Money Management (August 25, 2011) by Cirrus Media

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Vol.25 No.32 | August 25, 2011 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

ANZ’S NEW LOAN FACILITY: Page 11 | RATE THE RATERS: Page 19

Lonsec reprises top rating By Mike Taylor LONSEC has been named Money Management’s Ratings House of the Year for the second year in succession, on the back of strong support from both the fund managers it rates and the dealer groups it services. The Ratings House of the Year Award is the result of Money Management’s twostage Rate the Raters survey process, in which both fund managers and dealer groups are interrogated on their views of the major ratings houses on issues ranging from the quality of their research, value for money, personnel, customer service and model portfolios. The runner-up for 2011 was van Eyk Research, which managed to regain much of the ground lost due to senior departures in the previous 18 months, including that of its founder, Stephen van Eyk. Lonsec emerged as a winner, because it topped the scores across both the fund manager and dealer group elements of the survey, but it was the fund manager survey which proved crucial to its win.

“

Lonsec would not have a successful research business if we compromised on the quality or objectivity of our research.

”

– Amanda Gillespie

Amanda Gliiespie Where the dealer group survey was concerned, Lonsec’s overall result was tied with that of smaller ratings house, Zenith. Subsequent to the two Rate the Raters surveys being held, Zurich announced the sale of Lonsec to the Mark Carnegie linked Financial Research Holdings, which also houses specialist superannuation ratings house, SuperRatings. This was later followed by the departure of head of research, Grant Kennaway –

Product providers need to shift focus to users By Chris Kennedy THE probability of launching a financial product and having it be unsuccessful is higher than it has been in the past, meaning providers need to shift their focus more towards the end user. That is the outcome of a panel session organised by financial services recruitment agency Vantage Recruitment – featuring speakers from Colonial First State (CFS), Bendigo Wealth, and Macquarie. “Product providers are currently at a tipping point whereby they need to shift their focus from being product-centric to focus more on the experiences of the end user,” said CFS general manager of marketing and distribution, Linda Elkins. “Product manufacturers may be victims of their own past successes, where it used to be possible to simply release a product and know it would sell – that won’t be the case going forward,” she said. “We are already seeing that new financial products being launched are less likely to be successful than in the past,” she added. “We need to move from being productcentric to customer-centric – that penny has now dropped. Now we’re on the tipping point of saying ‘how do we do this’,” she said.

Many financial services institutions such as IAG, NAB, Challenger, Macquarie, AMP and Westpac (including BT and St George) have now engaged specialist customer experience consultants, Different, to help define product and service strategies by engaging customers throughout the design process. Creative director of Different, Anthony Colfelt, said companies can benefit from a customer-centric design (CCD) focus by knowing more about how their customers think and interact with a product or service up-front, which can save expenses in terms of restructuring offerings down the track. “But CCD is an ongoing commitment rather than a one-off expense, and often senior management in financial services want to know up-front exactly how much project cost outlay will be involved – which creates reticence in terms of committing to CCD,” Colfelt said. Bendigo Wealth senior manager, technical and research, Julie McKay said this means a client-focused approach can require a compromise with senior management, who often want to be able to see results straight away, therefore a balance Continued on page 3

events which may alter perceptions of the ratings house in the 2012 survey. In determining the Ratings House of the Year, Money Management took account of the number of clients serviced by each ratings house and provided a higher weighting to some criteria such as quality of research and customer satisfaction. While Lonsec was a clear winner in 2011, its margin over the other ratings houses was narrower than had been the case a year earlier – with van Eyk, Stan-

dard & Poor’s, and Mercer each receiving a higher ranking. According to Lonsec’s head of research, Amanda Gillespie, the company’s business model was at the core of its back-to-back success. Gillespie said there had been a lot of debate around business models in the research industr y, but added that “Lonsec would not have a successful research business if we compromised on the quality or objectivity of our research”. What was acknowledged by both Gillespie and van Eyk chief executive, Mark Thomas, was the importance of personnel with Gillespie crediting the stability of Lonsec’s research team as a key ingredient for success. Commenting on van Eyk’s runner-up status, Thomas paid tribute to a successful rebuilding effort, and the recruitment of quality people into key roles. “We continue to keep investing in the business,” he said. “It is true that we went through a period that challenged the culture of our business, but the culture has won,” Thomas said.

Standard performance criteria needed By Andrew Tsanadis A trend towards low performance hurdles and high outperformance fees among fund managers has drawn criticism from ratings houses amid suggestions there should be an industry standard for performance criteria. In Lonsec’s ‘Australian Equity Long/Short Sector Review’ released in July, researchers found some fund managers set “inappropriate low performance hurdles” in their performance fee structures. Lonsec stated, “To some extent, this is justified, given the relatively low capacity limit of these products and the additional costs associated with employing shorting skills”. Typical performance fees for the 14 managed

funds reviewed were found to be between 15 and 20 per cent of any returns greater than a fund manager’s hurdle. The EQT/SGH Absolute Return Trust was the only managed fund that did not charge a performance fee, hurdle rate, or a watermark. SG Hiscock managing director Steve Hiscock said he does not believe investors should be charged a full base fee as well as a full performance fee. “What I find interesting about the report is that a number of funds have the same base fee (MER) as Absolute, yet still charge a full performance fee,” Hiscock said. The funds Hiscock refers to are Smallco Investment Fund and Wavestone Australian

Equity Long Short Fund, which have a base fee of 1.4 per cent and 1.5 per cent, and a performance fee of 18.64 per cent and 15 per cent, respectively. Hiscock said managers should either charge a full base fee or a full performance fee in order to avoid “double dipping” on an investment that has limited capacity. Hiscock said this standard should be incorporated across all management classes to avoid the setting of low hurdles. In justifying the performance fee of ING Extended Alpha Australian Share Fund, Jim McKay from ING Investment Management said the fund’s 20 per cent performance fee was in line with that of other Continued on page 3

Editor

Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Jayson Forrest Tel: (02) 9422 2906 jayson.forrest@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Cadet Journalist: Angela Welsh Tel: (02) 9422 2898 Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 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. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

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mike.taylor@reedbusiness.com.au

Legislation covering super needs renovation

t will not emerge as an item high on the current Federal Government’s agenda, but at some point, the Commonwealth will need to revisit legislation covering the operation of superannuation funds in Australia, with a view to ensuring it better reflects current fact and practice. A revision of the legislation is necessary in circumstances where there is now clear evidence that the underlying structures have not kept pace with the evolution of a dynamic industry, and where some organisations have sought to manipulate the resulting inconsistencies for their own commercial and political advantage. The Government has undertaken that next year it will refer the issue of default funds under modern awards for consideration by the Productivity Commission. It should go further by extending that referral to examine issues such as the structure of trustee boards and the application of the sole purpose test. A few weeks ago, Tasmanian Liberal Party Senator David Bushby took the extraordinary step of writing a column for Money Management in which he pointed out that he had asked questions of the Australian Prudential Regulation Authority (APRA) regarding events surrounding MTAA Super. In that column, Bushby reported that having asked what were “hardly earth-shat-

Superannuation funds “enjoy a special status in Australia ... This should result in greater transparency than is currently the case.

”

tering or market bursting” questions, he was confronted by the regulator utilising the secrecy provisions of its parent Act to avoid providing answers. What APRA was essentially telling an elected member of the Australian Parliament was that information relating to the activities of a major superannuation fund falling under the jurisdiction of a key financial regulator could not only be kept out of the public domain, but kept away from the scrutiny of the Parliament. It seemed to not matter to those running APRA that the trustee board of MTAA Super controls billions of dollars in funds belonging to literally thousands of individual members in the automotive industry. Nor does it seem to have mattered that many of

those individual members might have been interested in reading the answers to the Senator’s questions. While it is important for regulators to avoid taking any action which would undermine the security and value of members’ assets within a superannuation fund, that objective should not be pursued to the exclusion of necessary transparency. Under Australia’s current superannuation legislation substantial power and discretion is vested in the members of trustee boards, while individual members are denied a voice beyond indicating or specifying the broad investment allocation of their money. Superannuation funds enjoy a special status in Australia, owed to the compulsory nature of the superannuation guarantee and the consequent tax advantages which apply. This should result in greater transparency than is currently the case. In short, the activities of the trustee board of MTAA Super should be just as transparent as those of the board of any publicly-listed financial institution, and there should be no reason for the regulator to find reasons to invoke secrecy provisions when dealing with Members of Parliament. Change is not only necessary – it will ultimately prove unavoidable. – Mike Taylor

Earn your clients the RBA cash rate

+1% return

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The FirstRate Investment Deposits product is a deposit product of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank) offered through the superannuation and pension investment options provided by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State), the issuer of interests (including all investment options) in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, and FirstChoice Wholesale Pension from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Interests (including all investment options) in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, and FirstChoice Wholesale Pension from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 are not covered by the Australian Government Guarantee scheme. The First Rate Investment Deposits product is administered by Colonial First State. This is general information only and does not take into account any person’s individual needs, ﬁnancial circumstances or objectives. Investors should read the relevant PDS available from advisers before deciding whether to invest in FirstRate Investment Deposits. ^Rate does not include a deduction for the tax payable by your super fund on earnings, currently up to 15%. *In the event your client needs access to funds prior to maturity, an adjustment cost may apply. CFS2030/HPC/MM 2 — Money Management August 25, 2011 www.moneymanagement.com.au

News

Women more concerned over nation’s finances By Chris Kennedy

Lynette Argent

AUSTRALIAN women are significantly more concerned than their male counterparts over Australia’s economic outlook, research from Million Dollar Woman has found. Only 30 per cent of working women are confident that Australia will avoid another economic downturn, compared to 47 per cent of working men, Million Dollar Woman’s Financial Confidence Report found. And 29 per cent of working Australian women believe they are worse off in 2011 than they were in 2010, compared to 25 per cent for men. “The depressed levels of Australian women’s financial confidence could go some way to explaining the reasons for Australian households’ diminished

“

Financial confidence directly relates to knowledge and understanding, and it comes as no surprise that these results are also poor for Aussie women.

”

– Lynette Argent

levels of spending, coupled with the recent natural disasters and general ‘two-speed’ economic uncertainty,” Million Dollar Woman chief executive Lynette Argent said. A potential reason for the more negative sentiment among females is that they experience higher debt; for every dollar a woman earns they owe $2.60, compared to $2.10 for men, according to Million Dollar Woman. The report also found males were more confident in their financial knowledge, with 63 per cent reporting they were confident in financial matters, against 53 per cent for females. “Financial confidence directly relates to knowledge and understanding, and it comes as no surprise that these results are also poor for Aussie women,” Argent said.

Product providers need to shift focus to users Continued from page 1

between cost and long-term results is required. “Accountants will always be measuring the bottom line, but there is a large burning platform now saying we can’t keep doing things the same way”, McKay said. She added, “those financial considerations won’t go away, but are starting to take a back seat to the customer focus”. “Another challenge to an ongoing customer-centred design approach is the rapid pace of change within

the industry”, she said. “You put all these resources into customer research, then in six months the market has moved and the opportunity has gone. It’s a balancing act,” McKay said. The pull of factors such as IT and legacy systems can be insurmountable, but you have to trust the depth of the customers’ relationship with the bank, she said. “If you listen, customers will tell you want they expect. But with the sheer amount of change and new regulations, it’s very difficult,” McKay said.

Standard performance criteria needed Continued from page 1 funds under review. Lonsec’s sector review also found certain fund managers are ambiguous when it comes to setting hurdles. For example, Smallco employs a hurdle of zero per cent, which means Smallco is eligible to receive a performance fee simply by generating any positive return, according to the review. A spokesperson from Smallco said the reason the hurdle is set to zero is because the company’s portfolio is a lot smaller than it was before the global financial crisis, and setting an outperformance hurdle would be “unreasonable”. Lonsec’s review reflects Morningstar’s ‘Best Practice in Managed Fund Performance Fees’ report released in April, which reviewed 82 funds and found only 18 had some form of additional performance related charge. There was little consistency among these funds, with 17 different fee charging criteria within the group. Morningstar suggested a fund manager should set a reasonable hurdle before starting to accumulate performance fees, at the very least a hurdle that covers the base fee. www.moneymanagement.com.au August 25, 2011 Money Management — 3

News

AMP upbeat despite 18% profit decline By Mike Taylor AMP Limited has experienced a strong boost in revenue as a result of its merger with AXA Asia Pacific, but nonetheless experienced an 18 per cent decline in first half net profit after tax attributable to shareholders to $349 million. However, the company chose to point to the 3 per cent increase in underlying profit to $455 million as being a more reliable measure, and reinforced the fact that AMP had the largest adviser and planner network across Australia and New Zealand. It said the merged business had

4,020 planners and advisers at 30 June, with the merged group having 4,048 planners, representing a fall of six advisers from 31 December, last year. “Ongoing strong growth in AMP planner numbers was offset by lower recruitment for AXA advisers, particularly in the first quarter of 2011, against a background of heightened uncertainty for AXA advisers ahead of the final merger outcome,” AMP chief executive, Craig Dunn, said in a statement released to the Australian Securities Exchange (ASX). “We are very pleased with AXA adviser retention post the merger,” he said. “As of today, around 97 per

cent of the value of the adviser network in AXA and Charter Financial Planning has been retained.” The AMP release to the ASX revealed that AMP Financial Services operating earnings increased 2 per cent to $329 million for the half, which the company said reflected strong results from AMP Bank, Contemporary Wealth Protection and higher net cash flows into AMP Flexible Super. It said that its Contemporary Wealth Management division, which includes financial planning, superannuation, pensions and banking businesses, operating earnings had

increased by 5 per cent to $157 million. The announcement said AMP Capital Investors’ operating earnings were down slightly to $41 million. Discussing the outlook for the company, Dunn said the European debt crisis and uncertainty over the US recovery was likely to remain a source of investment market volatility for some time to come, while closer to home, Australian households remained cautious and continued to prefer increasing their savings through bank deposits over increasing discretionary contributions to superannuation.

Craig Dunn

Choice has questions to answer, says FSC Practices moving from revenue to earnings basis By Milana Pokrajac

THE integrity of consumer group Choice over its potentially conflicted partnership with One Big Switch has been questioned yet again, with Financial Services Council c h i e f Jo h n Bro g d e n u rg i n g t h e group to come clean about its remuneration arrangements with One Big Switch. Brogden’s call came after it was reported Choice would receive a commission for its role as an intermediary in the “Big Bank Switch” campaign. The FSC chief questioned whether the consumer group backflipped on its position outlined in its submission to the Parliamentary Jo i n t Co m m i t t e e i n q u i r y i n t o

financial products and services in Au s t r a l i a , w h e re i t s t a t e d t h a t “commissions created an unacceptable conflict of interest”. Br o g d e n s a i d C h o i c e h a d a number of questions to answer, particularly about its remuneration arrangements with One Big Switch. He further questioned whether the group rebated all or any fees it received back to consumers, “When Choice says it will d i s c l o s e a n y re m u n e r a t i o n i t receives for its role in the Big Bank Switch, has it changed its position from its submission to the PJC where it stated that it ‘does not believe that conflicts of the magnitude presented by commissions can be addressed through disclosure’,” Brogden said.

By Chris Kennedy

John Brogden

ECT changes add to super paperwork

Bill Shorten

SUPERANNUATION funds, including self-managed superannuation funds (SMSFs), are facing further administrative requirements as a result of the Government’s changes to superannuation excess contributions arrangem e n t s a n n o u n c e d i n t h e Fe d e r a l Budget. The arrangements – outlined in a discussion paper released by the Assistant Treasurer, Bill Shorten – impose a number of requirements on superannuation providers, including complying with compulsory release authorities issued by the Australian Taxation O f f i c e a n d a c t i n g t o p a y re l e v a n t amounts within 30 days. Individual superannuation fund m e m b e r s a f f e c t e d by t h e E x c e s s Contributions Tax (ECT ) regime will face a number of key choices, including whether or not to accept the oneo f f re f u n d o f f e r f r o m t h e ATO o r whether to appeal the issue, in which place the refund would be placed on hold until the matter is determined. The increased burden on superannu-

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

ation funds and members comes despite the Government saying the majority of the administrative processes were being handled by the ATO. The changes were announced in the Federal Budget, amid complaints that people were being unfairly penalised under the ECT regime for inadvertent and sometimes unavoidable errors in their superannuation contributions. In announcing the release of the discussion paper, Shorten said the Government believed the changes m a d e t h e s u p e ra n n u a t i o n s y s t e m fairer by giving individuals the option to take excess contributions out of their superannuation fund and have them assessed at their marginal rate of tax. “While the Government believes the high rate of excess contribution tax is important to encourage compliance with the contribution caps, individuals who breach their concessional contribution caps for the first time should be given a second chance,” Shorten said.

THE industry is clearly moving away from valuing financial planning practices, based on multiples of revenue towards valuing on an earnings basis, according to Hunts’ Group principal Anthony Hunt. The method of valuing based on revenue does have some logical basis in terms of the traditional financial planning business model, but virtually all other businesses in the world are valued based on multiples of earnings, he said. The revenue model drives some interesting behaviours and characteristics, he said, and if you think your business will be valued based on revenue, you strive to improve that without necessarily looking to improve revenue through factors such as improved efficiency, he said. “You’ve got to improve not just the top line but the bottom line,” he said. Factors such as streamlining back office and administration processes will become more important, as will ensuring you get the best deal from your platform provider – which benefits both the business and its clients, he said. The shift to an earnings based valuation model is being accelerated by proposed Future of Financial Advice (FOFA) reforms, but it is a process that would have happened eventually anyway, he said. Whether or not FOFA gets in practices will be valued for intrinsic practices such as their quality of customer relations, and an ability to demonstrate they have a value proposition that the customer likes and is prepared to come back for, he said. The shift in valuation methods will also impact the decisions of banks in lending to planning practices, he said. “It’s taken years to get specialist teams in banks to understand the principle of revenue multiple, but they understand earnings and are prepared to lend on an earnings basis. It will be the primary driver, if not the exclusive driver, going forward.”

News

Almost 1,700 convicted on tax and super offences By Milana Pokrajac ALMOST 1,700 individuals and companies have been convicted on tax and superannuation offences in the 2010-11 financial year, according to an announcement released by the Australian Taxation Office (ATO). Those include eight Project Wickenby related convictions over the past financial year, according to the ATO. Tax commissioner Michael D’Ascenzo

Michael D’Ascenzo said over 450 individuals and 140 companies were convicted between 1 April and

30 June this year alone for tax and super offences equating to over $9.5 million. D’Ascenzo said the most serious offences this quarter resulted in custodial sentences ranging from 6 months to over 9 years. “Offences this quarter ranged from a $3,000 fine for failure to lodge tax returns to 21 years combined jail time for three men for their role in an illegal investment scheme that would have allowed participants to claim over $46 million in fraudulent deductions,” he said.

The ATO reported using data-matching technology and collaboration with government – including law enforcement agencies and overseas networks – as part of its compliance approach, warning that for those who deliberately break the law the likelihood of being brought to justice is very high. In its announcement, the ATO has also urged those unsure about their tax or superannuation offences to contact the office for information.

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Cameron O’Sullivan

VicSuper adopts new tech

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VICSUPER has partnered with Provisio Technologies to deliver ‘single issue’ advice on a more widespread scale. Provisio’s Rapid Advice will be integrated into VicSuper’s existing member administration and work flow systems in order to offer advice in person and by phone, as well as print and web-based channels. “Integrated solutions will continue to provide value as a fund expands its use of rapid advice through mobile, web, phone and printed communications – unlike the old web-based calculators that cater for online members only,” said Provisio director Cameron O’Sullivan. “Funds who are serious about rapid advice don’t want to cut corners.” VicSuper’s chief executive Michael Dundon said he acknowledges that comprehensive advice is not for everyone and believes that this initiative will provide superannuation planning to members who may not otherwise seek expert advice. “Single issue advice will benefit many more of our members,” Dundon said. www.moneymanagement.com.au August 25, 2011 Money Management — 5

News

Corporate fund members could lose advice under opt-in By Chris Kennedy IF opt-in requirements are brought in as part of the Government’s Future of Financial Advice (FOFA), it could mean every corporate super fund member would be required to opt in to advice fees individually, costing members access to advice and other valuable services, according to the Corporate Super Specialist Alliance (CSSA). This possible outcome of the current round of regulatory changes would result in two types of corporate fund – MySuper funds and Choice funds, and although most employers currently charge a fee rather than a trail commission, it’s not clear how this will be affected by opt-in proposals, according to CSSA president Douglas Latto. “Currently, collective fees are agreed between employers and advisers, and apply equally across all members,” Latto said.

Under opt-in, it’s possible only individual members would be able to agree to such fees. This would mean advisers would have to collect the signatures of hundreds of thousands of employees every two years, which would be impracticable, if not impossible, he said. Latto added, it is not clear how these proposals would affect corporate super members, and it is an area that hasn’t really been addressed. “Other proposed remuneration solutions include a ‘user pays’ system, which has been shown to not work,” Latto said. “Under the current system, all users equally share the cost of additional services such as site visits, but a user-pays system is completely reactive rather than proactive, and services such as this could disappear altogether. Members always have the option to opt out through fund choice. “One of the biggest services the CSSA

performs is an advocacy role, including negotiating better terms for members with insurers, benefitting all members on an ongoing basis – another service that would be compromised under opt-in,” he said. Latto believes a proposed ban on group risk commissions within super seems to wrongly assume that group risk is unadvised simply because it is a default or group contract. But, he said, corporate specialists provide a range of ongoing advice services which are available to all members of the corporate super plan at all times, including ongoing reviews, monitoring, seminars and underwriting assistance. “If corporate super specialists cannot be fairly rewarded for their services then those services will have to be withdrawn, and ordinary Australians will lose access to experienced financial advice professionals, leaving them in the hands of inexperienced call centre staff,” Latto said.

Douglas Latto

Strict requirements of CFP qualification to raise industry standard: FPA By Angela Welsh THE growing number of financial planners undertaking the Certified Financial Planning (CFP) accreditation will lift the standard of the advice industry as a whole, according to the Financial Planning Association (FPA). FPA chief executive Mark Rantall said the greater the demand for the CFP accreditation and the more numbers going through, the higher the entry requirements and pass rates become. This pushes up the value and standard of the accreditation, he said. To enter the program, candidates now require an undergraduate degree, and to complete the requirements they must have 3 years of supervised experience in the industry and pass a comprehensive exam. “We have been lifting standards for a number of years now,” Rantall told Money Management. “A n d t h e t ra i n i n g n e e d s t o b e c o n s i d e re d i n conjunction with the professional framework that’s in place. This framework houses the FPA’s educational standards, ethics, practice standards, as well as our rules and regulations,” he explained. “It is a combination of those four factors that really determines the quality of the professional membership of the Financial Planning Association,” he said.

“The CFP is not an easy program to pass,” Rantall Mark noted. “And we track that Rantall with considerable interest. Together with the five units of the CFP certification, which is conducted – and s t a t i s t i c a l l y t e s t e d – by Deakin University, we can actually monitor the quality a n d t h e p a s s ra t e o f t h e program,” he said. Some 5,600 of the FPA’s members already have the CFP designation. As the FPA is the only Australian organisation with a licence to issue the qualification, it is estimated that around 8,000 non-FPA member planners are operating without that licence. Rantall described this as “a line in the sand issue”. “Moves had to be made to lift planners’ standing and to assure clients that they can trust the advice and ethics of their planner. The natural place to

go with this is with the most recognised international qualification – and that is the CFP qualification,” he said. The qualification is licensed through the Financial Planning Standards Board (FPSB) – an international body that publishes the abilities, skills and knowledge of financial plann i n g i n t h e Fi n a n c i a l Planning Competency Profile. Rantall said the FPSB also has an overview of the content and curriculum of the CFP program, and works to ensure those standards are met. “It’s all about not only taking responsibility for putting clients first, but demonstrating that [planners] have the training and expertise to do so effectively,” he said.

Super pool helped buffer financial crisis - ASFA By Mike Taylor AUSTRALIA’s large pool of superannuation savings helped keep the local economy on course through the global financial crisis by becoming the main source of equity finance when debt financing became unaffordable, according to new research released by the Association of Superannuation Funds of Australia (ASFA). The release of the research was timed to coincide with celebra-

tions around the 20th anniversary of the Superannuation Guarantee, with ASFA chief executive, Pauline Vamos, claiming it was proof that the superannuation savings pool was the ballast of the Australian economy. The research, conducted by Allen Consulting Group, not only claimed that the superannuation savings pool had provided stability through the GFC, but said it would continue to do so through the current

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

period of market uncertainty. Vamos also pointed to the research findings as confirming the value of lifting the superannuation guarantee from its current level of 9 per cent to 12 per cent. “The Allen research provides strong support that a move from 9 to 12 per cent would be not only good for the retirement futures of current workers, but would also have no adverse effect on employers,” she said. Vamos said the modelling

shows such a reform would lead to a 0.33 per cent increase in real gross domestic product by 2025, compared to a ‘no reform’ scenario. She acknowledged the report also indicated that employer costs would be increased in the shortterm, but added that the impact in any given year would be, at most, 0.25 or 0.5 per cent of wages – equating to $250 to $500 for a small employer with a wages bill of $100,000.

Pauline Vamos

News

Accountants alarmed by carbon tax impacts By Mike Taylor

Andrew Conway

Wealth crosssell helps Westpac bottom line WESTPAC has reported a solid third quar ter despite subdued market conditions, with cash earnings down 2 per cent to $1.55 billion, but operating income up 1.5 per cent on firmer margins. The quarterly update, released to the Australian Securities Exchange, also revealed that BT Financial Group had put in a good quarter, with solid flows into both corporate and retail superannuation helping offset weaker markets. It said BT Super for Life flows had continued to grow, with record flows recorded in June. Commenting on the result, Westpac chief executive Gail Kelly acknowledged that the June quarter had seen the operating environment become more subdued, with consumers increasingly cautious and larger businesses continuing to ‘de-leverage’. She said this had been reflected in slowing system credit growth in the quarter and weaker markets. “Notwithstanding these trends, momentum across the group has been sound, with solid flows in lending, deposits and funds under administration, underpinned by a further deepening of relationships,” Kelly said. She said sales of wealth and insurance products had been particularly pleasing, and that over the past 12 months Westpac had experienced the biggest increase in cross-sell of the major banks.

The financial performance of Australian small business owners will be negatively impacted by the introduction of a carbon tax, according to the results of a survey of accountants. The survey, conducted by the Institute of Public Accountants, revealed that 70 per cent of respondents believed small busi-

ness would be negatively affected, with 63 per cent of respondents believing those same small businesses would not be adequately compensated. Commenting on the survey, IPA chief executive Andrew Conway said his organisation’s members were trusted advisers to the Australian small business community and he believed it was alarming that so many of them perceived

a bleak outlook for the small and medium business sector over the next 12 months. “We are not talking about one industry, we are talking about a pessimistic outlook across the entire small business community in Australia,” he said. “Despite the Government stating that only the top polluters will be impacted with the introduction of the carbon tax, it seems the

interests of small business have not been considered,” Conway said. The IPA survey revealed 66 per cent of respondents believed there had not been enough consideration given to how the carbon tax would impact small business, while 67 per cent believed there had been insufficient information provided to small business over how the carbon tax might affect them.

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Performance to 30 June 2011

1 Year

3 Years (p.a.)

5 Years (p.a.)

Since Inception (p.a.)

Gross Performance^

19.4%

5.8%

7.8%

9.4%

Net Performance*

17.2%

5.1%

6.7%

8.1%

BlackRock Reference Benchmark

19.6%

5.7%

6.0%

6.7%

MSCI World ex-Aust (hedged)#

26.7%

1.2%

2.0%

4.3%

Past performance is not a reliable indicator of future performance.

For more information or to learn about our ratings call 1300 366 101

blackrock.com.au/advisers ^Gross performance excludes fees and charges and assumes the reinvestment of all distributions. *Net performance of Class D units (min investment $5,000) since inception to 30/06/2011 and assumes the reinvestment of distributions. It does not take into account the effect of taxes. Inception date is 4/7/05. # MSCI World ex-Aust (hedged) is not the benchmark for this Fund but is used to indicate the performance of broader global equity markets (hedged in AUD). The Benchmark for the Fund consists of a weighted average of returns for a composite of 36% S&P 500 Composite Total Return), 24% Financial Times/S&P Actuaries World Index ex-US (Total Return), 24% Merrill Lynch Government Index GA05 (5 year Treasury Bond) and 16% Citigroup Non-USD World Government Debt Index. Issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230523 (BlackRock). BlackRock is the responsible entity of the Fund. A PDS for the Fund is available from BlackRock. You should consider the PDS in deciding whether to acquire, or to continue to hold, the product. This is general information only and does not constitute financial product advice. The information doesn’t take into account an individual’s financial circumstances. An assessment should be made as to whether this information is appropriate for an individual and consideration should be given to talking to a financial adviser before making an investment decision.

www.moneymanagement.com.au August 25, 2011 Money Management — 7

News

Insurance offering on excess contributions By Mike Taylor A new insurance offering has come to market specifically aimed at helping self-managed superannuation fund (SMSF) trustees challenge the Australian Taxation Office (ATO) on excess contributions. The offering is being promoted by Self Super Insurance, which says it is offering a new level of cover to help

trustees in the event a fund member receives an excess contribution tax assessment notice. Self Super managing director John Kelly said his company had always provided cover to a trustee who was sued for an error in relation to excess contributions, but this had been extended to provide $25,000 toward the legal costs of a member who successfully challenges an assessment on the

basis the ATO has applied the law incorrectly. “There will be occasions when someone will wish to legitimately challenge the ATO regarding an excess contribution tax assessment notice, but won’t because the costs of doing so potentially outweigh the benefits,” he said. Kelly said his company’s new offering gave such people an option.

Foreign investment tax to be aligned with OS mark By Milana Pokrajac

Financial Planner of the Year 2011

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

AUSTRALIA’s taxation of foreign managed funds will soon be aligned with countries including the US, the UK, Hong Kong and Singapore, as the Federal Government rolls out its draft amendments to the Investment Manager Regime. The amendments to income tax law will clarify how certain income of foreign funds for 2010-11 and prior income years, are taxed. It would also clarify the treatment of certain investments of foreign funds, where the returns or gains are treated as being attributable to a permanent establishment in Australia, the Government said. The Assistant Treasurer and Financial Services Minister, Bill Shorten, said the proposed changes in tax treatment would provide certainty for businesses investing through Australian intermediaries. “These new measures will help Australia retain $57 billion already invested here by foreign managed funds; the proposed amendments will support Australia’s managed funds industry, which stood at around $1.8 trillion at the end of March 2011,” Shorten said. The newly released draft was supported by the Financial Services Council (FSC), which recommended the Investment Management Regime to the Financial Centre Taskforce (Johnson Review) in late 2009. “It will remove uncertainty for Australian fund managers and encourage foreign investors to invest in Australian-based fund managers,” FSC chief John Brogden said.

News Perpetual closes in-house international equities manufacture

By Mike Taylor PERPETUAL Limited has abandoned inhouse manufacturing of its international share funds in Ireland and transferred the function to Boston-based specialist, Wellington Management Company.

Prepare for the upswing, Lachlan says By Tim Stewart RATHER than panicking and selling their shares, investors should be watching the markets for signs of the expected recovery, according to wealth management firm Lachlan Partners. Historical evidence from recent recessions shows that the Australian sharemarket tends to bottom out 12 to 18 months before corporate earnings begin rising again, suggesting that excellent buying opportunities could be just around the corner, according to Lachlan. “Markets tend to rise through the latter parts of a recession,” Lachlan Parners chief investment officer Paul Saliba said. “We need to identify when they start on an upswing – a difficult proposition as there is no historical parallel for the current situation,” he said. Saliba added that there was a “crisis of confidence” among investors at the moment, which he put down to market volatility and the planned introduction of the carbon tax. Lachlan Par tners cofounder and managing director Philip Pezzi said the lack of confidence was leading to many Lachlan clients “freezing their investment activities”. “We suggest that investors seek a health check on their financial position with a wealth management adviser to put their minds at ease, or develop a plan to deal with current market downturn and the expected recovery,” Pezzi said. “There will be excellent buying opportunities in property and shares in the near future and investors should be seeking to take advantage of them,” he said.

At the same time, the company has exited the self-managed superannuation funds administration business, selling its Smartsuper offering to a Sydney-based professional services company. The company also flagged that its fullyear results would be in line with earlier guidance, and broadly in line with last year. Announcing the moves overnight and on the Australian Securities Exchange today, the company said the move on its international equities manufacturing had followed

a review of its Dublin-based in-house international investment capabilities based on market demand, profitability and alignment to its equities business strategy. Commenting on the move, Perpetual chief executive Chris Ryan said at an organisational level it represented a constructive change aimed at delivering value to stakeholders. Perpetual group executive, equities, Cathy Doyle said the company had come to the view that the current manufacturing of Perpetual’s international share funds had

not met its business expectations. “We have taken the decision to close the in-house manufacturing of the funds – this has also resulted in the closure of our Dublinbased international equities business, PI Investment Management Limited,” she said. The company’s moves on its international share funds follows on from tough ratings house scrutiny of Perpetual’s domestic equities options in the context of the future intentions of its equities head, John Sevoir, who is currently on 6 months leave.

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www.moneymanagement.com.au August 25, 2011 Money Management — 9

News

Astarra sentence an ‘effective deterrent’ By Chris Kennedy

Greg Metcraft

THE two and a half year jail sentence handed down to Shawn Richard – the mastermind behind the Trio Capital fraud – is an “effective deterrent”, according to Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft. For mer Astarra Asset Management investment manager Shawn Richard was sentenced to a total of 3 years and 9 months imprisonment, with a minimum term of 2 years and 6 months for his role in the Trio Capital fraud. Medcraft welcomed the sentence as an effective deterrent against dishonest conduct

by those in positions of trust. “Mr Richard was a critical gatekeeper in the financial services system, responsible for making decisions in the interests of investors. His dishonesty resulted in significant detr iment to those investors,” Medcraft said. “ASIC has recently increased its focus on the responsibilities of gatekeepers and, as this case demonstrates, will ensure that those who dishonestly fail in those responsibilities are brought to account in criminal proceedings,” he said. Richard was potentially facing a sentence of up to 10 years for his part in the largest theft of superannuation funds in Australian history, which

saw Australian investors stripped of more than $100 million. In sentencing, NSW Supreme Court Justice Garling said: “Mr Richard is guilty of serious crimes of a high order. They were carefully considered and planned, they were well concealed, they continued over a period of nearly 4 years and they led to significant financial losses in excess of $26.6 million.” Richard has previously pleaded guilty to two charges of dishonest conduct related to making false statements and taking more than $6.4 million in undisclosed payments, while he personally received around $1.3 million

in secret payments. Last year, Richard entered into an enforceable undertaking with ASIC which saw him banned for life from the Australian financial services industry. Following an investigation into Astarra Asset Management and its responsible entity, Tr io Capital, ASIC alleged Richard was involved in causing Astarra funds (the Astarra Superannuation Fund and the Astarra Superannuation Plan) to place investor money into overseas hedge funds, and that he and Astarra received in excess of $6.4 million in undisclosed payments for making these investments.

More deductibility sought on own occupation TPD By Mike Taylor SUPERANNUATION funds want the Federal Government to accept higher levels of deductibility with respect to Total and Permanent Disability (TPD) insurance provided through superannuation. In a submission filed with the Federal Treasury, the Association of Superannuation Funds of Australia (ASFA) has supported a government proposal to enable superannuation funds to claim deductions for a portion of the cost of certain TPD policies, but argues those deductions should be higher. “We are supportive of the removal of

the requirement for funds to obtain an actuarial certificate, whilst still giving funds the option of doing so where they are of the view the prescribed percentages do not appropriately reflect their particular circumstances,” the submission said. However, it said it believed the 67 per cent applied to “own occupation” was too low. “Discussions ASFA has had with insurers indicate that for most TPD-only policies the loading for an own occupation definition is between 25 per cent and 40 per cent, with the actual figure depending on the occupations of the

members covered by the policy,” the submission said. “This suggests that an appropriate deductible portion of the premium for a TPD own occupation policy should be somewhere in the range of 70 per cent to 80 per cent,” it said. “That said, we do not support the creation of a range of occupationally based percentages, as this would run counter to the aims of the measure, being simplicity and ease of administration, particularly as the industry consolidates and the range of occupations of fund managers within a single fund increases,” the ASFA submission said.

ASIC’s guide for CFD issuers By Andrew Tsanadis ASIC has released a regulatory guide for contracts for difference (CFD) issuers in order to provide greater disclosure to investors. The guide, Over-the-counter contracts for difference: Improving disclosure for retail investors, provides seven benchmarks for which CFD issuers are to adhere. The benchmarks include client qualification, opening collateral, hedging, financial resources, client money, suspended or halted underlying costs, and margin calls. As part of addressing each of the benchmarks stipulated in the guide, issuers must provide a detailed explanation of their policies and practices when trading. For example, one of the

standards requires the issuer to disclose whether they hold sufficient liquid funds to withstand significant adverse market movements. ASIC said most CFDs are issued as over-the-counter (OTC) products, making them increasingly accessible to retail investors. The regulatory body warns that because of this, many investors may not be aware of the high-risk nature of CFDs. “Most investors don’t understand the complexity of CFDs, and they don’t get independent financial advice,” said ASIC chairman Greg Medcraft. “That means we need CFD issuers to do a much better job of spelling out to investors the risks, as well as the rewards of these complex products. “We want issuers to work harder to ensure people

S&P holds Aviva ratings steady By Tim Stewart

investing in CFDs better understand what they are getting into – before they start trading,” he said. The guide requires CFD issuers to either address each of the seven benchmarks or provide an ‘if not, why not’ explanation in their products disclosure statements.

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

According to Investment Trends’ 2010 Australian CFD Report, there are currently 39,000 active CFD investors in Australia. ASIC said the CFD market has seen growth of over 300 per cent in the past 5 years, and it is reasonable to assume that this growth will continue.

STANDARD & Poors Funds Services (S&P) has announced its ratings on all Aviva Investors Australia products remain unchanged, following the sale of the business to nabInvest – the direct asset management arm of National Australia Bank (NAB). Aviva Investors Australia stated that the ownership change would not affect t h e m a n a g e m e n t o f i t s Au s t ra l i a n e q u i t y c a p a b i l i t i e s, i n c l u d i n g t h e current make-up of its investment team. The transaction is expected to close this quarter, and is subject to regulatory approval. Aviva Investors Australia has approximately $5.5 billion in funds under management, and nabInvest manages approximately $51 billion via in-house management teams and external partners, according to NAB.

News

ANZ announces new loan facility By Tim Stewart AT a time when planners are struggling to source business l o a n s, A N Z h a s p r ov i d e d i t s a d v i s e r s w i t h s o m e re l i e f by launching a new financial planner loan facility. The ANZ Practice Funding Facility was created to help the bank’s advice businesses grow

their client bases and prepare for the Future of Financial Advice reforms, according to ANZ general manager for advice and distribution, Paul Barrett. “Our advisers need the flexibility to adapt to the new business models required to succeed in a fee-for-service environment,” said Barrett. The funding facility can be

sourced through more than 20 accredited ANZ business banking relationship managers, according to the bank. ANZ claimed that the new funding facility would help advisers grow their businesses by acquiring practices, purchasing client books from retiring planners and refinancing existing business loans.

“Teams across ANZ from industry specialisation, commercial, and OnePath’s advice and distribution all collaborated to develop and launch the ANZ Practice Funding Facility,” said Barrett. “It will also form an important part of a broader integrated recruitment and succession strategy in development with our aligned dealer groups,” he added.

Paul Barrett

Life insurance made for living. Mark Oliver

ETF trading on the up amid volatile markets By Milana Pokrajac EXCHANGE traded fund (ETF) sector activity has significantly increased over recent weeks, according to ETF trader iShares, which the company attributed to market volatility. iShares reported a 300 per cent increase in trading volumes in ear ly August, compared to its 20-day average for its broad mar ket iShares MSCI Australia 200 and S&P/ASX High Dividend. The company has seen the surge in activity in the Asia-Pacific region, too, where two of its products experienced three to four times their 20-day average trading volumes. Similar results could be seen in the northern hemisphere, according to managing director of iShares in Australia, Mark Oliver. Oliver said the increased ETF trading volumes demonstrated that this sector was a ‘go-to’ liquidity source during times of market uncertainty. BlackRock’s recent half-year ly ETF Landscape Industry Highlights repor t found that the global industr y had 2,875 ETFs and assets of US$1.4 trillion from 146 providers at the end of first half of 2011.

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www.moneymanagement.com.au August 25, 2011 Money Management — 11

SMSF Weekly SMSFs show interest in gold By Mike Taylor RECENT market turbulence has seen an increase in interest in gold bullion from self-managed superannuation fund (SMSF) trustees. The uptick in interest in physical gold has been flagged by Taur us Funds Management director, Mohendra Moodley. Taurus has recently developed a retail product offering exposure to gold, silver,

platinum, palladium and some gold equities. He said that while Australian investors had previously exhibited a reluctance to build significant exposures to physical commodities, there seemed to be a change in attitude flowing from the most recent market volatility. Moodley said he believed a part of the increased interest in physical gold was based on a realisation that gold equities did not deliver the same outcome.

As well, Moodley said the reluctance of Australian investors to garner exposures to gold and other physical commodities was not replicated in the US or Europe, where reasonable exposures were common – particularly among institutional and family investors. He said that there had also been increased interest in US and Europe in exposures to physical commodities, at least some of which was based on debt and currency concerns.

Russell launches BGL announces new Volatility Toolkit SMSF services RU S S E L L In v e s t m e n t s h a s produced a toolkit it says is aimed at both advisers and investors to help them ride out the current market volatility. The product, appropriately titled “Volatility Toolkit”, offers daily perspectives on changes in capital markets drawn from 500 global investment professionals. Co m m e n t i n g o n t h e n e w product, Russell Investments chief executive officer for Australasia, Chris Corneil, said given market movements it was not surprising investors were experiencing some anxiety and uncertainty. “We have a responsibility to give investors as much guidance as possible so they can

make more informed decisions about their investments now and in the future,” he said. Russell’s chief investment strategist for the Asia Pacific, A n d re w Pe a s e, s a i d Ru s s e l l believed the US and global economies would continue on a path of gradual recovery, even t h o u g h t h a t re c ov e r y w a s fragile and sub-par. “We think market sentiment is fluctuating more dramatically than changes in the underlying economic fundamentals,” he said. “For this reason, we don’t recommend investors reposition their portfolios to cash at this time.” Pease claimed well diversified portfolios would cushion the effects of market volatility.

By Damon Taylor ON the back of SuperStream’s data automation focus, self-managed super fund (SMSF) software vendor, BGL, has announced a number of new services which it believes will revolutionise SMSF data processing. Commenting on the automated SMSF solution, Ron Lesh, Managing Director of BGL, said the new service would destroy the myth that SMSF work could not be fully automated. “Just imagine the efficiencies created if when you opened your SMSF software, all bank account transactions from all Australian banks and all broker transactions from all Australian brokers were automatically loaded into all of your funds,” he said. “And, at the end of the financial year, you could reconcile all your holding balances with the registries, receive all your dividend and distribution statements and process all tax components of

transactions automatically.” Lesh said that BGL’s new processes were designed specifically for SMSF administrators, so that instead of having to log into each fund to check for unallocated data, a multifund processing system would allow them to allocate any unallocated transactions for all funds from a single screen. “As industr y leaders and automation experts, it is easy for BGL to provide our clients with unique functionality that provides huge efficiencies and time savings,” he said. “And BGL will also introduce a new system to make it easier for administrators to control data feeds.” “This new system will allow administrators to view and sign up for some or all of these new data services through a single screen, and will provide automated status updates for each service,” Lesh continued. “We want to ensure the administrator is always kept in the loop,” he said.

Fixated by price ﬂuctuations, the online obsessive reaches for the mouse with a quivering hand. Good news sees them hugging their screen, bad news causes them to hit refresh, refresh, refresh. Triumph and tragedy are always only a click away.

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

InFocus ETF SNAPSHOT Exchange traded funds on the rise Total number of exchanged traded funds (EFTs) globally, at the end of the financial year 3000

Billion

2500 2000 1500 1000 500 0

The financial services industry has celebrated the 20th anniversary of the Superannuation Guarantee and, as Mike Taylor reports, the industry funds have more to celebrate than most.

number of financial services luminaries gathered in Canberra last week to celebrate the 20th anniversary of the Superannuation Guarantee (SG) amid plenty of back-slapping and mutual congratulation. And with 20/20 hindsight, that back-slapping and mutual congratulation was more than justified given the manner in which one of Australia’s most significant industries was born out of what was really a politically-expedient means of bringing Australian wages growth under control. No one should forget that the Superannuation Guarantee was borne out of the need for a relatively new Labor Government with few economic runs on the board to place a brake on wages growth. It did so by way of negotiating an accommodation with the Australian Council of Trade Unions (ACTU) via the so-called Prices and Incomes Accord. In short, the Superannuation Guarantee could only have been created because an Australian Labor Party (ALP) Government was in power and because the then leadership of the nation’s peak union body, the ACTU, was pragmatic enough to see the mutual benefits which would flow from such an arrangement. In political terms it represented an absolute triumph. The Prices and Incomes Accord, via the SG, succeeded in containing wages growth at the same time as laying the foundations for what, 20 years later, became an almost $2 trillion savings pool. Much was owed to the fact that Australia had an ALP Government but it was equally important that the then, Prime Minister, Bob Hawke, had been a former secretary of the ACTU and intimately understood both the personalities and the issues. Just as important was that the then Treasurer, Paul Keating, developed a pragmatic working relationship with the then secretary of the ACTU, Bill Kelty. The Prices and Incomes Accord survived the life of both the Hawke and Keating Governments and moved beyond the development of the SG to also alter the face of Australian

2010

Total value of ETFs 1500 1200 Billion

Super celebration guaranteed

2011

900 600 300 0

2011

2010

Source: Blackrock

The Prices and Incomes “Accord, via the SG, succeeded in containing wages growth at the same time as laying the foundations for what, 20 years later, became an almost $2 trillion savings pool.

”

industrial relations and to pave the way for the Howard Government’s radical Workchoices. Two decades later, only a few of the cast of 1991 are still on the stage or standing in the wings. Most influential among those, however, is former ACTU official and industry funds stalwart, Garry Weaven. Where superannuation policy has been concerned since 2007 the Rudd and Gillard Governments have not had cause to consult deeply with the ACTU. Instead, the touch point has been the industry superannuation funds which grew in strength on the back of the SG. Much is made of the level of ALP and trade union influence on the trustee boards of industry superannuation funds but, in reality, the make up of those boards is little changed from the early days of award-based superannuation when equal representation was provided to employers and employees. But it is not at the individual industry superannuation fund level that most change has occurred. Instead, most change has occurred as a result of a number of industry superannuation funds joining together to fund the creation of a commercial entity – Industry Fund Services. It is worth noting that the evolution of that industry fund commercial entity mostly took place during the period of the Howard Coalition Government and that those responsible, including Garry Weaven, made little secret of

their intentions with building what has now emerged as a vertically-integrated financial services conglomerate offering banking services, funds management, asset allocation, financial planning and lobbying services. As well, what placed the industry funds clearly at odds with the financial planning industry was the Howard Government’s introduction of choice of superannuation fund legislation. It was the choice of fund legislation which prompted the commissioning of the so-called “Compare the Pair” advertising campaign – something which proved so successful that later surveys clearly showed that industry funds had emerged the net winners in attracting members in early years of choice of superannuation fund. While there were those that argued the “Compare the Pair” advertising campaign represented a breach of the sole purpose test applying to superannuation funds, the Australian Prudential Regulation Authority (APRA) allowed it to continue (with some disclaimers) on the basis that the industry funds were ultimately acting to benefit members. Nearly a half decade since the regulator gave those advertisements the nod, it is not clear whether it has seriously revisited the issue in the context of choice of fund no longer being front and centre, or the advertisements having been changed. With the Future of Financial Advice (FOFA) changes about to be released in the form of legislation, and with the Government moving to implement its “Stronger Super” policy, the Superannuation Guarantee looks likely to be lifted to 12 per cent in time for its 21st anniversary. What is also certain is that irrespective of whether the Government succeeds in having all its FOFA changes turned into legislation, the industry funds will continue to grow their presence in the financial advice space, particularly with respect to scaled advice. In fact, the degree to which the rise and rise of the industry funds continues will depend in large part on future Government policy and which particular party is in Government.

What’s on FSC Political Series: Prime Minister’s Breakfast 31 August 2011 The Westin, Sydney www.ifsa.com.au/events/calendar.aspx

FEAL September Luncheon: Climate Risk – what can funds do? Canberra – 7 September Adelaide – 12 September Melbourne – 15 September Brisbane – 19 September Sydney – 20 September Check website for locations www.feal.asn.au/events

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

ASFA National Conference & Super Expo 9-11 October 2011 Brisbane Convention & Exhibition Centre www.superannuation.asn.au/co nference-2011/default.aspx

FPA Certified Financial Planning (CFP) Dinner 2011 11 October 2011 Newcastle Club, 40 Newcomen St, Newcastle www.fpa.asn.au/events

www.moneymanagement.com.au August 25, 2011 Money Management — 13

OpinionDebtCrisis

Lessons from the Eurozone debt crisis Countries around the world have much to learn from the current Eurozone debt crisis. Michael Collins explains what has gone wrong in Europe over the past couple of years.

he Eurozone debt crisis is still unfolding - no one knows how o r w h e n i t w i l l e n d . Bu t already economic lessons have been learned. The first is that economic (monetary) integration without political (fiscal) integration is a flawed union. A common currency for Europe was a commendable idea, especially as it was an attempt to enmesh countries whose rivalries had triggered two world wars. But to work it needed to be done under a federal political system like Australia’s, because this allows seamless fiscal transfers across the unified region. Like Greece and Ireland, California has struck serious debt and economic problems, but Washington’s largesse (health and welfare payments, federal wages, etc.) supports the state. No such non-repayable money automatically flows into Greece, Ireland, Spain or Portugal from Brussels. Many of the solutions to the Eurozone debt crisis are thus, in theory, political. The second lesson is that countries that use a stateless currency such as the euro have limited ability to respond to economic troubles. They have no independent monetary policy, nor a currency that can plunge to make their economies more competitive. Their governments’ only levers are fiscal policy and any powers that can help deflate their economies – the recourse known as ‘internal devaluation’. That’s when governments impose deflation by such measures as cutting public-sector wages and lopping social security benefits at the same time as they are imposing austerity measures. As Greece, Ireland, Spain and Portugal show, people protest loudly when their wages and benefits are slashed or retirement ages are boosted. A floating national currency offers government a much more politically viable option for

making a country competitive. For whatever reason, people don’t see a plummeting currency for what it is – a cut in national income.

Austerity programs kill

Another lesson, and one that should surpr ise no one, is that auster ity programs kill sick, and even not-so-sick, economies. They thereby worsen, rather than fix government finances, rendering International Monetary Fund (IMF)style rescue pointless. The fiscal cuts Athens imposed as part of its 2010 bailout have torpedoed the Greek economy and consequently, as tax payments dropped and welfare expenditure soared, widened its budget deficit to about 10 per cent of its gross domestic product (GDP), beyond the 7.5 per cent target set for 2011 in last year’s bailout package. That is why Greece’s bond yields are double what they were when it accepted a European UnionIMF bailout in May last year, and the ratio of government debt to GDP is soaring towards 160 per cent this year from 110 per cent last year. The austerity package Greece just passed has been slammed as an ‘economic suicide pill’ by many economists because it is likely to make things worse. The UK is discovering this economic truth after its government imposed an austerity program in 2010 to rein in its budget deficit and debt, even though it faced no crisis. Yet many in the US are calling for austerity to fix the country’s government financial woes even though the economic recovery there is feeble.

Private poison

Another lesson from the Eurozone is that excessive private debt can be as poisonous as too much government debt. Greece floundered because its government ran (and hid) unsustainable fiscal deficits, as did Portugal. But authorities

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

in Spain and Ireland were fiscally prudent – Ireland ran budget surpluses until 2007 and had reduced government debt to 30 per cent of GDP by the mid2000s. But Irish and Spanish banks were reckless. They lent too much for property development and created property bubbles that burst and, in exploding, crippled their banks, economies and government finances. This is a warning to Australians. We are smug that our net government debt will only peak at 7.2 per cent of GDP this financial year. Yet most are oblivious to the fact that our net foreign debt – which is largely bank debt – stood at $677 billion, equal to 52.4 per cent of GDP, at the end of March. Australia’s financial system would’ve been at risk, if ever circumstances arose where foreign investors didn’t want to roll over maturing net private foreign debt worth $529 billion at the end of March (of which $358 billion was net bank debt).

Debt guarantees dangerous

Then there’s the lesson that it’s okay for governments to guarantee bank deposits, but dangerous to guarantee bank debt. Australia was one of many countries that in 2008 guaranteed bank deposits so people would think their savings were safe. Around the same time, Australia was one of many countries to stand behind bank debt so financial institutions could access money on global financial markets at a turbulent time. So far so good for most. But Ireland showed how haywire such pledges for bank debt can go. On 29 September 2008, when Irish bank debt was selling for half its face value, the Irish government decided to support its tottering banks by guaranteeing bank debt. All this private debt then became public debt. With one decision, that has been slammed as ‘economic treason’ and likened to using the Irish people as collateral, Dublin

wrecked the Irish economy for – let’s be optimistic – at least a generation. The last, and most contentious, lesson offered here – and one that is yet to fully play out – is that it can be better for troubled economies to default rather than accept emergency help that is conditional on punishing their populations with austerity programs. (Remember, too, that ‘restructuring’ is just a nice word for a partial default.)

Default an option

Iceland serves as one example of how this option can help resolve a financial crisis. The country’s banks were 10 times bigger than Iceland’s economy when they collapsed in 2008, so vast that the government refused to take responsibility for these private debts. So creditors lost money. After contracting 7 per cent in 2009, with IMF loans and a 50 per cent drop in the krone, Iceland’s economy is recovering now. Argentina’s experience, which was a sovereign default, is similar. At the end of 2001, the South American country defaulted on debt and snapped the peso’s currency peg (a similar constraint as belonging to the euro) to escape an IMF-imposed recessionary spiral. It duly did thanks to the lower currency helping commodity exports. Some conditions need to be met for a government to be better off defaulting, such as its budget needs to be at least in balance before allowing for interest payments - Greece isn’t there yet. The Eurozone debt crisis was largely caused by French and German banks underestimating the risks of lending to peripheral European economies. So, in principal, why shouldn’t they be punished for their recklessness? Surely, these bankers need to learn some lessons too. Michael Collins is the investment commentator at Fidelity.

Thinking about the woods AND the trees

or a long time, practitioners could devote themselves to company financials and valuations, with ‘set and forget’ asset a l l o c a t i o n m o d e l s. Bu t t h e n a l o n g came the biggest macro economic shock in more than a generation – suddenly, macro mattered and the challenge was to position portfolios around the world’s macro economic risks and opportunities. Now the challenge (and opportunity) is to combine these two ways of thinking – to position portfolios to benefit

from positive long-term macro opportunities while avoiding the macro risks t h a t m i g h t d e ra i l p o r t f o l i o s i n t h e shorter term AND then carefully select securities in which to invest. PortfolioConstruction Forum Conference 2011 is focused on better understanding the key macro AND micro issues and what they mean for investor portfolios – and successfully navigate through the woods AND the trees. Conference facilitates debate on the three pillars of portfolio construction – markets, strategies and investing. The

2011 program is another jam-packed, marathon three-day, 25-hour program featuring 40 intensive, objective, interactive sessions and more than 35 carefully selected local and international portfolio construction experts. It begins with an optional one-day, workshop-style Masterclass, followed by t h e m a i n t w o Co n f e re n c e d a y s featuring the 10-hour, plenary style Critical Issues Forum featuring 18 leading investment thinkers from around the world, and 4-hour Due Diligence Forum electives program featuring another 20

international and local investment experts. This issue of Money Management provides a quick reference guide to the 20 Due Diligence Forum electives. The presentations and podcasts are available online at www.PortfolioConstruction.com.au. Future issues of Money Management will feature the ‘best of’ research papers behind these presentations.

www.moneymanagement.com.au August 25, 2011 Money Management — 15

PortfolioConstruction Forum Conference

Due Diligence Forum program Each of the 20 Due Diligence Forum sessions is focused on a contemporary portfolio issue and is firmly grounded in a pre-approved research paper. These are available at www.portfolioconstruction.com.au. Slides and podcasts of each session will also be available in the online Resources Kit after the conference. DAY 1 Wednesday 24 August 2011 - Due Diligence Forum 1 - 11:00am-11.50am Room 1

Room 2

Room 3

Room 4

Room 5

Stream

Property

Australian Equities

Global Equities

Alternatives

Strategies

Partner

Abacus Property Group

Colonial First State

T.Rowe Price

AQR Capital Management

MLC

Topic

The prophecy of property

The equities piece of the postretirement puzzle

How to capture the full potential of emerging market growth

It’s not all alpha - what identification of hedge fund risk premia means for investors

A scenarios approach to asset allocation

Presenter

Dr Frank Wolf Abacus Property Group

Rudi Minbatiwala Colonial First State Global Asset Management

Scott Berg T. Rowe Price

Dr Gregor Andrade AQR Capital Management

Dr Susan Gosling MLC

Research Paper Summary

This research paper builds on earlier analysis of each sub-sector of the commercial property market, and extends that knowledge by analysing the various methods and strategies which can be used to deliver outperformance in any commercial property. The analysis provides evidence by way of case studies to support the argument that outperformance is best served by an active value-adding approach that can extract greater value than market movements alone will produce.

What are the key considerations when addressing equities in a retiree’s portfolio? How important are dividends and franking credits? How do you reduce volatility without sacrificing income and returns? This research paper explores the three most common post-retirement issues - income generation, capital preservation and longevity - and argues that an equities allocation can be modified to provide a better balance than alternative strategies that just focus on high yielding stocks to arrive at a strategy better-suited to today’s retirees.

Emerging markets are a significant source of earnings growth for many developed world companies – raising the question ‘why do investors need to hold EM equities if indirect exposure to EM growth can be obtained via developed markets?’ Outside of near-term inflation concerns, sceptics cite political, exchange rate, and corporate risks associated with EM equities. This research paper argues these concerns may be excessive and that investors must consider the merits of a “pure” direct exposure to EM in their global opportunity set.

Alpha is shrinking – that’s good news. Alpha is simply the portion of a portfolio’s returns unexplained by exposure to common risk factors. As these are identified, alpha shrinks. This research paper argues that risk factors underpinning classic hedge fund trading strategies – hedge fund risk premia – are investable and can enhance portfolio construction and risk management, leading not only to a reclassification of hedge fund alpha, but also to better diversified portfolios with greater transparency, improved risk control and higher returns.

Different approaches to asset allocation are available to practitioners. But reliance on selection of parametric return distributions, summary measures of risk and historical data as an indicator of the future remain widespread. This research paper proposes an approach that makes more complete use of information available about the future, forcing consideration of different time frames, alternate outcomes, and tail risk. It does this not by forecasting the future but by describing what has the potential to make a significant difference to long-term investment outcomes.

DAY 1 Wednesday 24 August 2011 - Due Diligence Forum 2 - 12:00pm-12.50pm Room 1

Room 2

Room 3

Room 4

Room 5

Stream

Debt

Australian Equities

Global Equities

Alternatives

Strategies

Partner

PIMCO

Hyperion Asset Management

Five Oceans Asset Management

RARE Infrastructure

BT Investment Management

Topic

Deep in the woods? How will clients deal with ‘new normal’ returns?

The economic costs of short-termism

International investing: Improving returns by managing risk

Infrastructure investing through the macroeconomic cycle

What to do when good beta goes bad

Presenter

Rob Mead PIMCO

Dr Emmanuel ‘Manny’ Pohl Hyperion Asset Management

Christopher Selth Five Oceans Asset Management

Nick Langley RARE Infrastructure

Joe Bracken BT Investment Management

Research Paper Summary

Three years ago, PIMCO introduced the concept of the ‘new normal’ and it is now widely acknowledged that investing has changed significantly due to uncertainty in economic outlook reflecting deleveraging, reregulation, global high unemployment and setbacks in developed economies. The new normal has already begun to impact Australia’s economy and bond market. This research paper argues that the Australian bond market continues to provide a reliable real return with relatively low volatility, and asks ‘are we deep in the woods or is there a way out?’

Short-termism is a pandemic that continues to flourish unchecked within financial markets, resulting in significant long-term economic costs to investors. This research paper examines the economic costs of excessive short-termism by corporate management, active fund managers, asset consultants, super fund trustees – and by their principals, ‘mum and dad’ investors. Despite repeated warnings on short-term speculation from investment luminaries, factors such as behavioural biases and increasing specialisation ensure the costs associated with myopic behaviour continue to adversely affect longterm investor returns.

Investment opportunities exist between values given by the market to companies based on immediate business outcomes that may not be replicable over time, and strategies that can sustain profit generation over the longer term. This research paper examines the internal (micro) and external (macro) factors influencing a company’s valuation, the drivers and the risks. It looks at various portfolio risk strategies, such as stock-specific risk management and hedging techniques, and whether diversification is still an effective risk management tool.

Infrastructure assets are increasingly forming part of investor asset allocations. This research paper argues that key attributes of infrastructure assets have led to its inclusion within portfolios and, that while infrastructure can be considered separate asset class, there is a clear link to the economy. It asks why infrastructure assets have performed differently to other investable assets (and can we expect this to continue), how is this performance linked to the underlying asset characteristics, and how the unique infrastructure attributes can improve returns.

The active vs passive debate is pointless if broad beta returns are barely positive or worse. This research paper looks at beta across bond and equity markets over time, arguing that while the ‘100 years of growth’ story is alluring, the reality is more disappointing. It examines how to boost returns on portfolios using liquid strategies available to Australian investors, and concludes with a take on asset allocation that is radically different from that practiced currently.

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

PortfolioConstruction Forum Conference

DAY 2 Thursday 25 August 2011 - Due Diligence Forum 3 - 11:00am-11.50am Room 1

Room 2

Room 3

Room 4

Room 5

Stream

Debt

Australian Equities

Global Equities

Alternatives

Strategies

Partner

Perpetual

Ellerston Capital / Zurich

Magellan Asset Management

Barclays Capital

Schroders

Topic

Global vs domestic fixed income – does it really pay to go overseas?

Investing in small caps – why the macro view is important and how it influences decisions

Rising inflation will impact your portfolio – what are you doing about it?

Commodities – a diverse and complex asset class

Turning the dial - how to sensibly make the move away from the cash crutch

Presenter

Vivek Prabhu Perpetual

Michael Besley Ellerston Capital

Hamish Douglass Magellan Financial Group

Ajay Jain Barclays Capital Fund Solutions

Greg Cooper Schroder Investment Management Australia

Research Paper Summary

The prevailing view is that global fixed income is a better investment than domestic fixed income. As markets prove time and again, the prevailing view is often wrong. Do investors who go offshore actually get a better result? This research paper looks at a number of factors that must be considered when looking at offshore credit and fixed income investing including distinguishing between defensive and yield driven strategies, currency risks and the cost of hedging, offshore vs domestic yield equivalency, asset quality and diversity.

The world has changed – no longer can you generate big returns in small caps from simple bottom up stock picking. With the index being dominated by resources and global macro factors just as important as bottom up fundamentals, small cap managers must address today’s issues to generate tomorrow’s growth. This research paper explores the issues impacting small companies, and how they are an essential and valuable part of an overall portfolio.

For years, the developed world has been a major beneficiary of imported deflation for a percentage of its core CPI as globalisation moved manufacturing capabilities to lower-cost / lower wage emerging markets. This research paper argues that this dynamic is running out of steam. As emerging markets wages increase significantly, the core CPI of many developed world economies will rise and potentially force some central banks to revisit interest rate settings. Positioning portfolios for the prospect of rising inflation is therefore critical.

Demand for commodities exposure is soaring as investors seek to capitalise on long-term trends and diversify portfolios. However, it is a difficult asset class to master. The investment community is still getting to grips with the fundamental drivers of commodity prices. This research paper highlights the knowledge needed to approach this asset class. It examines macroeconomic and long-term drivers of prices within the sector, and sets out a number of considerations to take into account when trading commodities in the short term.

In an investment environment that reeks of uncertainty, the allure of high cash deposit rates against current low inflation is strong. However, on a longer-term view, cash is unlikely to meet client requirements. This research paper discusses how to actively manage the trade-off between the risk and return of different asset classes in an uncertain economic environment.

DAY 2 Thursday 25 August 2011 - Due Diligence Forum 4 - 12:00pm-12.50pm Room 1

Room 2

Room 3

Room 4

Room 5

Stream

Debt

Australian Equities

Global Equities

Alternatives

Strategies

Partner

Principal Global Investors

SG Hiscock / Equity Trustees

Pengana Capital / nabInvest

AMP Capital Investors

Russell Investments

Topic

Interest rates rising – make sure you get the credit

Concentrated funds – are they too active and risky?

China’s transformation – the Razor’s edge for Australian investors

Downside protection: using hybrid infrastructure portfolios

Constructing an alternatives portfolio

Presenter

Robert da Silva Principal Global Investors

Robert Tucker & Robert Hook SG Hiscock / Equity Trustees

Diane Lin Pengana Capital

Greg Maclean AMP Capital Investors

Nicole Connolly Russell Investments

Research Paper Summary

Investors often overlook a crucial part of the fixed income market – short-duration bonds. This research paper argues these bonds are attractive during rising interest rate periods, offering the potential for both inflation protection and a yield advantage over cash and other low duration assets. It shows that since 1994, there have been two periods when US Treasury yields increased by more than 200 basis points and, in both, returns on short-duration high yield bonds were positive. The paper discusses factors contributing to their outperformance.

This research paper looks at how to define a concentrated fund, and how to identify whether it is really active or not, and thus justifies active management fees. It shows that concentrated funds with higher active shares outperform more their broadly diversified counterparts, and looks at how to define risk measures to assess the inherent riskiness of a fund. Finally, the paper examines whether volatility is bad and explains why the focus of risk should be heavily weighted to idiosyncratic risk.

Over the past decade, fixed asset investment accounted for nearly 50% of China’s GDP growth, driving global demand for materials and resources. This research paper argues this path to growth is unsustainable. It considers the impact of China’s demographic trends and its current Five Year Plan on the level and drivers of growth, and resultant policy changes, before arguing which economies, sectors and industries in the Asia Pacific region will benefit most from China’s transformation and which will be most at risk.

With markets going sideways, it is not surprising that investors are placing increasing emphasis on absolute rather than relative returns, questioning the relevance of traditional portfolio allocation rules and looking for more innovative approaches – particularly focusing on effective downside protection coupled with reliable returns. This research paper argues that given the limitations of listed equities in this capacity, consideration should be given to adding downside protection qualities to a portfolio via an investment in a hybrid of listed and unlisted infrastructure.

Investors are constantly on the watch for new market segments or strategies in the search for enhanced portfolio returns and reduced risk. Attention has focused increasingly on alternative investments and their benefits to a diversified portfolio. This research paper provides a definition of the category and the types of strategies and sectors that are typically included. A logical framework is provided in which investors can appreciate the characteristics of these investments, and guidance as to appropriate their weightings in a diversified portfolio.

www.moneymanagement.com.au August 25, 2011 Money Management — 17

PortfolioConstruction Forum Conference

The Great Depression – parallels for today As one of eight PortfolioConstruction Forum Academy members who recently attended a four-day Harvard Business School short course on the global economy led by Professor Niall Ferguson, Charles Creswick summarises one of the key course topics.

he ‘Black Tuesday’ stock market crash on 29 October 1929 set in motion a series of events that eventually led to the worldwide Great Depression. Irving Fisher, a noted US economist of the time, argued that the predominant factor leading to the Great Depression was ‘over-indebtedness’ and deflation. He tied loose credit to overindebtedness, which fuelled speculation and asset bubbles. Sounds familiar?

Catalysts

A false sense of prosperity In the 1920s, the US was over dependent on production – automobile manufacturing was the leading industry. It w a s a l s o a t i m e o f g re a t d i s p a r i t y between rich and poor. More than 60 per cent of the population was living below poverty levels, while a mere 5 per cent of the wealthiest US citizens accounted for 33 per cent of income – the richest 1 per cent owned 40 per cent of the nation’s wealth. This uneven distribution of wealth was mirrored in the unequal distr ibution of r iches between industry and agriculture. Global crisis While the US prospered during the 1920s, most of Europe was still reeling from the devastation of World War I, and fell into economic decline. The US became the world’s banker and, as Europe started defaulting on loans and buying less US products, the Great Depression spread. Speculation and over leverage Due to a distinct lack of stock market regulation, US investors were able to speculate wildly and buy stocks on margin, needing only 10 per cent of the price of a stock to be able to complete the purchase. Rampant speculation led to falsely high stock prices. When the stock market began to tumble in the months leading up to the 29 October 1929 crash, speculative investors couldn’t make their margin calls, and a massive sell-off began. Bank failures Once the US stock market crashed, millions of Americans began withdrawing their money from banks; fearful they would fail. The more money they withdrew, the more banks failed, and the more banks failed, the more money they withdrew. By 1933, more than 11,000 of the nation’s 25,000 banks had collapsed, and people simply lost their savings. Lack of available credit With the massive withdrawal of funds by depositors, US banks had no more money to lend. The surviving banks – unsure of the economic situation and concerned for their own survival – stopped being as willing to loan money, exacerbating the situation and leading to less and less spending.

People stopped saving After the stock market crashed, banks failed, and unemployment levels rose higher and higher, people understandably stopped spending money. This also deepened the economic crisis, as demand for products and services ground to a halt. Economist John Keynes referred to this hoarding of money and lack of desire to spend as the “paradox of thrift”. Preserving the gold standard Some economists believe that the US Federal Reserve allowed or caused the huge declines in US money supply, in part, to preserve the gold standard. Under this, each countr y set a value of its currency in terms of gold, and took monetary actions to defend the fixed price. It is possible that had the US Federal Reserve expanded monetary supply greatly in response to the country’s banking crisis, foreigners could have lost confidence in the US’ commitment to the gold standard – which would have led to large gold outflows and forced the US to devalue its currency. Likewise, had the Federal Reserve not tightened in the fall of 1931, it is possible that there would have been a speculative attack on the dollar, forcing the US to abandon the gold standard along with Great Britain. High unemployment During the Great Depression, unemployment in the US reached its highest level.

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

In 1933, 25 per cent of the US workforce was idle. Dust bowl A drought from 1930 to 1936, known as the Dust Bowl, aggravated the problems of the Great Depression. More than 1 million acres of farmland were rendered useless because of severe drought and years of over farming, and hundreds of thousands of farmers further swelled the ranks of the unemployed. US economic policy in Europe As businesses began failing, the US Government created the Smoot-Hawley Tariff in 1930 to help protect US companies, charging a high tax for imports and thereby leading to less trade between the US and foreign countries, along with some economic retaliation.

Parallels for today

The above has some very unpleasant parallels in current times. Some of US President Obama’s policies have similarities to those of Franklin Roosevelt, including massive budget deficits, huge stimulus packages and interventions in financial markets, an anaemic employment outlook and a lack of effective financial regulation. Globally, countries remain over indebted – often as a result of bailing out their domestic banks, global trade remains unbalanced, and there continues to be a

lack of effective financial regulation, with excessive risk as a result. Income and wealth inequality continues to grow and, most importantly, political leaders of all stripes only plan for the next electoral cycle, as opposed to the next 10 years – China being a notable exception. As the world’s largest economy, the US needs to take the lead for a global solution. Ongoing Keynesian stimulus measures cannot be applied indefinitely but, on the other hand, severe austerity measures in the US will push up unemployment, reduce tax receipts, and act as a continuing drag on the current account deficit of the US. Measures that must be considered include tax amnesties for US companies bringing offshore earnings home, a national valueadded tax, specific tax incentives for small businesses to hire staff, tax incentives for US citizens to save for their retirement (an Australian-style superannuation system), the withdrawal of foreign troops aboard, reduction on militarily spending, tax increases on wealthier Americans, cuts to overly generous retirement entitlements for certain unionised industries, social security and Medicare adjustments, et cetera. Once all of these options are considered, the US may start to gradually get its economic house in order. Charles Creswick is a financial planner with Logical Financial Management Australia. Professor Niall Ferguson will address the PortfolioConstruction Forum Conference on 25 August 2011.

Rate the raters

RATE THE RATERS 2011

Lonsec maintains its lead

Sprinting the final leg

The blame game

Movers and shakers

www.moneymanagement.com.au August 25, 2011 Money Management â&#x20AC;&#x201D; 19

Rate the raters

Lonsec maintains its lead Lonsec has yet again emerged as a favourite among dealer groups with its back-to-back victory in Money Management’s Rate the Raters survey, while van Eyk Research grabbed the second spot, writes Mike Taylor. LONSEC has been named Money Management’s Ratings House of the Year for 2011. It is the second successive win by Lonsec, based on responses from both fund managers and financial planning dealer groups as part of Money Management’s twostage Rate the Raters survey. While Lonsec again emerged as a clearcut winner across both dealer groups and fund managers, the 2011 survey process revealed what appeared to be the beginning of a recovery by van Eyk after nearly a year of negativity based around key personnel departures, including that of founder, Stephen van Eyk. Since Money Management conducted the two surveys it has been announced that the ownership of Lonsec has changed hands, with the ratings house now a part of the Mark Carnegie backed Financial Research Holdings which also houses superannuation ratings house, SuperRatings. The 2011 process also highlighted a serious divergence in attitudes between fund managers and dealer groups with respect to particular ratings houses, with the most extreme case being that of Zenith which – while struggling to gain support among fund managers – was strongly regarded by financial planning dealer groups. In a closely fought battle for runner-up as Ratings House of the Year, Money Management handed the prize to van Eyk, based on the comeback it recorded in the eyes of both fund managers and dealer groups.

Indeed, there was much for van Eyk to feel pleased about from this year’s Rate the Raters process, with dealer groups in particular strongly supporting its processes while marking the company down with respect to staff and client service. The Money Management survey process revealed that van Eyk was particularly poorly regarded with respect to client service and staff – something which clearly dragged down its overall score with respect to becoming Ratings House of the Year. Two of the companies to improve markedly in the 2011 Rate the Raters process were Standard & Poor’s and Mercer, with the latter gaining particularly strong support among the dealer groups, based on the quality of its research and client service. Morningstar was better regarded by respondents to this year’s Rate the Raters survey process, notching up improvements in terms of staff and client service, but appeared to still struggle with respect to the overall quality of its research when compared to the industry front-runners. Zenith – the smallest of the ratings houses – struggled in the fund manager segment of the Rate the Raters process, with the results well down on those of last year. However, in the dealer group segment it ran neck and neck with Lonsec on almost every criteria. What’s more, Zenith was the only ratings house in the dealer group survey not to record a negative vote, with its clients rating it as either “good” or “excellent”.

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

Amanda Gillespie Lonsec head of research Amanda Gillespie attributed the company’s back-to-back titles as Ratings House of the Year to its business model. “It is extremely pleasing that the hard work and focus of Lonsec’s research team over the past year has been acknowledged. Most importantly, our focus has remained on delivering timely, quality and objective research to our clients, while at the same time ensuring that the research product and service is specifically tailored to meet their needs,” she said. Gillespie said there had been a lot of debate around business models in the research industry but added that “Lonsec

would not have a successful research business if we compromised on the quality or objectivity of our research”. “Emphasising the objectiveness of the research process is important because, at the end of the day, our clients would not tolerate biased research,” she said. Gillespie also attributed the success to Lonsec maintaining a large and stable research team. She said this enabled the company to deliver in-depth research on a broad spectrum of products, proactively respond to growth in certain segments of the product market (ETFs, emerging market and income fund coverage, for example) and importantly, help to meet the different needs of a diverse advisory client base. Commenting on his company’s runner-up status in the 2011 Ratings House of the Year, van Eyk chief executive, Mark Thomas, paid tribute to a successful rebuilding effort and the recruitment of quality people into key roles. “We continue to keep investing in the business,” he said. “It is true that we went through a period that challenged the culture of our business, but the culture has won,” Thomas said. Looking at events over the past 12 months, he said there had been a number of turning points, and amongst those had been the retention of the Genesys mandate and the company’s solid performance in the fund management element of Money Management’s Rate the Raters series. MM

Rate the raters

Lonsec sprints the final leg A Money Management survey has seen Lonsec come out on top as the best-regarded research house in the country. Mike Taylor reports. LONSEC has emerged as the best-regarded research house among financial planning dealer groups, according to new Money Management research. A survey of dealer groups undertaken by Money Management as part of its Rate the Raters process, saw Lonsec confirmed as the best-regarded research house among dealer groups as measured across a range of criteria from client service through to model portfolios and value for money. It is the second year in succession that Lonsec has emerged at the top of the Rate the Raters dealer group league table. This follows on from the ratings house having topped the league table with respect to the perceptions of the fund managers they rate. The second-ranked ratings house in the dealer group survey was Zenith which, while dealing with a relatively small number of dealer groups within the overall survey sample, rated highly across virtually all criteria and managed the extraordinary achievement of never being rated at less than “good” or “excellent” by its clients. The other stand-out performer in the dealer group survey was Mercer, with both Standard & Poor’s and Morningstar both being better regarded in 2011 than during the previous survey period. The survey outcome suggested that while van Eyk is still paying the price for some senior personnel changes in recent years, the underlying quality of its work remains highly regarded by dealer groups. While Lonsec ranked well across all the survey criteria, consequently securing its leadership, it was outranked by both van Eyk and Zenith with respect to model portfolios, with van Eyk’s web tools the most highly regarded in the industry. The ratings company to move up most markedly in the survey was Mercer, with clients particularly pleased by its asset allocation research, its fund and company research, as well as its model portfolios. Where value for money was concerned, big global brands Standard & Poor’s and Morningstar fared worst among dealer group respondents, while Mercer and Zenith emerged as best regarded. The distinctive van Eyk model appeared to be well received by dealer groups while that of Lonsec appeared to garner a mixed response. The dealer group element of the Rate the Raters survey revealed the degree to which key personnel and client relationships are crucial to the overall rank of ratings houses. Lonsec emerged as strongest with respect to overall perceptions of its client service, closely followed by Zenith, Mercer and Morningstar. MM

Table:

Overall Rating

Overall Rating Average Score

Zenith

3.1

van Eyk Research

2.8

1 – Awful

Standard & Poor's

2.9

2 – Poor

Morningstar

2.9

3 – Good

Mercer

3.0

4 – Excellent

Lonsec

3.1

Table:

10% 20% 30% 40% 50% 60% 70%

80% 90% 100%

Client Service

Average Score

Zenith

3.3

van Eyk Research

2.7

1 – Awful

Standard & Poor's

3.0

2 – Poor

Morningstar

3.2

3 – Good

Mercer

3.3

4 – Excellent

Lonsec

3.4

Table:

10% 20% 30%

40% 50% 60% 70%

80% 90% 100%

Fund and fund company Fund and Fund Company Research research Average Score

Zenith

3.6

van Eyk Research

3.4

1 – Awful

Standard & Poor's

2.9

2 – Poor

Morningstar

3.2

3 – Good

Mercer

3.1

4 – Excellent

Lonsec

3.2

Table:

10% 20% 30%

40% 50% 60% 70%

80% 90% 100%

Model portfolios Model portfolios Average Score

Zenith

3.4

van Eyk Research

3.3

1 – Awful

Standard & Poor's

2.7

2 – Poor

Morningstar

3.0

3 – Good

Mercer

2.9

4 – Excellent

Lonsec

3.1

10% 20% 30%

Table:

Value formoney Money compared just lowlow cost Value for comparedtoto just cost

40% 50% 60% 70%

80% 90% 100%

AssetAllocation Allocation research Asset research Average Score

Average Score

3.3

Zenith

2.8

van Eyk Research

3.1

van Eyk Research

3.0

1 – Awful

Standard & Poor's

2.7

2 – Poor

Standard & Poor's

3.0

2 – Poor

Morningstar

2.7

3 – Good

Morningstar

2.8

3 – Good

Mercer

2.9

4 – Excellent

Mercer

3.6

4 – Excellent

Lonsec

2.9

Lonsec

3.1

Zenith

10% 20% 30% 40% 50% 60% 70%

80% 90% 100%

1 – Awful

10% 20% 30% 40% 50% 60% 70%

80% 90% 100%

www.moneymanagement.com.au August 25, 2011 Money Management — 21

Rate the raters

The blame game Claims by the financial planning industry that all industry participants, including research providers, should be liable for some client losses has been met with a mixed response from the research side, writes Milana Pokrajac. RESEARCH houses are currently not included in investigations following product failures, despite being regulated and having a licence to participate in the system, according to the Financial Planning Association (FPA) deputy chief, Deen Sanders. Sanders, along with the rest of the financial planning community, has long advocated a “more proportionate” retail investor compensation system, which would see all industry participants, including research houses, appropriately liable. He claimed dealer groups and small financial planning practices should not carry all the responsibility on their own, especially not in circumstances where a product or a managed investment scheme fails.

Background

Earlier this year, the Treasury released its review of compensation arrangements for consumers of financial services, compiled by lawyer, Richard St John. St John found that the current system was inadequate, as licensees relied heavily on professional indemnity insurance. The review therefore recommended the creation of a last resort compensation scheme which would be funded by licensees; the pooled money would be drawn upon when a professional indemnity insurer fails to compensate a client for their loss. The FPA had initially come out in suppor t of the scheme, but sought further discussion about the extent to which failed investments should be blamed on financial advice given to the client, and the extent to which the proposed scheme should be funded by licensees alone. In its submission to the Treasury’s review, the association has put the view that a consumer protection system would not be effective or complete

unless the responsibilities of all participants in the ‘pooled investment chain’ are “appropriately recognised and are made accountable for their failings to retail consumers”. These include product issuers, ratings agencies, research houses, auditors, and regulators – among others, according to the FPA. “An investor relies on a financial planner to know and understand products that exist in the market place; a financial planner in turn should be able to rely on the experts that guide them in relation to the qualifications and application of products,” Sanders said. Sanders further stated that there was currently no capacity within the system for those parties to be called upon for compensation, other than a civil suit undertaken by the planner or the client – whoever may have relied on their advice – which he claims is neither sensible nor effective. “We’re not suggesting that the research houses should take all the responsibility either – it’s a question of proportionality in terms of what pieces of information and evidence do people rely on to inform themselves over a decision,” he added.

Mixed opinions

Zenith Investment Partners director David Wright and van Eyk Research chief executive officer Mark Thomas have agreed that seeking researcher accountability was fair and reasonable. “If it was found that a research group had been negligent or lacked detail in their due diligence approach in rating a product that ultimately failed, then sure, that research group should bear some of the responsibility for the future,” Wright said, adding researchers should probably be included in the proposed compensation scheme. “Anything that builds consumer confidence in the financial advice industry needs

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

suggested models, and there’s compliance around that – but ultimately it’s up to the adviser to implement those things,” Thomas said.

Remuneration model still a concern

Deen Sanders to be shown in a positive light,” he added. However, while noting it was important that everyone played a role, Morningstar’s co-head of managed fund research, Chr is Douglas, argued researchers are not able to know the individual needs and objectives of clients. “What we’re providing is a broad class service to the market, so financial advisers can be more acute and aware of which fund is more suitable for their clients,” Douglas said. This argument was supported by Standard & Poor’s (S&P) chief Leanne Milton, who added it has never been S&P’s role to conduct “due diligence” on information provided by fund managers. “It is fund managers that verify the data provided to research houses; research houses are not auditors or investigators,” Milton said. Thomas said his company had an ongoing dialogue with the regulators, and had assisted them in inquiries around certain questions; adding that this was the role which should be played by research providers. “In dealer group land, they’ve got

Liability should not be an issue as long as all participants create, recommend or enter the investment with eyes wide open, according to van Eyk chief. The research provider remuneration debate has long been running in the industry, but Thomas said there still needed to be greater disclosure around the pay for ratings model. “If you’re giving advice to someone based on research which is funded by a promoter – the client should be made aware,” he added. However, FPA’s Sanders said the association was less concerned about who pays for the research, but rather about conflicts that arise from that. “If you buy the material, but you can’t rely on it for purposes of protection, you have to ask ‘why is it so expensive?’,” he said. Conflicts could be eliminated by reducing the “shopping mentality of product manufacturers where they just keep shopping until they find a researcher that’s prepared to say positive things,” according to Sanders. “There is no requirement for multiple validation of data that is in the hands of consumers and advisers; three agencies out of four might have rated the product poorly, but the only one that gets reported is the one that rates it high,” Sanders said. Thomas added the Treasur y had recently stated that conflicts did exist within pay for ratings models. “I don’t know whether that’ll make it through to regulation or letter of law; I have no issue with people charging for ratings, provided those who are relying on them are made aware that that is the case,” he said. MM

Rate the raters

Movers and shakers Some of the key players in the funds research sector have recently undergone major executive and ownership changes. Milana Pokrajac examines how much impact – if any – such high profile moves could have on a research house. THE funds research industry has certainly experienced major changes over the past 18 months, with the past few weeks proving to be particularly exciting for the sector. The industry has witnessed changes of ownership, and major executive appointments, as well as departures. For some, the impacts of such events – if any – are yet to be seen. Zurich Financial Services started the avalanche in early June, with the company announcing it would sell Lonsec to Financial Research Holdings (FRH) – a company substantially led by private equity specialist Mark Carnegie and superannuation ratings house SuperRatings. Just days after FRH managing director Jason Clarke said he expected little change for clients and staff of Lonsec, the then general manager of research, Grant Kennaway, departed the company – with his colleague Amanda Gillespie stepping into his former role. However, Kennaway quickly found a new home at Morningstar, where he

Table:

will head fund research for the Asia Pacific region, starting in November. Not long after Lonsec announcements, Standard & Poor's Funds Research (S&P) chief Mark Hoven announced he was leaving his role as managing director, and is yet to announce his next move. It is understood that Leanne Milton and José Ordonez will fill Hoven’s role. Similar events occurred two years ago within another research house, when Stephen van Eyk resigned from the company that bears his name – van Eyk Research. His departure was followed by others, with Nigel Douglas (who replaced van Eyk as head of research) also leaving the company. Stephen van Eyk's 25 per cent stake in the company was then purchased by New Zealand's Pyne Gould Corporation through a private equity deal last year, while Mark Thomas continued to manage the company, along with other newly appointed directors. Thomas had experienced the aftermath of these events first hand, with van Eyk

Research losing a couple of high profile contracts such as Westpac and Count Financial, which was then followed by job cuts. Since then, the company has recruited several analysts and appointed new heads of research and ratings. Thomas said the impact of such high profile changes could be enormous, but it also came down to the culture of the organisation, noting that his company had a 20-year succession plan in place. “In the situation when you’re talking about a funds management organisation where there is a portfolio manager who the organisation has built the process around and that person leaves – that’s pretty significant,” Thomas said. “But if you’re talking about an organisation which has a number of senior people like Lonsec, Morningstar and ourselves – and then you’ve got a change at the top – well, it’s more of a cultural issue in the medium term that you need to be monitoring. “That is because the person that’s left isn’t responsible for the entire performance of an offer,” Thomas added. The claim that every organisation is greater than one individual was supported by Morningstar’s co-head of managed funds research, Chris Douglas. Douglas said companies need to ensure there are people who will be able to quickly take over from those departing the company. “But there is no doubt that it shakes things up a bit. It can impact morale and

Grant Kennaway people’s view of where the business is heading…it creates a degree of uncertainty,” Douglas said. However, he said that clients usually did not make decisions overnight. “For a dealer group to change their research house is quite a long process, and an intensive process at that,” he said. “In the short term, you don’t really see much impact, but longer term – it’s all about how these organisations react,” Douglas added. Nonetheless, if past events are anything to go by, the coming 12 months and next year’s Money Management Rate the Raters survey results should prove interesting. MM

Researcher profiles

Company Name

Date Commenced

van Eyk Research

1989

Zenith Investment Partners

2002

S&P

2005 in Australia

Morningstar

CEO

Number of analysts Senior Junior

Number of products researched

Number of sectors researched

Number of clients

Own products

Remuneration method

Mark Thomas

436 strategies/ 5000 funds

250

Blueprint funds

Licensee subscription

David Wright & David Smythe

575

n/a

Licensee & fund manager subscription

Leanne Milton & Jose Ordonez

606 strategies/ 2002 funds

104

n/a

Pay for ratings and subscription

1999 in Australia

Anthony Serhan

333 strategies/ 4400 funds

n/a

Subscription

Mercer

1945

David Anderson

n/a

4684 retail funds

365 (globally)

138 (incl. institutional)

Multi-manager funds for insto investors

Subscription (software)/ fee-for-service (consulting)

Lonsec

1985

Craig Semmens

596

60 (incl. sub-sectors)

320 (Licensees)

n/a

Pay for research and subscription

Source: Money Management

www.moneymanagement.com.au August 25, 2011 Money Management — 23

OpinionSoftware Software offers the soluton Alexei Piltiaev explains how implementing the right software solution can help financial planning businesses tackle the compliance and administration issues flowing from the proposed Future of Financial Advice changes.

ith less than 12 months until proposed Future of Financial Advice (FOFA) reforms come into effect, there isn’t a great deal of time to adapt and fine-tune your business processes for the new regime. While many questions regarding future legislation remain unanswered, there is no doubt that financial planning businesses need to evolve and quickly adopt new technologies and the solutions they provide in order to survive and prosper under this new regime. Part of the solution is undoubtedly found in software – which is the centrepiece for communication and interaction with clients. Efficient, cost effective and most importantly user friendly software should be paramount. Starting the evolution with software solutions, which cater to both back and front office operations, is the ideal process. When purchasing a new software solution in preparation for FOFA, some deciding factors would be considering your business requirements now and in the future, how the software would be used, and who would use it specifically within your business.

How can software assist before and after FOFA?

One of the major changes in the FOFA reforms is the switch to a fee for service remuneration model from commission based payments. Adapting your practice to the new model may not be an easy task. With more emphasis being placed on the fees clients pay and the service they receive in return, the importance of tracking the services provided to the client, as well as the time spent providing these services, has never been higher. Fortunately, intelligent software can assist in a number of ways: 1. Establish the time and costs involved in servicing existing and new clients. With many advisers facing the question of how much to charge for advice, implementation of a software solution to help track the time spent on each client by the adviser, as well as the support staff, may provide some answers. This process may take some time getting used to but should over time provide you with a realistic and accurate pricing model for your services. 2.Standardise processes and service offerings for your client base. Your initial efforts of timing and pricing your services will consequently allow you to standardise your processes and help establish service offerings for your client base. Having established a clear understanding of time and costs involved in providing a service to a client, a business can realistically plan for future expansion as maximum capacity to service clients with current resources will be known.

Business requirements

Before committing to any software solution it is important to factor in your current business size, its location, and future expansion plans. For example, if a practice plans to expand into multiple offices then software with a centralised database and internet access may be exactly what is required to allow easy flow of information between locations, regardless of geographical position.

Software use

Generally every business is likely to have a number of users with varying needs. Broadly, depending on how hands-on an adviser is, they may prefer simple to use calculators and modelling tools to help illustrate a strategy or concept being conveyed to the client. An adviser may also be interested in the business management aspects and, as such, would prefer a variety of practice management tools. A paraplanner, however, would prefer more in-depth modelling capabilities which produce detailed illustrations of outcomes of recommended strategies. Last but not least are support staff who would most likely prefer simple data entry, reporting and easy access to client information. When analysing the spectrum of user requirements, it can be seen that one contradicts the other. On the one hand, a simple standalone calculator for a client meeting may be required and, on the other, an indepth modelling tool which will allow illustrations of multiple scenarios and strategies. Software, just like financial planning advice, needs to be suitable to a client’s needs and objectives. It is imperative that the right solution is chosen for the business. For example ,a sole practitioner will benefit from software with a strong emphasis on Client Relationship Management (CRM) functionality and less detailed modelling features. An adviser working alone may not have sufficient time to completely model all of the possible scenarios, but may use stand alone calculators, models and template driven tools to formulate an overall strategy. Bigger practices employing paraplanners and multiple support staff will find a single system, covering both customer relationship management and modelling functionality, more suitable to their needs. In the past it has been argued that as financial planning software becomes more comprehensive, complexity of its use also increases. This may be true in certain aspects, however the efficiencies achieved through a single software solution for the entire business cannot be overlooked. For example, a good all encompassing system will only require a single data entry point, with entered information then used throughout the entire system whether for database segmentation, modelling or final advice document preparation. This

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

means that every staff member is at all times using the latest information available for the client and is constantly aware of all interactions with the client. A single system will also likely reduce time spent on data entry, human errors and omissions prevalent in maintaining multiple systems.

Task automation

The more complete systems will allow automation of routine tasks like marketing campaigns, templates for advice documents and regular client reviews thus greatly reducing the daily burden. Any improvements in efficiency, provided by investment in software, will likely lead to higher capacity to take on and service new clients. It should be noted that simply buying a financial planning application and installing

it on the computer may not be enough. Some initial investment of time and resources may be required to either adjust the system to your business process, or adjust some of your business processes to the system. There will always be debate around the best financial planning software solutions as it is evident that the “one size fits all” approach does not apply to all business models. When looking to create efficiencies within your business in preparation for the new regime, it is important to acquire software which will suit your business needs now and in the future and not just because it has hundreds of features. Alexei Piltiaev is a software trainer at Fiducian Portfolio Services.

OpinionChina Chinese aspirations signal growth Emerging market growth opportunities still exist if investors know where to look, writes Skye Macpherson.

h e re’s n o d o u b t e m e r g i n g e c o n o m i e s h a v e c re a t e d significant investment opportunities over the last decade and despite suggestions that capitalising on this growth will become increasingly challenging, there is one way to tap into emerging markets which has largely been overlooked – hard and soft commodity equities. Demand for these items is primarily being generated by the developing world, but meeting the required level of demand requires a global supply effort.

Urbanisation drives demand

The ongoing urbanisation of China and many other emerging economies is the key driver of demand for food, metals and energy. Today, the urban population represents more than 50 per cent of total population and according to the United Nations, 70 million people will be urbanised annually over the next 25 years. This is the equivalent of more than three times Australia’s population improving their living standards each year via better housing and transport. A key reason for relocation to urban environments is the quest for improved living standards – which includes higher incomes – and the difference between the two is significant. As at 31 December 2010 China’s National Bureau of Statistics reported the average Chinese urban income was Renminbi (RMB) 21,000 – almost three times the income earned in the country (refer to figure 1). As personal wealth increases, metal intensity per person rises. In most developed countries steel consumption tends to peak at around 1,100 kilog ra m s p e r p e r s o n p e r a n n u m , b u t today in China steel intensity stands at less than half that figure. However, u n l i k e s o m e o f t h e m e t a l s w h e re consumption reaches a natural peak, energy consumption continues to rise as wealth increases. This rise correlates with increased use of heating, cooling and electronic equipment purchases

such as computers and televisions, which we use every day.

Don’t underestimate Chinese aspirations

The aspirations of urbanised Chinese to improve living standards shouldn’t be underestimated and is particularly evident in the shift towards larger apartments for families. In 2001, just 33 per cent of urban homes had more than two rooms. However, there’s been a push to upgrade the urban housing stock over the past decade. Furthermore, despite home ownership being high in first-tier cities such as Beijing and Shanghai, in second-tier cities (characterised by Knight Frank as having a population greater than three million and GDP per capita of more than US$2,000 per person) and below, where 92 per cent of China’s population re s i d e s, h o m e ow n e r s h i p re m a i n s below 25 per cent. In fact, China has 93 cities with a population of one million or more and 20 cities with a population in excess of five million. There’s also a very low level of penetration in consumer items that require raw materials in production, such as airconditioners, washing machines, plasma televisions, vacuum cleaners and refrigerators. In addition, modes of transport are changing, with bicycles being upgraded to motorbikes and eventually cars. In 2010 new car sales in China reached almost 14 million vehicles, making it the world’s largest car market, yet penetration is three cars per 100 people compared to 80 cars per 100 people in the US. Furthermore, China has become the second largest importer of oil in the world, consuming as much energy as the United States, but its current oil demand intensity is only 2.5 barrels per person per annum relative to 22 barrels per person per annum in the US.

Rising wealth improves nutrition

From an agricultural perspective, rising wealth is resulting in improved nutrition,

“

The aspirations of urbanised Chinese to improve living standards shouldn’t be underestimated and is particularly evident in the shift towards larger apartments for families.

”

via the consumption of more food and the introduction of protein. This increase in demand for protein has an important multiplier effect on grain consumption because it generally takes two kilograms of grain to produce one kilogram of chicken, four kilograms of grain for one kilogram of pork, and seven kilograms of grain for one kilogram of beef. Protein demand in China has risen dramatically over the last 20 years. The average growth rate for pork is 4.3 per cent per annum, beef is 9.2 percent and chicken is 7.2 percent. Despite this growth, protein consumption, at 53 kilograms per person per annum, is significantly less than the 125 kilograms per person currently consumed in Hong Kong.

Demand remains robust

The drivers behind demand for hard and soft commodity equities remain very robust. China, India, and other populous nations such as Brazil and Indonesia, account for 43 per cent of the global population. However, they all have a GDP per person of less than US$9,000 per annum. Consequently, there is still significant demand growth for food, metals and energy. While movements in commodity prices capture the attention of markets

Figure 1: Chinese urban versus rural income in RMB 18,000

Income per Capita: Urban Household (RMB)

16,000

Income per Capita: Rural Household (RMB)

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

and drive sentiment in the short-term, w h a t’s m o re i n t e re s t i n g f r o m a n investor’s perspective is understandi n g h ow t o a c c e s s t h e u n d e r l y i n g volume of growth for these raw materials. By investing in companies that are increasing their production to meet demand – whether it’s in metals, energy or agricultural products – good investment returns can be achieved in the long term.

Structural drivers lead to superior returns

There are two key reasons why hard and soft commodity equities have delivered superior returns to global equities: • The significant demand for underlying commodities from emerging markets, and • The asset or resource owners have tended to make larger margins and delivered greater return on equity over time. Also, hard and soft commodity equities provide other benefits to investors relative to emerging markets equities. Firstly, commodity equities are listed o n e xc h a n g e s a l l ov e r t h e w o r l d , p r ov i d i n g i n v e s t o r s w i t h g re a t e r geographic diversification. Secondly, while many of the companies in the hard and soft commodity equity sector supply the raw materials to emerging countries, many are listed on Western e xc h a n g e s. T h e s e e xc h a n g e s h a v e stringent standards regarding the treatment of minority shareholders and corporate governance, including the requirements for continuous disclosure and dissemination of information to all shareholders, tighter rules on insider trading and market manipulation, and more transparent corporate ownership structures. For an equity investor this provides a way of gaining exposure to emerging market growth within the governance structures and regulatory environment of the developed world. Emerging markets are behind the structural shift we are experiencing in the demand for food, metals and energy. By investing in hard and soft commodity equities, investors are afforded an alternative exposure to the ongoing growth that is anticipated from emerging markets. Investors who want to gain exposure to this trend should seek out companies that are producing hard and soft commodities and who are growing their productive volumes to meet demand. Skye Macpherson is a portfolio manager for Colonial First State Global Asset Management’s global resources fund.

Source: CEIC, NBS

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

OpinionInsurance Testing the buy-back t l u fa line in trauma insurance

While the buy-back structure within trauma insurance policies exists to benefit clients, Col Fullagar identifies a series of inconsistencies in how the facility is represented within the various insurers’ policies.

he first trauma insurance policies appeared on the Australian market in the late 1980s. While considered state-of-the-art at the time, in comparison to the contracts available today, they could either be described as “basic” or “focussed”, depending on the view taken. The number of insured events was much fewer than today, with cover typically being provided for conditions such as: • Heart attack; • Stroke; • Cancer; • Coronary artery bypass surgery; • Kidney failure; • Major organ transplant; • Paralysis; • Multiple sclerosis; • Blindness; • Major head trauma; • Severe burns; and • Parkinson’s and Alzheimer’s disease. Policies were only available as riders to

other insurances such as term life. The trauma insurance benefit amount had to be equal to, or less than, the term insurance. When a trauma insurance benefit was paid, the term insurance was reduced by the amount of the payment. It was not long, however, before advisers identified a problem associated with this structure.

Case study

John’s adviser identifies that John needs: • $600,000 of term insurance in order to provide John’s wife with sufficient funds to invest and replace his income if he died; and • $200,000 of trauma insurance, being made up of $150,000 medical reserve, $25,000 to fund the children’s school fees, and a $25,000 contingency reserve. Two years later, John has a severe stroke which leaves him almost totally incapacitated. He receives a payment of $200,000 under his trauma insurance; however, because of the severity of his stroke, the

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

full amount goes towards funding the immediate and ongoing medical costs. In line with the policy terms and conditions, John’s term insurance has been reduced to $600,000 – ie, by the amount of the trauma payout. Unfortunately, John never recovers from the effects of the stroke and he dies just over a year later. The term insurance of $600,000 is paid; however, unfortunately this amount is well short of what John’s widow required to invest and replace his income. The trauma insurance payment, while assisting John at the time of his stroke, had the effect of exposing his family to financial risk when he died. The problem arises because the term insurance and the trauma insurance needs are quite separate and distinct from each other. Term insurance is protecting in areas such as: • Final expenses;

• Income replacement; • Estate equalisation; • Charitable bequests; and • Funding of school fees, etc. Trauma insurance is protecting in areas such as: • Ability to obtain optimal medical care; • Financial access to rehabilitation; and • Lifestyle needs such as pre-funding school fees, funds to enable a reduction in working hours, a superannuation boost to fund early retirement, etc. To overcome this problem, by the early 1990s a facility was incorporated within trauma insurance policies that enabled the term insurance lost when a trauma payment was made to be reinstated or bought back subsequent to the payment. This was, and continues to be, referred to as the term insurance buy-back benefit.

Buy-back design

Initially, the buy-back facility provided for the reduced death cover to be reinstated

load to the expenditure of the trauma insurance payment and driven in part by risk research competitive pressure, eventually amended the buy-back design such that two-thirds of the reduced term insurance cover could be repurchased after one year and the remaining third after the second year. Eventually, this evolved to the current position where generally 100 per cent of the reduced term insurance cover can be repurchased after one year.

Basis of buy-back

While the logic underpinning the buy-back facility is consistent, even if sometimes viewed as consistently flawed (as is often the case with product design), how the facility is represented within the various insurers’ policies is far from consistent across the market. The inconsistencies fall into a number of areas: When can the buy-back be exercised? The majority of contracts indicate that the term insurance can be bought back on the first anniversary of the drawing of the trauma claim cheque or the crediting of the insured’s account with the claim proceeds.

the trauma sum insured was paid in full.” The reasons behind the inclusion of an arbitrary 30-day time limit are difficult to understand for two reasons. Firstly, control over the timeframe is in part with the insurer which calls for and assesses the requirements, and secondly, the consequences of failing to meet this timeframe are potentially dire – ie, the substituting of an early trigger date with a much later one. Whatever the reason, the position is further exacerbated by the fact that the meaning of the wording is unclear. Must the insurer make the assessment within 30 days? Or is it that the definition must be met within 30 days and the insurer can make their assessment subsequently? What are the terms of buy-back? The repurchased term insurance is generally subject to equivalent underwriting additional premiums and exclusions as the original term insurance, although one insurer – not quite logically – carries over any loadings and exclusions that applied to the original trauma insurance, rather than the term insurance. While it should be unnecessary for the client to provide any information concerning their health, finances, occupation or

While it is important for contracts to allow for different “terms to apply between insurers so that normal competitive forces can exist, a number of aspects of the buy-back facility would benefit from consistency within the industry.

”

in equal instalments on the first, second and third anniversary of the trauma insurance claim payment. The logic (ignoring whether or not the logic held true to reality) was that if a trauma insurance payment was made, the life insured would indicatively put that money in the bank. If the life insured died the next day, the full trauma insurance payment would still be intact. As the trauma insurance payment equalled the reduction in death cover, the money in the bank plus the subsequent reduced death cover payment would equal the original amount of term insurance required. If, on the other hand, the life insured survived for a period of time after the trauma insurance payment was made, the funds in the bank would gradually be used. Again, the original logic was that these funds would be expended equally over a three-year period. Therefore, to compensate for this, the facility to repurchase the reduced death cover was also spread evenly over a threeyear period. Product designers driven in part by a realisation that there would be a front-end

Typical wording is: “The option to restore the sum insured for death cover becomes available one year after we pay the full trauma cover claim.” Other contracts, however, have a different option date, for example: “The (buy-back) option can only be taken up 12 months after the later of: • The date we receive your fully completed claim form; and • The date when you satisfy the criteria under (the insured event definition).” The advantage of the above wording is that both these dates would generally predate a claim payment, resulting in an earlier availability of the buy-back option to the client. Finally, at least one policy has the following wording: “12 months after a valid claim form is lodged with (the insurer).” A “valid claim form” is subsequently described as: “one which resulted in a claim payment … and where (the insurer) determines the … definition of the trauma condition suffered was met within 30 days of the claim form being lodged. If there is no valid claim form, the relevant date for reinstatement is 12 months from the date

pursuits when applying for the buy-back, a number of policies simply refer to health, and remain silent on the other three. At least one insurer appeared to reserve the right to reassess smoking status. The buy-back facility will have an expiry date which – depending on the insurer – might be age 65, 70, 75 or the policy anniversary after age 74, or potentially some other date. The repurchased term insurance may or may not be eligible for subsequent indexation increases, again, depending on the insurer. A potential disadvantage can occur if the buy-back does not apply to partial trauma insurance payments. For example, if the buy-back wording for a full trauma insurance payment is: “The policy owner can affect a new policy … for a sum insured equal to the trauma insurance payment”, it could be that the life insured is only able to buy-back the reduced amount of insurance that applied subsequent to a partial trauma payment, as set out in the example below: Original trauma insurance benefit amount = $500,000 Partial trauma payment = $125,000

Subsequent full trauma payment = $375,000 Buy-back only applies to the $375,000. Is buy-back pro-active or re-active? Some insurers state, “We will write to the policy owner within 30 days (of the option date)”; whereas others indicate, “You must notify us in writing of your intention to exercise the (buy-back option)”. Still, others are silent as to who will do what, simply stating that the buy-back facility will become available at a particular time. As one adviser reports: “Our firm has had about 100 claims over the past 4 years and the issue of buy-backs is a real concern. We have only found one company that has a process that ensures the buy-back offer goes to the client. We have lost count of the number of times we have had to make sure the offer is made. It’s ordinary when insurers make offers and then [do] not deliver on them.” It is important for the adviser and client to know who will do what, because if the responsibility to activate the process lies with the client, this responsibility may well be deemed to pass through to the adviser. Were a buy-back option to be missed because the adviser did not remind the client, this could result in liability also passing through to the adviser. Commission payable? The insurer’s commission schedules are often silent as to whether or not commission is payable on the term insurance put in place as a result of the buy-back facility. The attitude of some insurers appears to be that there is little or no work involved in effecting a buy-back facility, possibly due to the mistaken belief that commission is to compensate advisers for the effort involved in “making the sale” which – in the case of a buy-back – would generally be small. If commission is not payable, the client and adviser may logically feel that the ‘no commission’ premium discount should apply, although this is unlikely to be the case. Further, if the adviser knows that commission is not payable, the adviser may feel that it would be appropriate to charge a fee for the work involved in assisting with the implementation of the buyback facility. While it is important for contracts to allow for different terms to apply between insurers so that normal competitive forces can exist, a number of aspects of the buyback facility would benefit from consistency within the industry – eg, the basis of the option date. Consistency in areas such as this would reduce the chances of an adviser or a client misunderstanding the position and missing out on what would otherwise have been a genuine risk insurance opportunity. The catalyst for this article was a very recent real life example of a terminally ill client who almost missed their buy-back opportunity because of confusion and uncertainty as to when the buy-back should apply. Col Fullagar is the national manager, risk insurance, at RI Advice Group.

www.moneymanagement.com.au August 25, 2011 Money Management — 27

OpinionMarkets

Where are we now? The GFC never ended, and the bill for a quarter century of profligacy may be due, Robert Keavney argues.

hat happened to the collateralised debt obligations and other toxic assets, which were the focus of so much attention during the global financial crisis (GFC)? Were they repaid? Broadly no. Have they increased in quality? No – the United States housing has continued to fall. So where have all these toxic assets gone? Some losses have been borne by investors, for example, Basis Capital. Some have been written off by the institutions that owned them. But a significant volume has been taken by the Federal Reserve and a large sum remains with banks – in both cases being carried on the books at values which are illusory. Part of the measures introduced to ameliorate the GFC was to allow the banks to pretend their toxic assets were worth more than they are. The Fed is doing likewise. This is a strategy of solving a problem by pretending its not

there - like a frightened child who closes his eyes so he can’t see what frightens him. The crisis was materially a result of overindebtedness. Has this reduced? During the Great Depression, total American debt as a percentage of gross domestic product (GDP) reached 300 per cent, unprecedented and not approached again for half a century. However, since 1980 debt has inexorably risen to a peak in the recent – I mean current – financial crisis, above 370 per cent. It has since inched down to around 350 per cent, but it is still stratospheric. In no sense has the debt problem been addressed. Yet, as markets have risen over the last few years, the confidence of investors has followed. There has been a tendency to think that the crisis is over and that we have entered an enduring recovery phase. The thesis of this article is that the GFC never ended and is still ongoing.

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It is well known by anyone who reads a newspaper that “America is weak, Europe is wounded, and Australia is slowing down, though hanging by a thread. ”

The John Wayne School of Economic Management

The generation now running America grew up watching cowboy movies in which, unfailingly, the US Cavalry - with John Wayne in the lead - rode over the hill to the rescue just when the peril was the greatest. During the GFC it was governments and their central banks - led by Captain Ben Bernanke - that rode to the rescue. Hooray! The authorities engaged in a flurry of

extreme action, for example guaranteeing banks, initiating stimulatory programs (cash for clunkers, etc), quantitative easing (QE) and so on. Unfortunately, the effectiveness of the ‘rescue’ can be seen in the state of the economy today. Most of the strategies implemented lacked any historical evidence suggesting they would be effective. Yet, similar policies were applied in Europe, China and Australia.

continued to decline to a level 5 per cent below a decade earlier. (One result of QE was to pump up equity markets, at least temporarily. Federal Reserve chairman Ben Bernanke claimed credit for this as a benefit of Fed policy - as if it is a role of central banks to manipulate markets.) The economy has remained anaemic. The deficit has remained horrific, indeed indebtedness increased to pay for the stimulus. Over each of the last three years, the United States government borrowed 36-40 per cent of everything it spent. The end result of this, if continued too long, is unthinkable. The dilemma America faces today can be described as follows: the deficit needs to be addressed for growth to be sustained, but growth is too weak to address the deficit. In other words, in the short term, ever more debt seems unavoidable. Buttonwood concludes, “In a sense the bill has come due for the past 25 years.” He speaks of Britain but it aptly describes America and parts of Europe.

How Did It Happen?

In my youth there was a great caution about debt – it could lose you your house. This was a result of the influence of the last generation with living memory of the Great Depression. In those days, loans were principal and interest, and monthly reductions of principal, were monitored with satisfaction by mortgagees because to be debt-free was to be secure. Debt was to be gotten rid of as fast as possible.Governments ran surpluses as often as deficits.

How Did These Attitudes Change?

It is well known by anyone who reads a newspaper that America is weak, Europe is wounded, and Australia is slowing down, though hanging by a resources thread. Meanwhile, China’s economy – seen by many as Australia’s saviour – is artificially inflated by excessive investment. In aggregate, these represent a most serious situation, not improved - and perhaps made worse - by the various ‘rescues’ administered so far. Since I began writing this, the stock markets fell sharply on August 7 and S&P downgraded US debt. Events are moving so fast that, by the time this is published, it may be clear to everyone that the situation is deeply serious. However, the recovery of markets from the depths of the GFC implied a widespread, but quite illusory, view that the world’s economic problems were being overcome. It is therefore worthwhile highlighting how grave the situation is.

Comfort Uber Alles

Much of the developed world is overindebted. Deleveraging is a pre-condition for a sustainably healthy economic environment. But deleveraging is painful. The modern Western world is obsessed with comfort, and this has been reflected in the economic arena in an obsession with avoiding downturns - at any price. As the Economist’s Buttonwood column (July 30, 2011) put it: “Economic policy…over the last 25 years has followed one overriding principle: the avoidance of recessions at all costs. For much of this period, monetary policy was the weapon of choice. When markets wobbled, central banks slashed interest rates. A by-product of this policy was a series of debt financed asset bubbles. When the last of those bubbles burst in 2007 and 2008, the authorities had to add fiscal stimulus and QE to the mix.” During this period of extraordinary stimulus real median household income has

Howard Marks of Oaktree Capital (memo from the chairman, July 21, 2011) traces it back to 1967, with the creation of the first credit cards that did not require the full balance repaid every month. This meant the debt need not be repaid, so long as the interest was paid. Previously consumers could only buy what they could afford, defined as having the money to pay for it. Credit meant consumers could buy things they would be able to pay for later. However, as the practice of permanent outstanding balances was adopted, credit has come to mean consumers can buy things they can afford to pay the interest on. Marks comments: “One of the most striking aspects of debt in the modern era is that little if any attention is paid to repayment of principal. No one pays off their debt. They merely roll it over - and add to it. In other words, repayment of principal [is] absolutely unimaginable.” Simultaneously, governments have adopted the same policy, spending more than they earn most years and incurring compounding debts. Since 1980, the US has run a deficit every year except four. Once borrowers owe more than they can afford to repay, they lose control of their fate, which then relies on the willingness of borrowers to roll over their debt. This is true for individuals, businesses and nations. All three would be under threat if we return to credit crunch conditions. So far, Greece is the only nation to have come face to face with the threat of a lenders’ strike. But, eventually, anyone

who can’t repay their debts could suffer this. Many great nations, including the no-longer triple A rated US, cannot pay off their debts (ie. repay the principal). At this moment there is no question of lenders abandoning America, and long may it remain so. We are just exploring extreme possibilities should US debt compound inexorably, and lenders take fright.

American Political Zealotry

The US default deadline crisis underlined the lack of balance of the political class, whose role it should be to chart a path to a stronger future. Australia’s politicians may (with a couple of exceptions) be bland and stand for no more than getting elected, but at least they wouldn’t knowingly bring the country to its knees in pursuit of ideological purity. If you had to select someone to lead America out of its difficulties, you would not pick many of the people who currently populate the legislature.

The European Problem

All that really needs to be said about Europe is that it faces the same problems as America, compounded by the absurdity of a common currency for Germany and Greece, and everything between. In aggregate, Europe seems riskier than America. Like the Federal Reserve, the European Central Bank has acquired toxic loans, valued unrealistically, and is continuing to do so. (If anyone invents a way to short these institutions, I would love to get set.) Europe is terrified about Greece being the first domino, due to the extent of loans by their banks to Greece and its banks. Then add Portugal, Ireland, Spain and Italy as danger points and there is a possibility of a full-blown banking crisis. Already there are reports of interbank lending in Spain becoming frozen. But the banking system is integrated worldwide. The GFC has demonstrated that when banks don’t function, nothing functions. Earlier in the GFC, governments stepped in to guarantee their banks but a government guarantee is only as good as the government that gives it. We have a new game now, unknown in the modern world and governments are becoming the weak link.

Turning Japanese

So far America, Britain and much of Europe has followed the Japanese precedent lengthen the wick, and hope that something turns up. This precedent is not inspiring. The Japanese introduced ineffective stimulus package after ineffective stimulus package at their economy. Will the West do likewise? I fear so. The world faces the possibility of an international banking and sovereign crisis. I acknowledge that history teaches that extrapolating existing conditions into the future is fraught. It is also possible that we may somehow find a way to muddle through. We may also enter another false dawn, such as we experienced in the two years since March 2009. Nonetheless, the current situation is grave. Robert Keavney is an industry commentator.

www.moneymanagement.com.au August 25, 2011 Money Management — 29

Toolbox Certainty about life’s two certainties The Australian Taxation Office has indicated the two certainties in life – death and taxes – will become closely intertwined when it comes to super pensions. David Shirlow addresses some of the technical issues which might arise.

hey say there are two certainties in life: death and taxes. With the release of draft ruling 2011/D3, the Australian Taxation Office (ATO) is signalling that it has firmed its view that one certainty will trigger the other in relation to super pensions. The draft ruling is part of the ATO’s process of formalising its views on when super income streams start and finish for tax purposes. It has given rise to some contentious technical issues, which seem inevitable given some underlying deficiencies in the 2007 superannuation tax reform legislation. While the ruling considers account-based pensions only, the principles discussed will typically apply to other pension types payable under the SIS Regulations. The problem with death: broadly, the ruling indicates that, if a super pensioner dies and the pension does not revert automatically to the deceased's spouse or other dependant, then the pension ceases immediately upon death. This means that, from the time of death, tax is payable on income derived in relation to assets supporting the deceased member’s account, including capital gains arising on sale of the assets in order to pay out a lump sum death benefit. Thus the benefit is depleted not only by any benefits tax payable (and typically benefits tax will be payable where the benefit is paid to an adult child of the deceased), but also by the capital gain tax (CGT) and other tax liabilities. Some have suggested there is nothing new in this view, as it is in line with an interpretive decision the ATO had issued as early as 2004 (ID 2004/688). However, that interpretive decision dealt with a specific set of circumstances and was based on the law prior to the 2007 reform amendments. The release of the ruling is a more comprehensive indication of the ATO’s approach to the current law. It opens the way to debate the validity of taxing pension accounts post-death not only on a technical basis, but also at the policy level. The ATO and industry have been engaged in debate for an extended period of time via the National Tax Liaison Group

Superannuation Technical Sub-group, and a number of industry and professional bodies are likely to challenge the ATO’s views on technical grounds. There isn’t space in this article to outline the carefully considered arguments for and against the ATO’s position but, in any case, perhaps it’s time to focus not just on what the law does say, but on what it should say. If it’s not saying what it ought to say then the solution is to have it amended. A number of submissions are also likely to be made to government advocating amendment of the law to remove uncertainty and ensure reasonable taxation outcomes. Many would argue that, if the ATO’s view of the current law prevails, then the relevant tax provisions create two layers of tax and an unreasonable tax burden on affected death benefit recipients. This includes beneficiaries not only of self-managed super funds (SMSFs), but also many large funds. Further, if the tax treatment of all relevant income stream accounts were to change immediately upon death, there would be administrative complications for many large funds. Typically, funds are notified of the death of a pensioner some days (or weeks, in some cases) after the date of death. Funds cannot retrospectively re-engineer the appropriate tax treatment of relevant accounts for the period from death until notification without extensive and expensive manual intervention. From a planning perspective, if the ATO’s view prevails then advisers and their clients will need to continue to consider using reversionary pensions where possible and reconsider buy and hold investment strategies. For SMSFs, consideration also needs to be given to whether or not pension assets should be segregated and the role of anti-detriment benefit deductions in neutralising the impact of post-death fund tax. Cessation of pensions in other circumstances: the ATO also considers that an income stream ceases in either of the following circumstances: - Where there is a failure to comply with the pension rules and the payment standards in the SIS Regulations. For example,

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

if the minimum annual pension payment requirement is not met in an income year, the income stream is considered to have ceased. Indeed, the trustee is taken not to have been paying a superannuation income stream at any time during the income year in which the relevant requirements are not met, which presumably means that the pension has ceased at the end of the previous income year (or was never an income stream, if the minimum payment requirement was not met in the first income year). • Upon receipt of a valid request from the member to fully commute the income stream. One question is whether this view holds even if the request is expressed to be to commute the income stream at a future date. Another is whether the view holds even if there is still a final pension payment to be made. (Note that an income stream is not considered to have ceased upon receipt of a request to partially commute the income stream.) As with death, one of the tax implications of cessation of income streams in these circumstances is that any subsequent income or capital gains realised in respect of the assets that were supporting the income stream will be subject to tax. Lump sum benefits: further, if an income stream ceases in the circumstances described above then in effect the ATO also considers any subsequent payment from the relevant account is a superannuation lump sum. The ATO also indicates that a payment made upon partial commutation from an interest (in practical terms, an account) that supports a super income stream is always a superannuation lump sum (never an income stream benefit). These views may have significant tax implications for clients under the age of 60, since the tax treatment of lump sum benefits differs from income stream benefits for them. Thus the draft ruling reinforces the need not only to ensure pension payment standards are met annually, but also to plan carefully well before a direction is made to commute a pension. David Shirlow is the executive director at Macquarie Adviser Services.

Briefs RUSSELL Investments has launched an online volatility toolkit intended to help advisers, institutions and investors navigate their way through the economic downturn. The toolkit includes perspectives on changes to capital markets, as well as articles about investment strategies for those who are worried or confused, behaviours that threaten financial security, and how investors can learn from volatility. The articles also include historical overviews of previous market cycles. ASTERON has announced a range of product upgrades as part of a plan to help advisers navigate through upcoming Future of Financial Advice (FOFA) reforms. The enhancements include a 10 per cent discount to its income protection product over the life of the policy for all new business from 15 August in an attempt to make the comprehensive policy more affordable for new clients. In an effort to incentivise advisers to use the platform, the life insurer is also offering an additional 5 per cent commission until 18 October for advisers using the technology solution, Lifeguard EQ. HERSCHEL Asset Management (Herschel) has transferred the trusteeship and management of the Herschel Absolute Return Fund to Bennelong Funds Management (Bennelong). Bennelong has appointed Kardinia Capital, a new boutique created in partnership with Mark Burgess and Kristiaan Rehder, to manage the fund on its behalf. Mark Burgess is now Portfolio Manager of the fund, while Kristiaan Rehder will commence with Kardinia Capital on 1 September 2011. Herschel has transferred the management of the Herschel Absolute Return to Bennelong, who will take over trustee responsibilities and management of the fund immediately. This is the second boutique Bennelong has brought on board in three months, with two former UBS small cap asset managers joining the firm in May to form Avoca Investment Partners. APOSTLE Asset Management has picked up another key mandate for its Londonbased associate global bond manager, H2O Asset Management. It said Mercer had awarded H2O a $100 million sovereign and currency mandate following a manager review. Apostle said the mandate from Mercer had followed on from a $270 million allocation from Colonial First State’s First Choice multi-manager funds in May. Apostle director of sales, Richard Borysiewicz said the H2O investment approach was well-regarded by Australian institutional investors and represented a good fit with their investment objectives in the current environment.. “This is the third H2O mandate we have secured in Australia this year,” he said. “This is an extremely important development for us and one that we believe establishes the firm’s position in the local market.”

Appointments

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

Superannuation Fund, Chairman of ABN AMRO Australia and member of its Advisory Council. Equiti Capital executive director Lindon Toll said the appointment was an important step and one that will help the company grow its long-term business strategy. “Dr Hewson is a very highly experienced economic, business and finance specialist, and we are delighted to have him join us as Chairman,” Toll said.

John Hewson EQUITI Capital Limited has named the economist and former politician, Dr John Hewson, as the firm’s new Chairman of the Board. Renowned for his work as an economist for the Australian Treasury, the Reserve Bank of Australia, the International Monetary Fund and the United Nations, Hewson is also well known for his political career as Leader of the Liberal Party and the Coalition in opposition, and before that as Shadow Treasurer under Andrew Peacock. Dr Hewson was a founding executive director of Macquarie Bank, a trustee of the IBM

WB Financial Management has announced that Paul Bonney and his business, Plan B Financial Solutions, will be joining the firm as a sub authorised rep and corporate authorised rep. Plan B Financial Solutions has no relation to the publiclylisted company Plan B Wealth Management. Bonney is originally from the United Kingdom, where he gained two decades of experience in stockbroking, investment banking, investment trading and financial planning. He moved to Australia in 2005 and has held financial planning posts with Tupicoffs, Credit Union Australia and Commonwealth Financial Planning. Bonney holds an Advanced Diploma of Financial Services,

Move of the week

with his tax governance and risk management experience.

FORMER Association of Financial Advisers (AFA) president Dr James Taggart, OAM, has been elected to represent Australia on the board of Asia Pacific Financial Services Association (APFinSA). Dr Taggart's financial planning career spans 24 years, since he established and grew his own financial planning practice in 1987. He holds a Doctor of Business Administration and a Masters Degree in Commerce, majoring in Financial Planning. In 2010 he was awarded the Medal of the Order of Australia. Dr Taggart said he was honoured to have been nominated and accepted to the Board, which represents the interests of advisers across the Asia Pacific region. In congratulating Dr Taggart, AFA chief executive officer Richard Klipin said AFA members, including Rod Scurrah and John Craik, have served with distinction in the region in previous years, and Dr Taggart’s election would continue this tradition. “We are very pleased that as we enter the Asian century the AFA and its members are represented by someone of Jim's calibre,” Klipin said.

GLOBAL financial services firm Russell Investments has appointed Thomas Gillespie as director, risk advisory. Dr Gillespie will be based in Russell’s Sydney office, working with existing and new clients to establish and implement industry best practice risk management. Dr Gillespie brings over 20 years experience in risk strategy, and joins Russell from the Australian Reward Investment Alliance (ARIA), where his most recent role was head of risk. He has also held senior positions at Citigroup and JB Were.

and started his own planning practice, Plan B, in Brisbane in September 2009. Plan B is one of 18 adviser businesses in WB Financial Management, a boutique adviser-owned financial services company.

CROWE Horwath has appointed goods and services tax (GST) practitioner, Jonathan Doy, as a principal in the Sydney Tax Advisory group. Doy has 26 years experience as a senior indirect tax adviser in the

Opportunities SENIOR FINANCIAL ADVISER – PRIVATE CLIENTS Location: Adelaide Company: Terrington Consulting Description: A national financial services firm is seeking an experienced financial adviser to provide specialist solutions to a high-net-worth client base while promoting portfolio growth. As a self-licensed entity, this firm is able to provide the right applicant with access to the flexibility and credibility to offer diverse strategies, while remaining supported through research and administrative support. The successful applicant will possess a passion for providing needs-based solutions that will translate into sales growth and financial success. He/she will ideally be working towards the CFP or a relevant tertiary qualification. Strong technical and analytical skills are essential as well as the ability to communicate effectively with clients. To find out more, visit www.moneymanagement.com.au/jobs or contact Emily on 0422 918 177, emily@terringtonconsulting.com.au.

PARAPLANNER Location: Melbourne Company: FS Recruitment Solutions Description: As a paraplanner in this organisation, you will be presented with a variety

big four accounting firms, with his last eight years spent at PwC. He was the first equity GST partner at a big four firm following the introduction of the GST in 2000. Most recently, Doy was a major contributor to the Australian Taxation Office’s (ATO’s) 2010 GST Governance and Risk Management Guide. Crowe Horwath chief executive officer Darren O’Brien said that Doy’s appointment would benefit the accounting firm’s clients due to his strong GST technical expertise combined

THIRD Link Investment Managers (TLIM) has appointed Vinnie Wadhera to the new role of head of distribution. Based in Sydney, Wadhera will be responsible for managing relationships with both financial intermediary channels and institutional investors for the firm’s existing and proposed fund offerings. He will report to TLIM director and portfolio manager Chris Cuffe. Cuffe said he was pleased to welcome Wadhera to TLIM to assist the firm grow its funds under management.

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

of tasks that will challenge your ability to research and learn different strategies, along with the ability to make a difference to the client. The key to success in this role will come down to the pride you take in your work, diligence in keeping up with legislative and compliance issues, attention to client goals and efforts to make statements of advice more personalised. To be considered for this role you will have a minimum of 6-12 months experience working in a financial planning business supporting advisers, along with a positive attitude and a minimum of DFP 1-4. In return, you will be provided with professional support and resources, investment research, and a regularly updated career development plan. For more information and to apply, please visit www.moneymanagement.com.au/jobs or contact Kiera Brown at FS Recruitment Solutions – 0409 598 111, kbrown@fsrecruitmentsolutions.com.au.

FINANCIAL PLANNERS Location: Hong Kong Company: ipac Asia Description: ipac Asia has a presence in Hong Kong, Singapore and Taiwan and is a member of the Global AXA Group. The firm is now seeking

entrepreneurial candidates to join its Hong Kong team to offer all-round financial solutions. ipac Asia offers a competitive base salary and an attractive bonus/commission package, as well as a 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 opportunities, please visit www.moneymanagement.com.au/jobs or forward your resume to vivian.chan@ipac.com.hk.

FINANCIAL PLANNING OPPORTUNITIES Location: South Australia, Northern Territory and Western Australia Company: Terrington Consulting Description: Terrington Consulting is interested in receiving applications from qualified financial planners who are ready to make their next move or are interested in being alerted to equity opportunities. Current positions include: paraplanner/review planner, Adelaide; financial planner, large chartered accountancy firm, Adelaide; financial planner, Darwin; senior

financial planner (business start-up); senior financial planner (equity option), Adelaide; as well as financial planners in Iron Triangle, Mt Gambier, Clare Valley, Alice Springs and Metropolitian Perth. For more information and to apply, visit www.moneymanagement.com.au/jobs or contact Emily on 0422918177 or emily@terringtonconsulting.com.au.

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 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 roles are predominately commission only with full back office support provided. However there are also a number of salaried plus 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 to: inquiry@sterlingassociates.net.

www.moneymanagement.com.au August 25, 2011 Money Management — 31

Outsider

“

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

Where there’s smoke, there’s super AS a one-time two pack a day man (now reformed), Outsider can certainly understand the difficulties some people face in trying to give up the smokes. Before he is accused of getting up on his high horse, Outsider is prepared to confess that the extra exercise involved in walking up and down a flight of steps every time he felt like a quick puff was a key motivator in his decision to abandon the cancer sticks. However for those who can face the extra exertion Outsider completely understands the appeal of ducking out for some ‘fresh air’ occasionally. Outsider is purely talking about individuals here, because it’s less common to hear about a financial entity having trouble shaking its nicotine addiction. But that appears to be the case for the New

Zealand Superannuation Fund, which was recently sprung by the country’s Greens party for holding shares in Shanghai Industrial Holdings, whose subsidiary Nanyang Brothers Tobacco manufacturers - amazingly – tobacco. It’s certainly not illegal to hold shares in a tobacco manufacturer, but if you’re a state-run fund, a member of the Responsible Investment Association Australasia and have a publically stated policy of not investing in ‘unethical’ stocks such as tobacco, then it’s not exactly a great look. It leads Outsider to wonder if perhaps nicotine is as tough a habit to shake for a $19 billion superannuation fund as it is for a hardworking journalist – and if so is there a nicotine patch big enough to help?

A sweeter ordure OUTSIDER is a pragmatic chap who has lived long enough to witness a range of economic and financial phenomena - from the wool boom through to the ‘87 crash, the “tech wreck” and, more recently, the Global Financial Crisis. He also notes that while Australians have labelled the period between 2007/08 and 2008/09 the GFC, there are those on Wall Street who have chosen to label it the “Great Recession”. But what’s in a name, a financial dung-heap by any other name would be as noisome. It is with this in mind that Outsider notes the most recent Roy Morgan Research concerning member satisfaction with superannuation funds and the fact that those who belong to industry superannuation funds are likely to be happier than those who are members of the so-called “Big six retail funds”. Putting aside his natural cynicism with respect to relative exposures to infrequently

valued unlisted assets, it all seemed to make perfect sense to Outsider. That was until he turned to a table in which the various funds were ranked according to member satisfaction and noted that the trouble-plagued MTAA Super was ranked at 15 ahead of the likes of AXA, AMP, Sunsuper, St George and Mercer. Looking at the relative performance of those funds ranked behind MTAA Super, Outsider can only conclude that their members are either far more exacting in their expectations or that MTAA Super members are just happy to see their fund has resumed returning some positive numbers. According to all the data Outsider has seen, the thing most likely to influence member attitudes to their superannuation fund is the rate of return they are receiving. Self-managed superannuation funds are, of course, the great exception because few people feel comfortable blaming themselves.

Virtually trading OUTSIDER has neither pretended nor aspired to be a trader. There is something about their mode of attire – all suspenders, buttondown collars and bow-ties – that has always served to put him off such a career change. Bow-ties are to traders what French cuffs are to funds management BDMs. However, he was last week reviewing both his prejudices and his options after receiving word that financial media outlet CNBC was offering up to US$1 million in prizes for budding traders from Australia, the UK and the United States.

The company was offering participants the opportunity to take five fictitious trading accounts containing one million virtual dollars to see what they can build between 12 September and 18 November by trading on the New York Stock Exchange, the NASDAQ, AMEX, LSE and our local ASX. Apparently, at the end of every week the participant with the highest percentage gain will be deemed the weekly winner and receive a weekly prize. However, the real objective has to be aiming to finish first or second over the whole contest when a Maserati is on offer for the runner-

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

up, with US$1 million going to the winner. Mrs O has never let Outsider play with the family budget but he is sure she would not object to him playing with fictitious money if it meant adding a lazy million to the bank accounts just before Christmas. However, she would not be all that impressed by a Maserati having always believed that four doors on any conveyance are better than two. Outsider shall spend the weekend shopping for bow-ties and buttondown collars. His girth means suspenders would be a superfluous adornment.

Out of context

“You’re going to have riots – all these irate planners waving flags and throwing firebombs. It’d be like London.” Planners will be less than amused if the Government refuses to grandfa-

ther commissions, says Radar Results principal John Birt.

“The FEAL board certainly had their finger on the pulse when they chose the theme for this conference: catastrophe, chaos, confusion.” Hostplus CEO David Elia comments on the unusual (or perhaps not so unusual, considering recent market events) theme name of the Fund Executive Association conference in Melbourne.

“Save your money: turn to fraud and look young forever.” Director of KPMG Forensic Peter Morris urges delegates at the FEAL conference to save money on antiageing cream and become the eternal 38-year-old average perpetrator of superannuation fraud.