Money Management (December 8, 2011)

The publication for the personal investment professional

www.moneymanagement.com.au

CBA SETTLES COUNT DEAL: Page 8 | 2011 TOP 5 LISTS: Page 13

Adviser sentiment cleaving to liferaft

By Mike Taylor

Figure 1 Financial planner sentiment index 60 53

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AS debate heats up over the Australian Securities and Investments Commission’s (ASIC’s) proposed educational guidelines for financial advisers, training providers argue that a push for higher education will not fix the inherent discrepancies in educational standards.

In an effort to lift industry assessment standards, the Financial Planning Association (FPA) is currently requiring all new advisers to have an approved degree from 1 July 2013 in order to be recognised as an associate financial planner.

Pinnacle managing director John Prowse believes a key element in raising the standard of adviser education is recognising that the Diploma of Financial Planning (the current benchmark) has been carelessly issued by some recognised training organisations (RTOs). Training regulators often allow some RTOs to use a “tick and flick” method for issuing diplomas and certified professional development (CPD), he said.

Under the proposed threetiered approach outlined in ASIC’s consultation paper (CP) CP153, financial advis-

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Continued on page 3

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“Adviser sentiment is generally still lower than when we last conducted our survey in October, but the result for December is markedly better than it might have been – largely because of the more positive news around central bank intervention and the impact on share

ers will be required to complete a national examination assessment, a 12-month supervisory period, and a knowledge review within two years of undertaking the exam – and every three years thereafter.

Prowse said he has long supported ASIC’s proposed national exam because there is an inherent conflict of interest involving educators who set their own training requirements. However, this issue does not get resolved by making university-level education the minimum requirement for all financial planners, he said.

“If you set a standard and don’t police that standard, it doesn’t do any good to set the standard in the first place,” he said.

A three-year degree followed by a year of supervision is too excessive for a normal financial planning job, he added.

According to CP153, the regulatory body does not currently “have the expertise, or the resources, to administer a national exam”. It has proposed “outsourcing the administration of the exam to a commercial exam provider, through a tender

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Planner education needs consensus

By Andrew Tsanadis

Figure 2 Are times good or bad for you ?

ASX All Ordinaries Index

THE degree to which Australian financial planners are looking for more optimistic signals amid the current torrent of bad news has been revealed in new research released by Wealth Insights.

The Wealth Insights Planner Sentiment Index for December revealed sentiment plumbing levels not seen since the Global Financial Crisis, but the surveying process also revealed the degree to which advisers seem to be looking for better news.

Wealth Insights managing director Vanessa McMahon said that amid last week’s more positive news around European Central Bank intervention and the consequent improvement in share markets, adviser sentiment had improved markedly.

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markets,” she said.

The Wealth Insights research has consistently revealed a close correlation between Australian financial adviser sentiment and the fortunes of the Australian Securities Exchange, and McMahon said this had been strikingly

confirmed by the spike recorded mid-way through the December survey process.

This was something that had been evidenced by the significantly different responses from survey respondents between Tuesday and Wednesday last week, and then Thursday and Friday.

Asked whether times were good or bad right now, the survey revealed a 20 per cent spike towards positivity on the latter two days, and after the more positive news on Central Bank action.

Despite this spike in positivity, McMahon pointed out that the overall planner sentiment remained at levels not seen since the depths of the global financial crisis in late 2008.

She said that, in short, Australian financial planners were closing out 2011 feeling generally pessimistic about the immediate outlook.

Merger threat to platform FUM

By Chris Kennedy Industry consolidation, particularly involving large dealer groups, has the potential to shift large volumes of funds under management (FUM) from current platforms into products aligned to the new institutional owner.

Questions were raised last week as to what will happen to the large volume of FUM in white-labelled BT products through Count Financial once new owner Commonwealth Bank takes over.

Money Management understands there is also significant FUM allocated to BT products through DKN advisers who are now aligned to major platform provider IOOF, while AMP has large volumes of assets in BT products and Westpac-owned Asgard, which it

Mark Kachor could theoretically begin to shift towards newly-aligned AXA products such as North.

News that BT had sent a communication direct to BT Lifetime Flexible Pension members giving them the option of setting up an advice fee for personal financial advice to replace the existing fee arrangement (consisting of an upfront and ongoing commission) drew more than 30 comments on

Merry Christmas This is the final print edition of Money Management for 2011.

The entire team at Money Management wish our readers a merry Christmas and a safe and prosperous 2011.

The first print edition of Money Management will be published on 19 January 2012. In the meantime, readers will continue to receive Money Management’s daily e-newsletter up to and including Friday 16 December 2011 before it resumes on Monday 9 January 2012.

Money Management’s website.

Several advisers expressed disappointment that BT had contacted clients directly, and some suggested it was a move aimed at disconnecting clients from their current advisers to either reduce payments to non-aligned advisers or to create “orphan” clients that it could then acquire.

But a BT spokesperson told Money Management the sole reason BT contacted clients directly was its disclosure obligations, and was completely unrelated to the acquisitions of DKN and Count.

Mark Kachor, managing director of research house DEXX&R, said that ultimately it would be reasonable to expect that CBA would look to migrate the BT 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: Zeina Khodr Tel: (02) 9422 2198 zeina.khodr@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Milana Pokrajac Tel: (02) 9422 2080 milana.pokrajac@reedbusiness.com.au Journalist: Tim Stewart Tel: (02) 9422 2210 Journalist: Andrew Tsanadis Tel: (02) 9422 2815 Journalist: Keith Griffiths Melbourne Correspondent: Benjamin Levy Tel: (03) 9527 7392 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Marija Fletcher Sub-Editor: Daniel Winter Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply.

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Closing out a challenging year

B

ecause this is the last print edition of Money Management for 2011, it is worth reflecting upon what a challenging year it has been for Australian financial services generally and financial planners in particular.

The term ‘perfect storm’ has become somewhat clichéd but could quite appropriately be applied to Australian financial services in 2011, as financial planners not only had to witness the uncertainty and consequent volatility generated by Europe's sovereign debt, but also the political uncertainty generated around debt in the US as well as the efforts of Australia's first minority federal government in more than 50 years.

It is fair to say that Australian financial planners started 2011 uncertain how it would end. They will likely start 2012 with the dynamic hardly changed.

Few readers will be surprised to learn that an analysis of Money Management's news pages for 2011 reveals that the most talkedabout issue was the Government's Future of Financial Advice (FOFA) changes and the manner in which they were handled by the Assistant Treasurer and Minister for Financial Services, Bill Shorten.

When the year began, Shorten remained an unknown quantity for the industry, but that quickly changed as his handling of FOFA cast him as having maintained his

“

The polls and Australia's political timetable mean that financial planners must push for the changes they want to occur via a Coalition Government in 2013/14.

”

close links with the trade union movement – and therefore being allied to the views of the Industry Super Network (ISN).

The degree to which Shorten's union links seemed to be reflected in the Government's policy approach appeared allied to the occasions on which policy formulation veered away from the recommendations of the Ripoll Inquiry to embrace elements such as ‘opt-in’, the banning of commissions on life/risk sales inside superannuation, and annual product disclosure statements.

By the time the first tranche of the FOFA legislation had been introduced to the Parliament, planners seemed justified in their suggestions that the Government was pursuing an agenda to extend the influence of the industry superannuation

funds at the expense of the financial planning community.

At the same time, the Government seemed oblivious to the fact that one of the unintended consequences of FOFA was vertical integration and the re-emergence of the old tied-dealer models of the past.

While some planners have been critical of the inability of the Financial Planning Association and the Association of Financial Advisers to negotiate substantial changes to the FOFA package, such criticism is unfair in the context of the single-minded approach the Government chose to adopt.

With the balance of power in the House of Representatives having being altered with a change in speakers in late November, financial planners must now accept that most of Shorten's FOFA changes will flow through the Parliament unamended. In short, they will have to navigate the second half of 2012 in a fully-fledged post-FOFA environment.

The polls and Australia's political timetable mean that financial planners must push for the changes they want to occur via a Coalition Government in 2013/14.

In the meantime, on behalf of the Money Management team, I wish all our readers a safe and happy Christmas and New Year.

– Mike Taylor

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2 — Money Management December 8, 2011 www.moneymanagement.com.au

News

Suncorp purchases AMP general insurance business

By Chris Kennedy SUNCORP has purchased AMP’s General Insurance Distribution (AMP GID) business, securing the business for Suncorp for the long-term, the two groups announced today.

Suncorp previously provided general insurance products to AMP through a national distribution network of more than 700 aligned general insurance professionals, or authorised representatives (ARs), Suncorp stated.

“This initiative is part of Suncorp’s strategy to strengthen its distribution footprint and grow its business, as well as provide distribution in line with clients’ preferences,” said Anthony Day, chief executive of Suncorp’s commercial insurance business.

AMP director financial planning, advice and services Steven Helmich said the trans-

Suncorp will continue to “provide product, marketing and services under the same terms and conditions as today.

- Steven Helmich

”

Steven Helmich action will provide uninterrupted support for GID authorised representatives.

“Suncorp will continue to provide product, marketing and services under the same terms and conditions as today. With this transaction, GID authorised representatives will become part of a company committed to strong growth in general insurance and to investing in and develop-

ing general insurance professionals,” Helmich said.

When AMP sold the manufacturing side of its general insurance business to Suncorp

in 2001, it kept the distribution agreement through AMP GID. The group’s focus in that area has lessened since the merger with AXA, with an increased emphasis on the financial planning, wealth management and investments areas of the business, Helmich said.

From 31 December 2011, Suncorp will become owner of the GID business, the staff will become employees of Suncorp, and the advisers will be licensed by Suncorp. Suncorp will retain preferred general insurance provider status for AMP advisers who want to deal in that area, Helmich said.

The transaction will have no effect on AMP’s financial planning operations or planner numbers, he added.

The groups would not disclose the acquisition price, other than to say it is not material for either party.

Planner education needs consensus Continued from page 1

process” involving industry representatives, education providers and members of the Advisory Panel on Standards and Ethics.

Prowse said that while the FPA has made some attempt at facilitating an industry standard for education, it should ultimately be the responsibility of the Government, and he opposed having an industry body gain legal status. In regards to ASIC's proposed 12-month monitoring of new advisers, Prowse argued that an accreditation process for authorised supervisors was needed.

According to FPA chief professional officer Deen Sanders, however, the Government should not provide additional legislation in assessment and education

of planners. He said it would be better for the industry to take “an optimistic and positive” stance on adviser education.

“When you seek to identify yourself as a professional, people assume you have a degree qualification,” he said.

“There will be, we don’t doubt, room in the marketplace for people with vocational qualifications or other regulatory-aligned qualifications rather than professional ones.”

Sanders said there would always be advisers who chose not to necessarily embrace the full professional identification or obligation that the FPA is seeking to enshrine with the “financial planner”designation – and this would be the distinction in the industry.

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Merger threat to platform FUM Continued from page 1 white labelled Count funds to its own platform.

Those funds would be unlikely to dramatically shift in the short-term because advisers would have to show the advice was in the client’s best interests, and funds in superannuation products would also have to meet Superannuation Industry (Supervision) Act requirements.

However, he said impending Future of Financial Advice legislation may add a sense of urgency because as it stands, from 1 July 2012 new funds will be subject to the new remuneration regulations – but funds already in place will be

grandfathered in terms of volume-based payments.

Profit is in the product rather than the distribution – meaning there would seem to be strong incentive for CBA to offer an equal or better proposition to clients currently in the BT version of the wrap, Kachor said.

He added that while one would expect Colonial First Choice investments to be available on the BT white label product, if they weren’t already included they would be soon enough.

When contacted by Money Management, CFS provided a statement that read: “We’ve made it clear that going forward we intend to maintain Count’s open architecture model.”

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News

Structural separation the answer: Premium

By Chris Kennedy

THE financial planning industry is starting to look more like it did back in the 1970s, with most advice tied to product; and conflicts of interest won’t be eliminated without a structural separation of advice and product, according to Premium Wealth Management.

Premium general manager Paul HardingDavis said the industry is looking more like it did when he joined in 1978. And despite having moved through a number of challenges since then, has now returned to a sit-

uation where around 85 per cent of advice is tied to product manufacturers such as banks, super funds and life offices.

There will be some interesting conversations to be had around systemic conflict of interest and structural separation, but the future is bright for those in the niche and specialist space servicing sophisticated and high net worth clients, Harding-Davis said at a roundtable in Sydney yesterday.

Premium Wealth Management director and principal of Premium Financial Solutions, Phillip Leslie, said at the moment reforms were

attempting to paper over the fundamental conflicts of interest of having 85 per cent of financial advisers working for product providers, and compared the practice to having doctors working for pharmaceutical companies. “Unless you put structural separation on the table, it’s all a terrible game,” he said.

Rodney Brown, director of Tristone Private Wealth, said the consolidation within the industry leading to more advisers being tied to product manufacturers was terrible for consumers, but presented a great opportunity for up-andcoming advisers who had their clients as their

number one interest, because an ageing group would be leaving the profession.

Harding-Davis said he didn’t predict much of a further increase in terms of more advisers becoming tied to product providers because as the larger groups continued to buy up distribution, other advisers who wanted to provide independent advice would leave to start their own businesses.

He said he would like to see the Premium business grow from its current level of 20 practices to around 40 or 50, with one practice set to formally join the group today.

ASIC’s Storm case to continue

By Milana Pokrajac THE Storm Financial compensation case brought by the Australian Securities and Investments Commission (ASIC) on behalf of two investors is set to continue, after the Federal Court rejected challenges from the companies involved in the collapse.

In December 2010, ASIC commenced legal proceedings on behalf of Barry and Deanna Doyle against Bank of Queensland, Senrac and Macquarie Bank.

The case was in relation to the alleged breach of contract, contravention of statutory prohibitions against unconscionable conduct, and the banks’ liability as linked credit providers of Storm under the Trade Practices Act 1974.

Earlier this year, all three companies asked the court to strike out and dismiss the whole or part of ASIC’s statement of claim, which was rejected by Justice Lindsay Foster.

The court has, however, asked ASIC to clarify certain aspects of the claims by filing an amended statement of claim.

These proceedings are separate from other Stormlinked legal cases brought

by ASIC, including the civil penalty proceedings against former Storm chief and his wife, Emmanuel and Julie Cassimatis.

4 — Money Management December 8, 2011 www.moneymanagement.com.au

News

FOFA cannot be separated from MySuper

By Mike Taylor THE Association of Superannuation Funds of Australia (ASFA) has told the Parliamentary Joint Committee (PJC) looking into the Government’s Future of Financial Advice (FOFA) bills that the nature of intra-fund advice means the legislation must be viewed in the same context as MySuper.

In a submission filed with the PJC last week, ASFA said that given the degree of interdependency between FOFA and

intra-fund advice, it was critical that the FOFA legislation be considered in conjunction with MySuper legislation.

“To consider the FOFA legislation in isolation, without consideration of its interaction with, and potential impact upon, the provision on intra-fund advice risks there being unintended consequences which, at the extreme, may affect the viability of providing such advice,” the ASFA submission said.

ASFA has also joined those suggesting that the Government may not be

allowing enough time for the implementation of its new arrangements.

It said that while ASFA supported the FOFA reforms, it was important to note that implementation – especially by superannuation funds which will also have to implement changes resulting from the Stronger Super reforms – would “necessitate significant and comprehensive changes having to be made to what are mature and complex arrangements”.

“For financial advisers and trustees

to be in a position to be able to implement the required changes necessitates a degree of certainly as to the regulatory requirements,” the submission said.

The ASFA submission said a variety of strategic and tactical decisions needed to be made, and given timeframes that would not see the Bill passed by the House of Representatives until May next year, there would need to be a transition period of at least 12 months.

PJC told how advice costs vary SUPERANNUATION fund members are generally unwilling to pay extra for financial advice provided over the phone, over the internet or via a mobile device, according to research contained in a submission filed with the Parliamentary Joint Committee (PJC) reviewing the Government’s Future of Financial Advice legislation.

The research, conducted by Mercer and cited by the Association of Superannuation Funds of Australia (ASFA) in its submission to the PJC, suggested that 40 per cent of superannuation fund members would contact their super fund if they needed advice.

However, the submission also included the results of research conducted for ASFA by actuarial consultancy Rice Warner, which suggested the cost per fund member of advice delivered through call centres – and advice delivered by a financial planner that is paid for directly by the fund rather than by the member – was relatively low.

“The average cost per member per year for call centre activities is $11.23, with average cost of financial planning $2.99,” the submission said.

“The average cost per call received is $17.00.”

The submission noted, however, that there was a reasonably wide variation across each of the expenses. Significant contributors to that variation included differences between funds in the level and quality of service, particularly in respect of member contact centre services, and the incidence of members taking advantage of different services.

“The cost of operating call centres ranged from a low of $4.47 a year per member to a maximum of $21.16 per member,” it said. “Expenditure on financial planning services varied from $0.65 a year per member to $26.25.”

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News Opposition attacks MYEFO super changes Survey reveals

By Mike Taylor THE Federal Opposition says cut-backs announced as part of the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) have served to further undermine the incentive for Australians to save for retirement.

The shadow Assistant Treasurer, Senator Mathias Cormann, said the MYEFO changes were effectively punish-

ing those who were prepared to take responsibility for their own retirement needs.

"By pausing indexation of concessional contribution caps, Labor is again reducing the incentive for people to save more because the caps are not keeping pace with inflation and wage increases," he said.

Cormann said he believed it was absurd for the Government to force people to contribute more to compulsory superan-

nuation while on the other hand removing incentives for people to make additional voluntary super contributions.

"Instead of increasing compulsion, the Government should complement current compulsor y savings levels with appropriate incentives for people to make additional voluntary savings – in particular at a stage of their lives when they are most able to do so," he said.

confidence at GFC lows

Mathias Cormann

Government extends pension drawdown relief

By Chris Kennedy THE Government has announced an extension to the 25 per cent drawdown relief for account-based pensions for the 2012-13 financial year, which it said would benefit around 125,000 selffunded retirees.

The move continues the 25 per cent reduction that was put in place for the 2011-12 financial year, and acknowledges the impact of share market volatility on retirement savings. This was scaled back from the 50 per cent reduction that was in place for the previous three years.

“The provision of drawdown relief for the past four years has assisted accountbased pension holders by reducing the need for them to sell assets at a loss in order to meet the minimum payment requirement,” said Assistant Treasurer and Minister for Financial Services and Super-

Bill Shorten annuation Bill Shorten, in a statement.

“The Government had indicated previously the minimum payment amounts would return to normal in 2012-13. However, equity markets

continue to be volatile and prices remain significantly below the levels reached prior to the GFC,” he said.

“Continuing the current limited drawdown relief for a further year will assist retirees to recoup capital losses on their pension portfolios as equity markets recover over time.”

The move was broadly welcomed by the Small Independent Superannuation Funds Association (SISFA), although SISFA chair Michael Lorimer said the association would have preferred the Government retain the original 50 per cent reduction.

However, Challenger’s chairman of retirement incomes Jeremy Cooper said the move highlighted a shortcoming in the nation’s retirement system through its over-reliance on equities, which could not be relied upon to provide bedrock or lifetime retirement income.

Govt removes SG age limit THE Government has amended its Superannuation Guarantee (Administration) Amendment Bill 2011 to abolish the superannuation guarantee (SG) age limit, after recently raising that limit to 70.

Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten said that from 1 July 2013, eligible employees aged 70 and over will receive the superannuation guarantee for the first time.

“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer,” Shorten said.

The recently-announced Superannuation Guarantee (Administration) Amendment Bill 2011 raised the age limit for SG contributions from 65 to 70, but shortly after this Shorten told Parliament the

Government would be abolishing the age limit altogether.

The changes will also ensure that employers will be able to claim income tax deductions for superannuation guarantee contributions made to employees aged 70 and over from 1 July 2013, according to a Treasury statement.

It ensures employers will not bear a higher cost in employing workers 70 and over compared with other workers, the statement said.

HFA downgrades earnings guidance HFA Holdings Limited has downgraded its earnings guidance for the current half year.

In an announcement released on the Australian Securities Exchange last week, HFA said it expected to report earnings before interest, tax, depreciation and amortisation of between US$3 million and US$4 million, compared to US$10 million for the corresponding period last year.

It said the expected decrease was a result of a significant drop in product investment performance fee revenue due

to volatility in global markets; an increase in non-cash equity settled transaction expense; a one-off expense relating to a reduction in staff following a restructure of the Australian Certitude business; and a review of the compensation structure to ensure staff were remunerated in line with industry standards.

It said group assets under management or advice stood at US$6.03 billion as at October, 2011, compared to US$5.13 billion for the half year ending 31 December, last year.

6 — Money Management December 8, 2011 www.moneymanagement.com.au

RECENT declines in financial planner sentiment may be a reflection of the broader state of Australian small business, if a new CPA Australia survey is an indicator.

The CPA Australia 2011 Australia Asia-Pacific Small Business Survey has found Australian small business confidence mirrors that displayed at the height of the global financial crisis and lags behind that of other regional players.

The survey, conducted among over 1500 small businesses in six Asia-Pacific economies, found Australian small business operators were the least likely to expect their business to grow in the next 12 months, with just 57 per cent indicating a positive growth outlook for the coming year.

CPA Australia noted that the 57 per cent figure was identical with that recorded at the height of the GFC. It also found that 41 per cent of Australian businesses borrowed for business survival in the past 12 months, with 29 per cent borrowing to fund growth.

As well, the CPA Australia survey found that 18 per cent of Australian businesses had indicated no intention of undertaking key business management activities such as stock control, sale of assets, marketing or promotion in the coming year.

Commenting on the survey findings, CPA Australia chief executive Alex Malley said they painted a bleak picture of small business attitudes.

He said that while global economic volatility had played a part, the greater contributors had been increasing expenses, higher borrowing costs and tighter lending conditions.

Capstone adds eight practices, welcomes FOFA NON-aligned dealer group Capstone has welcomed a post-Future of Financial Advice (FOFA) world and has announced the recruitment of eight new practices.

Capstone managing director Grant O’Riley said he did not think the FOFA reforms would spell the end of a level playing field for mid-tier practices. Capstone had 70 authorised representatives in July this year, according to Money Management’s Top 100 Dealer Groups survey.

Capstone’s business model will allow it to continue to be an independently owned licensee, regardless of what happens with FOFA, and many of its practices have operated under guidelines similar to those proposed under FOFA for some time, O’Riley said.

The group is focused on improving efficiencies and adopting new technologies to better support its practices, Capstone stated. In preparation for fee-for-service requirements, the group has developed its own integrated client engagement model that “provides a structured methodology with a technology base to assist practices in building or amending a business model for the future,” Capstone stated.

The group said it is also fielding several calls per week from practices looking to

Grant O’Riley align with an independent group. According to Capstone, these requests demonstrate that practices still value licensees and their value proposition, and show many advisers are not thinking the big end of town is the solution for the future.

The new practices recruited by Capstone include Victorian firms PCR Partners from Morwell, Equus Private Wealth from Malvern and BKM Financial Services and HGN Private Wealth from Camberwell. Also included are Brad Tilley from Millicent in South Australia, Agbis Financial Planning from Armidale in New South Wales, Corpacc Financial Planning in Brisbane and Gold Coast-based practice CoastGuard.

News

Change of speaker changes ASIC warns on upturn in investment fraud odds on FOFA

By Mike Taylor THE recent change in the balance of power in the House of Representatives is likely to mean the G over nment’s Future of Financial Advice (FOFA) legislation will be passed into law with little or no amendment.

While both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) last week filed their submissions with the Parliamentar y Joint Committee (PJC) reviewing the FOFA legislation, significant change is no longer expected.

With a Coalition backbencher now sitting in the Speaker’s chair, the Government has one more vote in the Parliament, effectively changing the equa-

Richard Klipin tion for the major financial planning lobby groups.

Previously, it had been believed that the lobbying of NSW independent Rob Oakeshott and Tasmanian

independent Andrew Wilkie might have garnered their support for some amendments to the legislation.

However, Wilkie has subsequently acknowledged that his influence has been underm i n e d by t h e c h a n g e i n speakers. Financial planners w h o h a d b e e n l o b by i n g Oa k e s h o t t h a d e x p re s s e d doubt about his position even before last week’s parliamentary announcement.

AFA chief executive Richard Klipin acknowledged that, on the face of it, the changes had placed the Government in a better position to secure the passage of its legislation.

However, he said his organisation would be making its position clear to the PJC and arguing for change.

INCIDENCES of investment fraud appear to have increased over the past nine months, according to the Australian Securities and Investments Commission (ASIC).

What is more, the companies behind that fraud have been predominantly based on the Gold Coast – albeit, often registered elsewhere in Australia.

ASIC and State and Territory police services have issued a warning about the increased incidences of fraud, warning that investors are being targeted all over the company.

It did so at the same time as obtaining orders against a Gold Coast company for operating an unlicensed financial services business.

According to ASIC, the fraudsters usually contact their victims by telephone and convince them to invest in schemes involving the purchase

BT offers fee-for-advice option to super members

By Andrew Tsanadis BT FINANCIAL Group has announced a new fee-for-advice option which will be made available to a number of BT Retail Personal Super and Pension funds.

According to a letter sent to BT Lifetime – Flexible Pension members on 14 November, members will be given the option to set up an advice fee for personal financial advice, effective from 14 December 2011.

The fee-for-advice option, or ‘Option B’, will replace the pension fund’s existing fee arrangement, which currently charges members an upfront commission of 0 to 4 per cent and an

ongoing commission of 0.6 per cent per year based on the value of a member’s investment.

As part of the new option, members can either sign up to a one-off advice fee or an ongoing advice fee, which members can opt-out of on a date specified or after a period of two years – whichever is earlier. Members can either fill out an Advice Fee Cancellation form to cancel ongoing payment to advisers, or extend that arrangement by filling out a completed Advice Fee form, the letter stated.

According to BT, if a member commences either one of the advice fee arrangements, they will receive a fee

rebate to their account of up to 0.6 per cent per year.

“Increasingly, advisers have been requesting this flexibility to charge a specific fee-for-advice rather than a bundled commission. Given levels of demand, BT will be progressively introducing this across its entire retail product range,” said BT Financial head of superannuation Melanie Evans.

Apart from Flexible Pension, the new option will also be available to a number of other BT superannuation funds including BT Lifetime – Personal Super, BT Retirement Selection – Personal Super Plan, and BT Superannuation Investment Fund.

of shares or investment in index funds or currency trading schemes.

It said once an investment was made, the fraudsters provided access to a website that showed projected returns, however those returns were completely fictitious.

“These fraudsters operate without Australian Financial Services (AFS) licences and use false addresses and phone lines often routed to another address. In the vast majority of cases, investors lose all of their money,” the ASIC warning said.

Specialist SMSF accreditation on the rise THE number of people holding self-managed superannuation fund (SMSF) Specialist Advisor and Specialist Auditor status is continuing to grow.

The Self Managed Super Fund Professionals’ Association of Australia (SPAA) said the number of people holding the specialist status had increased by 65 per cent, with a number of practitioners holding both accreditations.

Commenting on the data, SPAA chief executive Andrea Slattery said the organisation had experienced strong interest from financial planning dealer groups and accountants who were entering the marketplace and interested in ensuring their SMSF advisors had the SPAA designation as a minimum education requirement.

She said that along with accreditation, SPAA also offered financial planners the opportunity to apply for a registered tax agent status.

Count/CBA deal proceeds as Gale departs

By Chris Kennedy THE Commonwealth Bank’s proposed acquisition of Count Financial will go ahead after receiving court approval and overwhelming support from shareholders, while chief executive Andrew Gale has announced his resignation.

Shareholders voted 94.82 per cent in favour of the schemes of arrangement in a vote on Friday 25 November – a week after the Australian Competition and Consumer Commission announced it would not oppose the move.

On Monday 28 November the Supreme Court of New South Wales approved the acquisition, and the group also announced that founder and chairman Barry Lambert would stay on as a non-executive director.

Count officially ceased trading

as a separate entity last Wednesday 30 November, and on the same day the group announced the resignation of chief executive and managing director Andrew Gale.

CBA general manager for strategic development in wealth management, David Lane, immediately assumed Gale’s role. Prior to joining CBA in 2010, Lane was chief operating officer for Neuberger Berman’s hedge fund business, and has more than 13 years’ experience in investment banking in New York, London and Sydney.

In a statement to the Australian Securities Exchange (ASX), Lambert thanked Gale for his contribution to Count over the prior 20 months.

“Count appreciates Andrew’s work during difficult market conditions and his leadership of the

Barry Lambert company during the transaction with CBA,” the statement read.

Lambert will remain chairman of Countplus, which will remain as a separately listed company under independent management – although the CBA will become its largest shareholder.

8 — Money Management December 8, 2011 www.moneymanagement.com.au

Under the scheme of arrangement, all ordinary Count shares will be acquired by a wholly-owned subsidiary of the Commonwealth Bank. All outstanding options in Count will be cancelled for consideration in accordance with a scheme of arrangement, according to a separate statement to the ASX. Entitlements of $1.40 cash per Count share (or $1.40 worth of Commonwealth Bank shares per Count share) and consideration of between two and 10 cents per scheme option will be determined on Tuesday 6 December, according to the statement.

The payment and issue of the scheme consideration will be made on the implementation date of the schemes (Friday 9 November), the statement read.

“As Count’s life as a publicly

listed company will soon come to an end, as the founder of Count you may well ask if this is a sad day for me and Count,” Lambert told the company’s annual general meeting on 28 November.

“In different circumstances, that may well be the case.

However, in view of the certainty of the CBA offer versus the uncertainty surrounding the proposed regulatory change, the prevailing global economic conditions and the political uncertainties in Australia, the directors unanimously recommended acceptance of the CBA offer,” he said.

Lambert said he believed Commonwealth Bank would be good owners of Count and provide a safe and secure home for its staff, franchisees, financial advisers and clients.

News

Guardian Advice unveils new succession plan

By Chris Kennedy GUARDIAN Advice has overhauled its succession planning strategies, with a focus on bringing new advisers into the business.

Guardian said it will aim to proactively identify an appropriate succession strategy for practices using a threepronged approach.

This will consist of a standardised succession and purchasing execution process, including legal documentation; providing better access to finance for advisers to use through parent company Suncorp and other accredited banks when acquiring new client registers or buying equity in an existing practice; and an equity partnership model to support the goals and succession plans of larger practices.

The offer is part of Guardian’s value proposition to prospective buyers, according to Guardian Advice executive manager Simon Harris. Guardian continues to aim to increase from around 150 to 200 advisers over the next three years, and is currently in discussions with around 40 to 50 practices, Harris said.

The new strategy was developed from March this year when former Commonwealth Bank national head of financial planning Ian Anderson joined the group as business acquisition manager.

Harris said the changes were based on adviser feedback, and although Future of Financial Advice reforms had caused some uncertainty around practice valuations there are still plenty of buyers waiting in the wings until there is some more certainty.

The changes will make it easier for younger advisers to buy into a practice when an older adviser is looking to get out, and will also allow for a more orderly transition, Harris said.

There has also been no change to the group’s buyer of last resort policy (BOLR) since the 2007 decision to move from a BOLR arrangement to a practice buyout facility based on current market valuations, according to Harris.

Those practices with a grandfathered BOLR policy will retain that, with those that are in place usually done on a recurring revenue valuation basis; although the exact number varied from practice to practice, Harris said.

Simon Harris Harris described two BOLR transactions that had taken place recently. In one, Guardian had acquired 100 per cent of the practice, then sold that back to another adviser allowing that adviser to join the group and take over those clients. In the other, Guardian entered into a four year servicing agreement with an existing practice on a “try before you buy” basis, allowing that adviser to purchase the practice any time in the next four years at the agreed price – with the potential to improve the value of the practice over that time.

Shorten’s retrospective tax law criticised

By Milana Pokrajac BUSINESS taxpayers are concerned about being retrospectively penalised for complying with previous tax laws, according to the Institute of Chartered Accountants in Australia.

These concerns have been raised following the Assistant Treasurer Bill Shorten’s announcement of major changes to the tax treatment of the residual tax cost setting and rights to future income rules, which the Government said would help return the Federal Budget to surplus in 2012-2013.

The changes would reduce deductions available to taxpayers under the operation of the consolidations regime that was originally introduced in 2002.

However, the Institute’s tax counsel, Yasser El-Ansary, has criticised the retrospective tax law changes, claiming such laws should only be used in extraordinary circumstances where genuine integrity risks exist.

“Retrospective laws should not be used to correct policy deficiencies in the tax system or shortfalls in budget revenues,” El-Ansary said. “We need to recognise that every retrospective law change puts another dent in the perception of Australia’s brand in the international marketplace.”

El-Ansary named amendments to the petroleum resource rent tax (PRRT) as an example of retrospective tax laws.

“Changes to the PRRT regime will result in a back-dating of the tax law to 1990, while the Government has proposed enacting seven-year retrospective transfer pricing legislation which has the potential to raise billions in additional tax revenues from multinational organisations,” the institute stated.

www.moneymanagement.com.au December 8, 2011 Money Management — 9

SMSF Weekly SMSF growth threatens institutional funds

By Mike Taylor THE rapid growth in selfmanaged superannuation funds (SMSFs) may be constraining the level of growth in institutional assets, according to new research released last month.

The research, conducted by KPMG and the Australian Centre for Financial Studies (ACFS), also suggested SMSFs’

growth would continue to crimp the level of growth in assets within superannuation institutions.

The research, ‘Superannuation trends and implications’, found the growth of the SMSF segment since 2000 – and the ageing Australian population – provided the greatest threat to the future of superannuation institutions.

It pointed out the SMSF

segment had increased by 461 per cent, and the industry funds segment by 410 per cent, against a more sombre growth in retail funds of 177 per cent, and public sector funds, 100 per cent.

Commenting on the findings, KPMG’s superannuation group head Sean Hill said many superannuation institutions faced increased rollovers to SMSFs and increased

benefit payments at the same time their contribution inflows were slowing.

“This perfect storm potentially threatens their future viability,” he said.

The report found that superannuation institutions that fail to adapt and respond to a changing landscape face the prospect of negative funds flow, diminishing assets and terminal decline.

Bartering does not Post-retirement a key focus circumvent SIS Act

By Damon Taylor

S E L F - M A N AG E D s u p e r a n n u a t i o n f u n d (SMSF) trustees have been warned against entering into arrangements such as bartering which may be deemed to breach the legislative provisions around superannuation.

The warning has come from Cavendish Superannuation head of education David Busoli, who pointed to a recent interpretive decision handed down by the Australian Taxation Office.

Busoli said the interpretive decision made it clear that arrangements needed to be looked at as a whole, because while their component parts might not give rise to a breach, the total product might well lead to penalties.

The ATO interpretive decision 2011/84 looked at a trade exchange or bartering arrangement and held that it did contravene the anti-avoidance provision in subsection 66(3) of the Superannuation Industr y (Supervision) Act 1993 (SISA).

It said this arrangement, taken as a whole, was “structured with the intention that the acquisition by the SMSF of units in a unit trust from a party that was not a related party to the SMSF, avoided the prohibition (in subsection 66(1) of the SISA) of the SMSF acquiring assets from a related party. The parties to the arrangement are therefore guilty of an offence under subsection 66(4) of the SISA”.

The interpretive decision found that while the trustee of the unit trust was not a related party of the SMSF, nor was the unit trust a related trust of the SMSF. The company itself was a related party of the SMSF because a member of the SMSF, together with her relatives, having a majority voting interest in the company in accordance with the definition of 'related party'.

THOUGH self-managed super funds (SMSFs) may currently excel when it comes to providing an income stream during retirement, the development of viable post-retirement alternatives is set to become a key area of focus for all superannuation providers, according to David Lees, general manager – Super and Investments for the BT Financial Group.

“A s a n i n d u s t r y, I t h i n k w e’v e focused very heavily – especially in the last decade – on the accumulation side of the (retirement savings) system, and I think the next big area for the industry to focus on, the next big area for Government to focus on,

is fundamentally around the retirement part of that retirement savings system,” he said. “It’s come out of the global financial crisis, because we’ve seen people getting into that retirement red zone, not wanting to take as much risk and wanting to try and deleverage some of that risk.”

Particularly concerned about the retirement red zone – those 10 years pre- and post-retirement – Lees said that a lot of current product sets were largely asset-based, and therefore still quite exposed to market variations. “ What we’ve seen people do is really start to get to grips with this concept of a stream,” he said. “So when they’re working, it’s almost like a stream – there’s income coming in

and you can spend it, and when we talk to them, they all see retirement as being like a bucket.”

“You have a bucket of money and that’s it,” Lees continued. “And when they see the GFC, that bucket was halved in one blow, so they’re very very conscious around how to manage that, through what type of product and what kind of income stream they can get.”

According to Lees, retirees are looking for something like an overlay, if not a full layer, on top of the age pension.

“Something that’s far more acceptable to their standard of living,” he said. “And that’s what the industry’s responding to and obviously we see this as a huge opportunity within BT and we’re responding to it as well.”

Parliamentary committee examines tax bill A PARLIAMENTARY Committee will examine the Government legislation aimed at making it easier for people to seek the consolidation of their superannuation accounts.

The House Economics Committee will inquire into and report on the Tax Laws Amendment (2011 Measures No. 9) Bill 2011 which, in part, is designed to enable certain super fund members to electronically request the consolidation of their super through the Australian Taxa-

tion Office, particularly with respect to lost accounts.

The legislation also makes technical changes to the way in which the capital gains tax applies to business restructures, and amends the Goods and Services Tax treatment of financial services.

The Chair of the Committee, Julie Owens, said that the committee would be examining the adequacy of the Bills in achieving the policy objective, and where possible identify any unintended consequences.

SMSFs in advance of Stronger Super THE one key change set to come through on the back of the Government’s Stronger Super reforms lies in both the information available and superannuants’ interest in it, according to Andrea Slatter y, chief executive officer of the Self Managed Super Funds Professionals’ Association (SPAA).

Slattery said the reason the Stronger Super refor ms had come out so favourably for self-managed super funds (SMSFs) was that the sector already undertook the majority of the proposed changes as a matter of course.

“So we’re not going to see a lot of difference in the way in which specialised advice, engaged clients, genuine decision makers and information is going to change,” she said. “But

10 — Money Management December 8, 2011 www.moneymanagement.com.au

I think where there is going to be change within super itself where there’ll be more information about super as a whole.

“The clients and members of funds will have more information, the advice will be improved and this is across the board.”

Slatter y said that it was also her expectation that members’ engagement would lift, as well as their ability and capacity to make decisions about their own personal circumstances.

“I think we’re talking about some of the things that were perhaps not allowing the system to move forward as efficiently and effectively as it could, and introducing things that are basically creating the capacity to do that.”

Andrea Slattery

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The folly of

denying global economic reality The political clock is ticking and, as Mike Taylor writes, global economic reality may overtake the Government’s policy agenda before it can deliver proof of a Budget surplus in May, next year.

W

ith the release of its Mid-Year Economic and Fiscal Outlook (MYEFO) in late November, the Federal Government seemed to confirm the analysis of many of its critics – that it is more about the political façade than genuine economic substance.

Rather than acknowledging that Australia needed to accommodate a world economy that had entered a phase more dangerous than that which prevailed during the global financial crisis, the Treasurer, Wayne Swan, insisted on delivering a strategy based on the continuing existence of a Budget surplus.

By almost any analysis, Swan’s $1.5 billion Budget surplus is more about maintaining political capital than economic reality. Given that the Government promised a return to surplus in the next financial year, the Treasurer wants to be able to argue that it delivered on that promise. It goes to the heart of being able to prove the Gillard Government’s credentials as an economic manager.

There exists a belief in the Australian Labor Party that if the Government can assert its ability as an economic manager over the first six months of 2012 and deliver the promised surplus, then it can utilise this as the basis for a turnaround in the polls ahead of a 2013 Federal Election.

Why is this important for the financial planning community?

Because the more successful the Government’s strategy proves to be, the sooner it is likely to go to a federal election.

What financial planners need to recognise is that with the surprise change in speakers from the ALP’s Harry Jenkins to former Coalition backbencher, Peter Slipper, the Gillard Government has not just obtained an extra vote in the House of Representatives – it has obtained the stability necessary for the Government to run a full term.

To remain in power, the Government now needs only the support of two of the independents, and is much less reliant on Tasmania’s less than predictable Andrew Wilkie.

Where financial planners are concerned, this means the Assistant Treasurer and Minister for

12 — Money Management December 8, 2011 www.moneymanagement.com.au

“

The Government has wound back incentives for Australians saving for their retirement.

”

Financial Services, Bill Shorten, is much more likely to secure the passage of his Future of Financial Advice (FOFA) bills through the House of Representatives with little or no amendment.

While both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) had exhorted their members to lobby both Wilkie and NSW independent, Rob Oakeshott, with a view to extracting amendments to the FOFA bills (particularly around opt-in), these efforts may prove to have been in vain.

Indeed, even if Oakeshott and Wilkie were to support the Opposition’s expected amendment to the opt-in provisions, the vote would be tied.

This fact makes the suggestion by Shorten that he will accede to some of the concerns raised by the FPA by moderating the Government’s approach to the annual fee disclosure statement even more crucial.

Indeed, with the benefit of hindsight, there is the suggestion that Shorten was aware of impending events in the House of Representatives when he asserted at the FPA Conference in Brisbane that his FOFA legislation would be passed intact.

It is little wonder then, that as November turned to December, both the FPA and the AFA were focusing on putting arguments before the Parliamentary Joint Committee (PJC) hearings convened to examine the FOFA legislation before it is ultimately voted on in the house.

While the PJC hearings provide yet another forum via which the FPA and the AFA can outline their continuing concerns around the FOFA legislation, the committee process is now unlikely to give rise to anything that would

discomfort Shorten or his ambition to have his legislation passed.

While the PJC in the form of the Ripoll Inquiry produced a bipartisan report-backing reform in the financial planning industry, the current PJC processes seem more likely to give rise to two reports - one from the Government supporting the FOFA bills and a dissenting report from Coalition members.

The major industry organisations will also be aware that there are key elements of the FOFA changes which have yet to hit the Parliament – not least, a compensation scheme and standards of professionalism.

Then, too, there is the question of whether the FOFA bills will be passed in sufficient time to allow the industry to put in place the necessary back-office changes or whether the Government will allow an extended period of transition.

Planners might also care to reflect upon the degree to which, over the past four years, the Government has wound back incentives for Australians saving for their retirement beyond the superannuation guarantee.

Contribution caps were wound back under the Rudd Government and (including last month’s MYEFO) there have now been significant cuts to the attractiveness of the superannuation co-contribution and cap indexation.

Which brings us back to Australia’s political timetable and the Treasurer’s insistence that the Government can, and will, ultimately deliver a Budget surplus.

Economic conditions in Europe and the US and their impact on China suggest the first six months of 2012 will provide some of the greatest challenges ever encountered by an Australian Government – something that will focus the minds of the Government’s most senior Treasury advisers.

The Treasury will be preparing the 2012–2013 Budget at much the same time as the FOFA legislation is being subject to a vote in the House of Representatives, but it seems likely that the Prime Minister, Julia Gillard, and the Treasurer, Wayne Swan, will be focused on former US President Bill Clinton’s old admonition – “It’s the economy, stupid”.

Money Management Top 5 Lists year and was promoted to general manager of Colonial’s advice business following Paul Barrett’s departure.

As her role involves responsibility over Commonwealth Bank-aligned dealer groups, Perkovic was reunited with Count following the bank’s successful acquisition bid, and she will also serve as a director on the dealer group’s board.

4. Avoca Investment Management In April this year, John Campbell and Jeremy Bandeich left their roles at UBS’s Australian Small Companies Fund, and after a month’s break, emerged with Avoca Investment Management – the most high profile new boutique fund manager on the market.

They took with them another UBS team member, Michael Vidler, and gained additional backing via their partnership with boutique incubator Bennelong Funds Management.

Campbell and Bandeich, after leaving UBS, are now majority owners of their own boutique, and this brave move scored them a spot on this year’s winners list.

Wins 1. Industry Super Network It seems as though the Industry Super Network (ISN) won where the financial planning industry lost. Not only does the ISN still run its fairly successful and well known “Compare the Pair” advertising campaign, the body also had the Government’s ear with respect to crucial parts of the Future of Financial Advice reforms, such as the removal of adviser commissions and the introduction of the controversial opt-in proposal.

Despite the financial planning industry’s opposition to research and arguments presented by the ISN for the introduction of such proposals, Prime Minister Julia Gillard still praised the ISN chief David Whiteley for

standing “with us from the earliest days in our determination to secure a better retirement for all Australians”.

2. BT Financial Group The reason why BT Financial Group grabbed a spot on this year’s Top 5 winners list is because it was the only wealth management division owned by a major banking group – the other three being MLC, Colonial First State and the relatively young ANZ Wealth – which did not struggle over the year, despite the ever volatile markets and falling investor sentiment.

In fact, it was BT’s strong performance over the year that drove Westpac to a strong full-year finish.

According to the banking group’s chief executive, Gail Kelly, the division welcomed over 70,000 new customers onto the BT Super for Life platform over the year, and there had also been a strong uplift in the cross-sell of wealth and insurance products.

3. Marianne Perkovic Career woman Marianne Perkovic was another winner this year, as her career at Colonial First State keeps blossoming.

Perkovic moved from her position as chief executive officer of Count Financial to Colonial First State in 2009, where she first performed the role of general manager, distribution.

She rose through the ranks earlier this

1. Industry Super Network

2. APRA/MTAA Earlier this year, Liberal Senator David Bushby asked the Australian Prudential Regulation Authority (APRA) a series of questions relating to problems associated with MTAA Super, including the regulator’s decision to appoint a special counsel and whether APRA had sufficient

While the independent dealer group sector just lost one of its major players to an institution, one clear winner has emerged from CBA’s acquisition of Count Financial – its former executive chairman and founder, Barry Lambert.

When the transaction between the banking group and Count is finalised, Lambert will walk away with around $249 million in his pocket.

He founded Count Wealth Accountants in 1980 after 19 years spent at the Commonwealth Bank. Lambert will remain on the Count board as a non-executive director.

- By Milana Pokrajac Not long after this announcement (which was preceded by a number of other incidents), the company filed for Chapter 11 bankruptcy.

The collapse of MF Global affected a number of Australian companies, including MF Global Australia, MF Global Securities Australia Limited and Brokerone Pty Limited.

The Federal Government said MF Global’s collapse highlighted the need to strengthen client money protections, announcing it would consult with the industry on regulations around over-the-counter derivatives.

Fails While the ISN’s methods in fighting the war against adviser commissions have long been questioned by the financial planning industry, the matter was recently taken to Federal Parliament.

The Federal Opposition directed the questions towards two corporate regulators about the assessment of some of the prudential and legal risks the “Compare the Pair” advertising campaign carries, after which the Australian Securities and Investments Commission has agreed to review the popular campaign.

Meanwhile, at the Association of Financial Advisers national conference, the ISN chief David Whiteley declined to specify precisely how much his organisation and its industry fund constituents were spending on television advertising.

5. Barry Lambert

5. Praemium resources to conduct investigations.

Instead of answering the questions, APRA cited section 56 of the Australian Prudential Regulation Authority Act 1988, which it said precluded it “from disclosing information disclosed or obtained under or for the purposes of a prudential framework law and relating to the affairs of a regulated entity”.

After effectively avoiding answering questions about MTAA Super, APRA was reminded of its accountability to the Parliament, which oversees the role of regulatory bodies; however, the answers were not provided.

secrecy around its relationship with One Big Switch was widely criticised, and some even called the group hypocritical.

The criticism centres on the apparent double standard of CHOICE receiving referral fees, and not disclosing the full details, after it was critical of the planning industry’s lack of transparency.

Eureka Financial Group managing director Greg Cook pointed to the group’s “partnership” with One Big Switch – something which, while not publicly disclosed, “indicates some kind of financial relationship.”

4. MF Global 3. CHOICE Consumer group CHOICE was another one of the harshest critics of commissions and asset-based fees. However, CHOICE’s

On 25 October 2011, derivatives broker MF Global reported a $191.6 million quarterly loss as a result of trading on European government bonds.

Platform provider Praemium had taken longer than anticipated to gain the desired scale in its Australian and UK operations over the past couple of years.

The company reported a loss of $5.7 million last financial year, which was an improvement over the previous 12 month period when it reported a loss of $10.9 million.

Praemium announced two capital raisings between December 2010 and February 2011 which would fund the improvement of the company’s financial performance.

The decision to raise capital also follows the resignation of founder and former chief executive Arthur Naoumidis in early August, who is still involved with the business as a consultant to new chief Michael Ohanessian and the rest of the Praemium board.

- By Milana Pokrajac

www.moneymanagement.com.au December 8, 2011 Money Management — 13

Money Management Top 5 Lists

Ones to

watch 1. FOFA The Government’s Future of Financial Advice changes have dominated the news for nigh on two years now and we still don’t seem much closer to a resolution. There have been endless submissions from all sectors of the industry, and varying degrees of opposition to almost every aspect of the parts of the legislation that have been made public so far. That now consists of two of three proposed tranches following November's tranche 2 release. The first tranche has already undergone several amendments and more are likely, with Assistant Treasurer and Financial Services Minister Bill Shorten conceding the Government may reassess the surprise inclusion of retrospective fee disclosure requirements. With each delay the Government’s proposed 1 July 2012 start date becomes increasingly unlikely.

Pa r t s o f t h e l e g i s l a t i o n h a v e a l s o garnered less than eager support from key independents who hold the balance of power of this minority Government.

Long after the industry would have expected certainty around these proposals, a huge question mark still hangs over almost every aspect of these critical reforms.

2. MLC The wealth management division of National Australia Bank has been one of the most proactive in its attempts to increase its distribution network amidst the current round of industry upheaval.

The group publicly made a grab for AXAa f f i l i a t e d p ra c t i c e s t h a t m a y h a v e become disenchanted during the group’s

merger with AMP. This followed an unsuccessful bid from NAB itself for AXA’s Asia-Pacific business when the Australian Competition and Consumer Co m m i s s i o n d e e m e d s u c h a m ov e w o u l d b e a n t i - c o m p e t i t i v e. M LC approached a large number of AXA practices, with several publicly confirming the switch, while a number of AXA executives also moved over to MLC during 2011. It will be interesting to see to what extent MLC continues this acquisitive drive in 2012.

3. Matrix Planning Solutions 2011 was the year of the merger, as uncertainty over the shape of impending Future of Financial Advice reforms saw DKN join the IOOF family and Count join forces with the Commonwealth Bank of Australia, while Snowball and Shadforth Financial Group also teamed up. Late in the year Matrix Planning Solutions managing director Rick Di Cristoforo announced his group would be looking for an institutional backer to acquire 100 per cent of the business. The group has already commenced discussion with potential buyers – although Di Cristoforo has yet to reveal any details surrounding the future of the group or his own career direction. Given the departures of Count chief executive Andrew Cole, DKN CEO Phil Butterworth (to BT Financial Group) and Snowball chief executive Tony McDonald, there is no guarantee Di Cristoforo will remain with the group when a buyer is inevitably found. Matrix appears almost certain to announce the future owner of the group some time in 2012,

14 — Money Management December 8, 2011 www.moneymanagement.com.au

while the rapidly-dwindling non-aligned dealer group market could well take further hits.

4. Lonsec and van Eyk Two research houses, both servicing the re t a i l f i n a n c i a l a d v i c e s e c t o r : o n e striding away from a period of disruption, and the other headed for the uncertainty which goes with a change of ownership.

When van Eyk founder and chief executive Stephen van Eyk departed the c o m p a n y i n 2 0 0 9 , n e w C E O Ma rk Thomas oversaw a period of high volatility with a number of prominent departures, including head of research Nigel Douglas. The uncertainty may have contributed to van Eyk’s mixed results in Money Management’s 2010 Ratings House of the Year award (which is based on feedback from fund managers and financial planners). However, under Thomas and new head of research John O’Brien the firm moved up to outright second in 2011. Could it be the start of bigger and better things for van Eyk? Meanwhile it was announced this year that Lonsec, a clear winner in both the 2010 and 2011 awards, would be sold by Zurich to the Mark Carnegielinked Financial Research Holdings, parent company of superannuation researcher SuperRatings. Almost immediately, Lonsec’s general manager of research Grant Kennaway announced he would be departing the company for rival Morningstar. It remains to be seen how ties between the Industry Super Ne t w o r k ( I S N ) a n d Su p e r Ra t i n g s (SuperRatings supplied the research for

the ISN’s controversial ‘compare the pair’ advertising campaign) affect the firm’s standing with retail financial planners – traditionally philosophical opponents of the ISN.

5. Commonwealth Financial Planning One year ago Commonwealth FP was one of Money Management’s ‘Top 5’ dealer groups of 2010, due to significant growth in adviser numbers and funds under advice (FUA). At the same time the group was one of our ‘Top 5’ bad apples, thanks to the actions of rogue planner Don Nguyen – although CFP was proactive in cooperating with the Australian Securities and Investments Commission (ASIC) and reimbursing affected clients.

One year on and Nguyen has been banned for seven years by ASIC, while CFP has entered into an enforceable undertaking with ASIC to improve its risk management framework. Just a year after joining from Count Financial, Marianne Perkovic succeeded Paul Barrett as general manager of Commonwealth’s advice division, Colonial First State. In November, head of Commonwealth Financial Planning Neil Younger left after little more than a year in the role to join ANZ. No replacement has yet been named. All the while CFP continues to be one of the largest advice groups in the country in terms of advisers and Funds Under Administration.

Can Commonwealth put the negative headlines behind them in 2012?

- By Chris Kennedy

Money Management Top 5

Moves 1. AXA executives Since its establishment in February this year, MLC’s retirement solutions team has grown to 10 people; of those, eight were recruited straight from AXA. The moves occurred following the completion of the AMP/AXA merger and started with the appointment of former AXA head of structured solutions Andrew Barnett.

Other moves to MLC included three North executives – Paul Stratton, Michael Tobin and Remi Bouchenez, as well as three other members of the group’s senior management – Shaune Egan, Stuart McGregor and Joachim Lumbroso.

2. Neil Younger Although financial services executives have played musical chairs for much of the year, financial planning executive Neil Younger has notched up a rare achievement. In the last 14 months, Younger has held senior roles at three of the big four banking groups.

For most of last year, Younger was in charge of BT Financial Group’s dealer group business before moving to Commonwealth Financial Planning in October, where he was appointed new general manager.

He spent just over a year at Commonwealth FP, when it was announced that he was moving to ANZ to head up practicebased financial planning. He was welcomed to the team by his former colleague at Commonwealth Bank (CBA) Paul Barrett.

3. Paul Barrett One of the more significant moves in the financial planning world was Paul Barrett’s move from Colonial First State (CFS) to ANZ, where he heads the group’s wealth management division.

Barrett first moved to CFS as distribution general manager from a CBA-owned dealer group Financial Wisdom. He was later promoted to head of advice business, but made a move to ANZ Wealth earlier this year.

AND

Following in his footsteps is Marianne Perkovic, who was quickly promoted from distribution general manager to CFS head of advice business following Barrett’s departure.

4. Grant Kennaway Funds research and ratings houses have seen quite a bit of executive movement in the past 12 months.

Soon after Lonsec was sold to Financial Research Holdings, its then chief executive officer (CEO) Grant Kennaway announced he was leaving the company. Only weeks after that announcement, the news got out that Kennaway had found a new home at Morningstar, where he heads fund research for the Asia Pacific region. Following his departure, Kennaway’s colleague Amanda Gillespie was promoted to chief executive officer of Lonsec.

Another significant departure within the funds research space was that of Mark Hoven, who left his position as chief executive officer of Standard & Poor’s Fund Services and is yet to announce his next move.

5. Phil Butterworth Almost immediately after DKN was acquired by IOOF, its CEO Phil Butterworth left the group for a senior position at BT. His departure saw three more high-level DKN executives leave the dealer group – Lonsdale CEO Mario Modica, Lonsdale executive director Kon Costas, and DKN executive director of distribution Andrew Rutter.

Butterworth, however, was not the only executive to leave a company acquired by IOOF. If we go back to 2009, former Scandia chief Andrew Black was made redundant after the company was purchased by IOOF. He has found a new gig this year as chief executive officer of a Western Australian dealer group Plan B. - By Milana Pokrajac

16 — Money Management December 8, 2011 www.moneymanagement.com.au

Acquisitions

1. Lonsec Earlier this year, Zurich announced the sale of the research and ratings house, Lonsec.

Zurich had been entertaining bids from interested parties in the months leading up to the announcement, with the researcher finally going into the arms of Financial Research Holdings (FRH).

FRH, led by private equity specialist Mark Carnegie, also owns SuperRatings, which was referenced in the Industry Super Network’s controversial ‘compare the pair’ advertising campaigns.

Not long after the acquisition of Lonsec was announced, the then chief executive officer Grant Kennaway departed the research house for its rival Morningstar, while Amanda Gillespie filled Kennaway’s role.

2. Count Financial As an independent dealer group with more than 700 advisers and a huge client base - but more importantly as a group delivering positive profit results over the years – Count Financial was an institution’s dream purchase.

The dealer group was certainly a highly sought-after acquisition, with net-profit after tax growing to $51.6 million, up 113 per cent over the year to 30 June 2011.

Count was courted by the Commonwealth Bank for more than a decade before it finally caved in for a price of $373 million.

Count founder Barry Lambert alluded to the uncertainty surrounding the Future of Financial Advice (FOFA) reforms as an important element for the top-down consolidation. Count itself has been quite vocal in its opposition to optin requirements.

3. DKN Financial Group Another independent dealer group which was lost to the institutional

market is DKN Financial Group. Following the approval of IOOF’s proposal to acquire the group for $115 million, chief executive officer Phil Butterworth left DKN. With substantial changes in senior management and a fairly challenging year ($13.95 million loss in net profit after tax), it will be interesting to see what 2012 will bring for the group.

4. ING Investment Management Another significant acquisition was that of ING Investment Management. In July this year, ING Group agreed to sell its investment management business to UBS Global Asset Management (UBSGAM).

The takeover (for an undisclosed amount) was finalised in October, which led to the redundancies of 36 of the 120 ING IM staff.

The acquisition, however, saw the doubling of UBSGAM’s funds under management, and has placed the Swiss bank in the top 10 largest investment managers in Australia.

5. Shadforth Financial Group The Australian dealer group market was further consolidated when Snowball Group and Shadforth Financial Group decided to become one.

Snowball intended the new group to become ‘Australia’s leading dedicated non-aligned financial advice and wealth management group’.

In addition to an executive reshuffle, the group signalled its intention to integrate the Shadforth and Outlook advice businesses into a single-focused operating model concentrating on high-net worth and mass affluent clients.

T h e m e r g e d e n t i t y, u n d e r t h e proposed name SFG Australia, reported a net profit after tax of $25.4 million in August.

- By Milana Pokrajac

4. Count Financial

Dealer groups

million to $53 million, according to the group’s end of financial year results for 2011.

As a supporter of scaled advice, ClearView managing director Simon Swanson added that the group is wellplaced to deliver such advice going forward.

A successful 2011 saw Count Financial post net profit after tax for the year ended June 2011 of $51.56 million, which was more than double the previous years’ results.

Count Financial senior executive of advice Dean Borner said the solid drive by investors into services such as cashflow management and income generation has been a focus for the group in the past year, compared to the significant investments made by clients prior to the global financial crisis. Borner added that Count has had an estate planning focus for some time, and the group has been enhancing adviser training to provide them with more estate planning support services.

In a significant industry acquisition, Count Financial officially agreed to a takeover bid by the Commonwealth Bank worth $373 million.

3. AMP Financial Planning 1. Guardian Advice Guardian Financial Planning recently celebrated its 10th birthday, and announced a slight rebrand in an effort to reposition the business as a risk-focused boutique, changing its name to Guardian Advice.

In the past 12 months, Guardian managed to secure Commonwealth Bank’s national head of financial planning Ian Anderson, and began leveraging an inhouse paraplanning team to provide free statements of advice (SOA) for risk insurance for advisers.

In June, the boutique joined the Association of Financial Advisers’ Licensee Partnership Program in order to give it representation before the Government and regulators on policy issues and the opportunity to work with advisers Australia-wide.

In a growth strategy echoed by a number

of other dealer groups in Money Management’s survey, Guardian Advice executive manager Simon Harris recently said that the business was hoping to expand its current adviser base of around 150 to 200 over the next three years.

2. ClearView After changing its name from ComCorp Financial Advice this year, ClearView Financial Advice’s rapid growth in planner numbers has reflected a strong year for the dealer group. Although it sits at 51 on the dealer group table, ClearView’s acquisition of Bupa Australia has been the driving force behind the growth of its distribution network. The acquisition also saw ClearView report net profit after tax of $19.3 million, and increase its surplus capital above internal target requirements from $40

Platforms

AMP Financial Planning (AMPFP) came out on top in the institutional category in the Money Management Top 100 Dealer Groups of the Year survey based on a combination of its recruitment and retention strategy, including its popular traineeship program, Horizons Academy.

In the second half of the year, AMPFP unveiled a one-stop shop financial planning centre in Parramatta to provide potential clients easy-access to financial advice – which precedes the launch of a second walk-in business in Camberwell, Melbourne.

Meanwhile, the corporate merger between AXA and AMP in March saw executive leadership at AMPFP remain unchanged, but the significant addition to the team was the appointment of CommInsure executive Todd Kardash as national sales manager.

5. Synchron

ending June 2011 ($4.6 billion), which was more than could be said for the majority of big players in the market.

The platform had recently announced a $150 million investment into a new information technology system, which will allow BT’s platforms to rid themselves of the ancient technology implemented in 1997 – the year they were created.

Apart from dealer groups owned by Westpac, DKN was a big supporter of BT’s Wrap platform prior to the acquisition by IOOF. BT has confirmed it was watching the distribution land grab game closely, but stated it was confident it would remain the largest platform in the market.

4. MasterKey

Earlier this year, Colonial First State radically revamped its FirstChoice platform arrangements, which resulted in it offering lower fees than industry superannuation funds.

CFS chief executive officer Brian Bissaker said at the time that the new offering was aimed at putting an end to a “fruitless debate” about the fees charged by industry superannuation funds and retail offerings.

The independent specialist superannuation consultancy Chant West confirmed that FirstChoice Wholesale Personal Super in fact has lower fees than both the average industry fund and the average retail fund, based

on an average account balance of $25,000.

Actions certainly speak louder than words, and Colonial’s move to revamp the product has earned FirstChoice a top spot on Money Management’s Top 5 Platforms list.

It is also worth mentioning that FirstChoice has the largest number of primary adviser relationships in the market, with $49.1 billion in funds under management (FUM) as at June 2011 (including FirstChoice Wholesale).

2. BT Wrap and SuperWrap BT Wrap and SuperWrap platforms have achieved positive net flows in the year

- By Andrew Tsanadis

MasterKey has around $34.6 million in FUM compared to $33.6 million during the same period last year, according to data from Plan for Life.

In November, MLC announced a major overhaul of its MasterKey Fundamentals platform, including the lowering of administration fees for balances up to $200,000 and the introduction of new investment options.

For MLC, the platform market is falling into two distinct categories: high net worth investors and the majority investors.

MasterKey Fundamentals caters for the masses, the company said.

5. Macquarie Wrap 3. North

1. FirstChoice

One of the more openly vocal dealer groups opposing various aspects of the FOFA bill was risk-focused financial advice licensee Synchron.

The dealer group’s director Don Trapnell said that as of April, around 80 per cent of Synchron’s 195 authorised representatives were risk writers.

Around this time, the dealer group also launched the Synchron Mentoring Program to provide in-house support to up-and-coming advisers, planners moving into managerial positions, as well as planners retiring from the industry.

In June, the dealer group’s policy of enhancing its technological offering saw it partner with online personal insurance portal MultiCover.

Earlier this year, AXA unveiled its new North platform, which is the first full wrap owned

by AMP. Its impressive revamp and performance over the year have earned this platform a spot on the Top 5 Platforms list in 2011.

Its net inflows in the September 2011 quarter ($242 million) were double what they were the same time last year, with the platform introducing new options to investors.

Since developing into a full wrap offering, North has included direct share trading, 200 managed funds and a variety of term deposits, rather than just the guarantee.

Macquarie’s new portfolio-priced version of wrap released in May, Macquarie Consolidator, hit $1 billion in net inflows and has attracted over 900 new clients.

Macquarie is a big supporter of the independent financial adviser sector and has allowed smaller providers to access its platform, finishing the year to June 2011 in a positive territory.

Macquarie Adviser Services head of insurance and platforms Justin Delaney said the reason for the platform’s success has been due to the company’s proposition around administration, custody, and the use of technology.

- By Andrew Tsanadis

www.moneymanagement.com.au December 8, 2011 Money Management — 17

OpinionRisk Surveillance under scrutiny

Col Fullagar looks at the issue of surveillance during claims management and the adviser’s role in making sure the client is treated fairly. Is surveillance an invasion of a client’s privacy, or perhaps the insurer’s right to better understand a claim?

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o one would reasonably deny the importance of the claims assessor’s role, nor could it be reasonably denied that assessors need to have access to a wide range of information in order to effectively undertake their role. Information can be derived from sources such as doctors’ reports and medical examinations, tax returns and other financial statements and, on occasions, claimant interviews.

There is one source of information, however, that has a tendency to give rise to emotion and controversy, typified by the statement from the claimant that it is ‘an invasion of privacy’, or the concern and consternation typified by the insurer that it’s ‘expensive and not always reliable’.

That information source is of course surveillance and it, no doubt, would benefit from itself being placed under scrutiny.

identify the destination; • Checking the claimant’s actual activities against a recently completed insurer’s activity log; or • Undertaking overseas surveillance on the basis that the further the claimant is from home, the more they will let down their guard.

use of surveillance by “anThe insurer can be a valid tool that will assist to mange claims. ”

Basis of surveillance Surveillance involves the obtaining of film or photographs by an investigator either from a vehicle or a covert position. The focus of surveillance can be almost any location, with the most common being: • The claimant’s home; • The claimant’s place of work; • The claimant’s neighbours – for example to observe a social function; • A public venue such as a sports oval or shopping centre; or • The surgery from which an independent medical examination is to be undertaken.

Surveillance might even be undertaken by way of: • Someone making contact with the claimant on the basis of a pretext – for example, pretending to purchase a car or boat from the claimant, although some insurers are reluctant to use this facility; • Following the claimant’s car in order to

On occasions surveillance may be detected by the claimant, so the surveillance will be stopped but then recommenced several days later when it would be least expected.

There are, however, rules that must be followed under the law generally, and privacy in particular. Examples of restrictions to surveillance include: • The person undertaking the surveillance cannot represent themselves as a government employee, for example a member of the police force or fire brigade, nor can they represent themselves incorrectly as a member of a legitimate company other than their own; • Entrapment techniques cannot be used – for example, leaving a pile of soil in the claimant’s drive to see if the claimant is able to shovel it clear;

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

• Surveillance cannot be undertaken from private land without permission; and • Whilst film can be obtained without permission, audio cannot.

To be effective, surveillance should be undertaken in an environment where the claimant will not be directly aware it is occurring. Logistically, it is more difficult to achieve this in remote and rural areas compared to the city.

ly taken can be tainted by bias. Also, logically, if the assessor has reached a decision in regards to the claim, sufficient proof should already be available such that surveillance is unnecessary.

Surveillance should be approached from a neutral position and in line with the previously described role of the assessor – ie, if reasonable uncertainty exists, additional information should be obtained in order to remove the uncertainty.

Reasons for surveillance The use of surveillance may be considered by the assessor if the claim appears in some way unusual, for example: • Where the nature of the disability and the physical condition of the claimant appear to differ – for example, the claim is in respect of a frozen shoulder but the arm shows no signs of wasting; • The duration of an income protection claim is materially longer than the average for similar causes, occupations, etc; • The cause of the claim is subjective, and there is some other concerning factor such as the policy having recently started or the benefit amount being relatively large.

On rare occasions surveillance has even been undertaken overseas where a suspicious ‘death’ has occurred.

Surveillance may also be considered if the assessor, based on their experience, is in some way unsure of the validity or otherwise of the claim – ie, there may be no one major factor, but a series of small issues adding up to a general disquiet.

Whilst the reasons for arranging surveillance may be reasonable, whether or not an appropriate outcome is reached is, in part, dictated by the attitude of the assessor.

If the assessor has made up their mind that a claim is not valid and is simply using surveillance as a tool to prove it, the results of the surveillance and actions subsequent-

Case study Minnie is a real estate agent who owns a suburban real estate firm that also employs two other agents. Minnie is on claim for depression.

Surveillance is undertaken and this shows Minnie attending the office for an hour, once or twice a week.

The response from the assessor to this might be: • Immediately assume Minnie is working and take action in line with this – for example, close the claim, or • Appreciate that Minnie’s attendance at the office does not necessarily mean she is working, and thus seek clarification from Minnie.

The adviser and surveillance Advisers who are experienced in claims procedures will recognise that the use of surveillance by an insurer can be a valid tool that will assist to manage claims, serve to confirm the validity of genuine claims and reduce the rate of fraud, and thus reduce overheads that can drive up premiums.

Experienced advisers viewing surveillance in this way may see that a natural extension of this would be to inform clients who are on claim as to the facts surrounding surveillance, and also that it may be used in certain circumstances.

Taking an open and natural approach gives the adviser and the claimant the opportunity to discuss other aspects of the claim, in addition to surveillance, in an informative and non-threatening way. This in turn should mitigate any subsequent concerns the claimant may have if they become aware of surveillance when it is occurring, or if they subsequently learn that it has been undertaken.

To the extent that surveillance is a valid claims management tool, the insurer and the adviser should not avoid the fact that it exists and may be used. Discussions concerning it should be open and honest.

The claimant and surveillance A number of insurers were recently asked the following questions in regards to surveillance: If surveillance was being undertaken and the claimant asked the assessor if it was – would you tell the claimant?

The majority of insurers responded with “Yes”, noting that this applied in regards to a direct question from the claimant rather than proactively advising the claimant that surveillance is being undertaken.

This would appear to be the appropriate response. To avoid the question or worse still, to misrepresent the position, would endanger the insurer’s credibility in future dealings with the claimant and the adviser.

If, however, confirmation would compromise a situation where there is strong evidence to suggest the presence of fraud, there may be merit in the insurer seeking to tactfully avoid a direct answer.

If surveillance had been completed and the claimant asked the assessor if it had been undertaken, would you tell the claimant?

Again, the majority of insurers answered with “Yes”.

In a situation where surveillance has been completed, confirmation would appear not only reasonable but, in some situations, reasonably necessary. For example, in the case study above, by

confirming to Minnie that surveillance was undertaken and that it showed her attending the office, she is given the opportunity to explain the position such that the insurer can make an appropriate decision.

If the claimant requested a copy of the surveillance tape,would you provide a copy?

Once more the responses varied in line with those above. However, insurers who refuse to provide a copy of the surveillance tape may be falling foul of their duty to act fairly – ie, in good faith, and also of privacy laws.

It seems only fair that if evidence has been obtained that may influence the insurer’s assessment of a claim, the claimant should be given the right of reply.

The court appeared to agree when it handed down its judgement of a case several years ago.

The insured submitted a claim which was denied, based on medical examinations the insurer arranged. A question that arose during the trial was whether the insurer had acted unreasonably and unfairly in failing to disclose to the claimant details of the medical reports.

The court ruled the insurer had a duty of good faith and that “the failure by an insurer to disclose medical reports adverse to the claimant, with the result the claimant was not given an opportunity to answer them, could be sufficient to justify the court in saying that the (insurer) did not act fairly and reasonably in coming to a decision on the (claimant’s) claim.

“Fairness required the appellant to be given the opportunity of answering the new material before the respondent made its decision”, the court said.” (61-453 Beverley v Tyndall Life Insurance Company Ltd. ANZ Insurance Cases Vol.10. 1998-1999) Under privacy laws a person is able to have access to personal information concerning them unless an exception applies. Potentially relevant exceptions might be: • Providing access would be likely to prejudice an investigation of possible unlawful activity;

• Providing access would be likely to prejudice…the prevention, detection, investigation, prosecution or punishment of criminal offences, breaches of a law imposing a penalty or breaches of prescribed law (Information sheet – Private Sector, 1A National Privacy Principles 6.1 (i) and (j)).

The insurer and surveillance Surveillance would generally be considered as one of a number of claims management tools at the disposal of the insurer. It would be the exception to the rule for surveillance alone to be used as a basis of denying or closing a claim.

doubt vary between insurers.

Surveillance can be expensive, costing around $3,000 a day. A standard approach is to commission one or two days surveillance, and then extend the duration based on the results obtained.

Prudent claims management procedures would likely dictate that the insurer will have written guidelines as to when surveillance might be considered.

Further, it should have similar guidelines as to the qualities and standards it would require of an organisation to be used to undertake surveillance.

Summary

“

Responsibility for cost controls does not only rest with the insurer; advisers and honest claimants have a part to play as well.

”

t

Claim payments might, however, be suspended on the basis of doubts arising from surveillance so that the claimant is given the opportunity to clarify the position.

The frequency with which surveillance is used appears to belie the controversy it causes. Estimates have it used in fewer than 5 per cent of claims.

For every 100 times surveillance was undertaken, estimates show: • On 50 occasions the result was neutral; • On 10 occasions doubt was cast on the validity of the claim; • On 35 occasions the claim appeared genuine; and • On 5 occasions surveillance was compromised.

The numbers should be taken as indicative only, as the results will no

Fraudulent and exaggerated claims are expensive both in the cost of payment of unwarranted benefits , and also in the cost of detection.

These costs are simply added to the overall outlays that insurers recoup by way of premium payments: ie, the honest clients fund the less than honest.

Responsibility for cost control does not only rest with the insurer; advisers and honest claimants have a part to play as well: ie, to be understanding and supportive of the reasonable processes insurers need to put in place in order to reduce the burden of unwarranted claim payments.

For its part, the insurer should appreciate that not all claims that appear unusual will be fraudulent or exaggerated; thus they should, wherever possible, give the claimant the benefit of the doubt and the right of response to surveillance that is undertaken.

If all parties take an open and respectful approach, the use of surveillance will be not only be an invaluable source of information for the assessor seeking to gain an improved view of a claim, but also a basis for the important building of trust and understanding between the insurer, claimant and adviser.

The matter of surveillance certainly deserves scrutiny.

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

www.moneymanagement.com.au December 8, 2011 Money Management — 19

The Messenger

China: from bonus to onus Japan’s economy has been a basket case for two decades, while China’s has boomed. Yet Robert Keavney suggests that China may face some of Japan’s problems.

E

veryone who thinks about the future of the world's economy must form a view on China. The prevailing view is that China will roll on inexorably, even if at a lower growth rate.

I have dissented from that view, even going so far as to call the Chinese economy a Ponzi scheme. Today I will go further and suggest that, in certain respects, the best indicator of China’s future could be Japan's present. Lest you consider this to be an irresponsible attempt to be controversial, I will shortly quote the views of the Governor of the Bank of Japan in support of this position.

The first step in this process is to understand what has caused Japan's malaise.

Western economists and politicians are fond of pointing out what the Japanese should be doing to fix their economy. It is claimed that they need to overcome cultural issues, reduce their savings surplus, fix their mismanagement, stop the depreciation of the yen, print more money, etc. Everyone explains the solution according to their pet theory.

However, there is one fundamental problem faced by Japan which cannot be fixed – short of genocide of the elderly.

consumption – leaving a smaller percentage of the population working – pressures must emerge.

But this lies in our future; it is current reality for Japan today. According to the World Bank, the global average dependency ratio is 11 per cent (ie, 11 of retirement age to 100 workers.) In North America the ratio is 19.6 per cent, almost identical to Australia’s. The ratio is 25.9 per cent for the European Union.

In Japan there are 35.5 people of retirement age for each 100 workers. This ratio has increased inexorably and at an increasing rate, and will continue to for many years (see Table 1). The rate has doubled since 1990, the end of their boom years.

Demographics

The view from Japan

We have heard a great deal about the babyboomers and the forecast impact their retirement will have on Australia’s future dependency ratio.

The term ‘dependency ratio’ refers to the ratio of adults of retirement age to those of working age. This is often measured as those 65 or older as a ratio of those aged 15 to 65.

We will adopt this formula in what follows and express it as a percentage.

Of course this is an imperfect measure of the number of the elderly needing to be supported by those working: some of working age could be unemployed; some retirees could be self-funded; some under 65 could be retired; some over 65 could be working; some over 15 may be studying fulltime and not working, etc. Nonetheless it is widely used as it is a reasonable indicator of the ratio of those too old for work compared with those working.

No one knows quite how the ageing of Australia will affect our economy, but it will certainly bring challenges. With a larger and larger proportion of the population retired and thus reducing both labour supply and

The Governor of the Bank of Japan (Japan’s central bank), Masaaki Shirakawa, presented a paper to the Bank of Finland’s 200th Anniversary Conference in 2011. In it he explored the reasons for Japan’s economic collapse and explored whether there may be any lessons in it for China and India.

Mr Shirakawa reminds us that Japan’s average rate of growth over the 15-year period from 1956 to 1970 was nearly 10 per cent per annum. He notes this is very similar to China’s average growth rate over the 15 years from 1990 to 2005.

Japan's growth reduced from these levels through the 1980s but remained above that of most advanced economies. China's growth since 2005 has been stronger than Japan in the 1980s.

Shirakawa explores the reasons for Japan's spectacular growth from 1956. The first cause he points to is favourable demographics. Not only was the population relatively youthful, supporting both production and consumption, but also, he adds: “The migration of surplus labour from the rural areas to the cities enabled the rapid

Table 1 Dependency ratio in Japan 1990 2000 2010

16.6 24.3 35.5

This ever-increasing number of nonworking people creates a growing weight for the economy to handle – typically retirees reduce both consumption and the labour supply.

20 — Money Management December 8, 2011 www.moneymanagement.com.au

growth of a high productivity manufacturing sector.”

But wait! That is exactly what's happening in China: double digit growth, fuelled by migration to the cities. Perhaps there are some similarities… (Naturally, other factors were also described as contributing to the boom period, but they lie outside the purpose of this article.)

Then Shirakawa turned to the causes of Japan's subsequent struggles. He noted the bursting of Japan's bubble created problems. Next he noted that Japan's superior operational efficiency was lost as competitors caught up. He then turned again to demographics, referring to the growth in dependency ratio, noting: “Such rapid aging has never been seen in past economic history.”

In short, Shirakawa says that Japan had a “population bonus” during its boom years, which has since become a “population onus”.

Then he went on to point out that China is on a similar path.

One-child China The one child per family policy was introduced into China in 1978. This policy has one unintended demographic consequence: it guarantees that at some time the dependency ratio will be horrific. To understand this, consider a family of two parents and one child. When the two parents retire only one child will be left in the workplace.

We therefore need to consider the future of China's dependency ratio. The United Nations (UN) has done this, making forecasts using a range of assumptions. We will consider their ‘medium variant’ forecast, as there is historical as well as forecast data for it. This data is presented in Graph 1, ‘China's dependency ratio’ (see page 21).

You can see that China's dependency ratio begins to accelerate from around 2010, and is forecast to reach and then surpass Japan's current rate.

It must be acknowledged that long-term forecasting is an uncertain business, so the actual figure may be above or below these projections. For this reason forecasts beyond 2050 have not been shown (though we can note in passing that, under the UN’s worstcase scenario, a dependency ratio of 76 per cent is forecast by 2100). Even though it is not possible to forecast with precision, we can say for sure and certain that, like Japan

before it, China faces a seriously deteriorating dependency ratio which will create challenges for the economy.

This time it’s different, again There are many similarities between the over-confidence in Japanese equities in the 1980s, the over-confidence in technology stocks in the 1990s, and the prevailing attitude to China in recent years. In each case investors mistook a phase in a cycle for an enduring trend. Investors persuaded themselves that the fundamentals were so favourable that prices would continue to rise. In other words, they extrapolated the recent past into an ever more favourable future. In short, they believed that ‘this time it's different’.

A dangerous tendency to make the same mistake has emerged with regard to China.

Many people are utterly persuaded that it will sustain strong growth for the foreseeable future, and that strong long-term equity returns will follow. Once again, this time is different – nothing will go wrong.

This form of thinking does not have a good track record: the Japan and technology bubbles resulted in savage losses for investors.

In order to counsel caution about this, I

bonus stage,” he says.

India’s dependency ratio is becoming favourable and is forecast to keep improving until around 2030.

Europe

mind that no one uses it.

We reported an acknowledgement by a leading figure in China’s government that there is an element of public relations (ie, spin) in China’s published growth figures.

In this article we have explored the new ‘great wall’ of China: ie, the demographic wall that China will need to climb while attempting to grow its economy.

There are serious risks to the China

investment story. These need to be weighed fully before allocating an exposure to, or allocating an overweight exposure to, resources on the basis of China's ever-growing demand.

India Incidentally, Shirakawa notes that India is at a very different demographic stage.

“India has yet to enter the population

Conclusion

China s Dependency Ra o (UN)

Graph 1 China’s dependency ratio 45 40 35 30 25 20 15 10

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have devoted a series of articles to exploring China as an investment theme. Historical evidence was examined demonstrating that there is no correlation between economic growth and equity returns in emerging markets. In other words, the mere fact that China is growing strongly is not evidence that it will produce a superior equity return.

We also reported that 50 per cent of China's gross domestic product (GDP) consists of investment. This has no historical precedent and would appear to be a form of artificially propping up the economy. It is not sustainable.

Yet this is a good part of the argument for the China growth story: look how many roads, cities, power stations, etc they are building. We pointed out that China had built a number of brand spanking new ghost cities, with virtually no residents.

I recently heard further anecdotal evidence of over-building, in a report by a traveller in north-west China, driving for hours on a six-lane highway and hardly seeing another car. If large road building is seen as evidence of a healthy China, then we would be twice as impressed if this highway was expanded to 12 lanes. Never

It may be interesting to cast a demographic eye towards Europe. Germany has the world's third highest dependency ratio, at 30.8 per cent. This rate is also growing markedly, having increased by 29 per cent over the last decade (compared to a 41 per cent increase for Japan). Over two decades, German dependency has grown by 43 per cent, compared to more than doubling in Japan (source: United Nations).

Germany does not appear to face the scale of demographic problems which Japan does and China will. Nonetheless, at a time when Germany is seen as the possible saviour for all of Europe, it is worthwhile recognising that it faces issues of its own.

There are 15 countries beside Japan with a dependency rate of 24.9 per cent or higher.

These are: Austria, Belgium, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Italy, Latvia, Portugal, Spain and the United Kingdom. (Special mention goes to Italy with the second highest level of dependency at 31 per cent.)

All these nations except Croatia are in the troubled European Union.

It should be expected that advanced economies would have a higher dependency ratio due to a longer life expectancy and a generally lower fertility rate (ie, number of births per woman). However, the situation in much of Europe is worse than Canada, the USA and Australia.

On a per capita GDP basis, Bulgaria, Croatia, Estonia, Greece, Latvia and Portugal are not nearly as wealthy as the leading European states. Nor are Italy and Spain, though the margin is not so great. Though their dependency is not growing as rapidly as in Germany, the standard of living of these nations will remain under pressure from their high dependency ratio. In passing it can be noted that immigration could provide relief from a difficult dependency ratio. It may therefore be unfortunate that Europe is experiencing an anti-immigration phase, especially of Islamic immigrants.

The point being made is that demographics will not help Europe grow out of its current difficulties, though they don't face the challenges of Japan and China.

China’s dependency is only beginning to accelerate more quickly. Their dependency problem will only develop slowly. And certainly there are differences between Japan and China. Dependency is only one factor in a complex modern economy. Nonetheless, an excessive dependency ratio has the potential to stifle China’s economic growth, as it did in Japan.

Shirakawa said that there were concerns about Japan’s demographic trends in the 1980s, but they were “considered vaguely as an issue for the distant future.” It would be easy to take the same attitude to China today.

Robert Keavney is an industry commentator.

Source: United Nations

www.moneymanagement.com.au December 8, 2011 Money Management — 21

OpinionClientService

Review your reviews How do you keep your clients engaged for the long-term in an age of instant gratification and continuing market volatility? The answer may lie in the client review process, according to Sue Viskovic and Lana Clark.

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e live in a world of instant gratification. Wondering what the final score was at the game? Google it, or subscribe to have it texted to you within 60 seconds of the final siren. Need a map?

Click on the application on your phone and you’ll get directions, a traffic update and estimated time of arrival. We’re not just referring to Generation Y here: when was the last time you checked your bank balance in the branch, or looked at the balance in your passbook? Of course, you check your bank balances and transactions online – in most cases you don’t even need to wait until you get to a computer, you can do it from your mobile phone.

Wealth creation, on the other hand, doesn’t occur immediately. The tremendous positive impact that a great financial adviser can have on the health of their clients’ wealth and lifestyle is best demonstrated over time. Initial financial plans can save clients a great deal in tax, fees, income and benefits, and yet the true benefits of quality advice are only fully realised over the long term.

The impact of investment returns, longterm tax savings, the avoidance of making poor decisions, a quality risk management plan and the discipline of investing regularly and consistently compounds over time, and is best demonstrated five, 10, even 20 years into an advice relationship.

That is, of course, if the client has maintained the services of their adviser, and allowed them to keep their financial plan and actions up-to-date with the changes that continuously occur in the legislative and economic environments, as well as the personal life of the client.

How, then, do you keep your clients engaged for the long term when they can obtain such fast results in other aspects of their daily life? It is imperative that an adviser can demonstrate the value of this

long-term relationship through a consistent and meaningful ongoing service, so that the client recognises the importance of its existence and continues to opt-in year after year, despite market volatility, media scrutiny, and short-term negative returns in their portfolio.

Clients make these decisions based on a variety of factors, including the tangible results that are demonstrated in their net wealth and lifestyle, and importantly, the emotional benefits they receive from the knowledge that they have an expert they can trust who is looking after their affairs and assisting them to make educated decisions about their financial affairs.

Over 25,000 clients of financial planning firms in Australia have completed the Business Health Catscan client satisfaction survey; and surprisingly, clients continually rate the review service delivered by their advisers as by far the worst-performing area. Compare this feedback with the fact that over 80 per cent of the participating practices state that they have a regular and documented review process in place.

Clearly, clients value having a ‘review’ with their adviser, and yet the quality of that review is paramount. It’s not enough to simply provide a report and/or discussion on portfolio performance. Successful advice firms who will continue to have long-term relationships with their clients in the future will need to provide a review service that is powerful and meaningful for their clients.

Whilst an ongoing service package contains more than just a review meeting, this article focuses on this very important inclusion in your client’s annual calendar.

Let’s consider why a client engaged their financial planner in the first place.

We often find that great financial planners take their abilities for granted. Their years of education, knowledge and experience allow them to understand finan-

22 — Money Management December 8, 2011 www.moneymanagement.com.au

cial concepts, rules and strategies, and they often forget that these skills are not common in the greater population. How often have you heard statements like “I’m not good with numbers”, “I hate money”, and “I was never good at maths/economics”? Essentially, clients come to you because they wish to outsource their financial planning to an expert; for many of them money is ‘boring’, planning is ‘boring’. Of course, there are also those who have the ability to plan for themselves, but choose to outsource it anyway, so as to allow them to focus on what they do best, or enjoy more – this discussion is equally relevant for them too!

Across the profession, we use the term ‘client review’ when referring to a meeting held after the initial on-boarding process with a client. Let’s think for a moment how a client looks at that term. If the financial analysis is ‘boring’, how exciting does a ‘review’ sound? Sure, they want to know what has been happening with their money – but do they really want to ‘review’ the economy, investment markets and legislation, or is that what they pay you for? Does a client really care that much about the performance of their investments, or are they more interested in whether their portfolio and financial actions will still allow them to achieve the current and future lifestyle they want? Yes, historical returns will be a factor but, consider this: should a review be about the client and nothing but the client? In times of market volatility, advisers too often focus on our fears instead of getting back to the relationship we've already built and continue to build on it by understanding the client, their family and what they want to achieve; we somehow forget that a product and its performance is a means to an end.

Many advisers use a client review in a retrospective manner – taking a look at

the client’s investments and superannuation, with a focus on the performance of funds. Realistically it should be about restoring perspective, reviewing the client's circumstances and understanding what changes should be put in place in response to any changed circumstances, and how the client is feeling about their situation.

Right about now you're asking if a client review is not an investment update. What is it? Simply, it's a chance to celebrate, reevaluate and update! It's a chance for you to really let your client know that you understand them and where they are headed; model where they are placed on the journey towards their goal(s), and review what you can all do separately and together to have a further impact on their future. So would it be more appropriate, and perhaps even more engaging to a client, to change the name of a ‘client review meeting’ to a ‘strategic update meeting’, a ‘forward planning meeting’, or even an ‘on-track meeting’?

Review your Reviews Take the time with your staff to revisit the process you use to conduct reviews in your business. If you are not convinced that your clients truly value this service, if you’re not convinced that the way you conduct your reviews results in better financial outcomes for both you and your clients, take action. Ideally, ask your most valued clients what they would like to experience, and embed a rock-solid process in your business that fits with your client value proposition and will allow you to hold onto your clients for the long-term.

Lana Clark is a business coach with Elixir Consulting, based in Brisbane. Sue Viskovic is managing director of Elixir Consulting.

ResearchReview

Analysing the raters Research Review is compiled by PortfolioConstruction Forum in association with Money Management, to help practitioners assess the robustness and disclosure of each fund research house compared with one another, given the transparency they expect of those they rate. This month, PortfolioConstruction Forum asked the research houses: “You are making the final decision as to whether to recommend an international equities fund – what is the one last question you would ask (or ask again) of the fund manager, and why?”

Lonsec A good question to ask would be: “Why do you believe you can meet or exceed the fund objectives?”

This is a catch-all question, but should provide a consistency check, particularly in terms of answers the manager would have already provided around people and resources, research approach, corporate structure and the ability to deliver an appropriate reward for risk. Linking this question back to current portfolio positioning should also provide an indication of how insightful the manager has been over the period since the last review, and whether the manager is adhering to its process and remaining true to label.

Of course, the reality is that there is no single last question that will determine the decision to recommend an international equities fund. Ultimately, Lonsec aims to make an assessment of whether a fund can provide consistent long-term performance above that of its benchmark and peer group. We believe a manager’s ability to do this can be distilled down to having the right people, in the right environment, supported by a logical and robust process.

Mercer The final question to be re-asked is: “Can you identify what your competitive advantage is and how your investment process exploits this opportunity?”

The reason we ask this question is that it is nearly as important that a manager understands where they have an edge (and where they are directing their efforts) as having an edge in the first place. If the manager does not understand this feature of their investment proposition, they are just working hard but without a clear focus.

There are a number of ways in which Mercer believes it is possible for a manager to add value, including: • Superior knowledge to other market participants;

• The willingness to take a long-term view when other market participants are not, and are overwhelmed by the noise of more recent news flows. (Does not preclude strategies with a shorter-term time horizon being rated highly), and; • A better understanding of behavioural factors than a typical market participant.

Morningstar The question would be: “What is your competitive advantage?”

The reason for asking this is that it is an open question, and gives the manager great scope to answer on a number of levels should they so choose.

The approach taken to responding, and the answers they give, can be revealing and instructive. It is also instructive of our qualitative approach to research in delivering an holistic view of a manager’s capability.

Each manager should be able to clearly explain the areas of particular strength they believe give them an edge. This could be across a number of areas such as analyst insights, team tenure and experience, portfolio construction, proprietary models, investor alignment, or a combination of these and other factors. In the absence of a sound rationale, we would question whether they have the belief in themselves to deliver excess returns over the medium to long term. Some fund managers also mention their weaknesses in the same response, which may highlight a balanced approach and a desire to improve. Therefore, it will highlight any difference between their perception of themselves and the reality in which they operate in. It gives an insight into their culture.

Standard & Poor’s From an investment strategy selection perspective, the key considerations are covered off in the manager due diligence

review, and strategy review processes.

However, assuming all is satisfactory and the due diligence review validates the strategy, we would revisit the following questions: “Does the strategy have an alphagenerating thesis that can be validated in at least one economic cycle; has the manager demonstrated consistent and reliable alpha generation through the implementation of a repeatable investment process; and is the alpha opportunity being considered the one that has actually produced the alpha for the strategy?”

All other things being equal, the answers to these questions are the core consideration in the fund/strategy selection process. Consequently, it is imperative for portfolio construction to fully understand and have confidence that these aspects of a fund/strategy are able to generate alpha as intended.

van Eyk The final and most important question to ask is: “Can you communicate your strategy to clients in such a way that they will stick with you in sickness and in health (at least in terms of performance)?”

The obvious attributes of strong people, process and business are by now minimum investment grade criteria. It should also be taken as a given that a highly rated manager has a tangible edge in the market (a surprisingly rare attribute).

Much better investment outcomes are generally achieved when clients are placed with managers they identify with at a level deeper than implied by b ra n d i n g , p a s t p e r f o r m a n c e o r a weighty research report. We all stand a much better chance of making sure clients have the patience to let the manager exploit the investment hypothesis if the thesis can be commun i c a t e d t o a n d i n t e r n a l i s e d by

i n v e s t o r s. I f t h e y l a c k b e l i e f i n a manager, they will find it even more difficult to stick with those who have a more active investment strategy. It should also be noted that the impact of ill-timed switching can easily swamp the potential added value from good manager selection.

Zenith Investment Partners The short answer, after reviewing all other aspects of the manager and fund, is accountability – who is ultimately accountable for the investment portfolio and performance of the fund?

In Zenith’s opinion, it is critical that there is a single person, usually the portfolio manager, who is responsible for the fund, and therefore is ‘on the hook’ for its performance. It is quite common, particularly with large, US-based global equities managers, for stock selection and por tfolio management to be managed by a committee. In our view, a committee or multiple por tfolio manager approach rarely works, as no one person is fully responsible or accountable for the management of the fund. In many instances, the Australianregistered global equities fund invests into a por tfolio of global equities managed for US or other globally-based investors. We prefer to see an experienced portfolio manager responsible for the fund managed for Australian investors – and on top of and accountable for its performance. This tends not to be such an issue with the Australianbased global equities managers, where the investment team is much smaller.

Nonetheless, it remains critically important that there is a dedicated portfolio manager responsible and accountable for the performance of the fund.

In association with

www.moneymanagement.com.au December 8, 2011 Money Management — 23

ResearchReview REITs – still a worthwhile asset class?

REITs are worth persevering with as an asset class, even if allocations within a portfolio are low for the time being, according to Tim Farrelly.

24 — Money Management December 8, 2011 www.moneymanagement.com.au

Figure 1 Australian REIT price movements 3000 2500 2000 1500 1000 500 1 Nov 11

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This is another tricky question, and one ultimately dominated by a discussion of gearing. AREITs have been variously reported to own somewhere between 30 per cent and 50 per cent of the total investment grade property in Australia.

On this basis, it is clear that buying the index of AREITs gives an incredibly diversified exposure to Australian commercial property. The index is clearly not undiversified from a property perspective.

Allocations are low because forecast returns are low, not because there is anything irredeemably wrong with the asset class. Prices are simply too high compared to the fundamentals. But this will not always be the case. There may well come a time when AREITs appear to be a once-in-a-generation bargain that produce wonderful long-term gains for investors. Markets often go through longterm cycles of euphoria followed by panic, followed by premature bargain hunting, then disappointment, before loathing and finally utter boredom sets in. In our view, REITs are in the loathing stage. Boredom is probably still a few years away, and they are certainly not bargains yet. But that time may well come.

Some notable examples of unloved asset classes becoming standout invest-

This is another furphy. The real issue is more about whether having that property in too few hands creates another set of risks. The two Westfield funds plus Stockland and GPT represent almost 60 per cent of the index. Throw in Goodman and Dexus and we are at over 70 per cent of the index, with half of that represented by the two Westfield entities. This represents a concentration of management rather than a concentration of too few underlying properties. Do we need management diversification? Maybe. Given the appalling track record of the industry in managing debt, it could be argued that the answer is a categorical ‘yes’. We disagree.

1 Mar 05

Investing in REITs is simple. Managed funds, exchange-traded funds and

Are AREITs too undiversified to represent a viable asset class?

Current expected returns and allocations are low, so why bother?

Excessive manager concentration

1 May 04

Investing is easy

The fact that the question as to whether REITs are a worthwhile asset class is being asked is evidence of how different they are. Right now, Australian equities look a far more attractive proposition than AREITs. On the other hand, AREITs looked more attractive than equities from around 1998 through to 2004. During the period 2000 to 2007, AREITs outperformed equities; since then, equities have greatly outperformed. AREITs do march to a different drum. They have become highly correlated with equities in the short term, which gives rise to the feeling that they s e e m t o b e h a v e j u s t l i k e e q u i t i e s.

However, in the short term, most assets are positively correlated, so if taken to its logical conclusion, this argument would have us with just two asset classes; equities and debt. For our purposes the main question is: are they different in the long term? The answer is clearly yes.

The problem with excessive debt is that all the managers tend to take it on at the same time, driven by the same factors. Manager diversification offers little real protection.

This seems to be a bit of a furphy. Retail property is probably the most resilient of all the main commercial property categories, and so a higher exposure to that is like having a corporate bond fund with an excessive exposure to AAA-rated companies. It will not help your long-run returns but may not actually increase risk.

1 Jul 03

REITs are quite predictable over the long term. Rents grow at around inflation, and valuation multiples are mean reverting.

The shocks over the past few years highlight the risks that exist with all forecasts – sometimes they can be wrong, particularly if the fundamentals shift dramatically and unexpectedly. In the case of the recent debacle, the villain of the piece was excessive gearing and abysmal management of that gearing. The difficult-to-predict aspect was just how much damage that poor management could inflict. Now we know.

REITs are different

Excessive exposure to retail property?

1 Dec 03

Predictability

direct investment are all straightforward in big amounts and small. While farrelly’s would prefer to invest in property directly or by way of unlisted vehicles, the investability criterion is difficult to meet. Illiquidity, excessive gearing, excessive fees and too lumpy sizes all make direct unlisted investment difficult. And, given the long-term return profile of direct investment is not that different from the listed alternative, we remain happy to stick with the listed vehicle.

1 Feb 03

T

his is a very good question, and one we get asked regularly. The reasons put forward as to why not to focus on real estate investment trusts (REITs) as a separate asset class are many and include: • They seem to behave like equities, not property; • The index is dominated by one name – Westfield; • There is very little diversification, with a few entities dominating the index; • It is virtually all retail, and retail is dead because of online shopping; • The expected returns aren’t attractive either; and, • The farrelly’s allocations are too low to make any difference.

A glance at Figure 1 showing Australian REIT (AREIT) price movements over the last two years would seem to suggest the patient is dead – certainly if this was a heart monitor chart, that would be the conclusion.

Despite this, REITs are worth persevering with as an asset class, even if allocations within a portfolio are low for the time being.

What makes a worthwhile asset class?

Farrelly’s criteria for a assessing whether an asset class is worthwhile are predictability, investability and differentiation. REITs tick all three boxes.

ments include Australian government bonds which, after a decade of negative real returns, could be locked away in 1982 at 16.4 per cent per annum for 10 years. Gold spent 20 years in a bear market between 1980 and 2000. Since then, it has been one of the bestperforming asset classes. Emerging markets had become popular in the early 1990s before producing nine years of awful underperformance between 1994 and 2003. Since then, they have strongly outperformed developed markets.

There is every chance that this pattern will be repeated with AREITs some time in the future.

Have the problems been sorted out?

Despite being tidied up over the last few years, AREITs are still not without their problems. The two major ones are the ongoing potential for excessive gearing, and the continuing presence of management that seems to be oblivious to the interests of unit holders. But it seems to pale into insignificance when compared

to the issue of gearing. In fact, without gearing, even poor management would be of only passing concern to investors.

Gearing needs to be brought down and kept down Gearing results in negligible increases in returns on the net amount invested, and it actually reduces returns on a portfolio basis. It increases correlation with equity markets, increases the impact of poor asset management, and dramatically increases risk of poor capital management.

Because expected returns on real property are around 8 per cent to 9 per cent per annum, borrowing at 7 per cent per annum has very little impact on retur ns. With 30 per cent gear ing, returns on a property fund could be increased by about 0.3 per cent to 0.6 per cent per annum before management fees and transaction costs. An allowance for these would remove much of that incremental return.

In any event, even this gain is spurious.

If an investor wanted a $100,000 exposure to property in a portfolio, they could invest $100,000 ungeared or $50,000 in a geared portfolio that effectively gave the investor $100,000 property exposure and $50,000 debt. This would leave the investor with $50,000 to invest in cash to offset the debt in the A-REIT. Assuming the investor receives 4.5 per cent per annum on the cash and pays away 7 per cent per annum on the debt, the net effect on the overall portfolio return is that the investor in the geared product gets exactly the same return as the ungeared investor, less $1,250 per annum, which is the interest rate difference between what is earned on the cash and that which is paid away by the fund on its debt.

While not increasing returns, gearing does dramatically increase risk. It increases the correlation between returns on AREITs and the broader equity markets, as both respond to the same factor – rising borrowing costs.

Back in the distant past, when gearing

was much lower, so too were correlations between AREITs and equities much lower, and diversification was enhanced.

Gearing also increases the risk of bone-headed investment decisions aimed primarily at increasing the remuneration of the managers. Without debt, the key errors management can make are bad acquisitions and bad developments. Both are hard to do in an environment where they have to be financed by raising equity capital from shareholders, who naturally want to be convinced they are getting a good deal. Contrast that with a deal financed by bankers, who are only concerned that they get their loan repaid, which will happen as long as the manager hasn’t bought a property that is about to lose more than 50 per cent of its value. Even an acquisition that is 20 per cent overvalued is a good deal for a banker who only lends 50 per cent of its value.

Without excessive debt, the ability of management to destroy significant value is also limited because the size of deals is limited. By way of illustration, a poor acquisition valued at 10 per cent of the capital base of the fund will only reduce fund net asset value by 2 per cent, if it proves to be 20 per cent overvalued.

Unpleasant, but not catastrophic.

But the most significant risk introduced by gearing is the risk of poor capital management, as was so vividly illustrated in the debacle witnessed in 2008 and 2009. During this time, as shown in Figure 1, the average A-REIT fell in value by 68 per cent. Investors were left with just 32 cents in the dollar.

Contrast this with the average fall of 10 per cent to 20 per cent in underlying property valuations. Capital management is a huge risk factor.

Will gearing be brought permanently into line? Eventually, perhaps. Meanwhile, we watch and wait. Even with the issues associated with gearing and misalignment of management incentives, there will be a price at which these assets again become attractive.

Tim Farrelly is principal of specialist asset allocation research house, farrelly’s.

In association with

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

Toolbox Determining the hidden costs Advisers may be unaware of the hidden costs with regards to the taxation treatment of lump sum benefits from superannuation, according to Damian Hearn.

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he taxation treatment of lump sum benefits from superannuation is widely understood and taken into account when advising clients. However, advisers may be unaware of the hidden costs which can result in a client losing Government assistance payments and paying more personal income tax.

When advisers speak to clients about lump sum benefits from superannuation, the amount of tax payable (if any) is calculated and taken into account. However, it is not widely known that the taxable component of a lump sum benefit (including a lump sum death benefit paid to non-death benefits dependants) is included within the client’s taxation return as assessable income for the financial year in which the benefit is received.

The full extent of the true costs becomes apparent when the client’s tax return is completed and lodged with the Australian Tax Office. Playing a proactive role in the lump sum death benefit paid in the case study below demonstrates one method which ensures sufficient cash reserves to repay Government assistance payments and pay additional taxes and levies.

Case study: Mike and Alicia Mike (age 39) worked full time for the 2010-2011 financial year and he earned $61,000. Alicia (age 34) worked one day per week and she earned $7,680.

Mike and Alicia have two children, Ben (age 9) and Emma (age 6), who are in primary school. Alicia had their third child, a baby girl, in July 2011. Alicia ensured she satisfied the eligibility criteria for the new paid parental leave scheme by working one day per week across the 2010-2011 financial year.

Alicia’s mother passed away in December 2010 and her super account of $210,000 was paid as a lump sum death benefit to Alicia. Even though Alicia had a close relationship with her mother, she is classified as a non-death benefits dependant for taxation purposes. The lump sum death benefit was received by Alicia in May 2011 and comprised a taxable component of $210,000 (with no tax-free component).

Mike and Alicia might want to retain a cash reserve of at least $15,000 to pay for the additional costs outlined below.

What impact will this have on Mike and Alicia’s situation?

The taxable component of the lump sum death benefit ($210,000) will be classified as assessable income for taxation purposes for the 2010-2011 financial year.

Consequently, this will have an impact on Alicia and Mike’s personal situation (as summarised within the following table).

The additional costs will reduce the

combined adjusted taxable income for this period within the 2011-2012 financial year will be less than the $75,000 income threshold ($61,000 x 50 per cent = $30,500).

Taxation Medicare Levy Normally, Alicia’s employment income of $7,680 for the 2010-2011 financial year would not be subject to the Medicare levy.

Impact: Alicia’s taxable income for Medicare levy purposes will increase to $217,680. This means Alicia will pay the Medicare levy of $115.20 on her employment income ($7,680 x 1.5%).

lump sum death benefit to $159,935.

These additional costs add a further 7.34 per cent of transaction costs to the lump sum withdrawal. As a combined amount, the total transaction costs are 23.84 per cent as a percentage of the gross lump sum benefit.

The following information outlines the detailed analysis of table 1.

Family Assistance payments Mike and Alicia claimed family assistance payments for their two children, Ben and Emma for the 2010-2011 financial year.

Impact: Alicia’s adjusted taxable income for Family Tax Benefit purposes will increase to $278,680. Mike and Alicia will need to repay $5,840.36 in family assistance payments.

Parental Leave Payment Scheme Alicia satisfies the eligibility criteria for the new parental leave payment scheme during the 2010-2011 financial year and she is planning to claim the payment from September 2011.

Impact: The lump sum death benefit increases Alicia’s adjusted taxable income to $217,680 for the 2010-2011 financial year, and this will exceed the limit of $150,000 or less in the financial year prior to the date of the birth. Alicia will not receive parental leave payment scheme payments of $10,609.20 ($589.40 per week over the 18 week period).

The baby bonus of $5,437 will be payable if Mike and Alicia’s estimated combined adjusted taxable income is $75,000 or less in the six months following the birth of their child. Mike and Alicia’s

Table 1 Gross lump sum death benefit

$210,000

Tax payable on lump sum death benefit (including Medicare levy)

-$34,650

Net lump sum death benefit

$175,350

Other payments Family Tax Benefit

-$5,840

Parental Leave Scheme*

-$10,609

Baby Bonus

$5,437

Medicare levy: employment income

-$115

Medical levy surcharge

-$2,787

Low income tax offset

-$1,500

Medical levy surcharge Mike and Alicia did not have private health insurance with private patient hospital cover for the 2010-2011 financial year. The lump sum death benefit will be included within Alicia’s assessable income for surcharge purposes. Mike and Alicia’s combined income for surcharge purposes for 2010-2011 is $278,680.

Impact: Both Alicia and Mike will be subject to the Medicare levy surcharge.

Mike will pay $610 (1% x $61,000), whilst Alicia will pay $2,176.80 (1% x $217,680).

Low income tax offset The inclusion of the lump sum death benefit within Alicia’s taxable income for the 2010-2011 financial year means the low income tax offset will not apply.

Impact: The low income tax offset will reduce from $1,500 to nil, and Alicia will pay personal income tax of $7,680 on her employment income. In dollar terms, Alicia will be required to pay $252 ($7,680 – $6,000 x 15%, assuming no other deductible expenses or tax offsets).

Summary Financial advisers need to be aware of the full impact that lump sum benefits from superannuation can have on a client’s overall financial situation when they are under age 60. It is essential to include appropriate disclaimers within your statements of advice and ensure the client seeks taxation advice from a registered tax agent.

The most important issue is to play a proactive role to ensure you manage your client’s expectations and highlight the impact that the lump sum benefit could have on their overall financial situation.

Damian Hearn is the technical services manager at IOOF.

Table 2 Fortnight

Per annum

Subtotal additional costs

-$15,414

Family Tax Benefit – Part A

$148.87

$3,870.60

Total transaction costs

-$50,064

Family Tax Benefit – Part B

$75.76

$1,969.76

Adjusted lump sum death benefit

$159,936

Total

$224.63

$5,840.36*

Note: Assumes no personal income tax will be paid by Alicia during the 2011-2012 financial year.

26 — Money Management December 8, 2011 www.moneymanagement.com.au

* Excluding the annual supplement payment.

Appointments

Please send your appointments to: andrew.tsanadis@reedbusiness.com.au

THREE more AXA executives have been appointed to MLC’s retirement solutions, which h a s g r ow n t o 1 0 m e m b e r s since its establishment in February 2011.

Shaune Egan will take on the role of MLC Retirement Solutions head of segment management, Stuart McGregor moves to MLC Retirement Solutions manager of pricing and risk a n a l y s i s, w h i l e Jo a c h i m Lumbroso has been appointed MLC Retirement Solutions manager of hedging and risk reporting.

Egan was most recently AXA head of integration – sales, marketing and advice stream; McGregor joins MLC from the AXA North Risk Management team where he was managing director of pricing and risk analysis; and Lumbroso was previously head of hedging services Asia for Singaporebased AXA Services.

COLONIAL First State Global Asset Management (CFSGAM) has announced the appointment of Angus McNaughton as managing director (MD) of CFSGAM Property.

Replacing current MD Darren

Steinberg, McNaughton steps into the new role having come from the position of CFSGAM Property’s head of wholesale property funds. The firm added that he will retain responsibility for driving long-term strategy and performance across the wholesale property business.

DIXON Advisory Group Ltd has appointed Kevin Smith to the newly-created role of chief investment officer.

Smith has moved from Hong Kong to work out of Dixon’s Melbourne and Sydney offices.

He moves into the position at the independently-owned financial advisory firm after holding previous roles as chief investment officer, equities at ABN AMRO Asset Management in London, and chief executive officer at Standard Life Investments (Asia) Limited in Edinburgh and Hong Kong.

At ABN AMRO, he was responsible for the global investment team that managed in excess of 75 billion in equity, listed property and alternative investments.

ALTIUS Asset Management

Move of the week FORMER Commonwealth Bank of Australia executive David Lane has been appointed chief executive officer at Count Financial after current CEO Andrew Gale made the decision to resign from his post.

Gale’s decision to step down comes days after Count shares officially ceased trading on the Australian Securities Exchange (ASX).

Set to take up his new position effective immediately, Lane joined CBA in March 2010 as general manager, strategic development wealth management. He has more than 13 years experience in investment banking and was most recently chief operating officer for Neuberger Berman’s hedge fund business.

h a s a p p o i n t e d Va n e s s a Thomson to the role of head of credit research.

With over eighteen years experience in financial services, Thomson was most recently senior research analyst – income assets in the fixed income department at ING In ve s t m e n t Ma n a g e m e n t .

Prior to this, she worked at Macquarie Bank in London in project and structure finance.

A l t i u s’ s e n i o r p o r t f o l i o manager Chris Dickman said T h o m s o n’s n e w ro l e w a s consistent with the fund manager’s approach in taking advantage of credit opportunities in the market to optimise returns for investors.

“Vanessa has a diverse range of sector experience both across investment and subinvestment grade levels, and tremendous quantitative skills, which will prove very useful to our investment activities,” Dickman added.

WILLIAM Buck has bolstered its audit team with the appointment of Matthew King as director of the company’s audit and assurance division.

The chartered accounting firm now boasts 17 directors and more than 130 staff, and K i n g’s a p p o i n t m e n t h a s fulfilled a longstanding goal of the firm to continue to

Opportunities FINANCIAL ADVISER Location: Brisbane/Port Moresby Company: Fortune Consultants Description: An opportunity exists for a financial adviser to join a financial advisory firm based in Port Moresby.

The company will offer qualified leads and training to candidates with experience in financial planning or sales.

The position boasts 3-hour air-links between Brisbane and Port Moresby, as well as giving applicants the potential to earn a significant wage based on a commission-based benefits structure.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Rick at Fortune Consultants – 0408 819 398, fortuneconsultants@bigpond.com.

AMP HORIZONS ACADEMY Location: Australia wide Company: AMP Horizons Academy Description: AMP is accepting applications for its 2012 AMP Horizons Academy 12month training program.

The paid traineeship begins with a 10week course at the AMP’s academy in Sydney. Graduating as a competent

develop its audit and assurance arm.

K i n g b r i n g s m o re t h a n a decade of experience to the role, specialising in auditing ASX-listed companies, large private companies, not-forprofits and cooperatives.

Co m m e n t i n g on his appointment, King said the level of technical audit and financial reporting expertise in Adelaide was a considerable attraction in taking on the position.

W i l l i a m Bu c k m a n a g i n g director Jamie McKeough said King’s range of skills in both audit and commerce complemented the firm’s position as a multi-disciplinary offering.

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

financial planner, you will be provided with a position in your home state and receive additional on-the-job training for nine months in an AMP Horizons practice and be mentored by experienced financial planners throughout the year.

The successful applicants will have a Diploma of Financial Services (Financial Planning) or be RG146 compliant.

You will be rewarded with a fast-tracked career in the company and a competitive training salary.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact AMP – 1300 30 75 44.

SENIOR DEALER/ASSOCIATE DIRECTOR Location: Perth Company: Terrington Consulting Description: A firm offering a fixed income brokerage service is seeking a highly motivated senior dealer/associate director.

In this role you will report to the existing director while managing all sales and business development activities for Western Australia. As part of the founding team in Perth, the successful candidate will receive an attractive remuneration

package and have access to a bonus structure.

You will have experience and knowledge of fixed income markets and products, and have a strong desire to develop your client relationship, business development and leadership skills.

To find out more and to apply, visit www.moneymanagement.com.au/jobs

FINANCIAL PLANNER Location: Melbourne Company: National Australia Bank Description: National Australia Bank is looking to take on a financial planner to service, retain and provide ongoing advice to clients, as well as seeking new business opportunities.

The successful candidate will be offered a competitive remuneration package, uncapped bonus incentives, ongoing professional development, and paraplanning and administration support. You will also be offered a initial support by utilising NAB’s referral relationships and an established fee for advice model.

To be successful in this role, you will ideally have completed your ADFS or equivalent, and possess solid planning experience demonstrating a proven sales ability. Tertiary

degrees in a business related field will also be highly regarded.

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

CLIENT SERVICES MANAGER Location: Adelaide Company: Terrington Consulting Description: An Adelaide-based financial services firm is looking for a relationshipfocused and highly professional client services manager.

In this role you will be assisting planners to maintain and build client relationships; become the key contact for clients; provide administrative support as needed; prepare financial planning documentation and client reviews; and manage compliance procedures.

You will have experience with financial planning processes, and have the ability to maintain client relationships. Previous experience using Xplan or similar planning solutions would be a distinct advantage.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting – 0422 918 177 / (08) 8423 4466, myra@terringtonconsulting.com.au.

www.moneymanagement.com.au December 8, 2011 Money Management — 27