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Vol.25 No.29 | August 4, 2011 | $6.95 INC GST
The publication for the personal investment professional
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OPT-IN WILL INCREASE UNDERINSURANCE: Page 5 | ADDRESSING LONGEVITY RISK: Page 14
Lack of comparison undermines FOFA By Mike Taylor THE Federal Treasur y has admitted it has not done a complex international comparison of the Government’s proposed Future of Financial Advice (FOFA) changes and experience in major overseas jurisdictions. The absence of any such comparison has been revealed in the Treasury’s answer to a question on notice during Budget Estimates by Tasmanian Liberal Senator, David Bushby, and reveals that while the Treasury has monitored events overseas, its observations have fallen short of definitive point-bypoint comparisons. Bushby has told Money Management he is disappointed in the Treasury’s answer and will be pursuing the matter further when Parliament resumes after the winter recess. For his part, Financial Planning Association (FPA) chief
executive Mark Rantall questioned whether objective judgements could be made about FOFA in the absence of international comparisons. “Reforms of this magnitude that impact on both clients and financial planners should be viewed in a global context to see what works and what doesn’t,” Rantall said. “As an example, opt-in is not being introduced anywhere in the world because it is an inappropriate law,” he said. Rantall pointed to the fact that examinations had been introduced in South Africa and were having a major impact on financial planners. “The UK is looking at enshrining financial planning in legislation and banning commissions on insurance is not being implemented to my knowledge,” he said. “What global legislators are doing is impor tant to give context to the extent of the
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FOFA has caused deep concern in the industry and these issues need to be pursued. - David Bushby
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Mark Rantall wide ranging changes here and should be considered,” Rantall said. Senator Bushby had asked the Treasury whether, in the context of its work on the FOFA changes, it had performed research on overseas regulation regarding payment for advice. He asked whether, if this were the case, Treasur y could complete a “matrix” based on
Online tinkering tainting PDSs By Benjamin Levy
FUND managers with digitised short-form Product Disclosure Statements (PDSs) are altering the online accessory documents so often that they are in danger of accidentally including links to obsolete accessory documents when selling a product. An increasing number of fund managers and super funds are placing short form PDSs online, with a link to accessory documents within the PDSs as a method of reducing paperwork. However, financial software firms are raising concerns that fund managers are tinkering with the ‘incorporation by reference’ documents so often it is exposing them to the danger of including outdated accessory documents on PDSs that are provided to clients. By law, fund managers are allowed to include ‘incorporation by reference’ accessory documents in their short form PDSs.
Grahem Sammells IQ Business Group chief executive Graham Sammells said the risk of including obsolete accessory documents was much higher with online material in recent PDSs. “The issue is more at risk and pervasive in just the online world, and in the digital world there is a higher potential that changes will get made because it seems to be easier,” Sammells said. Digitised documents were becoming increasingly pervasive and more of an issue to manage, he said. Fund managers need to ensure that changes to accessory material are managed
and coordinated properly, Sammells warned. Senior consultant for superannuation communications company Transform Consulting, Ian Taylor, said that some funds were almost totally unaware of the issues involved in short form PDS and had to be walked through the legislation. Transform offers a short form PDS for super funds. “They’re really not aware of a lot of the issues, particularly around the incorporation by reference stuff,” Taylor said. Although easily updated online shor t form PDSs were “a beauty”, fund managers needed to maintain an ‘order trail’ to ensure that clients were accessing the current suppor ting documents, Taylor said. Aon Hewitt changed its existing governance procedures for their short form PDSs to ensure that any incorporation by reference changes Continued on page 3
whether countries had banned payments to financial planners in relation to superannuation products, managed investments and life insurance. Taking the question on notice, the Treasury later said it had “monitored developments in comparable overseas jurisdictions” and in particular the United Kingdom. However, it said it had not undertaken any
“matrix” of jurisdictions on financial advice issues. “Different regulator y approaches make a direct comparison between jurisdictions on the basis of superannuation, managed investment and life insurance through such a matrix difficult and possibly misleading,” the Treasur y response said. It cited, as an example of the difficulty in completing such a matrix, the “unique” nature of the Australian superannuation system. Senator Bushby told Money Management he did not accept that Australia was particularly unique or that the Treasury could not provide an appropriate comparison and that he would be pursuing the issue fur ther when Parliament resumed. “FOFA has caused deep concern in the industry and these issues need to be pursued,” he said.
Unethical lending practices flagged By Chris Kennedy SOME lenders have been taking advantage of regulatory loopholes to either recommend clients start up a self-managed super fund (SMSF) or obtain a declaration of business purposes to circumvent the National Consumer Credit Protection (NCCP) Act, according to industry sources. CPA Australia has formally advised its members that some lenders are seeking declarations from accountants that the purpose of a loan or lease will be predominately for business use, which helps a lender form a view that the loan is outside the requirements of the NCCP Act. CPA Australia has advised all its members
not to provide such a declaration, and if they do they should make rigorous enquiries beforehand. “You can assist your client in the lending process by providing them upon request, a statement on their financial position or other factual information about your client’s finances which you can verify,” the guidance states. CPA Australia financial planning technical adviser Keddie Waller said the requests for false declarations were most likely to come from smaller lenders and pertain to vehicle loans. A false declaration may have legal ramifications and in turn affect a member’s professional indemnity insurance, CPA Australia stated. Mortgage and Finance
Association of Australia chief executive Phil Naylor said a false declaration would represent a straight breach of the Act, and he would be horrified if such things were happening. “One of the things the NCCP Act was designed to do was to overcome those false business declarations that were made to indicate that the loan was for business purposes when it wasn’t,” he said. SMSF Loans director Craig Morgan said there was absolutely no question that some brokers and ‘property spruikers’ were crossing the line and advising people to establish an SMSF to invest in property. To make people aware that it can be done is fine, but when someone 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: Ashleigh McIntyre Tel: (02) 9422 2815 Cadet Journalist: Angela Welsh Tel: (02) 9422 2898 Melbourne Correspondent: Benjamin Levy Tel: (03) 9509 7825 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Tim Stewart 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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A wolf in cheap clothing
F
ederal ministers overseeing the development of new legislation at the same time as selling a carbon tax and counting numbers in caucus are very busy people, so it is unlikely the Assistant Treasurer and Minister for Financial Services, Bill Shorten, has ever walked through a shopping centre and spied bored young men in cheap suits spruiking real estate investments. If, in fact, the minister had fallen into conversation with these bored young men in their cheap suits, he might have been given pause to consider whether they were selling a product or giving advice or, perhaps, doing both. Superannuation specialist within the Institute of Chartered Accountants, Liz Westover, last week expressed concern about real estate agents promoting the virtues of purchasing real estate within a self-managed superannuation fund (SMSF) and, in doing so, clearly pointed to the fact that such people fell outside the regulatory strictures which guide both accountants and financial planners. She might have added that a significant portion of the Australian population does not understand what constitutes financial advice and that it remains far too easy for people operating well outside the scope of
2 — Money Management August 4, 2011 www.moneymanagement.com.au
More galling for the “financial planning industry is that some of those gullible consumers may later blame any losses they incur on the ‘adviser’ they met in the shopping centre.
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the Financial Services Reform Act to give what amounts to financial advice. The proposed Future of Financial Advice (FOFA) changes will not alter this reality. Notwithstanding the fact that bored young men in cheap suits ought not be in the business of ‘advising’ shoppers on how to invest in real estate, the practice is likely to continue and many gullible consumers will be none-the-wiser. More galling for the financial planning industry is that some of those gullible consumers may later blame any losses they incur on the ‘adviser’ they met in the
shopping centre. The Parliamentary Joint Committee into the financial services industry (the Ripoll Inquiry), which gave rise to the FOFA recommendations, did a reasonable job of traversing the issues that evolved out of the collapse of Westpoint and Storm Financial. However, it did not in any meaningful way address “advice” given outside of the formal advice industry and nor did it do more than pay passing heed to the development of socalled “industrialised advice”. The Australian Securities and Investments Commission (ASIC) will soon deliver its report on the provision of scaled advice – something which has the potential to give rise to further questions touching upon the utilisation of industrialised advice mechanisms as companies and superannuation funds seek to gain the scale and efficiencies necessary to remain competitive. While the Government is this month expected to release the first draft of the legislation resulting from its FOFA proposals, it is clear that a great deal more work remains to be done and that the bored young men in cheap suits will not soon be vacating a shopping centre near you. – Mike Taylor
News
Super funds may lose class order relief SUPER funds providing scaled advice to their members may soon be required to play by the same rules as the rest of the financial planning sector, as the corporate regulator proposes to revoke their class order relief from the so-called ‘suitability rule’. Superannuation trustees and their authorised representatives currently have class order relief from the requirements in s945A of the Corporations Act where a financial planner is required to know their client, know their product and ensure advice is appropriate. The proposal to revoke the class order exemption for superannuation funds was included in the ’Australian Securities and Investments Commissions (ASIC’s) newly released consultation paper 164 (CP164). ASIC said there were indications that very few funds are currently relying on the relief. “In addition, the Australian Government has announced that s945A will be amended
to clarify that AFS licensees can scale advice and still comply with s945A, making our relief less necessary,” the regulator stated in its consultation paper. CP164 Additional guidance on how to scale advice provides expanded guidance on provision of scaled financial advice, describing the difference between factual information, general advice and personal advice. However, in providing scaled advice services, financial planners would still need to comply with obligations under Chapter 7 in the Corporations Act and to the so-called ‘suitability rule’. When ASIC initiated its push for the introduction of scaled advice, the financial planning industry expressed concerns about liability and compliance issues. “The new guidance CP164 explains how you can scale advice in a way that complies with [these rules],” the regulator stated.
Unethical lending practices flagged Continued from page 1 without an Australian Financial Services Licence (AFSL) suggests an SMSF or explains how to establish one in order to help someone afford a property, that is completely inappropriate, Morgan said. He added that it was an interesting grey area, because under the Corporations Act an SMSF is not a financial product. But to set one up and Phil Naylor buy a property, the client would have to roll over their superannuation, which enters into financial advice territory, he said. “If not wholly illegal, and certainly [the Australian Security and Investments Commission] is taking a dim view of it, it’s inappropriate that an unqualified person starts telling people what they should be doing with their superannuation,” he said. Naylor said the MFAA had asked brokers to exercise caution in these areas, because they involve different risks and risk appetites – and unless brokers have an AFSL, they are treading in very dangerous territory. He recommended those without an AFSL steer clear of discussing SMSFs altogether.
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The regulator might cause further confusion rather than guidance or clarification for consumers and the profession.
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CP164 includes eight examples of giving information and advice to clients about car insurance, purchasing shares, investing in inheritance, adopting a transition-to-retirement strategy, superannuation pension products and retirement planning issues. The Financial Planning Association (FPA) welcomed CP164, but cautioned that without the consideration of how this interacted with ‘best-interest duty’, the guidance remained incomplete.
“The FPA had provided clear feedback to ASIC on this issue, and we strongly recommended that ASIC not release the consultation guidance paper until the best interest duty had been formulated and incorporated as part of this guide,” FPA chief executive officer Mark Rantall stated. Rantall said the regulator might cause further confusion rather than guidance or clarification for consumers and the profession. ASIC pointed out in its consultation paper that it was not yet clear whether the proposed Future of Financial Advice (FOFA) reforms would be introduced in their current form, declining to further comment on their implications on scaled advice. However, if and when the FOFA reforms are implemented, ASIC will review the updated guidance, while submissions to CP164 will close on Thursday, 8 September 2011.
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Online tinkering tainting PDSs Continued from page 1
went through a sign-off process before going on the Internet, Aon principal and actuary Jenny Dean said. Aon was one of the early fund managers to institute the short form PDSs. Any changes to Aon’s PDSs have to be signed off by legal counsel and the office trustee. Dean is the office trustee at Aon Hewitt. “I know that I will be reviewing the document before it replaces what’s on the web. So therefore
there’s version control, and we also keep copies of the versions,” Dean said. Fund managers must have version control for their accessory documents, she said. However, Dean said accidentally including an outdated document wouldn’t lead to legal action against the fund manager. “It would have to be a pretty major error, and there usually is a clause in most PDSs that they will be changed from time to time,” she said.
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www.moneymanagement.com.au August 4, 2011 Money Management — 3
News
Klipin encourages planners to continue their lobbying By Chris Kennedy
NOW is no time for advisers to ease up in terms of lobbying local members of parliament (MPs) around Future of Financial Advice (FOFA) issues, according to Association of Financial Advisers (AFA) chief executive Richard Klipin. In a speech to the national AFA roadshow, Klipin was again critical of two key elements of FOFA: opt-in provisions, and the banning of risk commissions within superannuation.
Klipin said an alternative to opt-in was strengthening opt-out provisions and making them easier to understand, rather than opt-in, which he said would drive up costs. Opt-in could drive up costs by around $100 per client between adviser time and staff preparation time, as well as increase costs from product providers, he said. Klipin also asked: why would you set up a payment system for insurance where you can get essentially the same product inside or outside a tax structure where one way the
adviser gets paid and one way they don’t, unless it was a political decision or designed to drive consumers into industry super funds? The AFA has now shifted from policy to politics and now is the time for advisers to continue going to see their local politicians and speak to them, Klipin said. MPs may toe the party line in person but if they all go back to the party room and relay that they are getting angst from their constituents then this will still influence the FOFA debate, Klipin said.
The AFA has a FOFA pack that will outline to advisers how they go about contacting their local member as well as other relevant information, he said. “We’re in the third quarter, this is not the time to drop the ball and think that any debate is now over,” he said. “We’re expecting draft regulation sometime in August. Once we get them, then we’ll get a sense of how successful we’ve been as a profession in arguing the toss – and then it’s our right to continue arguing,” he said.
Bennelong bags boutique By Ashleigh McIntyre
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FRESH from expanding its boutique offering with the addition of two former UBS small cap asset managers in May, Bennelong Funds Management is again looking to add to its manager line-up, with the addition of an Australian equity long-short absolute return fund. Bennelong has confirmed rumours that two hedge fund managers from Herschel Asset Management have agreed to move to the boutique fund manager, which currently manages almost $1.8 billion. Bennelong chief executive Jarrod Brown told Money Management the two portfolio managers who head the Herschel Absolute Return Fund, Mark Burgess and Kristiaan Rehder, plan to move to Bennelong on 1 September. The pair will form a yet-to-be-named investment business of which they will be majority shareholders. “They have tremendous past performance, a robust investment process and are very highly regarded in the absolute return space,” Brown said. Earlier in the year, Zenith gave the Herschel Absolute Return Fund a ‘recommended’ rating for its unblemished record of outperformance in a falling market, labelling it the “undiscovered gem” of hedge funds.
2011 Survey Winner CONGRATULATIONS to Laura Delaney of WLF Financial Services. Laura is the winner of the $500 Coles/Myer gift card for completing Money Management’s ‘Reader Survey 2011’. 4 — Money Management August 4, 2011 www.moneymanagement.com.au
News
Opt-in and fee-for-service will worsen underinsurance By Chris Kennedy
Pina Sciarrone
A MOVE towards opt-in and a shift to fee-for-service remuneration may force many consumers to walk away from advice about life insurance, according to AIA head of adviser services Pina Sciarrone. Referring to recent CoreData research commissioned by the Association of Financial Advisers
called Risking Everything, Sciarrone said the results clearly showed consumers were reluctant to pay up-front fees. Two in five respondents in the survey said they would not be prepared to pay fees on life insurance advice, and almost half said the reason they had not sought advice was an aversion to paying fees, Sciarrone said. “It’s telling us that consumers
don’t have a problem with commission at all – they want choice,” Sciarrone said. “A ban on commissions may force consumers to pay up front fees, and it may see consumers exit the market – that will exacerbate underinsurance,” she said. Members of corporate super funds valued the range of advice services they had access to,
according to the survey, particularly the ongoing interaction with their adviser, and the service was also valuable to employers, Sciarrone said. If opt-in is introduced these people will not opt-in to pay advice, and many will walk away from their corporate super fund. Many of these people will not seek advice after leaving that corporate fund, she added.
ISN talks up infrastructure and unlisted assets By Ashleigh McIntyre
THE Industry Super Network (ISN) has claimed exposure to infrastructure and unlisted assets has been a vital performance differentiator between industry and retail superannuation funds. Amid continuing discussion about the role of super fund investment in infrastructure, ISN chief economist Dr Sacha Vidler said the outperformance and reduced volatility of unlisted assets has been an important source of competitive difference for industry funds. He added it was a vital factor in their impressive investment performance. ISN used figures from Chant West on growth funds from 2009 to indicate that retail funds only allocated 9 per cent of their portfolio to unlisted assets while industry funds allocated 28 per cent. “This different approach to asset allocation has proved to be a vital performance differentiator for industry super funds as unlisted assets have both outperformed most other asset classes and also been less volatile,” Vidler said. Vidler said that during the global financial crisis, unlisted property and unlisted infrastructure experienced a shorter and shallower downturn than the precipitous crash that occurred in listed markets. However, one industry fund, MTAA Super, had a high exposure to unlisted assets and has recently been the subject of scrutiny over investment performance.
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www.moneymanagement.com.au August 4, 2011 Money Management — 5
News Good job prospects for Adelaide and Perth planners By Milana Pokrajac FINANCIAL planners based in Adelaide, Melbourne and Perth will be among the most sought-after professionals within the financial services sector in the third quarter of 2011, according to recruitment specialist Robert Walters. Robert Walters’ quarterly market update report found non-bank lending and wealth management sectors will see the highest levels of hiring this quarter due to growth and the re-emergence of consumer interest in personal investment. Robert Walters manager of banking and financial services in Brisbane, Samantha Campbell, said there will be strong demand for financial planners and relationship managers across most markets. “In particular, the Brisbane and
Melbourne markets will face a shortage of senior financial planners, and shortages of experienced relationship managers will also continue in Adelaide and Perth,” Campbell said. “These professionals can expect to receive the biggest salary increases and face multiple and counter-offers.” Business development managers and relationship managers in Adelaide and Perth will also see an increase in demand, according to the report. The Sydney banking operations market is also tipped to see increased hiring activity within selected segments, most notably investment markets and domestic banks. The report found that hiring within the banking and financial services sector would generally increase in this quarter, as the new financial year brings new budgets and headcount approvals.
Mixed results for S&P international property review By Angela Welsh
STANDARD & Poor’s Fund Services (S&P) has released its ratings on 21 funds in the International Property – Listed sector review. Most ratings have remained stable: 15 have been affirmed, with three downgraded and two upgraded. One fund managed by Advance remains ‘on hold’. In the review, S&P noted that performance of funds in this sector is still constrained by global economic events, despite signs of improvement. “We affirmed our five-star ratings, retaining our highest level of conviction in two funds managed by CBRE ClarPeter Ward ion Securities (formerly ING Clarion Real Estate Securities) and AMP Capital Brookfield, which remain the standout managers in the rated peer group,” S&P analyst Peter Ward said. Ward said the upgrade of two funds managed by RREEF matched the reviewers’ increased conviction in these funds since the previous ratings review. He cited changes within the global portfolio management team
and improvement to the continuity of stock coverage as the reasons for the upgrade. The three funds downgraded in the ratings review, two managed by Invesco and one by Resolution Capital, dropped from four stars to three stars. “Our conviction in the Invesco funds’ ability to consistently exceed their performance objective has been tempered somewhat due to the managers’ relatively conser vative por tfolio positioning,” Ward explained. “This follows a period of underperformance over several years,” he added. For Resolution Capital, Ward alluded to a number of significant team changes over the past 18 months. “In our view,” he said, “despite our high regard for the senior portfolio managers, the team is unlikely to be at full strength for a period.” He emphasised that the ratings agency retains conviction that Invesco and Resolution Capital can achieve their respective performance objectives. S&P will soon publish a sector report, which will include the key findings and sector themes from the review.
Sovereign debt issues will linger on By Mike Taylor R E S O LU T I O N o f t h e current European debt crisis will not necessarily serve to reduce the risk attaching to developed country s ov e re i g n b o n d s, a c c o rd i n g t o Blackrock Australia head of fixed income Steve Miller. He said that even if Greece, Spain and other Eu ro p e a n c o u n t r i e s
managed their way through the current debt crisis, the uncomfortable fact remained that most western countries faced demographic deficits. “It is likely public sector budgets face even more strain in the years ahead,” Miller said. “Retiree numbers are also likely to rise and the numbers of taxpayers is likely to fall on a relative basis. “ We n ow k n ow t h a t
s ov e re i g n d e b t i s n o t risk-free and traditional issuer-weighted fixed i n c o m e b e n c h m a rk s have not caught up to the new reality,” he said. Mi l l e r s a i d t h a t t o a v o i d t h e t h re a t o f sudden and hostile market events, investors would have to consider reconfiguring their fixed income allocations in a f a r m o re r i s k - a w a re manner.
6 — Money Management August 4, 2011 www.moneymanagement.com.au
Premium puts returns back on track By Ashleigh McIntyre FOLLOWING a major off-market buyback during the global financial crisis, Premium Investors has proved its returns are back on track by providing investors with a final dividend of 3.5 cents fully franked. Chairman Tom Collins said providing a strong dividend stream over the past year had been particularly gratifying given the buyback in 2009, which resulted in a 60 per cent reduction in the size of the company. “During the past two years your board has focused on restructuring the portfolio to a smaller, cost-efficient structure and enhancing the investment process to provide superior benefits to its shareholders,” Collins said in a statement to investors. Premium Investors is currently trading at around 76 cents compared to its net tangible asset value of 91.6 cents as at 30 June. Collins said the present unique structure of the company’s investments should assist the maintenance of a sound stream of fully franked dividends in coming years, provided no major deterioration of domestic or global financial markets is experienced. The dividend record date is 12 August 2011, with a payment date of 9 September 2011.
ANZ introduces new over-50s cover ANZ has launched a new life insurance product for over-50s that it claims will fill a gap in the market. The ANZ 50+ Life Cover has been designed to meet immediate post-death financial expenses up to $15,000 including funeral costs, credit card bills and utility bills. The product has a level premium plan where costs do not increase with age, with the option to cap premiums so the maximum a policyholder pays will never exceed the total benefit. There is also no requirement for medical tests or health questions, and cover is for life. Other features include up to $30,000 for accidental death after one year, availability of a premium payment pause of up to three months, and payment of the benefit within two business days. OnePath general manager of insurance, Gavin Pearce, said the product fills a gap in the market by providing affordable funeral and immediate postdeath expense cover, where premiums do not go up year-on-year. “Our research found a strong appeal for insurance cover that allowed consumers to avoid burdening their loved ones. Specifically, an insurance product that had no premium surprises,” Pearce said.
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News
After death pension tax unfair: Long By Mike Taylor AN Australian Taxation Office (ATO) draft tax ruling on the taxation of pensions after death has been described as “unfair, inequitable and against the spirit of the tax law”. The Self-Managed Super Fund Professionals Association of Australia (SPAA) chair, Sharyn Long, criticised the ATO approach. She said the retrospective nature of the draft tax rulings on pensions from a super fund following the death of a retired member was not only inequitable, but would be applied retrospectively to 1 July, 2007. “The SPAA believes the retrospective nature of this draft tax ruling is unfair and inequitable and against the spirit of the tax law,” she said. “Take an example of a property that has been held in a
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fund for many years. The capital gains tax bill could be a substantial part of the superannuation fund balance,” Long said. “If the trustees were not expecting to have to pay capital gains tax because the member is in pension phase, typically no tax contingencies will have been made by the fund for this purpose.” She said this posed questions for trustees and auditors signing off on annual accounts, since they had to determine the likelihood of the tax payments being due based on future events. “Rulings like this should be forward-looking so people can plan ahead for their retirement with confidence and not be afraid of leaving crippling tax bills for their grieving families when a member has died,” Long said. She said the SPAA hoped the ATO would seriously reconsider its position.
Sharyn Long
AIA leads life insurance risk market jump By Ashleigh McIntyre
INFLOWS into the life insurance risk market have grown 10.4 per cent over the year to March 2011, reaching $9.5 billion. New data from Plan For Life has found both inflows and sales in the life insurance risk market to be strong, with almost all of the major players recording double-digit percentage growth. Overall, AIA recorded the biggest jump in sales at 45 per cent, followed closely by AMP (29 per cent) and Tower (18 per cent). But it was Tower that experienced the largest increase in premium inflows with 28 per cent growth, followed by AIA (16 per cent) and OnePath (10 per cent). Inflows to the individual risk lump sum market grew by almost 10 per cent, with all companies reporting higher inflows. These were led by AIA (19 per cent), Zurich (13 per
cent) and OnePath (11 per cent). The individual risk income market also experienced inflow growth of 9.5 per cent, with BT leading the way at 23 per cent, followed by AIA (19 per cent) and OnePath (16 per cent). Premium inflows into the group risk market experienced the highest growth of any sub-market at 12 per cent, with significant percentage increases experienced by both Tower (53 per cent) and AIA (15 per cent). Sales in this sub-market jumped by almost 20 per cent, although the report stated this was likely to be somewhat fuelled by the cyclical remarketing nature of the business. AMP led the way in sales with 219 per cent growth – but it must be noted that this was off a relatively low base, and due to a change in their reporting method. Market leaders AIA also experienced strong growth of 62 per cent, followed by Tower with 34 per cent.
Count SMSF partnership offers new tools By Milana Pokrajac ALMOST half of Generation Y buyers will buy an investment property as their first purchase, putting aside the traditional ‘Australian Dream’ of a home, according to a survey conducted by Mortgage Choice. The Mortgage Choice 2011 First Time Property Investors Survey also found that Gen Y would not only ignore the first home owner grant and first home buyer concessions, but 77 per cent are currently making lifestyle sacrifices to achieve their goal. This compares to 66 per cent of Generation X and 66 per cent of baby boomers. Mortgage Choice spokesperson Kristy Sheppard said the findings called into question the concept of the ‘Great Australian Dream’ for people aged 30 years and younger. “Is it still a home, is it property in general – whichever type they can afford – or is it simply about investing in an asset they expect to bring in income and/or appreciate in value?” Sheppard said. “While it is clear that every generation is focused on profiting from their investment over the long term, many Gen Y respondents recognise building a nest egg rather than building a nest may better suit their income and needs at this early stage of their lives,” she added.
A SPECIALIST self-managed superannuation fund (SMSF) company in which Count Financial took an early strategic shareholding, Class Super, is the latest entity to enter into a strategic partnership to bring a new range of tools to SMSF trustees. T h e c o m p a n y h a s e n t e re d i n t o a s t ra t e g i c p a r t n e r s h i p w i t h C C H Australia with an offering specifically targeted at accountants, administrators and auditors. The partnership will see the integration of Class Financial’s products with CCH’s engagement platform, which it is claimed will improve audit workflow. The partnership also sees the integration of CCH’s content on SMSF and
Barry Lambert
broader taxation legislation. Commenting on the partnership, Class Super chairman Barry Lambert said it would allow both parties to simplify and automate many of the manual and routine tasks which currently dominate the cost structures of accountants and administrators dealing with SMSFs. “Count is pleased to have been an early stage investor in Class which allows accountants and SMSF administrators to administer SMSFs much more efficiently,” he said. Lambert said Class had enjoyed strong support from the Count network, and in particular CountPlus where after limited exposure over 50 per cent of the firms now used Class to administer their SMSFs.
Britons seize the day, not their retirement savings BRITONS are tending to ‘live for the day’ rather than save for their retirements, according to research released by market intelligence company Mintel. The new research, last week, found that those living in the United Kingdom were more focused on what their money ‘can do in the here-and-now’, with only 34 per cent of nonretired adults having some form of pensions savings. The Mintel research sug-
8 — Money Management August 4, 2011 www.moneymanagement.com.au
gested that while the UK Government might hold concerns about retirement incomes adequacy, it was something that was being pushed to the back of the consumer mindset. It said its research had found the most common reasons Britons were not saving for a pension was that they “would rather live for today than worry about what will happen in 20 or 30 years time”.
It said this laissez-faire attitude was more prevalent among younger adults, particularly those aged 18 to 24 (40 per cent), with 19 per cent of those not retired focusing on getting onto the proper ty ladder. Commenting on the data, Mintel senior financial analyst George Zaborowski said only one-third of UK consumers who had yet to retire had a pension – but more worrying still was
that some of those people were not contributing to that pension. “Many people only have a pension because one was made available to them through their place of work and because their employer also makes contributions,” he said. “Yet, as the cost of pension provision has risen, employer support for pensions over the past two decades has generally declined.”
+%
Earn your clients the RBA cash rate
+1% return
FirstRate Investment Deposits is a new longer-term deposit option that can help deliver reliable income and capital stability for your FirstChoice clients’ super and pension investments. And as the interest rate is floating, not fixed – unlike most traditional term deposits – it could provide some protection against rising inflation and interest rates. FirstRate Investment Deposits offers a lot of other pluses: + Attractive reliable income. Your clients earn the RBA cash rate plus 1% return^ p.a., calculated daily and paid monthly until maturity in April 2017. + Peace of mind. Your FirstChoice clients can feel confident knowing their super and pension money is on deposit with the Commonwealth Bank, one of Australia’s leading financial institutions. + Lower costs. There are no ongoing management or account keeping fees, which may help to lower the costs of your clients’ portfolio. + Simple to manage. Your clients can simply set and forget their investment until maturity in April 2017, knowing they can receive a monthly income that keeps pace with RBA interest rates. In the event your client needs access to funds prior to maturity, an adjustment cost may apply. It all adds up to a first rate option for you and your clients. To find out more about FirstRate Investment Deposits, contact your Business Development Manager on 1300 769 619 or visit colonialfirststate.com.au
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, fi nancial 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%. CFS2030/MM/FPC/R
News
ANZ Wealth appoints two more senior executives By Milana Pokrajac
ANZ Wealth has poached Greg Hansen from Colonial First State (CFS) to head up its distribution business transformation division, and appointed Bettina Pidcock as head of wealth marketing. Hansen held a number of roles at CFS, most recently the head of strategy and planning where he was responsible for the compilation of CFS Advice strategy, and establishing a plan to navigate the advice
business through regulatory reform. The company stated he would assist general manager for advice and distribution, Paul Barrett, in leading the transformation of the advice and distribution business “as the financial services industry enters an environment of unprecedented change”. ANZ Wealth has also recruited Pidcock as its new head of wealth marketing, who will be responsible for the promotion of all ANZ Wealth brands
Matthew Drennan
Advisers ready to re-invest By Chris Kennedy ADVISERS are increasingly ready to rebalance client portfolios away from cash to reinvest in growth assets, according to a survey from Zurich’s investment business in Australia. Over half the 300 advisers surveyed indicated a potential swing back to equities in the next six to 12 months, according to Zurich. Of those looking to rebalance clients’ cash holdings, more than three-quarters indicated a move to growth assets – with Australian shares the most preferred, followed by international equities, then listed property. “Investors want to be sure that markets have found a floor before reinvesting cash funds into the sharemarket, which is understandable but may be harmful in the long term,” said Zurich Investments executive general manager Matthew Drennan. Drennan highlighted the importance of the right mix of defensive and growth allocations, and advocated Zurich’s low-volatility equity income fund for risk-averse investors who also need some growth exposure. The 41 per cent of advisers who were not looking to rebalance away from cash said they were looking for more sharemarket stability and improved economic conditions, Zurich stated. 10 — Money Management August 4, 2011 www.moneymanagement.com.au
including OnePath, ANZ Private Bank and Super Concepts. The new appointments come a month after Barrett announced a major recruitment campaign as ANZ Wealth restructures its senior executive ranks. Pidcock will commence her new role on 2 August 2011, reporting to general manager for strategy and marketing at ANZ Wealth, Steve Sheppard. She made the move to ANZ from InsuranceLine, where she was general manager
for marketing. She has also held various marketing leadership positions at Asgard/ St George, MLC and Westpac. In welcoming Pidcock to the team, Sheppard said the newly created position would help ANZ grow its wealth business. “Bettina’s experience and insights from working with merged businesses at Asgard and BT Financial Group will also be an asset as we move to fully integrate marketing across all ANZ Wealth brands,” Sheppard said.
News
Beyond Blue and AFA concerned about FOFA fallout By Mike Taylor
Richard Klipin
WITH the Government’s proposed Future of Financial Advice (FOFA) changes weighing heavily on many planners, the Association of Financial Advisers (AFA) has entered into an arrangement with the national depression and anxiety initiative Beyond Blue. The arrangement, confirmed
by AFA chief executive Richard Klipin, follows on from his organisation’s concerns about the level of anxiety and depression emerging in the financial advice profession. “The environment our members operate in is changing, highlighted most recently by the FOFA reforms,” he said. “These changes have the potential to impact profoundly on the way
our members operate.” Klipin said the AFA recognised the relationship between changes in the workplace and people’s mental health, and would like to take a proactive step towards helping members become more aware of depression and anxiety. Beyond Blue deputy chief executive Clare Shann said periods of substantial change and stress
could put people at risk of developing depression and anxiety. “It is critical that employers take a proactive approach to managing mental health in the workplace,” she said. Shann aid the AFA and Beyond Blue recognised that small to medium business owners, who make up the majority of the AFA members and their client base, might be particularly at risk.
Age pension shortfall By Ashleigh McIntyre WHILE it is widely known that the expenses of retirees aged 70 are well above the full age pension, expenses for those aged over 90 still far exceed allowances from the Government, according to a study from the Association of Superannuation Funds of Australia (ASFA). In a new report on the spending patterns of older retirees, ASFA found that costs for 90-year-old retirees were, in some instances, substantially less than those for retirees aged 70. ASFA compared the new figures to its Retirement Standard to find that a couple leading a comfortable retirement will spend $54,562 at age 70 and $48,900 at age 90 – a difference of 11.6 per cent. A single person living a comfortable lifestyle will also spend $39,852 at age 70 and $36,770 at age 90 – a difference of 8.4 per cent. The differences were less noticeable for those living a modest lifestyle, with little difference between a 70 and 90-year-old couple, and only 4.6 per cent difference between a 70 and 90-yearold single. The cost of transport and leisure were highlighted as the major contrasts between the two age groups, as relatively few retirees aged 90 drive motor vehicles or go on overseas holidays. But this is somewhat balanced out by the fact that those aged 90 have additional expenses in household services and healthcare. ASFA said another implication to be drawn from its figures was that in planning for the future, retirees should not assume that it is necessary to maintain a constant level of expenditure over retirement. www.moneymanagement.com.au August 4, 2011 Money Management — 11
SMSF Weekly Real estate agents on dangerous ground By Mike Taylor THE Institute of Chartered Accountants of Australia (ICAA) superannuation specialist, Liz Westover has warned against real estate agents promoting the virtues of purchasing real estate within a self-managed superannuation fund (SMSF). Westover has referred to recent promotional efforts on the part of real estate agents suggesting that the process is straightforward, but warns that this is not the case. “These issues are never straightforward and there are a range of factors that need to be given due consideration, not only before
entering these borrowing arrangements but also before setting up an SMSF,” she said. Westover said SMSFs were not the best superannuation option for everyone, and should not be established simply as a vehicle to borrow to buy real estate. “Borrowing can be a valuable tool within an SMSF to bolster retirement savings, but it must be used appropriately and in full knowledge of the facts and all the associated risks,” she said. Westover urged people looking to borrow within an SMSF for the purchase of real estate to seek advice from a professional rather than a real estate agent.
Advice certificate a roadblock to SMSF property By Chris Kennedy
A CERTIFICATE of advice from a financial adviser or accountant has been identified as a potential major sticking point for clients looking to borrow to invest in a property within a self-managed super fund (SMSF). Often major lenders will look for a signoff from a financial adviser or accountant, but in many cases the adviser’s dealer group won’t allow its advisers to sign off on more onerous certificates, even when the adviser is comfortable with it, according to Multiport service development manager Ben Thomas. The major difficulty with this is that the problem won’t emerge until very late in the purchase process, often just two or three weeks before settlement and once most of the other paperwork is done, Thomas said. SMSF loans director Craig Morgan said that when people encountered this problem in the final week before settlement, advisers and accountants were signing the advice
certificates against their better judgement because their clients were being threatened with penalty interest if the deal didn’t go through. But with the licensee carrying the risk, they are effectively the one signing off on the document, and now that they’re becoming aware of what the advisers are signing there is some discomfort, Morgan said. “We’re seeing a bit of a collision course between the banks and the AFSLs [Australian Financial Services Licensees] because the AFSLs won’t have the same comfort levels as a suburban planner in looking after the client,” he said. “The way some of the banks have drafted [the advice certificates], they’re Ben Thomas exposing themselves horrifically. They’re being asked to go outside the boundaries of what their [professional indemnity insurance] would cover,” he said. Thomas pointed out that there is no standard advice form. Each bank will generate its own and, while some are fairly innocuous, it creates a potential sting in the tail and is a point for advisers to be aware of early in the process.
Strong currency hurting super GROWTH superannuation returns ranged from a low of 6.6 per cent to as high as 12.5 per cent last financial year, according to new data released by researcher Chant West. The research revealed the median growth super return was 9.2 per cent. Chant West principal Warren Chant said the main drivers for performance had been the global and international share markets, with the financial year capable of being split into two distinct periods. “The first nine months saw strong domestic and global share markets, which were the main drivers for growth fund performance, push the running return for the year up to 10 per cent,” he said. “In the June quarter, however, we saw share markets falter on the back of ongoing concerns about a slowdown in China, negative economic data coming out of the US and a resurfacing of the European debt crisis.” Chant said another factor to stifle returns had been the appreciation of the Australian dollar. “We estimate that the currency effect detracted about 3 per cent from the typical growth fund performance over the year,” Chant said.
ATO death benefit interpretation
ASFA extends SMSF education offering
By Damon Taylor ONE of the key acknowledgements for self-managed super funds (SMSFs) within Jeremy Cooper’s Super System Review was that they were a successful and well-functioning sector of Australia’s superannuation industry. In fact, the review’s panel was confident enough in SMSF trustees and their levels of knowledge that it stated:
“The panel does not accept suggestions that the levels of SMSF trustee knowledge are deficient and that compulsory education or other forms of accreditation are required.” Instead, the panel pointed to raising the minimum competency and knowledge levels of SMSF service providers as its preferred method of trustee education. However, according to the Association of Superannuation Funds of Australia (ASFA), that is not to say that trustee education is unavailable or discouraged. “ASFA has offered training for SMSF trustees and service providers since 2006, which includes guidance on compliance obligations, taxation, investment, benefits and retirement income streams,” an ASFA spokesperson said. “And any further developments will be reviewed in light of the outcomes of the Stronger Super process. “However, insofar as SMSFs continue to grow in popularity, one could say that it still is a developing market,” the
12 — Money Management August 4, 2011 www.moneymanagement.com.au
spokesperson continued. “And the Stronger Super focus to concentrate on the quality of service provider, and in particular the approved auditor, appears to be the favoured approach to increasing trustee knowledge.” Asked whether ASFA was confident that well-trained and accredited SMSF service providers would lead to well-educated trustees, ASFA’s spokesperson indicated that this, as always, would be reliant upon the individual service provider’s commitment to the professional standards that were in place. “SMSFs form an important part of the Australian superannuation architecture, and a majority of SMSFs are, in fact, run well,” the spokesperson said. “In the case of the SMSFs advised and/or administered by service providers that are members of ASFA, we are particularly confident that this is the case. “Involvement in ASFA is, among other things, an indicator of a commitment to professional standards.”
SELF-managed superannuation fund (SMSF) specialist Cavendish Superannuation has pointed out the Australian Taxation Office’s (ATO’s) continuing interpretation regarding the handling of superannuation pension accounts upon the death of a member. According to Cavendish, the ATO has confirmed that in the absence of a continuing pension beneficiar y, a superannuation pension account becomes an accumulation account on the death of a member. It said this then caused the account to pay tax on both income and capital gains from the date of death – something that “may create significant tax liabilities in the fund in addition to any that many be incurred when payments are made from the fund”. Cavendish said the ATO had first stated such an interpretation in 2004, but submissions relating to possible changes to the interpretation could be made until 26 August.
InFocus SUPER SNAPSHOT
Back in ol’ Blighty
Superannuation Growth Fund Performance 20 15.6 15 10.4
10
9.2
5
(%) 0 -5
-6.9
-10 -15
-12.9 2007
2008
2009
2010 2011
Median Returns for growth funds 2007 - 2011
As Australian planners seek to come to terms with the Government’s Future of Financial Advice changes, Paul Resnik outlines events in the United Kingdom and their impact on planners.
A
recent guidance paper produced by the Financial Services Authority (FSA), the United Kingdom’s equivalent of the Australian Securities and Investments Commission (ASIC), outlines the process that advisers must undertake to prove the suitability of their investment recommendation with regard to the investor’s willingness and ability to take risk. The FSA’s approach is to promote the personalisation of advice consistent with the practices adopted by high-end financial advisers. • This generally entails a solid emphasis on cash flow analysis and planning; • It sees the demise of simplistic ‘Portfolio Picker’ risk questionnaires as impersonal shortcuts to a portfolio; • It recognises the separate roles of risk tolerance and risk capacity in the advising process and the requirement for the adviser to show reconciliation of any differences between them; and • One issue that is not resolved is how advisers who have used inappropriate tools for risk profiling in the past (nine of the 11 tools reviewed by the FSA did not pass muster) should deal with clients who have been potentially misadvised. High-end independent financial advisers in particular are significantly more optimistic about their future than most others. A good number of the better advisers are oriented towards detailed cash flow planning for their clients and construct passive or semi-passive portfolios. Most felt the banks and life companies were at a disadvantage in terms of momentum to the new standard, and had lost the regulator’s and community’s confidence and trust. To give you a sense of the FSA’s ‘take no prisoner’ approach to regulation just listen to Margaret Cole. In her role as interim managing director of the Conduct Business Unit, Cole has detailed her experiences with the major banks. “I am not in the business of banker bashing, but if you look at the evidence, it was really the big retail banks who were the major players,” Cole said.
She said various miss-selling issues have emerged over the past 20 years costing consumers £24 billion. She added: “It is particularly striking to me that when we have done business model analysis we have seen how much of the business models of major institutions are being driven by aggressive product sales. We have to be prepared, to be more interventionist to head off those issues before they really get going.” To the best of my understanding two of the major UK banks have withdrawn from the general advice market in the past six months. Here are ten of the other major themes developing in the UK: 1. The number of advisers is expected to reduce from around 30,000 by as much as 25 per cent over the next three years. 2. There looks to be an over-supply of wrap platforms. Currently there are 29 in the market and several more in the wings. It’s difficult to see how they can all be adequately resourced, built and distributed. Fewer than six platforms are currently profitable. 3. There is an ever increasing recognition that the investment decision is the last component of the planning process. The amount of investment risk taken on is decided after all the other lifestyle options available to the client have been explored. 4. Growing recognition that, on average, portfolios have not adequately rewarded clients for taking equity risk over the last 40 years. Rolling 10 year average returns for 50/50 growth and defensive portfolios are similar to Australia. They delivered around 2.1 per cent a year before fees and taxes, above a purely defensive portfolio. The extra risk and return for moving to 100 per cent growth assets (1.1 per cent per annum in the UK, 1.7 per cent per annum in Australia) is also a surprise to many advisers. 5. An understanding that the sustainable investment proposition for clients promotes wealth preservation rather than wealth creation. 6. There is a very visible move to model portfolios away from customised portfolios. This is accompanied by a continuing shift from active to passive asset management. Both are
widely recognised as necessary to increase business efficiency and to improve the consistency and add quality to returns. 7. Investment products are expected to become simpler, guarantees and product ‘tricks’ to diminish, and fees come closer to those offered by index funds. 8. Growing recognition of the cost to consumer confidence caused by the failure to appropriately and consistently label funds, explain risk and to frame investors’ expectations. 9. Business processes will move from adviser knows best to informed client consent. 10. A growing acceptance of the need to add to the advisory business’ client proposition non-investment related services and benefits. There is a broad recognition now that all participants in the value chain must play a role in bringing consistency and integrity to the advising process. This methodology is the integration of five fundamental building blocks that enable a client to make a properly informed commitment to his or her plan. They are: • A reliable personal risk tolerance assessment tool; • A consistent, realistic and understandable method for both financial advisers and fund managers to explain risk and return; • A cash flow planning tool to illustrate the client’s spending against available assets taking into account the asset mix consistent with risk tolerance, risk required and testable for the client’s risk capacity; • A proven methodology to make future capital market assumptions to be used in the cash flow planning process; and • A proven capability to deliver portfolio outcomes consistent with pre-agreed benchmarks with the client. Consequently, almost all product and service suppliers engaged in reframing their business proposition to take account of the impending regulatory changes, or building to take advantage of the opportunities created by the failure of competitors.
15.6% -12.9%
2007 Peak median growth 2009 Lowest median growth
Source: Chant West
What’s on FINSIA: Young Finance Professionals Event – Trends in Technology & Investing in Innovation 10 August 2011 Corrs Chambers Westgarth, Melbourne www.finsia.com
FPA Workshop: the Referable Planner 16 August – Sydney 18 August – Melbourne 23 August – Brisbane CBD venues to be announced www.fpa.asn.au tinyurl.com/3p7otna
FSC Political Series: Prime Minister’s Breakfast 31 August 2011 The Westin, Sydney www.ifsa.com.au
MFAA Event: NSW Broker Symposium 31 August 2011 The Sebel, Parramatta www.mfaa.com.au
SPAA State Technical Conference 23 August 2011 – Qld See website for other states. Victoria Park Golf Complex, Herston, Qld www.spaa.asn.au
Paul Resnik is director and co-founder of FinaMetrica. www.moneymanagement.com.au August 4, 2011 Money Management — 13
Retirement products
Counting
every last
cent
The writing is on the wall that more responsibility will fall on individuals to fund their own retirement. The need for better post-retirement solutions to deal with longevity risk is a key concern and challenge facing the Government and the financial services industry, writes Caroline Munro.
Key points • Australia is falling behind other countries
in terms of post-retirement solutions, partly due to a lack of products that deal with longevity risk. • The ASFA Spotlight on Super Policy Issues paper revealed that there is some appetite among super members for compulsory provision of post-retirement solution for members. •Investor attitudes to risk changed following the global financial crisis, resulting in the introduction of products to address investment market risk and provide some capital security. • Most industry super funds have been slow to innovate, sticking to account-based pensions if they offer a post-retirement option at all. Yet account-based pensions reveal their true weakness in a downturn.
THE Treasury’s 2010 Intergenerational Report highlighted the extent to which an ageing population would affect government spending over the next 40 years, and the measures taken by the Federal Government to minimise that impact. They include increasing the age pension eligibility, and introducing policies to lift productivity and reduce barriers to work participation. But it’s clear the writing is on the wall that more responsibility will fall on the shoulders of individuals to fund their own retirement, and the review of Australia’s retirement savings system is an obvious indicator. Unlike other retirement savings systems overseas, Australian retirees do not have to take an income stream. However, some sort of soft compulsion is not out of the question as pressure on Budget mounts and as super account balances grow. The spotlight is also widening to include assets
14 — Money Management August 4, 2011 www.moneymanagement.com.au
held outside of super, like the family home. The financial services industry may still be holding back on product innovation until the details of the Government’s superannuation and financial advice reforms become clear. But there is no doubt that great challenge and opportunity lie ahead for super funds, insurers, and fund managers and advisers as the need for postretirement products continues to grow.
Australia falling behind
Although the retail sector has shown an increased interest in innovating around retirement products over the last few years and more industry funds have looked to provide post-retirement solutions, Australia is falling behind other countries. According to the second Melbourne Mercer Global Pensions Index 2010, Australia fell from second to fourth place, partly due to a lack of retirement income products that dealt with longevity risk.
“
Holistic post-retirement planning software and systems will have to take more into account than super assets.
”
Retirement products The innovators
Fiona Reynolds
A number of research reports over the last six months have revealed that Australians are feeling increasingly unprepared for retirement. A survey conducted by the Australian Institute of Superannuation Trustees (AIST) in conjunction with Russell Investments revealed that more than half of members in each of the age groups over 46 years felt their super balance was low and that time was running out. Some 31 per cent were not confident their retirement income goals were on track. According to the Association of Superannuation Funds of Australia (ASFA) report, Spotlight on Super Policy Issues (December 2010), 67.3 per cent of super members indicated they were concerned that their superannuation savings would run out before they die. The challenge of managing funds increases in retirement due to rising food, fuel and pharmaceutical costs.
Further data released by ASFA recently revealed that compared to the previous quarter, retirees will need more than $600 extra each year to live comfortably in retirement.
Government reform and tentative innovation
As part of the Stronger Super agenda, the Government considered mandating that MySuper products provide a post-retirement solution for members. It was decided as part of the consultation process that it would not be in the interests of members due to low balances, the imposition of significant costs, and increasing complexity for those funds that currently did not have an offering. However, the MySuper consultation working group issues paper released in May stated that mandating that MySuper products offer post-retirement solutions “at some time in the future” may encourage the devel-
opment of products when the superannuation system matures and post-retirement assets become substantial. The ASFA Spotlight on Super Policy Issues paper revealed that there is some appetite among super members for compulsion. Some 39.3 per cent agreed with the proposition that upon retirement people should be required to purchase an income stream that lasts until death. One-third of respondents did not have an opinion, and the remaining 28.6 per cent disagreed. Graeme Mather, Mercer’s head of superannuation investments Australia & New Zealand, does not believe a compulsory approach is the right way to go, although he supports some sort of soft compulsion where members can opt out of going into a default post-retirement product. “If we don’t have some sort of compulsion, taxpayers 20 years from now will be funding the age pension, and the cost of that age pension could be significant,” he says. “It’s up to the industry to create better solutions and choices for members.” Wade Matterson, senior consultant and leader of Milliman’s Australian Financial Risk Management practice, says that innovation is happening, but it is being driven in spite of the Government’s agenda at this point. “Obviously the retail sector sees the opportunity to satisfy the needs of their client base as well as retain that client base, while the industry fund market is faced with the massive challenge of retaining their members, who will become more active in their decision making. So they’re looking at post retirement solutions,” he says. “But there have been so many reviews that organisations haven’t been comfortable to innovate; when you don’t know what the legislative framework is going to look like going forward, you carry massive risk.” A lack of innovation in the superannuation sector has more to do with the relatively small size of account balances than with the number of Government reviews over the last few years, says AIST chief executive Fiona Reynolds. She says need drives innovation, and yet the average account balance is currently $19,000 across industry as well as retail funds. “People with those modest amounts will tend to take a lump sum,” she says. Nonetheless, post-retirement solutions are high on super funds’ agendas as the first lot of baby boomers start entering retirement, Reynolds says. She adds that their approach to product will depend on the demographic of their membership.
Wade Matterson believes that as the reform picture becomes clearer, product developers have felt more confident in developing solutions. Organisations are already taking different approaches to the post-retirement problem and a real mix of products will emerge, he says. “I think it’s a fascinating time. There won’t necessarily be one single solution that really dominates, and we’ll see through the evolution of the market what works and what doesn’t.” Investor attitudes to risk clearly changed following the global financial crisis (GFC), resulting in the introduction of products to address investment market risk and provide some capital security. Product providers have attempted to utilise the benefits of both account-based pensions and annuities to develop variable annuitylike products. The current leaders in that area are arguably AXA (North), Macquarie (Lifetime Income Guarantee) and OnePath (Money for Life). Another innovator is Challenger, which sought to address Australia’s traditional aversion to annuities by providing some access to capital through its Liquid Lifetime product. The fascinating thing about product innovation at the moment is that two distinct universes – funds management and insurance – are starting to merge, says Matterson. “There’s a lot of work going on at this stage to start to redesign the traditional structures around variable annuities, guaranteed products or protected products,” he says. Innovation was also happening in the background in terms of dynamic asset allocation approaches, which may not seek to provide a guarantee but attempt to better insulate investors’ returns from market downside, Matterson adds. Innovation will only speed up as a number of groups build up their internal expertise. MLC and NAB Wealth is one that formed a dedicated retirement solutions team earlier in the year. That team is still growing and has attracted much of its talent from AXA. Yet innovation is not just about product. The need to change advice pricing models in light of the proposed Future of Financial Advice reforms will also drive innovation in how advice is given. Matterson says increasing complexity in the post-retirement area will require advice businesses to rethink the way they give guidance and make sure that risk profiling is more specific to the individual. Ultimately, advice has to come first, says Matterson, as that is where one will get a better sense of what people can and can’t accept. From there advisers can look to newer products to tailor the types of outcomes clients expect, he adds. There is also a greater need for more sophisticated post-retirement advice tools, says James Hickey, a partner at Deloitte Actuaries and Consultants. He says holistic post-retirement planning software and systems will have to take more into account than super assets. “They will need to incorporate the home and various other things, like social security, tax and all those other issues important to retirees,” he says. Continued on page 16
www.moneymanagement.com.au August 4, 2011 Money Management — 15
Retirement products Continued from page 15
Product revival
Product innovation is good for ensuring greater choice, but some claim older products that can be used as part of a retirement income strategy are experiencing a revival of interest. The former chair of the review of the superannuation system and current chairman of Challenger Retirement Income, Jeremy Cooper, says having more choice is
good and asserts that Challenger does not advocate a 100 per cent allocation to annuities. However, more options add to the complexity of decision-making in a population where only one-fifth seeks out financial advice, he says. “Retirement is not a good time to be making choices between very complicated products. A lifetime annuity puts forward a very clear and simple promise,” Cooper says, adding that investors want simplicity and transparency.
Deferred annuities often come up in discussions around longevity risk, although in Australia they are currently buried under a pile of conflicting regulations. “That makes us a real outlier globally,” says Cooper. “If you look at all the comparable retirement systems, deferred annuities interestingly play a role in them because they are actually a very powerful product with a powerful financial proposition at the end for a relatively modest amount.”
Even if those regulatory hurdles are removed, Matterson questions whether deferred annuities will ever be popular. “It comes down to investor psychology – people are very good at making decisions around shortterm outcomes, but they struggle with making decisions that affect them over a longer term horizon,” he explains. Mather says that while he likes the concept of annuities, he worries about the lack of consumer
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protections in Australia. “I think for the annuity market to be successful in Australia we need some sort of consumer protection,” he says, referring to compensation schemes like those available in the UK. Equity release products are another area some in the industry claim is seeing a revival of interest. The reverse mortgage market saw 11 per cent growth in 2010, according to a study commissioned by the Senior Australians Equity Release Association (SEQUAL) and conducted by Deloitte. James Hickey says that in the past advisers have not considered property to be part of their discussions with their clients. This is changing as they look to downsizing or other for ms of early equity release, like reverse mortgages and reversion products, he says. Government is certainly not ignoring the high rates of homeownership in Australia. Following the Intergenerational Report, the Productivity Commission recommended a government-backed aged care equity release scheme. Hickey says the reverse mortgage sector experienced funding constraints through the GFC and, while banks have stayed active in the area, non-bank lenders have been lobbying the Government to find a way of promoting greater availability of funding. “From a public policy perspective, that may be beneficial to the Government because it may reduce the strain on the future financial system,” he says.
Industry funds slow on the uptake
Most industry super funds have not been quick to innovate, sticking to account-based pensions if they offer a post-retirement option at all. Yet account-based pensions reveal their true weakness in a downturn. Cooper says it is bizarre that some super funds still do not have a post-retirement solution. But, for those that do he feels it is fair that Government require specific duties around inflation, longevity and market risk, proposed as part of MySuper.
Retirement products “The industry is waiting to see what that actually means,” he says. “There’s a fork in the road there. I think a lot may just fiddle around with the allocated pension to address those risks, but there are others that may feel that real annuity style income in retirement deals with those risks. So that’s a bit of a question at the moment.” Regardless of what Government mandates, the whole-of-life approach to retirement savings is out there. On the retail side, BT Super for Life is perhaps an early innovator as members gradually move from a savings account, to a transition to retirement account, and finally into a retirement account. Matterson says the industry fund sector faces the greatest change as it was built out of a wholesale model where members are pooled together to enable low cost investment solutions. “But as people retire it is no longer a wholesale discussion,” he explains. “You need to talk to each member individually because retirement is a very personal thing. The model has to change to a more retail-like model and the funds that wake up to that are the ones who will be in the best position.”
unintentionally focused on costs. “A lot of super funds are looking to minimise costs. That’s wrong – they should be focusing on value,” he says, adding that the whole reform agenda could be counterproductive when it comes to product and service innovation. Those super funds focused on adding real value for members will look to better risk profiling, says Mather. “One of the biggest innovations we’ll see in the future is individual dynamic derisking strategies for members, where there is some sort of financial engine that will automatically change the risk of members to help them achieve the ultimate objective, which is defined at the outset,” he says. “I get annoyed when people in the market say that balanced funds are alright for everybody, when clearly they are not.”
We do appear to be “culturally wired up towards taking equity risk in retirement. ”- Jeremy Cooper
The needs of the individual
Product providers need to understand the dynamics of the pre-retiree and retiree market when innovating, says Matterson. “We need to consider the composition of the market where certain solutions are applicable – for people with low account balances, for example, it may be more about trying to inflate their income over a five, 10 or 15 year period before they move on to the age pension.” Mather agrees that innovation should be driven by what investors are looking for, which Mercer has termed the ‘trilemma’ – good returns, protection from risks and access to capital. Although it is impossible to develop products that address all three issues entirely, he says, the important thing is that the approach would seek to address investor needs. Mather says the problem with MySuper’s approach is that it has
Mather conceded that a lifecycle approach is too late for those with low balances now nearing retirement. He says Mercer is currently collating data to discover the impact on low account balances should investors stick to higher allocations of growth assets. The crux of the matter is that solutions will have to address the myriad needs of a varied group of individuals. Hickey says the advice and distribution networks are the key to product developers gaining a better understanding of pre-
they are starting to tap into the independent adviser network. “I think that will be a key to funds being able to retain their members and get the right services to them,” he says.
A shift of thinking required
Jeremy Cooper retiree and retiree needs. “Far too often they design a great product that makes imminent sense to the financial literate people in the organisation. But unless they tap into the needs of their customer base, it’s not successful,” he explains. “I think innovation will be more driven by members’ and advisers’ needs, and the product providers will adapt their offerings to suit.” Deloitte partner, Stephen Huppert, says while variable annuities, for example, have not been the sales success that some providers had hoped for, they could be a viable option in the future. “Sometimes it just takes time for advisers and consumers to understand the product, and for the product providers to understand the needs of consumers and tailor the product better,” he explains. The advice sector was also a key to success from a distribution perspective, according to Matterson. “As people get to retirement, the problems are so sophisticated that they are generally going to seek out advice. Organisations can be a bit slower bringing product to market as long as they have a strong distribution network.” Matterson says it will be very interesting from the perspective of industry funds. They traditionally haven’t had distribution or advice capabilities, yet
Cooper says the shift of mindset from an accumulation to decumulation mindset is happening across sectors. “There’s a fair degree of acceptance that we’ve built a fairly good accumulation system but perhaps the retirement piece has still got quite a lot of work to be done,” he says. Mather says the industry needs to step back and challenge the status quo now and again. “We’re here to help members to achieve better outcomes, save for retirement and, more specifically, to help retirees replace their working income with an income stream in retirement,” he explains. “We’re not here to maximise return, create funds that are compatible with each other, and increase funds under management. I think the industry sometimes forgets that.” A change of attitude is also required among investors, Cooper says. “We do appear to be culturally wired up towards taking equity risk in retirement. If you look at a scale of risk in retirement around the planet, we would be at the extreme risky end,” he says. Looking at the years since 2000, Australian retirees have had an unhappy four years out of 10, he says. “Retirement is not about averages but about actuals. It points to the number one defect of using just one style of product in retirement.” Again, Reynolds points to demand as the real drivers of change. She feels that the shift in mindset from accumulation to decumulation thinking will follow naturally as people have more money accumulated to warrant a decumulation strategy. “That’s why the funds with older members with larger balances are doing a lot more in this space than those that have young members with low account balances,” says Reynolds. MM
www.moneymanagement.com.au August 4, 2011 Money Management — 17
OpinionMarkets
Building BRICs Brazil, Russia, India and China formed a block of countries that returned well to their investors over the past decade. Tom Stevenson tries to predict which countries could make up the next BRIC.
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en years ago, Jim O’Neill of Goldman Sachs came up with the idea of throwing together the large and fast-growing economies of Brazil, Russia, India and China into one investable block called the BRICs. In essence, the key common advantage among these countries was their size: very high populations (more than 40 per cent of the global total) and very big land masses (over 25 per cent of the global expanse), which in turn supported major economic growth prospects. What are the emerging market opportunities a layer down from the BRICs that are not as well appreciated but have similar long-term investment potential? Using the broad criteria of large and growing populations and strong long-term economic growth potential, we take a closer look at the following five countries: Turkey, Indonesia, Nigeria, Mexico and the Philippines. Of all the contenders, Indonesia is perhaps the most similar to the BRICs, owing to its very high population (bigger than Brazil or Russia), comprised of a large and increasingly wealthy young working class producing strong average real gross domestic product (GDP) growth of 5.7 per cent in the last five years. Even during the global financial crisis, the Indonesian economy proved impressively resilient, with few of the problems seen in developed markets. The banking sector is well capitalised, with declining non-performing loan ratios and low and declining public and external debt levels. Apart from its favourable demographics, Indonesia also benefits from a degree of economic diversification owing to significant commodity exports, including oil, gas and coal. In December 2010, the government articulated an economic vision in which Indonesia grows to become one of the world’s 10 largest economies by 2025. If it succeeds in this objective, investing in Indonesian assets early on could prove to be rewarding. However, there are risks. Political risk is relatively high, with concerns about whether the government can stick to its reformist agenda owing to pressure from vested interest groups. Corruption is also prevalent, adding to a high risk business environment that falls short of Western standards. Although not as resilient to the global crisis as some of the other countries profiled here, the Turkish economy has nonetheless bounced back very strongly, growing around 8 per cent in 2010. Turkey is now reaping the benefits of reforms and generally prudent policies it pursued after its own crisis of 2001. The banking system survived the global crisis in relatively good
condition, and the government’s budgetary and public debt position (around 40 per cent of GDP) is significantly better than many countries in the Eurozone. An important driver of political reforms has been the hope of the European Union accession. Unfortunately, strong opposition from Germany and France makes this a difficult objective to achieve in the near term; however, it is more likely in the long run, and is a positive risk factor that deserves to be factored in by investors. Over the last decade, the moderate Islamist Justice and Development Party (AKP) consolidated its political position. Nevertheless, political risk remains high by European standards owing to longstanding tensions between the AKP and the secularist military.
Investors in the BRIC “group of countries have enjoyed excellent returns over the past 10 years. ”
Already the richest in per capita terms of the countries profiled here, Mexico’s growth prospects are not as strong as some of the others. Both a potential strength and weakness of the country is its very high economic exposure to the dominant US economy. Around 80 per cent of Mexico’s exports go to the United States and, as well as receiving substantial amounts of US investment, Mexico also benefits from the remittances of a strong Mexican-American community that resides in the US. Apart from benefiting directly from US demand, Mexico also has the potential to act as a relatively low-cost gateway to the US for third countries. For example, there has been some evidence recently of Chinese firms setting up factories in Mexico for export to the US, as well as some companies choosing Mexico over China, owing to transport cost advantages. On the negative side, Mexico’s notorious drug violence and associated security costs are becoming a growing concern for businesses, adding to other weaknesses in the commercial environment. Following recession in 2008-09, the Philippines economy has rebounded impressively, growing by 7.3 per cent in 2010 – the fastest pace in over three decades. The country benefits from a fairly large population, a growing middle class, and rising average incomes. The economy
has also seen some significant structural improvements in recent years. Although a balanced budget remains an unlikely prospect in the near term, the government has made significant strides in its fiscal management, owing to reforms and reduced tax evasion. Lower fiscal deficits (averaging less than 3 per cent of GDP in the last five years) have helped to push the debt-toGDP ratio below 60 per cent in recent years. The economy also benefits greatly from a substantial number of overseas workers (around 20 per cent of the population), whose remittances help support domestic private consumption, as well as keep the overall current account consistently in surplus. In terms of risks, the Philippines is susceptible to a high level of political unrest, with a history of military coups, political violence and civil unrest. It also has significant weaknesses in its business environment owing to security risks, corruption and inadequate infrastructure.
With a population of around 29 million, Malaysia is relatively small in comparison to some of the other countries mentioned, but its longterm record of development is impressive. Its economy is structurally quite diverse and benefits from a significant electronics exports industry, as well as commodity exports, a vibrant tourism industry and increasing domestic consumption.
Investors in the BRIC group of countries have enjoyed excellent returns over the past 10 years, and many will want to know who might repeat their success in the future. While outright replacements for the BRICs are impossible to find, there are a number of less appreciated (but well-populated) emerging markets with attractive longterm economic fundamentals. For all emerging markets,
investors need to consider the associated risk factors. Recent instability in the Middle East and North Africa has highlighted a higher susceptibility to political risk, in particular. Therefore, the task is to find assets within those countries that offer sufficiently high returns that adequately compensate for the level of risk being taken. This can be a research intensive and time-consuming
process that, in the case of many investors, is probably better left to specialist investment managers that have in-depth regional investment experience and successful track records. Spreading investments across a range of countries or multi-country funds can also help to control risk. Tom Stevenson is an investment director at Fidelity.
Some other highpotential emerging markets
The countries profiled merely give a flavour of a range of high-growth emerging markets that could provide attractive long-term investment opportunities. There are many others. For example, despite its Communist government, Vietnam (a country of more than 90 million people) has achieved impressive growth rates in recent years. With wages beginning to rise steadily in China, Vietnam is increasingly seen as a low-cost alternative for global manufacturers. South Africa (with 49 million people) is already the most developed country in Africa, and has significantly higher per capita GDP than its regional peers. However, other African countries are keen to catch up, and with its more developed characteristics, South Africa is uniquely placed to both facilitate and take advantage of Africa’s growth potential and aspirations. www.moneymanagement.com.au August 4, 2011 Money Management — 19
OpinionSuperannuation
Simplifying the super nest Chris Jansen explains how providing standalone super advice could be a win-win.
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any of us are in a constant battle to simplify our lives. We return duplicate wedding presents, cancel our gym membership once we’ve taken up a sport, and even consolidate our debt to make it cheaper and easier to manage. So why do so many Australians avoid consolidating their super, especially when the benefits are far greater than creating more cupboard space? According to the latest report from Rice Warner Actuaries on super fees, Australians have three superannuation accounts on average, and it is estimated that this results in a loss of $1.1 billion a year in extra fees, lost payments and missed earnings. This is an industry-wide issue. Some people have super accounts they are not even aware of, which means they could be paying too much in fees when they don't need to, and this can have a big impact on their retirement savings in the long-term. So how can financial planners help more customers consolidate their super to improve their retirement nest eggs? And how can the process be simplified to ensure a positive experience for planners and their clients?
Why should clients consolidate their super?
From a client’s perspective, it’s important to be able to easily articulate why it is beneficial to consolidate numerous super accounts. Some of the benefits of consolidating super include: • Savings on fees – if clients have multiple super accounts, they are probably paying more fees than they need. • Super balance growth – with compounding returns, combining super balances and saving on fees could help clients maximise their super balance over the long-term. • Lower chance of lost super – the process of consolidation usually ‘mops up’ any lost super and makes clients more aware of keeping track when they move jobs. However, even with knowledge of these benefits, many people still put off consolidating their super because it can be a confusing and time-consuming task, and in many cases they simply don’t know where to start. So this is an opportunity for a financial
planner to help guide clients through the consolidation process. It is an opportunity (for planners who are willing and qualified) to provide piece-by-piece or scaled advice. Let’s look at who is most suited to this approach.
Super consolidation and scaled advice
Many Australians still don’t understand the value of financial advice, with only about 20 per cent actually seeking the advice of a financial planner – this is despite Australia’s ageing population and the escalating need for people to fund their own retirement. There is no doubt that good quality financial advice delivers results. Research commissioned by the Financial Services Council reveals that someone who starts saving with the help of a qualified financial planner at age 30 could be more than $91,000 better off at retirement. Even those who receive financial advice later in life can benefit, with an average 45 year-old gaining a potential $80,000 more or at age 60 a potential $29,000 more, by age 65. So why do so many Australians overlook financial advice, especially when it comes to super and saving for their retirement? It could be that, as revealed by ASIC’s 2010 research, many Australians (particularly those that have never engaged a financial planner) want simple, scaled advice rather than a comprehensive financial plan. Scaled advice can help those unsure about seeking financial advice feel more comfortable as it’s less overwhelming than completing a comprehensive plan. It is also a cost-effective option. Planners who are qualified to do so could offer piece-by-piece advice, beginning with super consolidation, to highlight the value they can provide to new clients. Super consolidation is a good first place to start as it’s relevant to people at all life stages, and maximising a person’s retirement nest egg is important for most people.
Tips for smooth super consolidation
Even if a financial planner is using the scaled advice model to offer super consolidation, they must still begin with a thorough fact-finding consultation with the client. It’s important to discuss areas outside of the scope of advice that need to be addressed at some point in the future. While the process of advising on super consolidation is relatively straightforward,
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Offering to consolidate a new customer’s super, including finding lost super and insurance within the super, is a good first touch point with any client.
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there are some things that may be worth considering for different age groups: 18-34 year-olds: • Explain the value of considering retirement income, which may seem a long way away and not a priority for this group. • Ensure the individual’s risk profile is considered when choosing an investment option. Options with a greater growth focus may be more appropriate in an individual’s early years.
35-54 year-olds: • Explain how super fits into a more longterm financial plan, in addition to paying off the mortgage and keeping up with monthly bills, as these are usually this group’s immediate priority. • Explain the options for the individual or couple. Again, risk profiling is an important part of the process. • In conjunction with super consolidation, this is a good time to look at the client’s retirement nest egg and their transition to retirement strategy. 55-64 year-olds (pre-retirees): • Ensure you don’t make this group feel guilty about where they’re at or the choices they’ve already made. Regardless of where the client is at, consolidating their super will simplify their funds, reduce their fees and ensure they have the right level of insurance. • Look at how you can make the most of the time they have left in employment to grow their super balance and ensure they are in a product that will allow for a smooth transition to retirement.
Super consolidation and beyond
Offering to consolidate a new customer’s super, including finding lost super and insurance within the super, is a good first touch point with any client. Helping them with this task is a great way to build trust and demonstrate the value of financial advice. Chris Jansen is AMP acting director of wealth management products.
OpinionPlanning Building lasting client relationships A recent study has shown that advisers see their client relationship as the primary foundation of their value proposition. Fiona Mackenzie describes the importance of a good client relationship manager.
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uch has been said about change within the financial planning industry of late, particularly in relation to the changes proposed in the Future of Financial Advice (FOFA) reforms. Advice has come under the spotlight, with the reforms aiming to improve the quality and accessibility of financial advice in Australia. Clearly any professional adviser would support the concept of these aims, but what will these changes in the industry mean for advisers in practice? What sort of impact will these reforms have on their businesses? Perhaps most importantly, how will they manage the proposed changes? For the third consecutive year, articulation of value to clients was seen as the number one attribute of good practice management among those who took part in the Macquarie Practice Consulting 2011 Financial Planning Practices Benchmarking Study (carried out in March 2011). Further to that, relationships are seen as the primary foundation of their client value proposition. Advisers believe a good relationship counts for around half of the value they provide to their clients. Technical specialisation and investment selection are ranked second and third respectively, with price a distant fourth. This is particularly interesting given the current industry focus on pricing and fees. What this clearly indicates is that when it comes to value for money, it is the quality of advice which counts. While the client is paying for financial advice, what they are really paying for, and where they find the greatest return on their investment, is in the strength of the relationship they have with their adviser. Advisers therefore need to ask themselves, what are they doing to get to know their clients, their needs and their long-term goals? It is an understanding of these needs,
and knowing how to respond to them, that makes an adviser an effective client relationship manager. Advice and value are both intangible – what some clients deem as good advice and good value will be completely different to the measures another client uses – but what all clients want to know is that they are at the centre of the advice being provided. The strength of client relationships will no doubt have kept many businesses afloat during the global financial crisis and will continue to offer the most potential for further growth as businesses plan ahead for the future. Adding value to clients can be achieved through a variety of ways, for example, by advisers taking a more active management of their client base and re-connecting with their clients by offering more diverse wealth management and investment solutions. Looking at the client base of most firms, more than half are 55 or older, so these clients are in, or approaching, the drawdown phase of their financial planning strategy. This highlights the need for advisers and their broader practices to have the skills set needed to advise on estate planning, aged care and intergenerational wealth transfers. A good place to start is by talking to older clients about their changing needs and
discussing aged care and estate planning with these clients. Asking to be introduced to the adult children of older clients and educating them on how their parents’ needs will change and how to prepare can also be a worthwhile conversation. At the same time, it is important to focus on growing other client segments in the accumulation and retirement planning phases to offset the impact of an aging client base. If they are focused on growth, practice owners need to be asking themselves what strategies they can develop to attract younger clients. Expanding advice services into areas such as insurance, mortgages and cash flow management are all options that more and more practices are offering to diversify their revenue sources. It’s not only relationships with clients that offer potential for growth; it is also relationships with third parties, such as referral sources. Most client referrals come from existing clients and accountants. Use
of accountants as a referral source increased to eight out of every 10 practices in this year’s study. This relationship with accountants may also become more significant due to an increased focus on self-managed super fund investments. Industry peers can be invaluable in terms of opening up new networks of prospects, so it is important for practices to manage these relationships effectively and ensure they can add real value to the clients that are being passed to them. What is clear is that the financial planning industry and adviser business models are evolving to keep up with these changes. The fallout from the global financial crisis has changed client expectations, led to more reviews of the regulatory framework surrounding the industry and ultimately led advisers to focus more on what they need to do to achieve success. More than ever before, relationships are the key; knowing your client, building a sense of trust and ensuring that through the advice offered, clients feel they are getting value for money. It is through greater communication and understanding between clients and their advisers that the industry can add real value. Fiona Mackenzie is the associate director at Macquarie Practice Consulting.
www.moneymanagement.com.au August 4, 2011 Money Management — 21
OpinionVolatility Defining the ups and downs Dr Ron Bewely explains what volatility means, and whether reports of ‘volatile markets’ in the past couple of years have been accurate.
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t seems fairly clear to me that the lay person and finance analysts use the term volatility to characterise different concepts. From my reading, the popular definition of volatility is to do with bad things happening and the market not going up. Analysts, on the other hand, typically use a statistic called a ‘standard deviation’ that weights good and bad share price movements to the same extent. This measure allows analysts to put some notional range on what might happen to a stock price over a year due to the random nature of news affecting the stock. For this reason, we usually use the expression annualised volatility to demonstrate that a one-year period is being analysed. For example, a volatility of 10 per cent in a flat market is taken to mean there is a one in three chance of the price in a year’s time being more than 10 per cent higher or less than 10 per cent lower. Two ‘standard deviations’, or 20 per cent in this example, implies that there is a one in twenty chance of the price at the end of the year being outside ± 20 per cent. Understanding volatility and what drives it is important in both constructing and monitoring the performance of an equity portfolio. The volatility of the ASX 200 index was 13 per cent in 2010-11. That is normal by historical standards. The average for 1985 – 2011 is about 12.5 per cent. Interestingly, this is the average volatility for the S&P 500 over the last 50 years. I suspect non-
specialists find it hard to believe that 2010-11 was normal because the market didn’t seem to go anywhere and there were a number of modest corrections. That happens to be life. Indeed, the total return (including dividends) on the ASX 200 was 11.7 per cent – again about the average for the last quarter of a century. Furthermore, the return in 2009-10 was 13.1 per cent – a little higher than average – and volatility too was just above average. Two normal years on the run – but few are happy or confident. To put volatility into context I calculated the return for 2010-11 but starting at any day two weeks before or after 30 June 2010 and finishing any day in the two weeks leading up to 30 June 2011. The best (approximate one year) return from this set was 13.8 per cent and the worst was 0.7 per cent – a huge range in returns by adding or subtracting a few days. That is why I think it is important to measure things properly because our memories can easily distort our impressions of what has been going on. Of course the ASX 200 is made up of 200 stocks – from 11 major sectors – and these stocks do not move in unison. However, there is some degree of market volatility shared across the 200 stocks. In chart 1, I show in blue, the market volatility on the right and the volatility of the 11 component sectors to the left of it. The IT sector had the highest volatility at 21 per cent but even Materials – including BHP, RIO and the little miners – had a volatility of
Chart 1 Volatility by sector – 2010-11
Source: Woodhall Investment Research
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only 18 per cent. That is, because BHP and RIO have such a large weight in the Materials index that they swamp the little miners. BHP and RIO happened not to be that volatile last financial year. Investors possibly think more in terms of the volatility of the individual stocks they hold, rather than of some sector index. I have added the red bars in chart 1 to show the median (middle) value of the component stock volatilities from each sector and the broader index. The diversification within each index and weighting towards the larger cap stocks tends to produce a lower volatility for the index than the average component. For the ASX 200, half of stocks had volatility above 26 per cent – double that of the index – and half below 26 per cent. There is not much difference between the volatilities of the median stock and the index for IT and Telco because there are only a few stocks in each of those two indexes. This difference between the volatility of individual stocks and indexes highlights the importance of not only holding an adequate number of stocks overall – but a sufficient number of stocks in each sector. In chart 2 I show the volatility of each stock in the ASX 200 plotted against the market capitalisation of the company with colour and shape coding to identify to which sector the company is classified. The vertical dotted line separates the
stocks in the top 100 (to the right) from the rest. There is much more variation in the volatilities of smaller cap stocks than larger. The red diamond at the bottom right represents BHP and the four green triangles next to BHP represent the four major banks. Although the chart is too busy to track each individual stock, I hope that chart 2 clearly shows that lots of the high volatility stocks are typically red and blue diamonds (materials and energy). It just so happens that BHP is a relatively low volatility stock. The implication of chart 2 is that investors should be prepared to hold more small cap stocks for diversification purposes than if they were to confine themselves to larger cap stocks. But not all volatility is bad. The high red diamond just to the right of the dotted line represents Lynas – one of last year’s ‘market darlings’. Bathurst Resources – with the highest return for the year – is another high red diamond but to the left of the dotted line. To separate the good from the bad volatility, I have plotted stock volatility against the returns over 2010-11 in chart 3. The vast majority of high volatility stocks also had high returns. This trade-off is the standard riskreturn trade-off. Of course, not all high volatility stocks had high returns, but all of the high returns stocks had high volatility. Managing a ‘high octane’ portfolio of
Chart 2 Stock volatility by market capitalisation
Source: Woodhall Investment Research
high return stocks is difficult. Stock prices do not go up in a straight line so how does a manager differentiate between a temporary dip in price from a serious downturn? With difficulty is the only honest answer. But is volatility predictable? The Australian Securities and Investments Commission implores us all to say past performance is not a reliable indicator of future performance, but Rob Engle got the 2003 Nobel Prize for his work on volatility. His ‘elevator speech’ version of his lifetime contribution was along the lines of “I found some averages of past volatility to be useful predictors of future volatility”. I show a highly simplified presentation of this inertia in volatility in chart 4. I calculated the volatility for each stock in each of two years: 2009-10 and 201011. Since the composition of the index changes over time, and some stocks are offered or delist in a given period, I have only included the stocks that were in the ASX 200 on 30 June 2011. I excluded all stocks that did not have prices for the twoyear period. The red line in the scatter diagram is a line of best fit. Since 2010-11 was slightly less volatile
Chart 3 Stock volatility by returns
Source: Woodhall Investment Research
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Other than for major market movements as we saw in the GFC, low volatility stocks are reasonably likely to stay that way.
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than the previous year, the red line is a little flatter than a ‘450 line’ that would be the case if volatility was the same in both years. From my perspective, the blue dots are reasonably clustered around the red line for low-volatility stocks but less so for higher volatility stocks. That is, other than for major market movements as we saw in the GFC, low volatility stocks are reasonably likely to stay that way. Importantly, no high volatility stock suddenly became low volatility – that would require blue dots in the bottom right hand corner. Some moderately volatile stocks got a whole lot more volatile in 2010-11. The take-away from this analysis for investors constructing and monitoring their own portfolios is: 1. Stocks are a lot more volatile than indexes and so stock selection (and the number of them) within a sector is extremely important. 2. Small resource stocks tend to be a lot more volatile than other stocks. A portfolio with just a couple of small or mid-cap miners representing the materials sector could produce a wild ride.
Including BHP and/or RIO or a larger number of other juniors might be needed to slow down volatility in that sector of an investor’s portfolio. 3. Large cap stocks are typically a lot less volatile than small caps. 4. Stocks with a volatile past are not par ticularly likely to become low volatility stocks.
Technical note
When analysts calculate volatility or returns they usually use what is known as the ‘log (1+r) return’. Certain problems could arise without this transformation. A simple return, r, cannot be less than 100 per cent but it can be 1,000 per cent or more. Also, if a stock price goes down by 50 per cent then up by 50 per cent it doesn’t finish up from where it started. The log return approach is necessary for proper calculations of annualised volatilities, but for small variations there is little difference between the two measures. Dr Ron Bewley is the investment consultant at Infocus Money Management.
Chart 4 Predictability of stock volatility
Source: Woodhall Investment Research
www.moneymanagement.com.au August 4, 2011 Money Management — 23
OpinionInsurance
A take on business insurance Advisers are well placed to manage business succession strategies for small-to-medium enterprise clients, writes Ted Voges.
A
s the financial services industry evolves toward the provision of holistic and ongoing advice, the small-to-medium enterprise (SME) market represents a valuable opportunity for advisers who understand its unique needs.
take care of the SME’s overall long-term wealth creation, protection and distribution strategies. This is an area well suited for charging a fee for service, especially when SME needs in this space change frequently and rapidly and therefore require constant attention and review.
Regulation and SMEs
Small business, big prospects
For years business coach and financial services guru, Dan Sullivan, has been warning against the ‘commoditisation’ of our industry. He believes that having advisers’ remuneration linked to the sale of product is a short-term business model – one which has, in fact, hindered the ‘unique processes’ required for a quality advice proposition. This argument is particularly relevant in the light of the proposed legislation aimed squarely at commissions. These proposed reforms are forcing advisers to consider their current business models and, in particular, how they get paid for what they do.
The challenge
The first challenge facing advisers is to restructure their business to focus on feefor-service and reduce the reliance on commissions. The second challenge facing advisers is around broadening the scope of their advice to extend beyond the sale of a product. ‘Set and forget’ type business, which drives a high level of passive adviser income, is likely to be a thing of the past.
The opportunity
One of the best oppor tunities for advisers to build professional advice businesses and charge a fee-for-service is through the small-to-medium enterprise business sector. Not only does the financial adviser become an important strategic business partner, they are very well positioned to
The provision of business insurance, buy/sell cover or key person cover to their SME clients has always been a hot topic for financial advisers, and is often perceived as being a complex but profitable part of the market. Considering there are over 1.8 million SMEs in Australia - with an estimated total value of nearly double the total market capitalisation of the Australian Securities Exchange - it is imperative that advisers grasp the unique needs of SME owners in order to provide succession solutions. Most importantly, advisers must appreciate and intimately understand: • How business insurance fits within their SME clients’ overall business succession planning needs (as well as their retirement and estate planning needs); and • The importance of explaining to clients what business insurance does rather than what it is. Too often advisers go into solution mode and use industry jargon. They tell their clients they need “buy/sell cover” or “key person insurance” without explaining, in simple terms, what the cover is meant to achieve - both personally and in the context of their greater wealth protection plans.
Why plan for succession?
Business insurance is part of an overall succession strategy for SMEs. A robust exit plan ensures the realisation of a business owner’s equity in an orderly fashion and caters for all possible circumstances. The majority of SMEs go into business not only to earn an income, but also to
24 — Money Management August 4, 2011 www.moneymanagement.com.au
40 per cent of all SME “clients are totally reliant
on the proceeds of their business sale to fund their retirement.
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build the value of their equity. Most of these SMEs plan to realise this wealth to fund their retirement (we have all heard SMEs utter the words “my business is my super” at some stage). Research shows that 40 per cent of all SME clients are totally reliant on the proceeds of their business sale to fund their retirement. However, 85 per cent of these owners do not have an exit plan. SMEs, therefore, generally appear to hope for the best but fail to plan for the worst. On average, New South Wales-based
business owners are around 56 years of age. Further, 68 per cent plan to retire in the next 10 years. In light of this, it is not surprising that business succession is a key advice opportunity for financial advisers.
Voluntary and forced exits
SME clients mostly exit from their businesses voluntarily, selling their interest in their business when the time is right or just before retiring. Recent studies have shown that between 40 and 50 per cent of business owners surveyed were likely to exit their business within the next five years. However, most SMEs do not consider how they may exit their business down the track. Shareholder or partnership agreements often only contain a ‘right of first refusal’ clause. This effectively states that if one of the shareholders wants to sell their interest in the business, they must first offer it to the other shareholders or partners. As a result, most business owners automatically think that their succession arrangements are adequate, but fail to think what might happen if the remaining shareholders do not want to purchase their interest. Any equity sale to an outsider (someone not already a shareholder in the business)
clients’ ability to successfully extract the value of their equity. This is mainly because, unlike voluntary succession, they are not capable of supervising or partaking in the negotiations. Even in multiple-owner operations where the business will probably continue in their absence, the value of the deceased or disabled partner’s equity in the business will almost certainly be compromised. This is because the revenue of the business is bound to suffer as a result of their absence as business valuations for ‘going concerns’ are almost always based on the profits. Therefore, if profits suffer, the value of the shares will suffer. This, coupled with the uncertainties for the remaining owners around the deceased or disabled owner’s share in the business, means that planning for involuntary succession is just as vital as planning for voluntary succession.
Which exposures and why insurance?
is completely subject to whether the remaining shareholder(s) agree to accommodate them – and surely no person wants to buy into a business where the current shareholders don’t want them as a business partner.
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Advisers are well placed to become the project managers of an overall business succession strategy for SME clients.
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Current best practice is for SMEs to amend their shareholders agreements or to enter into separate exit agreements that stipulate, in detail, the potential voluntary and forced exit events that may take place. These exit agreements should also account for how the internal sale of these shares will be funded among the business partners (often from future profits). Solicitors should be engaged to modify the shareholder agreements or draw up separate exit agreements. It is easy to think of these agreements as business pre-nuptial agreements that deal with business break-ups, in a very similar way that a marriage pre-nup deals with marriage breakdown. After all, businesses fail roughly at the same rate as marriages.
Involuntary exits from the business Even in the unlikely event that this hurdle is somehow overcome, there is a good chance that an outsider will not have the same appreciation of the value of the business as the current shareholders. Further, it is very likely the sale price will be far less compared to an internal sale.
Beyond focusing on an orderly exit from their business through voluntary succession, the realisation of a business owner’s equity through involuntary succession creates probably the most angst for SMEs (as often a lifetime of effort is severely compromised). Serious disability or sudden death often has grave implications for SME
From any SME’s perspective, insurance can provide a very cost-effective funding solution for addressing the consequences of involuntary succession, especially when compared to the alternatives available (additional debt funding or vendor finance, selling surplus assets or selling a stake in the business). Most of the time, such alternatives are not accessible or their cost is prohibitive. For instance, the bank’s appetite for providing further funding at the moment a key person suddenly exits the business may be limited, and even if the funding could be obtained, the first year interest expense on the additional debt could often fund multiple years’ worth of premiums for a similar level of cover. Furthermore, exhausting the business’ borrowing capacity to fund an equity buyout may significantly limit the business’ future growth prospects if any further debt was needed to finance the expansion. A summary of the various types of business insurance solutions is set out below. When advisers discuss an SME’s involuntary succession needs, it is important to address all three exposures as they relate to very different personal outcomes. Emphasis should be placed on what each of the components does for SMEs personally, rather than what they are called. Buy/sell cover Funding the buy-out of a deceased or disabled partner or shareholder: • Creates certainty for the departing owner around obtaining a pre-agreed price for their equity in the business. It means their estate and dependants will receive fair compensation for their lifetime of effort invested in the business; • The transfer of the shares is handled through a separate legal agreement with trigger events that coincide with insurable events. These agreements are drawn up by solicitors; • Remaining shareholders retain control of their business and avoid having to increase their personal or business’ debt levels to fund a buy-out; and • It is much cheaper than funding the buy-out through borrowings (even if it is
possible to obtain bank funding at such a crucial stage considering the business has just lost one of its key people). Key person capital purpose cover To ensure all business debt is repaid upon the death or disablement of a partner or shareholder: • Often the bank has secured the business debt with personal guarantees over the personal assets of the owners. Ordinarily, these guarantees will only be released once the entire debt is repaid, thus ensuring that the debt does not outlive the borrower(s) (which makes practical sense); • It is common for loan agreements to state that the death or long-term disability of a key person in the business will be a trigger for the repayment of the entire loan; • Until the guarantees are released, the deceased partner’s estate cannot be finalised, and hence surviving family members cannot access their inheritance; and • Often the buy-out value of the equity in the buy/sell agreement is negotiated on the value of the business without debt. Therefore, ensuring that the debt is repaid supports the buy-out value of the equity. Key person revenue cover To mitigate the impact of a key person’s death or disablement on the profitability and productivity of the business: • In addition to some key employees, most business owners are key people and their sudden departure will surely impact on the bottom line; • Valuations of businesses operating as ‘going concerns’ are mostly based on a multiple of the ongoing profits the business is predicted to generate in future; and • This cover indirectly protects the equity of the remaining business owner(s) by replacing lost revenue and funding the additional costs of obtaining a replacement if necessary. This keeps the bottom line, and hence the valuation of the business, intact. Of course, there is a further raft of issues around the implementation of the above concepts which need to be addressed, including the sharing of the funding costs between business owners, ownership of the various policies and tax considerations around the premiums and the proceeds of policies.
Conclusion
Succession planning is not an event, but rather a process. With their overall endto-end wealth creation, protection and distribution focus, advisers are well placed to become the project managers of an overall business succession strategy for SME clients. This strategy will create certainty for business owners around the realisation and protection of their equity in their business - often their largest asset and the main source of funding for their retirement - rather than leaving it to chance in an uncertain world. Ted Voges is the forensic services manager at OnePath.
www.moneymanagement.com.au August 4, 2011 Money Management — 25
Toolbox
Separation and super Tim Sanderson explains the division of superannuation when relationships end and financial interests go their separate ways.
S
ince 2002, superannuation interests have been able to be included with other property when determining “who gets what” in the event of the breakdown of a marriage. This treatment has also applied to many separating de facto spouses since 2008. Due to the specific treatment of superannuation, it is therefore important to understand the process for dividing and transferring superannuation when such a relationship ends. Two common ways of deciding how the superannuation of a separating couple will be split are: • Superannuation agreements; and • Court orders.
allow property (including superannuation) to be divided. There are two types of court order. Consent orders – where a separating couple have come to an agreement on how their property should be divided (but they do not have a binding financial agreement) they can apply to the court to issue a consent order. This ratifies the agreement between the two parties and makes it binding. Financial orders – where a separating couple cannot come to an agreement on how their property should be split, the court can issue a financial order to divide the couples’ assets based on the circumstances of the case.
Superannuation agreements/binding financial agreements
Splitting superannuation upon relationship breakdown
A superannuation agreement forms part of a binding financial agreement. Binding financial agreements were introduced to allow separating couples who could reach agreement on a property split to do so without the delay, cost and the emotional toll of going to court. These agreements can be made before, during or after a relationship, and set out how the property of a couple, including their respective superannuation interests, will be divided in the event that the couple separate. Binding financial agreements will be legally binding on a couple if both members have a copy, have received independent legal advice and have signed the agreement. These agreements cannot (except in rare circumstances) be overturned by a court.
Court orders
Where a binding financial agreement does not exist, a court order from the Family Court will generally be required to
When transferring the superannuation of one member of a separating couple (the member spouse) to the other member (the non-member spouse), one of two methods may be used. Splitting the member’s interest Where the member spouse’s super balance is in an accumulation account or in an account-based or term-allocated pension, there is the opportunity to immediately allocate the non-member spouse’s entitlement to them. This may include: • Opening a new account within the fund for the non-member spouse; • Rolling over their entitlement to another complying fund of their choosing; or • Paying the entitlement to them directly (if a relevant condition of release has been met). The non-member spouse is able to choose which option will apply to them, and the fund must comply with their
choice, except where this is not possible (for example, their chosen fund cannot accept rollovers). Where the non-member spouse has not made a choice, the fund trustee generally has the option of: • Creating a new interest within the fund on their behalf; • Rolling the non-member spouse’s entitlement to an eligible rollover fund; or • Taking no action until benefits become payable. Splitting payments from the fund Where the member spouse’s super balance is a defined benefit interest, it is generally not able to be split until benefits become payable from the fund. This may, for example, occur when the member spouse reaches retirement and a lump sum or pension becomes payable. Lump sums (including commutations of a defined benefit pension) that become payable can then be: • Directed to a new account within the fund for the non-member spouse; • Rolled over to another complying fund; or • Cashed out (subject to a condition of release being met). Pension payments, however, must be paid directly to the non-member spouse.
Process required for splitting super interest
The procedure that must be followed and the evidence required by a super fund in order to instigate the splitting of a superannuation interest or payments depends on a number of factors and is shown in table 1. Once the super fund has received the required evidence, it is then required to notify both members of the separating
Table 1 Splitting superannuation Splitting by:
Client situation
Requirement
Superannuation agreement
Divorced
- Copy of superannuation agreement - Copy of divorce order
Married or de facto but separated
- Copy of superannuation agreement - Copy of separation declaration (if member spouse’s total superannuation interests exceed the low rate cap [currently $165,000], must have been separated for at least 12 months with no likelihood of co-habitation being resumed)
Court order
Divorced or separated
- Copy of splitting order from Court
26 — Money Management August 4, 2011 www.moneymanagement.com.au
couple within 28 days. The non-member spouse then has a further period of 28 days (or longer if allowed by the fund) to nominate whether they wish to retain, rollover, or cash out their entitlement.
Flagging super interest prior to a split
A separating couple can agree on, or a court can order, a payment flag to be placed on a member’s superannuation interest. This does not trigger a splitting of benefits, but instead prevents the trustee from allowing most withdrawals from the interest. A payment flag might be an appropriate precautionary measure where: • The couple have separated but a property settlement has not yet been reached; or • The superannuation interest cannot be split until retirement (for example, where the member’s interest is in a defined benefit fund). An existing payment flag can be lifted by agreement of the separating couple or by the court, then allowing a superannuation interest or payment split to occur. A payment flag cannot be placed on an interest already being used to pay a pension (for example, an account based pension or a defined benefit pension).
Tax components and preservation
Any superannuation interest transferred to a spouse upon relationship breakdown must be made proportionally from tax components and preservation status. For example, John has a super balance of $300,000 and is required to split 30 per cent of his balance to Sarah. John’s balance would be split as shown in table 2. Tim Sanderson is Colonial First State’s senior technical manager.
Table 2 Case study Tax components
John (existing)
Sarah (new)
John(new)
Tax free component
$100,000
$33,333
$66,667
Taxable component
$200,000
$66,667
$133,333
Unrestricted non-preserved
$20,000
$6,667
$13,333
Restricted non-preserved
$5,000
$1,667
$3,333
Preserved
$275,000
$91,667
$183,333
Preservation status
Appointments
Please send your appointments to: angela.welsh@reedbusiness.com.au
commence the position on 25 August.
Luke Symons ANZ Wealth has announced the appointment of Luke Symons to the role of head of ANZ Financial Planning. Symons will be responsible for driving the growth of ANZ Financial Planning, ensuring the delivery of quality advice to customers, and enhancing relationships with key stakeholders including the ANZ retail and commercial divisions. Symons has worked for ANZ since 1999, and has held a number of roles in small business and within the business banking division. He was most recently general manager of business banking for WA and SA. As head of ANZ Financial Planning, Symons will report to Paul Barrett, general manager advice and distribution. He will be based in Melbourne, where he will
THE Commonwealth Bank has named the man who will succeed Ralph Norris as chief executive: Ian Narev. Narev, the current head of the banking group’s Business and Private Banking division and a former head of strategy, was largely responsible for the Commonwealth’s acquisition of Bankwest and its investment in Aussie Home Loans. Narev joined the Commonwealth Bank in 2007 after heading McKinsey & Co’s New Zealand office, prior to which he was a lawyer specialising in mergers and acquisitions. Commonwealth Bank chairman David Turner said Narev would take over from Norris on 1 December, 2011.
COLONIAL First State (CFS) has announced the appointment of Linda Elkins to a newly created position, general manager of marketing and distribution. CFS chief executive Brian Bissaker said bringing together the distribution and marketing divisions would enable the business to more effectively deliver advice and product offerings to
Move of the week LONSEC’s former general manager of research, Grant Kennaway, will join Morningstar in the newly created position of head of fund research, Asia-Pacific, from November. Kennaway will be responsible for developing Morningstar’s fund research business in the Asia-Pacific region, including Australia and New Zealand, working closely with Morningstar’s global fund research organisation in Chicago, Toronto, London, and other European markets. Kennaway will report jointly to Morningstar’s president of fund research, Don Phillips, and Morningstar Australasia chief executive Anthony Serhan. Morningstar Australasia co-heads of fund research Chris Douglas and Tim Murphy will continue in their current roles, reporting to Kennaway.
its clients. Elkins joined Colonial Group in April 2010 as general manager of marketing. Prior to that, she worked for Russell Investments as managing director of superannuation. She will continue to report to CFS chief executive Brian Bissaker, and her appointment is effective immediately.
PLATFORM provider Netwealth has made two senior appointments to support the continued growth of the business. Karen Byrne has been appointed to the role of senior distribution manager in Victoria after two
years in the UK, and Aaron Ferguson will move from the position of senior account manager in Queensland to the role of state manager for Queensland and the Northern Territory. Prior to moving overseas, Byrne held senior distribution roles at Challenger and Colonial Geared Investments, where Ferguson was also previously Queensland state manager.
WESTERN Asset Management has announced the appointment of Damon Shinnick as portfolio manager/senior credit analyst in the firm’s Australian fixed income team.
Opportunities FINANCIAL PLANNER
Location: Sydney Company: St George Description: St George is seeking a financial planner to join its wealth business. The benefits of this role include a structured career path, an established client base, referrals, and practice management support with access to coaching, tools and business planning support services. St George also offers training and development, including an induction program, development days and mentorship programs. To be considered for this role you will require an ADFP (modules 1-6 minimum), at least two to three years’ experience as a financial planner, strong negotiating skills, a proven track record of achieving high sales targets, excellent technical knowledge, along with professional presentation and communication skills. For a confidential discussion, please call Liz Giltaine on (02) 8219 8963 and to apply, visit www.moneymanagement.com.au/jobs
BUSINESS DEVELOPMENT ASSOCIATE – FUNDS MANAGEMENT Location: Melbourne Company: Kaizen Recruitment Description: An outstanding opportunity exists for an up-and-coming business development professional to join this global funds management business. Key aspects of the
Grant Kennaway
In his new role, Shinnick will help formulate portfolio strategy and supplement credit research in Australian and New Zealand markets. He will also contribute to the development of new products and structured credit. Shinnick has recently returned to Melbourne from the UK, where he spent two years as a partner at Pension Corporation, a pension benefit administrator specialising in buy-out deals. Prior to that, he was a portfolio manager at Lehman Brothers Asset Management Australia and portfolio manager/senior analyst at Challenger Financial Services.
For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs
position include working in a team-based environment, making outbound calls to financial advisers, identifying sales opportunities and building long-term client relationships. The ideal candidate will have previous sales experience within funds management or financial services. You will have a relevant business degree, and possess outstanding communication skills, a demonstrated working knowledge of the investment management industry, as well as the ability to multi-task and work to a deadline. To learn more about this position and to apply, please visit www.moneymanagement.com.au/jobs or contact Matt McGilton at Kaizen Recruitment on (03) 9095 7157.
motivation to prospect for their own business. Their clients can offer: no start up costs, onsite admin and paraplanning services, an onsite compliance manager, and a supportive environment where you will be surrounded by like-minded self-employed planners. Ideally you will have a minimum of DFP1-6, an established referral network, or be confident that you can win enough business within 12 months to support yourself. Opportunities are also on offer for selfemployed planners who may be looking at buying a book of business, or even selling their existing book. For more information please visit www.moneymanagement.com.au/jobs, and don’t hesitate to contact Matt Grech on 0408 299 888 or email: jobs@iproconsulting.com.au
FINANCIAL PLANNER – RUN YOUR OWN BUSINESS
FINANCIAL PLANNER
Location: Sydney Company: iPro Consulting Description: Are you an experienced financial planner looking to go out on your own? Are you apprehensive about starting your own financial planning practice because of admin headaches and start up costs? This recruitment company is looking to recommend professional planners with a minimum of three years experience and the
Location: Perth Company: ANZ Description: ANZ Financial Planning (ANZFP) is a key area of ANZ’s wealth business, and is now seeking a financial planner who will be responsible for the provision of comprehensive financial planning services and advice. Reporting to the practice manager, you will assist clients to plan for their financial goals by providing strategies, access to a diversified product range and ongoing services.
You will have completed, or made a significant attempt towards completing a tertiary qualification in a business related field. In addition you will require an ADFS, and must be progressing towards your CFP qualification. For more information and to apply, please visit www.moneymanagement.com.au/jobs
BUSINESS DEVELOPMENT ASSOCIATE – WEALTH MANGEMENT
Location: Sydney Company: Kaizen Recruitment Description: Due to continued growth in their Australian operations, this global wealth management business requires a business development associate to support their wealth management team. To be successful in this role you will have experience within the financial services industry, and will demonstrate proficiency in using retail platforms. You will have a relevant bachelor’s degree, and possess finely tuned communication skills. Genuine career development opportunities are available to the right candidate. To express interest in this position, please visit www.moneymanagement.com.au/jobs or contact Kaizen Recruitment on (03) 9095 7157.
www.moneymanagement.com.au August 4, 2011 Money Management — 27
Outsider
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A LIGHT-HEARTED LOOK AT THE OTHER SIDE OF MAKING MONEY
One smart cookie OUTSIDER has been to enough financial services events in his time to have pretty much seen and heard it all. As such, it takes something from deep left field to really stand out, but at a recent Association of Financial Advisers (AFA) roadshow the AFA’s 2010 adviser of the year, Steve Salvia, managed it. In a motivational presentation to those assembled, one of Salvia’s key themes was for advisers to put a value on the advice they provided – and denoted that advice as ‘the cookie’. “I’ve got the cookie,” he announced, before getting his initially reluctant breakfasttime audience involved.
“Repeat after me. I’ve got the cookie. Say it again. I’ve got the cookie. Turn to the person next to you and say ‘I’ve got the cookie’,” he continued. With the barriers broken
down, Salvia soon had most of the room in fits of laughter. “We’ve all got the cookie. Everyone wants our cookie. Ok? I let my clients touch, taste and feel the cookie, but
if they want the cookie they have to pay. Stop giving free financial advice away because we’ve got the cookie. They all want our cookie and everyone’s prepared to pay because they need our cookie.” Outsider is prepared to suggest that this was the most number of times he’s ever heard a single person use the word ‘cookie’ in a 90second period. He is also prepared to concede that Salvia’s efforts to stand out were a rousing success – in what was a packed full-day program it is likely that every adviser present went home that day remembering that having the cookie really took the biscuit.
Keeping up with the kids WHILE it is true that Outsider’s own embrace of technology has not advanced much further than the gramophone (and dammit, needles are becoming hard to find), the nature of his work ensures he must stay abreast of technology in financial services. He is therefore intrigued by proposals being supported by the Financial Services Council for insurance sales to be connected to mobile phones. According to a report released by Telstra, “mobile applications provide insurers with a new opportunity to create a more interactive and ongoing relationship with their customers”. “The use of mobile technology can also assist in the underwriting and claims processes and thereby make the process of arranging life insurance cover and claiming on a policy easier, simpler and less time consuming.” All very compelling stuff, Outsider thought,
and then he recalled that insurance sales have been linked to telephones almost since the time of Alexander Graham Bell. Indeed, he well remembers Mrs O using the phone to ensure young Master O was appropriately insured while driving the family Studebaker on his Ps. However, Outsider’s young colleagues suggest that he misunderstands the whole concept and that the FSC and Telstra are talking about telephonic technologies well in advance of the highly-polished, black, pulse-dialling Bakelite handset that has pride of place in the Outsider lounge room. These young things suggest that it is all about ‘apps’ and ‘twits’ and ‘GPS’, but having watched events unfold in the UK, Outsider comforts himself that while his technology remains very 20th century, Mrs O’s Bakelite may have been dropped – but it’s never been hacked.
Swimming against the tide IT has recently come to Outsider’s attention that, unlike most of the world’s working population, sportsmen have the luxury of retiring fairly early. Most athletes retire at an earlier age than public servants in Communist countries, who start playing chess in the park on their 40th birthday. But what irks Outsider is that although sporting sponsorships and prize money means these athletes can fill their basements with
stacks of $100 bills by the age of 30, they are then often offered lucrative second careers. A certain young athlete who retired at the tender age of 28, has not only decided to choose a second career, but that career is in financial planning. Champion swimmer Grant Hackett has worked at Westpac ever since he hung up his Speedos and has targeted erstwhile teammates as providing a ready pool (forgive the
pun) of investment talent. According to a recent interview with Hackett he’s always had a passion for finance. In Outsider’s jaundiced view, this simply explains why he was prepared to rise in the wee small hours of the morning and swim endlessly up and down swimming pools pursuing nothing but a white line. Still, it is not the white line some others in the finance industry have been seen to pursue.
28 — Money Management August 4, 2011 www.moneymanagement.com.au
Out of context
“After all, businesses fail roughly at the same rate as marriages.” In his opinion column in this week’s Money Management, OnePath’s Ted Voges advises planners to arrange socalled ‘business pre-nups’, due to the overwhelming business failure rates.
“Imagine a situation where a future government had to choose between meeting creditors’ obligations or those of their citizens. The contract between governments and citizens may mean that creditors come off second best.” Blackrock’s Steve Miller may be foretelling an uncomfortable future reality.
“If you don’t know where you’re going, any road will take you there.” Finance Minister Bill Shorten quotes Lewis Caroll, author of Alice in Wonderland, to explain the importance of forward thinking and planning sessions at the Financial Sector Union’s national conference.