful metric to quantify potential worst loss over a specified time period.

While past performance is important, S&P Fund Services considers how a manager is positioned for future success to be more significant. We use a variety of quantitative metrics to assess what a manager has done well and what they haven't – in effect, creating a quantitative, results-oriented assessment of a manager’s skill-set to support our qualitative research. In determining our forward-looking ratings, we do not use a fixed weighting to quantitative metrics as it could incorrectly lead to higher ratings on funds that have performed well over recent history, but we believe may not necessarily continue to do so.

Morningstar

Morningstar’s research team studies a host of quantitative analytics when analysing a fund. To restrict the list to only five is a tall order, but the following are some of our favoured metrics (in no particular order).

• Risk-adjusted Rolling Returns – risk-adjusted returns reward consistency and penalise downside risk. They are the bedrock of the Morningstar Rating (star rating) of a fund based on the afterfee returns over three, five and 10-year periods, and assessed against peer groups. Importantly, it penalises downside risk against cash more than upside risk.

• Information Ratio – this is another risk-adjusted measure taking into account a fund’s excess return after fees above the market, and the risk taken to achieve it. An information ratio above 0.6 should see a fund in the top quartile of its peers.

• Holdings-based style analysis – this holdingsbased score based on the size and value/growth orientation of the underlying stocks in a fund is a great way to understand a fund’s essential portfolio characteristics, especially for blending purposes, but also gives a deeper understanding as to how the fund has evolved through time. Analysing the characteristics of a portfolio today, relative to

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

peers, is likely to tell more about future potential risks than five years of return data.

• Indirect Cost Ratio – fees are a constant, which erode returns over time. Many studies have shown that high-fee funds tend to underperform peers and the market. It’s very important to understand the cost equation, which also includes understanding the cost from excessive turnover - both significant headwinds to a fund’s future outperformance.

• Por tfolio Manager Investment – while managers in Australia are not required to disclose their investment in a fund, they are in the US, and it’s a very interesting quantitative metric to observe. Our US team has analysed the performance of funds with a high portfolio manager investment, and those that do invest in their own funds tend to outperform those that do not, and have lower fees and turnover costs.

While we assess a large number of quantitative metrics when analysing a fund, our qualitative research process which results in a five-point rating scale is 100 percent qualitative. It is designed to be forward-looking, and we do not believe in putting a number on the influence that quantitative metrics have in that process. It is the subjective analysis of fundamental factors and whether performance matches what’s expected that drives our final view of a fund.

Zenith Investment Partners

While Zenith reviews a wide range of quantitative factors when assessing the quality and appeal of a fund, the top five quantitative factors that practitioners should focus on, in our opinion, are: • Absolute Return (3+ year timeframe) – ultimately, investors expect a return on their investment. The current environment is an excellent case study in the thought process of retail investors. If they feel they can get a competitive return on their money via a cash account or term deposit, they need to be convinced to take on some investment risk, and they must be adequately compensated by a more attractive return. Investors are not so concerned about outperformance to a benchmark if a fund has provided them with an attractive absolute return above that they could have earned in the bank. This is not to say that outperformance of the fund’s market benchmark is not important and an important component of its assessment and rating – it is. But ultimately, an investor wants a positive return, irrespective of market conditions over the longer term, so this should be the first assessment criteria.

• Standard Deviation – another critical concern to investors is the volatility of their investment so assessing a fund’s standard deviation is important.

It is a more absolute measure of risk, whereas measures such as tracking error mean very little to the end investor and, often, their adviser.

While downside deviation and/or the Sortino ratio are specific measures of downside volatility, and therefore can be better measures of the kind of volatility that concerns investors, standard deviation is well understood.

High levels of standard deviation signal high levels of volatility with which investors are usually not comfortable.

• Income & Growth Return Split – as a general rule, the industry does not place enough focus on the breakdown of income and growth in a fund’s return. It can tell much about the level of portfolio activity (trading). A manager with high levels of portfolio activity is likely to produce higher levels of realised capital gains, which are distributed within income distributions. This is unlikely to suit high marginal tax rate investors where they will pay tax on this income, whereas this type of manager could be appropriate for a super fund investor where the after tax return is not as highly impacted given the super fund’s lower tax rate. This factor is extremely important when selecting appropriate funds for different tax rate investors.

• Cumulative Return Chart – consistency of returns is also important to investors and, while there are a myriad of statistics, one of the easiest is to ‘eyeball’ its cumulative return chart.

In an ideal world, the shape and slope of the return chart should be upward from left to right without large peaks and troughs. This would indicate the fund has generated consistent, positive returns over time.

• Sharpe Ratio – one of the more commonly known and understood risk/return measures, Sharpe ratio is important in assessing how a fund’s return is generated. It is arguably preferable that a fund generates attractive returns with lower volatility than higher volatility, and Sharpe ratio provides a good measure of this in an absolute sense. It reflects the increase in return above the risk free rate of return (cash), relative to the risk of the fund where risk is measured as standard deviation of returns. A Sharpe ratio above 1.0 is an excellent result as it indicates the fund is delivering a greater amount of outperformance for every additional unit of risk.

van Eyk Research

Quant measures are important tools in analysing the performance of fund managers.

They enable investors to determine not only how well a manager is performing but what is actually driving that performance, how much of it can be attributed to the skill of the manager, and whether that success is likely to continue.

The quantitative tools that van Eyk believes are the most important are: • Three-year rolling excess returns – a period of three years is usually long enough to capture performance covering different conditions in economic and market cycles. Fund managers may exhibit strong or poor relative returns over short periods of time when their style is in or out of favour. For instance, a value manager with a quality bias may underperform significantly during a strong upward lift in markets driven by speculation. Three years is generally enough time to assess performance over a variety of market conditions. While you can’t necessarily extrapolate past performance into the future, past returns are clearly a strong indicator of manager skill. We find three-year rolling excess returns more useful than cumulative excess returns in deriving more conclusions about the consistency of alpha generation and how this changes over time. It is also useful to track how alpha generation has evolved over time where funds under management have significantly increased.

• Information ratio – the excess return produced by a manager divided by the tracking error (where the latter is a measure of how much returns are likely to differ from the manager’s benchmark). The higher the information ratio, the better the manager has efficiently converted the level of risk taken in a portfolio into returns. Again, returns are best measured over rolling three year periods.

• Attribution analysis – Shows the proportion of a manager’s excess returns from being overweight the right sectors and underweight the wrong sectors (and for international equity managers, the right and wrong regions) and what stocks have contributed the most to that performance. It shows where the manager’s

strengths lie and shows whether performance has been broad based or driven by one or two stocks, on the basis that broad-based performance is probably more repeatable.

• Style analysis – examines the underlying portfolio to determine whether positions reflect what you’d expect from the investment process.

It can highlight anomalies between what the manager claims is its style and the reality of what is in its portfolio. Analysis of active sector positions and market capitalisation biases explains the extent to which performance has been due to structural biases in a portfolio as opposed to active investment decisions. If, for example, a manager has a structural bias towards small cap stocks and these have outperformed, that needs to be taken into account. It gives you a feel for whether the manager’s choices are a reflection of considered investment decisions or whether, for example, there might be dominant personalities on the investment team, whose opinions are being given excessive weight, leading to consistent overweights and underweights in certain sectors.

Deviating from style is not always a bad thing, however, if it can be justified.

• Assets under management – many investment managers with strong track records attract significant funds under management. But, owning over 0.5 per cent of the free float value of a market seriously impacts a manager’s ability to be nimble or flexible in its investment decisions. Often where they have a competitive edge in stock selection, they may only be able to buy or sell just a small portion of what they planned before the pricing inefficiency has been corrected. It is much more difficult to achieve a strong information ratio with high levels of funds under management.

It is important to remember that quant measures should not be used in isolation. You cannot analyse a fund in full solely using data from your computer screen. Quant measures are most useful when they are used in conjunction with qualitative measures, which must include talking in depth to the people who run the fund.

In association with

www.moneymanagement.com.au August 18, 2011 Money Management — 23

ResearchReview The global economy – lessons learned In mid June, eight members of the PortfolioConstruction Forum Academy travelled to Boston, to undertake a four-day Harvard Business School short course on the global economy, led by Professor Niall Ferguson. These are some of the group’s key take outs.

What have we learned?

The course firstly considered the lead up to the crisis of 1914 and the similarities with the period leading up to 2007. Both ages of globalisation were marked by increased growth, decreased inflation and decreased volatility causing a shift in expectations about volatility and risk, which in turn encouraged leverage.

In both cases, something triggered a crisis. In 1914, it was a geopolitical event; the assassination of Austria’s Archduke Franz Ferdinand and his wife. In 2007, it was the subprime crisis. In both cases, liquidity dried up overnight and necessitated a massive increase in state involvement in the economy. In the aftermath of 1914, it was very difficult to reduce the role of government in the economy – globalisation took 65 years to recover.

What next?

Does a crisis of sovereign debt always end in inflation? Or is it more likely that real interest rates will increase while rates of growth decrease? We considered the lessons of German hyperinflation in the early 1920s, the Great Depression of the 1930s, and the Japanese experience of the 1990s, as well as more recent events including state capitalism, the difficulties created by a property crash in Dubai, the risks and opportunities surrounding energy and politics in Iraq, and whether the recent growth in Brazil is sustainable.

A substantial amount of time was spent discussing China, its relationship with the US, and the implications for the global economy. The group consensus was that ‘Chimerica’ is unsustainable – a marriage of convenience for China that it no longer requires. China’s 12th Five-Year Plan focuses on innovation and services – it will invest in research and development to move from replication to innovation, and increase internal consumption and urbanisation.

Professor Ferguson proposed that the result of the breakdown of ‘Chimerica’ is structural change in the global economy, rather than mean reversion. The likely outcomes are lower growth and higher unemployment, which is not responsive to monetary policy.

His final statement was most revealing: “The key decisions of the next 20 years will be taken in Asia, not the West”.

By Greg Hanson, Colonial First State

Multiple global scenarios

Europe European economic disintegration is under way. Monetary union without fiscal integration places immense pressure on the European Union and the Euro. While the break up of the Eurozone has a low probability at this stage, it can’t continue to bail out its troubled member economies. There is a high probability that Greece will default this year, via a deferral or restructure of debt. Ferguson did not rule out the rapid disaggregation of EU member countries, particularly the weaker states.

United States There is a very high probability of a double dip recession in the US, despite the Federal Reserve being highly focussed on not repeating past policy mistakes, particularly around the Great Depression, where money supply was restricted and credit availability was very tight. The Fed’s monetary accommodation is in part designed

to offset an increase in household savings and increase (velocity) money in circulation, but it is proving to be tricky. The US requires sustainable growth in excess of 2.5 per cent per annum (preferably above 3 per cent) to reduce high unemployment, thus placing more pressure on monetary stimulus.

China China’s development strategy is based on three core areas – productivity (leadership, planning, technology, internal migration); export growth (managing the exchange rate, ie, keeping it artificially low, access to new markets, cheap labour); and increasing internal consumption, which is currently around 36 per cent gross domestic product (GDP) compared to 77 per cent in the US. Chinese authorities are most concerned about social unrest, and so are focussed on keeping a lid on inflation, particularly food and wages inflation. The new Five Year Plan is aimed at China becoming an innovation

Three crucial themes impacting the global economy

To close the course, Professor Ferguson discussed three crucial themes impacting the global economy.

European sovereign crisis Although the Euro was originally created to provide financial integration across Europe, it has done the opposite. There is massive financial divergence between member countries. Ferguson argued that bailouts are just government short-term bandaids that do not address the source of the problem. Inevitably, Greece will default – more than likely this year. In fact, Greece should have never been allowed to join the Euro, as there were many conditions of membership that were never met, he explained. The real concern now is with Spain and Italy, he warned – they are much larger economies and have far bigger debt than Greece, so if they default, the consequences will be dire for the Euro.

US double-dip There are remarkable similarities between the US today and the US during 1936 and 1937, Ferguson explained. In 1937, the Federal Reserve tightened monetary policy by raising the official cash rate. Today, the Fed is also entering the phase of tightening monetary policy. As a result of the Fed’s actions in 1937 the US, after four years of economic growth of between 5 per cent and 14 per

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

society, less reliant on manufacturing and cheap labour.

Middle East What emerges from the conflicts and uprising in the Middle East could be far more unstable than previous regimes, Ferguson warned. This is positive for commodities, especially oil prices, longer term.

Emerging markets Emerging economies will soon account for over 50 per cent of global GDP growth, while the developed world accounts for a very large percentage of global debt to GDP. Demographics also favour emerging markets. Expect to see a step-up in developed world exposure to emerging markets (currently very low), but expect volatility in these financial markets.

By Richard Kovacs, Ottomin Investment Group

cent per annum, plunged back into another depression – a depression within a depression, if you like – and the US share market then plunged 54 per cent.

The key question, Ferguson said, is whether the US sharemarket will follow a similar path in the years ahead. He was very cautious (and is himself not invested in equities).

Emerging markets emergencies There is a lot of instability in the emerging world, with unemployment a lot higher among youth compared to other age groups – and political corruption. While the politicians are not providing employment opportunities for the young, they do give them cell phones – the inevitable outcome, Ferguson argued, is revolution. He expects we may well see the recent public uprisings in Egypt, Syria, and Libya spread throughout Africa and the Middle East.

Political unrest is a major concern for the price of oil, and Ferguson believes it is likely to appreciate over coming years. This will impact greatly on the US economy, with rising oil prices acting like a tax on its economy, leading to higher inflation and less consumer spending. That’s another reason why the US is likely to doubledip at some point.

By Peter Lanham, Lanham Investment Advisory

Research round-up PortfolioConstruction Forum asked the major funds research houses for an update on their on their most recent projects.

Lonsec

• In the short term, the impact of the Government’s proposed carbon tax on many companies and households should be low to moderate, as only major emitters are included and the carbon tax is set at a low level, according to a recent Lonsec Perspective. However, Lonsec argues that from 2015, the impact will increase and, overall, the impost of a carbon tax will be a net economic negative for Australian households, businesses and equity markets. It is unlikely to alter the growth in global carbon emissions, unless the biggest emitters (US, China, India and Russia) employ similar emission schemes themselves.

• The performance fee structure of most managers in the Australian equities long/short fund peer group is appropriate, according to Lonsec. However, some managers do employ “inappropriate low performance hurdles”, the house found in its examination of performance fees.

While managers that employ performance fees should reduce their MER (base fee), long/short products tend to have relatively high MERs compared to the traditional long-only Australian equity large cap sector. “To some extent, this is justified, given the relatively low capacity limit of these products and the additional costs associated with employing shorting skills,” Lonsec writes. Nonetheless, some managers would “forge improved alignment of interests with investors” if they reduced their MER to reflect the existence of a performance fee, the research house concludes.

• Lonsec has appointed Amanda Gillespie to the role of general manager of research to lead the firm’s research team,

replacing Grant Kennaway. Gillespie has been with Lonsec for 10 years, and was previously head of the firm’s investment consulting division, a role that will now be filled by Lukasz de Pourbaix, who has worked as a senior investment consultant with Lonsec since 2008. In addition, Anh Nguyen has commenced with Lonsec as a quantitative analyst.

Mercer

• Me rc e r h a s a p p o i n t e d Ru s s e l l Clarke to the newly created position of global chief investment officer (CIO), mainstream assets (equities, property, fixed interest and multi-asset portfolios), with regional CIOs reporting to him. Clarke will report to Mercer’s global CIO, Andrew Kirton. Andrew Howard has been appointed to Clarke’s previous position as CIO, Asia-Pacific, and Phil Graham has been appointed Deputy CIO, Asia-Pacific. Howard has been a senior portfolio manager with Mercer for seven years, working closely with Clarke. Graham has been a senior portfolio strategist since 2007.

Morningstar

• Former Lonsec general manager of research, Grant Kennaway, is to join Morningstar in the newly created position of head of fund research, Asia-Pacific.

Kennaway will be responsible for developing Morningstar’s fund research business in the Asia-Pacific region. Morningstar has also appointed Nigel Crampton as head of sales.

Standard & Poor’s Fund Services

• Standard & Poor’s Fund Services (S&P) has launched S&P Por tfolio

Services, offering retail intermediaries a non-tailored approved product list and model portfolio suite of best of breed funds. The service includes monthly performance reporting and quarterly economic commentary. Boutique financial services firm, 2020 Directinvest, has adopted tools for use with its DIY investor client base.

• Global listed infrastructure funds performed strongly in 2010, with positive inflows, according to S&P’s latest review of the sector. “Growth continues to come from an international trend to private ownership and management of these assets and, unsurprisingly, there has been strong growth in emerging m a rk e t s,” t h e re s e a rc h e r s a i d . It affirmed its ratings on nine infrastructure funds, upgraded one, and assigned two new ratings to infrastructure offerings from Magellan and RARE Infrastructure.

• S&P managing director, Mark Hoven, resigned in July, citing a shrinking of his duties after the firm opted not to implement a strategy to become a global business, including the merger of its European and Australian fund ratings businesses.

Hoven joined Standard & Poor's in 2001 as head of market development. Head of research, Leanne Milton, will run S&P on a day-to-day basis, while vice president sales, Jose Ordonez, will manage the commercial aspects.

van Eyk Research

• Not all investment strategies are suited to a separate management account (SMA)-style product, according to van Eyk. The type of strategy used and how it was implemented in a SMA helped determine the success of an individual portfolio, van Eyk found in its recent review of 19 Australian Equities SMAs. The SMA structure is better suited to a concentrated portfolio of a small number of stocks, to reduce turnover and keep transactions costs and tax liability as low as possible, the research house said. Neither a boutique model of SMA, nor those marketed by large fund managers, was found to be clearly superior. van Eyk found that boutiques may have a better handle on the implementation issues, but larger providers are often better resourced, and can have greater access to sources of investment and market infor mation. van Eyk awarded five ‘A’ ratings, eight ‘BB’ ratings and six ‘B’ ratings across the 19 SMAs it reviewed.

• van Eyk has signed a two-year agreement with advisor y dealer group, Genesys Wealth Advisers. The deal gives Genesys advisers access to van Eyk’s web-based iRate research software, including fund manager ratings and sector reviews, alliance partner research, the direct share module, risk ratings and risk profiles.

Released in July

• Lonsec – Month in Review • Lonsec – Preset Model Portfolio Performance report • Lonsec – Quarterly Outlook • Lonsec – Hedge funds long/short sector review • Lonsec – Core Fund Model Portfolios mid-year review • Lonsec – Global emerging markets sector review • Lonsec – Mortgage funds sector review • Lonsec – Perspective: Global equities product benchmarking • Lonsec – Perspective: Survival guide to emerging markets • Mercer – Monthly Market Review • Morningstar – Monthly Economic Update • Morningstar – ETF Monthly newsletter • Morningstar – Monthly Index Survey • S&P – Monthly Economic & Market Report • S&P – Australian fixed interest sector review • Van Eyk – Investment Outlook Report • Van Eyk – Australian Equities SMA sector review • Van Eyk – Global Macro sector review • Van Eyk – Special report: A review of 2010-2011 • Van Eyk – Discussion: The importance of cash flow • Van Eyk – Discussion: Aussie dollar likely to go higher • Van Eyk – Discussion: Stocks cheapest in 20 yrs, time to buy?

• Zenith – Monthly Economic Report • Zenith – Australian equities long/short sector review • Zenith – Agri MIS product updates

Upcoming in August

• Lonsec – Natural resources sector review • Lonsec – Australian Equities concentrated sector review • Lonsec – Direct property subsector reviews • Morningstar – Alternative investments sector wrap • Morningstar – Large cap international equities report • S&P – Listed infrastructure sector review • S&P – Global REITs sector review • S&P – Australian equities large cap sector review • S&P – Alternative strategies equity sector review • Van Eyk – Australian equities high income sector review • Van Eyk – Australian equities mid cycle sector review • Zenith – Global equities sector view • Zenith – Global equities long/short sector review

In association with

www.moneymanagement.com.au August 18, 2011 Money Management — 25

Toolbox Preparing for retirement – no small business It is critical for the financial services industry to work with business owners to help them prepare for comfortable retirement. Sam Rubin examines different strategies planners could use to demonstrate value to potential SME clients.

T

here are 1.26 million small to medium businesses in Australia.

Approximately 40 per cent of their owners are over the age of 50, and up to 40 per cent have no formal business plan. Small to medium enterprise (SME) owners have their homes on the line, which equates to an estimated $1.6 trillion.

The financial services industry can play a vital role in suppor ting and protecting the financial wellbeing of this segment via quality business and financial planning advice.

One of the main issues facing many SME owners is the fact that their retirement capital may be based on over inflated expected business sale prices.

Another issue is the uncertainty over who will purchase their business. As average SME owners are in their 50s, we would expect over the next decade an oversupply of SMEs for sale, which may reduce business sale prices based on supply/demand economic theory.

Financial planners are in a great position to assist business owners in preparing their business for sale, as they themselves may be small business owners and could be facing similar issues. By expanding their service offering, planners will have access to a new revenue stream for their existing client base.

Planners can also partner with other financial services professionals to focus on servicing the SME market. Providing business services to this market has been proven to be financially and personally rewarding.

True business value

It is vital for financial planners to understand the true business value through an independent valuation. If planners don’t understand the true value of their client’s business, it is like trying to provide someone with a pre-retirement plan without any information on their superannuation account, such as balance, contributions, earnings and portfolio. It would be impossible to complete a full statement of advice.

An independent valuation will provide

As part of the social security work bonus scheme, individuals over the pension age and still working will have their first $250 of the fortnightly employment income exempt from the incomes test. From 1 July 2011, an employment income concession bank has been introduced to enable pensioners to accrue any unused amounts of the $250 fortnightly exemption (to a maximum of $6,500).

Where you have an SME client operating their business as a sole trader and they are at, or over, the pension age, one strategy could be to discuss incorporating the business to maximise their social security age pension.

Example – Lauren the business owner a true indication of what their retirement capital may be upon sale. It will also assist in understanding the qualitative and quantitative business fundamentals in the matters that may have an impact on the business value.

One business valuation method widely used in the market is the market capitalisation method. This method is based on the following equation: business valuation = adjusted EBIT x capitalisation factor.

Adjusted EBIT (Earnings Before Interest & Tax)

EBIT is adjusted to normalise expenses and revenue items that are stripped out by the owner. For example, when the business premises are owned by the business and no rental costs are incorporated into the financial statements, or when owner’s salaries are below market rates.

Capitalisation factor

This is a multiple that is used to determine the goodwill value of the business.

This includes qualitative and quantitative measures, such as business IT systems, reliance on business owner, Sole trader

Company - salary

$30,000

$30,000

Income / salary Work bonus - exempt income Assessed income Per fortnight Threshold Excess income Pension reduction

Some of the financial planning strategies available to SME clients could cover maximising social security benefits, diversifying assets and utilising superannuation.

Social security

Figure 1

(after allowable deductions)

SME financial planning strategy opportunities

$0

$6,500

$30,000

$23,500

$1,153.85

$903.85

$150

$150

$1,003.85

$753.85

$501.92

$376.93

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

security of premises (especially for a retail business), KPI process for employees (eg, is there a system in place to make employees work towards improving business profitability). Financial planners need to work with owners to understand these fundamentals and their relationship with the valuation. These could include some of the following: • IT business systems.

• Reliance of the business owner.

• Lack of staff support.

• Debtors turnover ratio.

• High level of staff turnover.

Planners could work with the business owners and implement the following strategies: • Implement new/upgraded IT business systems to maximise reporting capabilities and business efficiencies.

• Help transition the business owner to the back office while implementing an employee incentive program to empower staff to suppor t/ser vice customers.

• Create an employee incentive program with key performance measures and indicators; this should include regular employee reviews and training.

• Implement a discount incentive to pay bills on time (such as a five per cent discount) and review all debtors and whether they are appropriate.

Financial planners have the opportunity to incorporate business services as part of their value proposition to their SME clients, supporting long term business growth for themselves and their clients. In marketing to SME clients, planners could also focus on SME financial planning strategies, which would help build their business as a specialist in this market.

Lauren is 65 years old and runs a small catering business. She operates as a sole trader and last year had a net profit of $30,000 from the business. Apart from her home, Lauren owns minimal assets and has approached her financial adviser to ask about her age pension entitlements.

Lauren’s financial adviser suggests that she consider operating under a company structure and receiving a salary of $30,000 to increase her age pension entitlements.

Please refer to Figure 1.

Extra pension received is $125 per fortnight or $3,250 per annum.

Diversifying assets - superannuation

Generally, incorporated business structures pay owners a salary up to $80,000 to cap the tax at 30 per cent. Financial planners can assist owners by suggesting retirement and taxation strategies.

Where the business cash flow can afford to, advice can be centred on utilising the individual owner’s superannuation caps.

This would help reduce their retirement risk by diversifying assets away from full reliance on business assets for retirement, at the same time reducing taxation to a 15 per cent tax rate.

Financial planners have an opportunity to provide quality business advice, coaching services and tailored financial planning solutions by truly adding value (which they can control) by maximising business valuations and overall retirement capital for clients. For many planners thinking about how the new Future of Financial Advice world will affect their own SME business, incorporating these services into their value propositions can support growth in both their business and their clients’ businesses.

Sam Rubin is head of technical services at IOOF.

Appointments

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

PRAEMIUM has selected Michael Ohanessian as its chief executive officer to replace company founder, Arthur Naoumidis, who resigned suddenly on 8 August.

Naoumidis remains the major shareholder and will continue as an adviser.

Ohanessian’s experience in technology-related businesses brings a combination of operational and strategic capabilities to the role. Following a ten year career at Mobil Oil, Ohanessian joined the Boston Consulting Group, where he consulted to clients in industries such as banking, airlines, mining, packaging, sports, oil and gas, retailing and biotechnology.

Ohanessian was also the chief executive of Vision BioSystems, where he transformed the business from a small contract manufacturer to a vertically integrated medical diagnostics business.

More recently, he was chief executive of Genetic Technologies Limited and was involved in investment management and corporate advice with Lion Capital.

ZURICH has strengthened its life

Karl Bird underwriting capacity in Queensland with the appointment of Karl Bird to its Brisbane-based team.

Bird brings 10 years experience to the multi-line insurance provider, and was previously an underwriter with AXA’s Queensland office. He also worked for the Royal London Group and Legal and General in the UK. Zurich’s general manager sales and marketing for retail risk, Philip Kewin, said the company has been vigilant in ensuring its support capacities keep apace with the “exceptional growth over the last two years”.

ASTERON has appointed Andrew Bridgland as sales manager for

the South Australia (SA) and Northern Territory (NT) regions.

Bridgland joined Asteron’s SA team on 27 July. He is responsible for working closely with advisers to grow their risk revenue, coaching advisers and key licensees on their sales strategies, and supporting adviser and referral partner presentations.

Bridgland brings more than 30 years industry experience to the role - 10 of which were recently spent running his own financial planning practice in SA. Prior to joining Asteron, he was a senior business development manager with MLC in SA, specialising in risk sales.

Move of the week ST GEORGE Financial Planning has announced a number of key appointments aimed at injecting new momentum into its three brand advice businesses.

Ian Knight has been appointed to head up Financial Planning at Bank of Melbourne, while Annie Wong would be head of business operations at St George Financial Planning.

The new head of distribution at St George Financial Planning is Jason Dunn, who was previously national client value proposition (CVP) director of advice at BT Financial Group.

The banking group said Knight had been tasked with delivering on Bank of Melbourne’s growth strategy, which was to see planner numbers rise to 50 within three years. Wong would be responsible for business operations across the three brands of the St George Banking Group’s advice business, while Dunn would be responsible for distribution across brands.

and building materials). Prior to his work with Merrill Lynch, Maia was a research analyst with a Sydney-based boutique brokerage house, as part of the small caps team, covering resources, energy and materials.

COLONIAL First State Global Asset Management (CFSGAM) has appointed Mario Maia as a senior analyst within the global resources team, focussing primarily on the soft commodities sector.

Maia joins CFSGAM from Merrill Lynch Australia where he held the role of research vice president (chemicals, paper and packaging, and advertising sectors) and, before that, research associate (metals, steel

FINANCIAL services technology provider, GBST, has appointed Nick Frolich to its wealth management business.

Based in GBST’s Sydney office, Frolich will be responsible for driving sales and new business

Opportunities OFFSHORE FINANCIAL PLANNERS Location: Hong Kong, Singapore, Malaysia, Spain, Cyprus, France, UK, UAE, Europe Company: Sterling Associates Description: This financial services recruitment company is looking for self-motivated, dynamic, goal oriented individuals to fill a number of financial planning roles with its clients across the globe.

After some initial training, your role will be to provide a comprehensive range of well known and internationally acclaimed tax free products to the expatriate community.

These positions are not for the faint hearted, but as many thousands of offshore advisers continue to prove the monetary rewards and job satisfaction for success are substantial – travel, fun, adventure and career development for those successful is guaranteed.

These roles are predominately commission only, with full back office support provided – however, there are also a number of salaried + bonus positions available in certain countries.

For more information and to apply, please visit www.moneymanagement.com.au/jobs and www.sterlingassociates.net, or send your CV in the strictest confidence to: inquiry@sterlingassociates.net.

PARAPLANNER Location: Melbourne Company: FS Recruitment Solutions Description: This organisation is looking for a paraplanner with at least nine months

across the Australian, New Zealand and Asian wealth markets. He will have a particular focus on the firm’s Composer platform that administers managed funds, structured products and retirement products.

Frolich previously worked for DST International (DSTi), where he was director in charge of sales and marketing for the past 10 years, and established the firm’s retail wrap offering. With 25 years experience in financial services, he has also held senior positions at Macquarie Bank.

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

experience. If successful in your application, you will be presented with a wide variety of tasks that will challenge your ability to research and learn different strategies to help the client achieve their goals.

The key to your success in this role will come down to the pride you take in your work, diligence in keeping up with legislative and compliance issues, and attention to client goals and efforts to make statements of advice more personalised.

To be considered for this position, you will have a minimum of nine months experience working in a financial planning business supporting advisors, along with a positive attitude and a minimum of DFP 1-4.

In return, you will be provided with professional support /resources, up to date investment research, and a regularly updated career development plan.

For more information on this position, please visit www.moneymanagement.com.au/jobs or contact Kiera Brown, FS Recruitment Solutions: kbrown@fsrecruitmentsoltuions.com.au.

FINANCIAL PLANNING OPPORTUNITIES Location: Darwin Company: Terrington Consulting Description: Terrington Consulting is interested in receiving applications from qualified financial planners who are ready to make their next move.

Whether you are seeking an opportunity with a firm, dealer group, bank, or are interested in hearing about ownership or equity opportunities,

you are encouraged to send your CV for consideration.

Current positions available are diverse and at all levels, including: financial planner, large chartered accountancy firm, Adelaide; financial planner, Darwin; senior financial planner (business start-up); senior financial planner (equity option), Adelaide; financial planner, Iron Triangle; financial planner, Clare Valley; financial planner, Alice Springs.

For more information and to apply, please visit www.moneymanagement.com.au/jobs or www.terringtonconsulting.com.au.

PARAPLANNER Location: Adelaide Company: Terrington Consulting Description: This recruitment company is now taking applications for an experienced paraplanner to join a high calibre, professional team of paraplanners based in Adelaide.

The successful applicant will be responsible for managing and adding value to an existing book of business through the preparation of first-class statements of advice, while strengthening key client relationships through the provision of exemplary service.

This is a truly diverse paraplanning role and will see you gaining exposure to SMSF, investments and risk.

If you are passionate about providing real value to each unique client in line with their specific situation and long term needs, you are encouraged to apply.

For more information, please visit www.moneymanagement.com.au/jobs and www.terringtonconsulting.com.au or contact Emily on 0422 918 177.

FINANCIAL PLANNERS Location: Hong Kong Company: ipac Asia Description: ipac Asia is an international financial advice and investment group that has been helping clients achieve their financial and lifestyle goals in Asia since 2002. The business has a presence in Hong Kong, Singapore and Taiwan. ipac Asia is a member of the Global AXA Group.

The firm is now on the lookout for entrepreneurial and top calibre candidates to join its Hong Kong team to offer all-round financial solutions.

In return, ipac Asia offers an attractive base salary and an excellent bonus/commission package, a generous marketing allowance, incentive trips/overseas conventions, a comprehensive professional training program, and sponsorship of your work visa if needed.

You must be tertiary educated or above, with a minimum of three years financial planning or relevant experience, and have a stable work history.

To express your interest in these exciting opportunities, please visit www.moneymanagement.com.au/jobs or forward your resume to vivian.chan@ipac.com.hk.

www.moneymanagement.com.au August 18, 2011 Money Management — 27

Outsider

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

Substance wins over looks OUTSIDER has old-fashioned views about the relationship that should exist between governments, departments and agencies.

That view is, essentially, that duly-elected governments set policy which is then translated into legislation which, in turn, is administered by public servants employed within government departments, including regulatory agencies such as the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

Those agencies, notwithstanding the views of some bureaucrats, are then ultimately answerable to the Parliament.

Along the way, of course, Outsider accepts that good public servants will provide their government masters with independent, frank and fearless advice.

He is therefore not at all amused by the Government’s recent tendency to refer to government regulatory agencies such as ASIC and APRA as “stakeholders” – something which could be construed as imbuing

them with a right to adopt public positions rather than simply and discreetly providing expert, independent, frank and fearless advice.

Outsider believes the Government’s approach has the capacity to imbue otherwise suitably anonymous civil servants within these agencies with the same celebrity status that seems to have attached to successive governors of the Reserve Bank.

While Outsider can appreciate that the Government is happy to have an independent Reserve Bank governor such as Glenn

Stevens take the blame for raising interest rates, he is not so sure the Government needs to have the chairmen of ASIC and APRA, Greg Medcraft and John Laker, being quite so up-front and media friendly in the middle of

Did you lose $8 billion this week?

NO doubt Outsider is not the only person in Australia who has been keeping a nervous watch on the stock market in the past few weeks.

Global markets have certainly taken worried investors, big and small, on a roller coaster ride of late. Being a career journalist of meagre means, Outsider can ill afford to have his scant superannuation nest egg ravaged by the incompetence of foreign politicians.

With the Australian Stock Exchange fluctuating tens of billions of dollars both upwards and downwards – in a single day at some points – Outsider eventually decided the best thing to do was effectively plunge his head in the sand and wait for the storm to pass. Besides – no matter how bad it seems, there’s always somebody else worse off.

For example, the dent to Outsider’s super is truly a pittance compared to the losses of Mexican multi-squillionaire Carlos Slim.

The septuagenarian telecommunications tycoon lost (by varying reports) between $6.7 and $8 billion dollars in the week prior to Standard & Poor’s downgrade of the US credit rating due to a slide in his company’s share price and a decrease in the value of the Mexican peso. (Outsider does note with some amusement that while most people would consider $1.3 billion a large sum of money, for Slim it is merely a rounding error.)

controversial policy debates.

Celebrity status or not, Outsider is pleased to note that Stevens, Medcraft and Laker are proof that tax-payer dollars are at least being expended on substance rather than looks.

“

Out of context

“We don’t know what Bob Katter thinks. But he used to be an AMP planner in the 1970’s, so we’ll find out if he’s still receiving trail commissions.”

FSC chief executive John Brogden

Outsider can’t even conceive of how most people would react to losing that kind of moolah, but he imagines taking out a second mortgage would generally not be adequate to offset such a loss. Fortunately for Slim, he won’t be needing to refinance just yet – he was still valued at a not unhealthy $64.4 billion, at last count. Poor thing.

Shortening the FOFA gestation IT says something about the recent Financial Services Council (FSC) conference on the Gold Coast that one of the most memorable aspects was Assistant Treasurer, Bill Shorten’s cross-referencing of the time being taken to develop his Future of Financial Advice legislation and the gestation period of a sperm whale.

Outsider has always regarded Shorten has having a somewhat bizarre approach to public speaking and, for a time, your ageing correspondent was collecting the minister’s speeches so that he could collate what he liked to describe as “Shortenisms”.

A particular Shortenism is his oftenused Lewis Carroll reference, “If you don’t know where you’re going, any road will take you there”, but he has made many

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

other whimsical references in the period he has been responsible for the financial services portfolio, not least, “If midwifery is the mother of all professions, surely financial planning is one of the human family’s oldest uncles”.

However, for those attending the FSC conference it was the sperm whale reference that took the biscuit, which might explain why FSC chief executive, John Brogden, later jokingly suggested the minister might have dined on an exotic cookie.

Outsider being nothing, if not precise, points out that the gestation period of a sperm whale is 16 months, and financial planners have been waiting a bloody sight longer than that for the first draft of Shorten’s legislation.

vows to investigate the independents at the FSC annual conference.

“Every commodity boom that Australia has had through the last 50 years we have managed to stuff up.”

Saul Eslake, program director of productivity growth at the Grattan Institute, speaking at the FSC annual conference.

“Australia does not have a public debt problem, despite the best efforts of the Opposition to confect one.”

Saul Eslake, again.