Money Management (January 26, 2012)

Print Post Approved PP255003/00299

Vol.26 No.2 | January 26, 2012 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

GOVERNMENT’S FOFA DISCONNECT: Page 8 | INCOME PROTECTION COVER: Page 14

Quality will need to trump quantity after FOFA

By Mike Taylor THE servicing of A and B clients will dominate and financial planners will be kidding themselves if they believe they can adequately service unduly large client books in the new Future of Financial Advice (FOFA) environment.

That is the assessment of a number of industry players, including Adelaidebased consultant, Max Franchitto, who believes planners will face significant difficulty in convincingly arguing they can appropriately service more than 300 or 400 clients in any one year.

He said the advent of FOFA meant planners were facing a new paradigm in which the fees charged would need to more closely reflect the expectations of clients.

“The reality is that there are only so many clients you can look after efficiently and effectively," he said.

Franchitto also believes that in an environment where the industry funds continue to agitate with respect to the value of advice delivered by planners, it will be important that planners deliver on client expectations.

“We are dealing with consumers who have been told some superannuation funds cost more because of commissions paid to advisers, so planners need to deliver," he said.

Syd n e y- b a s e d Au s t ra l i a n Un i t y planner Andrew McKee agreed that the FOFA requirements would ser ve to impose physical limits on the number of full-service clients a planner could re a s o n a b l y e x p e c t t o h a n d l e i n a 12-month period, but said insurancerelated and other clients should not be overlooked.

“FOFA possibly will serve to reduce client loads a little, but it will depend on the type of client," he said. “Certainly, you're going to find planners focusing

Wealth management jobs mostly safe despite banking cuts

Paul Harding-Davis more closely on A and B clients.”

P re m i u m We a l t h M a n a g e m e n t general manager Paul Harding-Davis said that despite the Government's

FOFA objective of making advice more readily available and affordable, one of its consequences was likely to be taking full-service advice out of the reach of many people. “ You might almost say the FOFA changes are making full-service advice a little more elitist," he said.

Harding-Davis said overly large client lists were not common amongst planners within Premium Wealth Management, with most focused on maintaining longstanding relationships with their clients.

Franchitto said planners with a large number of fee-for-service clients would not be unduly impacted by the changes, but those who had large numbers of C and D clients would need to think about “getting rid of people at the bottom of the food chain”.

“And realistically, they only have about five and a half months to get their act together,” he said.

EMERGING MARKETS

The road not taken

By Chris Kennedy DESPITE ongoing concerns from the Financial Sector Union (FSU) about job cuts and offshoring at the major banks, most of the banks either deny there are set plans to cut jobs, or say they have no plans to reduce numbers in their wealth management divisions.

ANZ recently announced plans to cut around 130 jobs, mostly in the area of retail banking, and there has been ongoing concern from the FSU about Suncorp moving a number of commercial insurance jobs offshore. In early November Westpac announced close to 200 mostly IT-related roles would go, while NAB signalled 135 jobs would disappear.

An ANZ spokesperson said it was possible there would be further job cuts in the future, but that there were currently no plans to reduce the number of roles in wealth management. The spokesperson added that the staff who lost their jobs would be able to apply for other roles within the company.

In September, ANZ’s general manager advice and distribution Paul Barrett spoke of growing the group’s advice network by about 50 planners per year. In December, he highlighted growth in the group’s phone advice service, My Advice.

Suncorp Life said in a statement that market conditions remained challenging but it was too early to predict what impact this might have on jobs.

“There will be efficiencies gained from the simplification of the business through the 31 December 2011 merging of our two life companies, Asteron Life and Suncorp Life & Superannuation. How this will impact employees will be better understood in due course,” Suncorp stated.

Continued on page 3

LAST year was a tough one for emerging markets, as investors shunned anything viewed as vaguely risky.

Falling investor sentiment and continuing volatility in Europe and the US saw global fund flows into emerging markets equities decline over the second half of 2011.

Europe, in particular, remains the problem, as the uncertainty around the continent’s economic outlook is clearly having an impact.

However, the news is not all bad, with many investors staying positive on emerging markets, and particularly China. The International Monetary Fund predicts growth in this sector for 2012 and the next five years.

Furthermore, the potential for a rapid rebound is a key factor in the current appeal of emerging markets, as investors want to catch the upswing.

But while Europe attempts to resolve its crises, investors seem to be Asia-bound, with Indonesia attracting the most attention.

For more trends on emerging markets, turn to page 10.

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 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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Savvy independents will weather storm

A

n almost inevitable consequence of the Commonwealth Bank's acquisition of Count Financial is that some Count planners have signalled they feel uncomfortable operating under the umbrella of a major institution and will be seeking to work in a different environment.

There is nothing unique about this eventuality. Recent history in the Australian financial planning industry confirms that almost every time an acquisition or buyout occurs, planners choose to change camps. Most recently there were changes when AMP Limited acquired AXA Asia Pacific.

It is no secret that whenever an acquisition or some other transaction occurs, competitor groups seek to lure away good planners who they believe may have become disaffected by their changed circumstances. This was certainly the case with respect to MLC in the immediate aftermath of AMP Limited's acquisition of AXA. Retention payments and other incentives can only go so far in overcoming the misgivings of some planners about their new arrangements, and even the uncertainties created by the Government's Future of Financial Advice (FOFA) changes have failed to dampen their continued

“

Consumers will continue to recognise the value of quality, independent advice clearly unaffected by links to banks, insurance companies or unions.

”

enthusiasm for a non-institutional approach.

Indeed, an increasing number of advisers are dismissing the assertion that the FOFA changes will solely play into the hands of the major institutions and industry funds and give rise to a return of the old tied-agent approach.

Notwithstanding a broad recognition that factors such as ‘opt-in’ will add significantly to their administrative requirements and cost structures, there is a growing belief among experienced planners that consumers will continue to recognise the value of quality, independent advice clearly unaffected by links to banks, insurance companies or unions.

Indeed, there is a view that given the size

and make-up of their client lists and their existing business models, FOFA, while undoubtedly vexatious, will not have an unduly dramatic impact on smaller, independent practices.

While FOFA and factors such as opt-in will represent a challenge for some planners, it will be less problematic for those who have regular contact with their clients throughout the year and who deal with feerelated issues on an ongoing basis.

This seems to have been reflected, in part, in recent research conducted by specialist firms such as Wealth Insights, which has revealed that the pessimism being shown by financial planners in the closing months of 2011 had far more to do with the state of the markets than their concerns about the ultimate state of the Government's legislation.

This reality has also been revealed in the diversity of submissions filed with the Parliamentary Joint Committee reviewing the FOFA bills, and the divergence in attitude around the role of volume rebates.

FOFA will almost certainly lead to the further dominance of the major institutions – but that does not mean independents will not only survive but very likely thrive.

– Mike Taylor

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2 — Money Management January 26, 2012 www.moneymanagement.com.au

News

FOS still inundated with flood claims

By Chris Kennedy ONE year on from the floods that devastated south-east Queensland, confusion over flood definitions means a huge number of disputes over denied flood claims is still clogging up the resources of the Financial Ombudsman Service (FOS).

FOS had received 482 disputes directly relating to the January 2011 floods by 30 June 2011, which had reached almost 1,000 by the end of the year. FOS expected new disputes to continue being lodged into 2012.

FOS said it had given priority to finalising claims relating to the January floods because of the devastating impacts on those affected, but had still only resolved around 45 per cent of claims.

FOS said many of the disputes had been

found in favour of consumers or settled between the consumer and the industry, in some cases with a partial payment because of initial damage from inundation or stormwater run-off before further damage was caused by floodwaters. In these cases, the onus fell on the financial services provider (FSP) to prove the damage had been caused by an excluded event (such as ‘flooding’) rather than a covered event (such as stormwater run-off).

Many of the disputes being raised are due to consumer confusion about the extent of coverage, as well as by the various use of wordings, including ‘flash flooding’ and ‘capped cover’, and the distinction between flood and storm water run-off, FOS stated.

FOS said it is strongly in favour of proposals for a single simplified definition

for flood, and the use of a key fact statement, to help eliminate the miscommunications sometimes encountered by consumers at policy inception.

In many of the disputes, it was contended that the FSP did not adequately inform the consumer as to the extent of the flood coverage. If the consumer claimed to have

been led to believe they were covered for flood, FOS had to establish whether an adequate product disclosure statement was provided. If one was not, it then fell to the FSP to prove that the client had been adequately informed – for example, by way of recorded phone conversation. Otherwise, the FSP would be liable for the claim.

Wealth management jobs mostly safe despite banking cuts Continued from page 1

A BT Financial Group statement said BT anticipated a decrease in staff numbers this year, but did not have a specific target on jobs reductions.

NAB did not comment on the wealth management division specifically, but said that in a company of its size “staffing numbers will fluctuate in various parts of the business at times due to the completion of programs, outsourcing of some projects and continuing focus on efficiency”.

The Commonwealth Bank said a continuous drive to increase ef ficiency may result in redundancies from time to time in some areas, while in other areas more staff may be needed, but that “there is no target or short-term plan for major staff reductions”.

Bendigo and Adelaide Bank managing director Mike Hirst said the bank currently had no plans to shed jobs and tried to work with staff to find ways of reducing costs.

“There is no doubt the industry is under pressure to maintain profit levels, but we believe our bank has good growth opportunities which continue to be realised,” he said.

NAB, ANZ and BT all indicated attempts would be made to find other roles within the business for staff that had been cut.

Leon Carter FSU national secretary Leon Carter said although none of the major banks had directly indicated wealth management would be affected, the FSU expected it would come under a fairly high level of scrutiny because the capacity to make money in wealth management is now more difficult than it has been in the past.

Carter was highly critical of the tendency to look at staff cutbacks as a first resort when it came to cost cutting, which he said resulted from banks being determined to maintain record profit levels.

“No-one is saying ‘if we don’t do this something bad will happen’ – it’s simply about maintaining a profit line,” he said.

“It’s a ridiculous expectation that bank profits have to continue at record levels when the world is clearly in dire financial circumstances.” www.moneymanagement.com.au January 26, 2012 Money Management — 3

News

UK clients willing to pay £155 for advice

By Milana Pokrajac AN average UK consumer is willing to pay no more than £155 (AUD$230) for financial advice, according to a survey carried out

by CoreData in the UK. This low figure excluded the fact that approximately a fifth of those who would consider enlisting the services of an adviser would pay nothing at all for advice, the report said.

The analysis revealed that around 2.1 million households in the UK have a full-time dedicated financial adviser, but only half are aware of the adviser’s remuneration model.

More than a third of respondents believe they did not pay for advice.

“On a positive note, consumers would expect to pay an average of £39.9 (AUD$59) per hour to engage an adviser, so perhaps the challenge is for advisers to articulate

that a thorough financial review of a would-be client’s situation requires more work that the latter anticipates,” said Craig Phillips, head of UK and Europe at CoreData Research.

The most popular method of remuneration is a flat annual fee, while other methods include an admin fee paid out of the product (16 per cent), an hourly fee (11 per cent), an upfront fee paid by the product manufacturer (less than 3

per cent), and other ways.

The average UK consumer believes four hours is sufficient time for an adviser to conduct a thorough review of their financial situation, the report found.

“A key challenge for advisers is in gently articulating the cost of delivering a full financial plan – clients need to appreciate advice is much more than just the faceto-face time spent with an adviser,” Phillips said.

Investor sentiment falls to a record low

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4 — Money Management January 26, 2012 www.moneymanagement.com.au

INVESTOR sentiment has fallen to a record low, with investors now less confident about the markets than they were during the global financial crisis (GFC).

CoreData’s Investor Sentiment Index for the last quar ter of 2011 revealed a confidence rating of -22.4 – slightly lower than in the first quarter of 2009, when confidence sat at -22.3.

This is also the lowest point for investor sentiment in the history of the index, which was established in 2005.

“The continued slide in sentiment we’ve seen since the beginning of 2011 is reflective of the turmoil in Europe and concerns about how this might impact the investment landscape in Australia,” said CoreData’s head of advice, wealth and super Kristen Turnbull.

However, for the first time since the GFC, there are more investors who thought cash would perform worse (29 per cent versus 25 per cent).

Despite this, cash remains the most popular asset class for investors to rebalance to.

Sentiment towards equities has improved in the last quarter, but remains in negative territory, the report has found.

The Sentiment Index also revealed two in five Australian households were financially worse off than they were 12 months ago.

CoreData’s survey had 843 respondents and was carried out between 19 November and 5 December 2011.

News

FOFA compliance to cost millions warns FSC

By Mike Taylor

THE Financial Services Council (FSC) has added its weight to calls for the Federal Government to provide an appropriate transition time for the implementation of the Future of Financial Advice (FOFA) legislation.

The FSC has also provided research adding to that which refutes the Government’s position that the cost of opt-in would be $11 per client per year and, instead, suggests that when the fee disclosure elements are included, costs will range from between nearly $54 and $98 per client, per year.

In a submission to the Parliamentary Joint Committee reviewing the FOFA bills, the FSC has warned that if the existing legislative timetable remains in place, the financial services industry will have less than six months to implement highly complex and expensive changes.

“On the current drafting of the legislation, the majority of measures within the FOFA package (excluding the provisions relating to life risk insurance) are due to commence from 1 July 2012,” it said. “The FSC is concerned that it is unlikely that the legislation will be passed before the first quarter of 2012. This gives the industry less than

six months to develop and implement complex IT systems, compliance frameworks and monitoring processes, education and training programs to ensure that financial services licensees, employees and advisers are aware of and able to meet their statutory obligations.

“Additionally, the implementation of these reforms will require significant investment and impose costs upon financial services providers of all sizes including small businesses throughout Australia,” the submission said. “These costs should only be incurred once the final form of the legislation and obligations are known.”

The submission pointed to the particular cost of the two-year opt-in, and the results of a survey within which FSC members had indicated that the cost to build the systems (compliance and information technology) to comply with the FOFA opt-in reforms “will range from $1 million – $60 million, depending on the size of the relevant organisation and the nature of their business activities”.

“Ongoing costs range from $10,000 to $9 million, again, depending on the size and relevant nature of their business activities,” it said. “The total implementing and

ongoing costs of the opt-in reform differs significantly, depending on the requirements on the business.”

The submission said that if the information on the Fee Disclosure Statement was summary only and only applied prospectively, the cost of compliance would be 50 per cent (for the client), compared with the alternative that is currently required by the bill tabled by the Government.

It said that based on a survey of representative advice providers, the average cost per client with respect to a Summary Fee Disclosure Statement would be $53.97 (summary fee disclosure) and $97.86 for a retrospective application.

The FSC said it was also important to recognise that the FOFA reforms were being introduced at or around the same time as a number of other significant financial services regulatory changes, including the Basel III reforms, G-20 reforms (financial services and markets regulation), stronger superannuation reforms, consumer credit reforms, banking competition reforms, insurance capital regime changes, tax agent services reforms, and the US foreign account tax compliance law. The FSC suggested a coordinated approach between FOFA and MySuper.

Job outlooks good: Hudson

By Milana Pokrajac DESPITE widespread negative sentiment, employment expectations within the financial services industry remain positive, according to recruitment expert, Hudson.

Hudson’s Employment Expectations report was released days after eFinancialCareers claimed 2012 could be a year of fear for financial services.

However, Hudson predicts a positive year for all industries, with 20 per cent of employers in the financial services and insurance sectors planning to increase their permanent headcount over the next year.

“In the financial services/insurance sector, specialist skills are highly sought after with financial planning, underwriting, mortgage lending, retail banking and sales skills remaining in demand,” said Dean Davidson, national practice director for Hudson – accounting and finance.

“The banking sector is booting employment expectations as they look to increase permanent headcount in retail branches on the back of enhanced customer service offerings,” Davidson said.

Despite a largely positive outlook, employer sentiment has slipped by 5.4 percentage points since the December 2011 quarter.

The most significant drop in financial services/insurance employer sentiment occurred in Victoria, where sentiment slipped 10.7 percentage points over the quarter and 18 percentage points over the year.

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Greencape Wholesale Broadcap Fund S&P/ASX 300 Accumulation Index Outperformance Greencape Wholesale High Conviction Fund S&P/ASX 200 Accumulation Index Outperformance

1 year (%)

2 years (%) p.a.

3 years (%) p.a.

5 years Inception* (%) p.a. (%) p.a.

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–2.42

11.45

2.08

5.20

–10.98

–4.76

7.67

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0.22

1.32

2.34

3.78

4.47

4.98

–8.70

–2.97

9.86

2.79

6.17

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–2.31

0.27

1.84

1.71

2.28

5.10

5.90

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News

MySuper must be considered with FOFA: CSSA

By Chris Kennedy THERE is too much crossover between MySuper legislation and Future of Financial Advice (FOFA) legislation for the two to be considered separately, according to the Corporate Super Specialist Alliance (CSSA).

One area where the two are linked is the insurance service fee. As part of its submission to the Parliamentary Joint Committee on the MySuper bill, the CSSA said the

removal of commissions for group insurances inside superannuation effectively prohibits payments to advisers for the services they provide to employers and their employees.

“Removal of commissions will create an unlevel playing field and could result in advice to a consumer that sees them using a less appropriate insurance solution," the CSSA stated.

The CSSA proposed to allow an insurance

service fee on a "dial-up" basis where insurance services are provided to a MySuper employer group.

The CSSA also said that member accounts should only be transitioned to MySuper accounts with the consent of the member.

The transition should not occur automatically because this could result in changes to investments or insurance coverage.

The CSSA said the intra-fund advice fee needed to be explicit and transparent. It

should be negotiated at the workplace level in response to the amount of services required by the members of the MySuper fund, while personal advice should continue to be paid for by the individual receiving the advice.

The legislation currently states MySuper funds can't be tailored for individual employers making contributions for less than 500 staff, but the CSSA argued that if there must be a limit then 50 is a fairer number.

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DESPITE widespread negative sentiment, employment expectations within the financial services industry remain positive, according to recruitment expert, Hudson.

Hudson's Employment Expectations report was released days after eFinancialCareers claimed 2012 could be a year of fear for financial services.

However, Hudson predicts a positive year for all industries, with 20 per cent of employers in the financial services and insurance sectors planning to increase their permanent headcount over the next year.

"In the financial services/insurance sector, specialist skills are highly sought after, with financial planning, underwriting, mortgage lending, retail banking and sales skills remaining in demand," said Dean Davidson, national practice director for Hudson - accounting and finance.

"The banking sector is booting employment expectations as they look to increase permanent headcount in retail branches on the back of enhanced customer service offerings," Davidson said.

Despite a largely positive outlook, employer sentiment has slipped by 5.4 percentage points since the December 2011 quarter.

The most significant drop in financial services/insurance employer sentiment occurred in Victoria, where sentiment slipped 10.7 percentage points over the quarter and 18 percentage points over the year.

News FOFA will 'decimate' industry, warns AFA

By Mike Taylor PREDICTIONS of significant reductions in the number of financial advisers contained in the Government's Future of Financial Advice (FOFA) bills, combined with the general drift around the legislative package, have served to create anxiety and uncertainty among financial advisers.

That is the assessment of the Association of Financial Advisers (AFA) contained in its submission to the Parliamentary Joint Committee reviewing the FOFA bills.

The AFA submission has also warned that if the reduction of over 40 per cent of financial advisers were to eventuate, it would "decimate" the industry.

"Such an outcome would result in a significant reduction in the number of consumers receiving financial advice, which would have seriously detrimental impacts upon the country as a whole," it said.

The submission said that in addition, the downstream impact of a reduction of 6,800 financial advisers "has a multiplier effect of at least five, given the staff the average practice employs and other related suppliers".

The AFA submission said the FOFA changes had lost direction. This was clearly indicated by the manner in which the changes had drifted away from the original recommendations of the Parliamentary Joint Committee and towards factors such as opt-in, annual fee disclosure and the changes to arrangements on insurance commissions inside superannuation.

The AFA said the Government had also failed to provide an explanation of why the introduction of the FOFA legislation had been split into separate tranches – something which had served to undermine faith in the process.

The submission also claimed that consumers had emerged as the missing piece and the real issue, with the focus of FOFA having become mired in a range of technical issues.

It said the debate needed to be re-centered on the key issues facing consumers: • How do we ensure more people seek financial advice?

•

How do we ensure that the financial advice provided is transparent, robust and in the best interests of the clients?

End FOFA carve-outs, say consumer groups CONSUMER groups including Choice and the Australian Shareholders Association (ASA) have welcomed the Government's Future of Financial Advice (FOFA) bills but argue they need to be made even tougher.

In a joint submission filed with the Parliamentary Joint Committee reviewing the legislation, the consumer groups said they believed changes were needed with respect to best interests and financial advice around basic banking and insurance products, conflicted remuneration, shelf-space fees and asset-based fees.

In particular, the submission has called for the removal of the carve-out for general banking and insurance advice, which it argues lowers the standard of financial advice.

The submission argues the legislation needs to be clarified to ensure it meets its overall objectives.

It cited the particular changes required as being: • The provisions limiting the scope of the best interests obligation when financial advice relates solely to basic banking products or general insurance must be amended. Without amendment the bill will actually set a lower standard of advice than the current law.

• The carve-outs from the definition of 'conflicted remuneration' need to be amended to ensure that consumers actually receive financial advice that is untainted by conflicted remuneration.

• The ban on shelf-space fees to platform operators should be widened to prevent all payments by product issuers that may distort the financial advice given to retail clients. • The ban on asset-based fees should be widened to limit the deleterious effects of such fees for consumers.

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Emerging markets

Although experts predict a good year for emerging markets, some regions – like Europe – should be avoided. However, it is always important to stay ahead of the curve, writes Janine Mace.

EVERYBODY knows the story about emerging market investments – huge natural resources, expanding populations, youthful demographics and strong economic growth.

But just as everyone knows the story, they also know that investing in emerging markets takes a strong stomach prepared to endure the seemingly eternal boom/bust cycle characterising their performance.

It’s a cycle that saw emerging markets boom in 2009, only to slump again in 2011 as investors shunned anything viewed as vaguely risky. The so-called ‘risk-on/risk-off’ pattern saw global fund flows into emerging market equities decline 4.2 per cent in the third quarter of the year after dropping 1.4 per cent in the previous quar ter, according to HSBC’s Fund Managers’ Survey of 13 of the world’s leading investment management houses.

“The survey results are no surprise as there is very high market risk aversion

Key points z

z z

The success of emerging market equities depends largely on the events in Europe.

Investors are turning to Asia for good investment opportunities.

Hot debate about asset alloction.

due to European and US concerns. It is no surprise that quarter-to-quarter managers are changing positions,” explains Geoffrey Pidgeon, head of global investments for HSBC in Australia.

However, the recent fund outflows do not paint the whole picture, with many investors staying positive on emerging markets and particularly China, according to Michael Collins, an investment commentator with Fidelity Australia.

“The world economy is not in great shape, but emerging markets are in quite good shape. They will be affected by a

10 — Money Management January 26, 2012 www.moneymanagement.com.au

recession in Europe, but the past decade of growth has set them up for the next decade of growth,” he explains.

This view is supported by the IMF’s World Economic Outlook September 2011, which predicts emerging and developing markets will grow 6.1 per cent in 2012 (compared to 1.9 per cent for the advanced economies). Collins also notes the IMF is predicting growth of 5 per cent plus for the next five years.

“E m e r g i n g m a r k e t s h a v e a g o o d economic outlook and over time people will gain greater confidence in the performance of their stock markets,” he says.

“The outlook is reasonably optimistic over the next five years and robust over the next 12-18 months, but they will still have challenges.”

Europe remains the problem Although many experts believe the outlook for both emerging market equities and bonds is good, they all caution

this is dependent on what happens in Eu r o p e, a s t h e p e r f o r m a n c e o f these economies remains linked to global growth.

“All the demographic reasons and issues such as developed market debtto-GDP [gross domestic product] being higher and the greater accommodative position of emerging market banks bode well for emerging markets – if there is no global slowdown,” Pidgeon says.

The uncer tainty about Europe is clearly having an impact, he notes. “The market is trading for two different outcomes at the moment. The first is the world economy surprises on the downside and there is a synchronised European recession – which we don’t buy. The second is there is no synchronised global recession and growth starts to improve and there is no recession in Europe. This is the HSBC view.”

The European uncertainty means the performance of the US economy and the approach of the Chinese Government are

Emerging markets Guidelines for emerging market investing According to Lonsec’s Steven Sweeney, there are several ‘rules of thumb’ for advisers when it comes to emerging markets: 1. You definitely need some exposure to emerging markets; 2. Think about specialist emerging market managers; 3. Consider the client’s risk tolerance; 4. Be mindful of the exposure the client has through global equity managers; 5. Consider a broader global emerging market manager, then an Asia ex-Japan mandate manager and finally, for aggressive investors, a single country fund; 6. Consider active management, as emerging market countries have smaller, less efficient markets.

“

Emerging markets remain hostage to European turbulence and China, so they will have a tough six months. However, as medium-term investors, we find pockets of value and continued growth despite the outlook at the moment.

- Geoffrey Pidgeon

”

Sweeney agrees valuations are good.

“The sell-off over the past year presents an opportunity if you can block out the macro and focus on the fundamentals.

Valuations are very attractive at the moment with less than 10 times PE when the long-term average is 13 times. So it can be seen as a great long-term opportunity; however, it could fall further if European concerns continue,” he says.

Cheap valuations aside, many emerging market companies are also attractive investments. “These are good stocks and they are companies that are wor th owning,” Collins notes.

Despite the opportunities, Sweeney believes advisers need to tread carefully.

“It is very difficult to weigh up the risks and returns, but you need to look at the way the global economy is moving and look at which markets you want exposure to over 20-plus years. GEMs [global equity markets] have delivered better returns, but the trade-off is higher volatility,” he says.

To support his point, Sweeney cites the 2011 performance of emerging markets (which were down 18 per cent), compared to developed markets (down 12 per cent). “The rewards are greater, but there will be years where you will feel more pain. If you have the stomach for the volatility, then you should have emerging markets exposure.”

Although this volatility has always been an issue for emerging market investors, the increasing inflow of institutional money is expected to dampen this trend. “As institutional investors now have to have emerging markets exposure in their portfolio for benchmark purposes, we should see less volatility,” Sweeney argues.

Investors are Asia-bound

vital, according to Diane Lin, senior portfolio manager for Pengana Capital’s Asian Equities Fund.

“Europe is the biggest risk and it is unlikely to have strong growth as the governments there are unable to stimulate their economies. If they do not handle things well, we could see a sharp downturn in the first six months. For the whole year, Europe remains likely to experience low growth,” she explains.

“In the US, the economy has overcome the worst problems but we will not see substantial growth. We will see stable, but not strong, growth of around 2 per cent.

“All this leads to China being very important in the whole picture. China is a very export-directed economy, but its biggest markets are likely to experience slow growth, so the role of the Chinese Government is incredibly important.”

Pidgeon agrees, but believes there is much to be positive about. “It is not all bad economic news and the US recession risk seems lower. In China, the fear of a hard landing is overrated and policymakers are reacting positively,” he says.

“A lot of developed markets have an accommodative monetary policy and

when this happens, you typically see emerging markets rebound.”

Catching the upswing The potential for a rapid rebound is a key factor in the current appeal of emerging markets.

Lonsec senior investment analyst Steven Sweeney points to the dramatic movements in these markets when investor sentiment changes. “Emerging market history is that when sentiment is clouded, they are seen as a risk-on investment,” he explains.

“You need to be cautious, but if we see improving global conditions, then sentiment can turn quickly.”

The prospects for global growth are critical to the performance of emerging markets, as most of these economies are closely tied to resources.

“We have seen how they can turn very quickly. While 2008 was disappointing for emerging market investors as capital flowed out quickly, in 2009 Asia was the fastest market to rebound – so you don’t want to be trying to time it,” Sweeney cautions.

“We believe it is prudent to maintain a cautious view on emerging markets at the

moment; however, it is worthwhile maintaining some exposure. But now is not the time for a rapid rise in portfolio exposure.”

Pidgeon believes emerging markets will rebound again this year. “In 2012 we believe we will see double-digit returns in the second half of the year based on a reversal of European concerns and a realisation the market is oversold and developed market concerns are overplayed.”

He believes investors need to consider the fundamentals and look beyond current market concerns.

“Emerging markets remain hostage to European turbulence and China, so they will have a tough six months. However, as medium-term investors, we find pockets of value and continued growth despite the outlook at the moment,” Pidgeon says.

“It is fair bet that in 2012 people will think the worst is over and all the bad news is factored in. That is when money will be made, as emerging markets will rebound.”

Another factor supporting a positive view towards emerging markets is some very attractive valuations. “Emerging market valuations are at a historic low, with forward PEs of 9.5 times, which is a 15 per cent discount to developed markets,” Pidgeon notes.

While China has been the most popular emerging market in recent times, other countries are starting to win admirers.

“Russia, South Korea and Turkey are the most attractive at the moment. South Korea has a 12.5 per cent forward ROE [return on equity] and Turkey’s is 16.2 per cent,” Pidgeon says.

“In Russia we are overweight cyclicals – especially energy. This is our largest overweight relative to benchmark as it has a forward ROE of 17 per cent. Russia usually trades at a discount to other emerging markets, but despite that we believe this discount is too high.”

Collins agrees there are interesting opportunities outside China and is also a fan of South Korea, although he is attracted to some of the Southern Asian nations.

“Within Asia, Indonesia is an interesting case as it has had the best-performing stock market. Indonesia is now a democracy with a local demand-driven economy, not an export-driven economy like China. It has good economic fundamentals and has regular debt rating upgrades versus Europe’s downgrades,” he notes.

Sweeney agrees: “Indonesia can be seen as a strong 10-year story. It is a small component of the index, but it is expected to grow.”

In Lin’s view, several Asian markets are appealing, par ticularly those with Continued on page 12

www.moneymanagement.com.au January 26, 2012 Money Management — 11

Emerging markets Continued from page 11 governments in a position to stimulate their local economy. “You need to look at whether policymakers have room to implement stimulatory policy in their local economy,” she says.

Stock values are also impor tant.

“G enerally we are positive on Asia (particularly China and Japan) due to their valuations, but not so much the ASEAN [Association of Southeast Asian Nations] markets. Indonesia and Malaysia have been good performers, but currently are quite expensive and overvalued, we believe.”

When it comes to the BRIC (Brazil, Russia, India and China) economies, it seems interest is on the wane.

“BRIC was really the flavour of the month five years ago, but there has been a 23 per cent drop in the BRIC index this year,” Sweeney says.

He sees problems with the economies of several BRIC countries. “Russia is tied to the oil price, the rouble is correcting and the political situation is making the outlook cloudy. The BRIC story is really China and India and with that you are getting Asian exposure, but not exposure to emerging Asia, which has the good performers such as Indonesia.”

Enthusiasm for the BRIC theme is also lukewarm over at HSBC. “The BRIC economies have struggled in 2011 due to fears about growth slowing and concerns

“

I believe emerging markets have a great longterm outlook and that will not be torpedoed by what happens in Europe.

- Michael Collins

”

about high inflation,” Pidgeon says.

“We are underweight Brazil and India due to their expensive valuations and the uncertainties due to the high and stubborn inflation in India.”

Essential part of the portfolio Although there is debate over the most attractive emerging markets and whether now is the right time to take advantage of cheap valuations, one point is not in contention – whether these assets belong in an Australian investor’s portfolio.

“Most people should have an allocation to emerging markets to take advantage of the long-term growth story and this has not changed despite the recent declines,” Pidgeon argues.

“Emerging markets to us represent

great value and advisers should be looking to the medium-term and be including them in the asset allocation.”

Collins agrees: “ With emerging markets it is well worth including some exposure in a diversified portfolio.”

According to Sweeney, this debate is finished among institutional investors, and the retail market is only now catching up. “There is good institutional interest, but retail is trailing that trend. Most institutional investors have a 5-10 per cent asset allocation, while for retail investors it is less than 5 per cent. As institutional investment increases, it becomes more compelling for retail to keep up,” he explains.

Pidgeon believes retail investors need to make a meaningful allocation to gain

exposure to the growth potential of these countries. “We believe 15-25 per cent of the total global equities basket should be in emerging markets, which leads to 5-10 per cent of the total allocation.”

According to Sweeney, the right allocation depends on the par ticular investor and their other investments.

“Lonsec believes you need to have some exposure to emerging markets (10-20 per cent of the global equities allocation), but investors need to be aware that they may already have exposure through their global managers, so they need to check the investment mandate.”

Collins believes the right allocation depends on the risk tolerance of the individual investor. “I believe emerging markets have a great long-term outlook and that will not be torpedoed by what happens in Europe. These economies have enough local demand to drive longterm growth.”

He points out emerging markets produce 40 per cent of the world’s exports, but currently represent less than 15 per cent of the world’s market cap.

“This will only increase, so you need to get in ahead of that, as that is where you make money – being ahead of the curve.”

In the future, Sweeney expects emerging market investments to become mainstream, with the action shifting further afield. “Frontier markets may be the thing when you want to add some spice to the portfolio,” he predicts.

MM

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12 — Money Management January 26, 2012 www.moneymanagement.com.au

Emerging markets

Anabolic markets Investors should probably keep changes in the Chinese economy in mind, despite its incredible growth over the years, Janine Mace reports.

WHEN it comes to emerging markets, investors the world over have been fixated by the stunning growth in the Chinese economy, and this has fuelled the expansion of many other economies.

Australia in particular, has been a beneficiary, and this has translated into good performances by many local stocks.

However, the key question for Australian investors now is what the future holds for the Chinese economy and what this means for both emerging markets and Australian equity investments.

According to Pengana Capital, emerging market investors will need to take more care with their stock selection in the future, with many Australian stocks also likely to face a tougher time going forward.

“Over the next three years the structural shifts in China will be very important,” explains Diane Lin, senior portfolio manager for Pengana’s Asian Equities Fund.

“In the past decade, growth has been driven by capital investment, exports, housing and infrastructure. However, this is changing and has now shifted to the domestic economy and new industries.

These changes in China are not necessarily good for Australia.”

Lin points out the Chinese Government’s 12th Five-Year Plan for 2011-15 has reinforced its target to restructure the economy from a manufacturing to a service-driven emphasis. In 2012, the Government will implement an aggressive fiscal policy designed to encourage development of a service industry in China. This includes new tax benefits designed to encourage entrepreneurship and small businesses in the service industry.

“We believe the development of the service industry will help China grow its economy without over-reliance on natural resources and energy,” Lin says.

She believes it is important for emerging market investors seeking to capture the growth potential of China to keep this restructuring in mind when selecting investment funds.

“Now the key word is diversification and how much of the mining, financials and service sectors you have exposure to. The service sectors are going to be more important going forward, and we believe this will be increasingly recognised in 2012 as we see the result of the policy shifts in China. These will reduce demand for building materials and this will eventually be reflected in company earnings,” Lin says.

“We expect small and mid-cap companies – typically from the new industries such as retailing, IT services and industrials – to outperform large caps, which are more prevalent in the old industries such as banking, property, building materials and coal.”

This means advisers will need to carefully select their investment benchmark and emerging market fund to ensure they gain

exposure to service industries, rather than the traditional sectors of the Chinese economy.

Lonsec senior investment analyst, Steven Sweeney, agrees investors need to keep the changes in the Chinese economy in mind when investing – both in emerging markets and local equities.

“Australian equities have done very well over the long-term and can be seen as almost an emerging market, as the index is dominated by resources. However, as emerging Asia becomes more consumerdriven, performance will shift away from being resources-driven,” he says.

“Investors definitely need both Australian equities and emerging markets, and over time they need to increase their exposure to emerging markets. We have had a great run in Australian equities, but the future performance may be different.”

Lin agrees times are changing: “Going forward, the Australian market’s concentration on the mining industry will be less beneficial.”

off and the Government appears to be engineering a soft landing, so managers have gone back to a neutral weighting as valuations are attractive.”

He believes a key point for investors to remember is that “GDP growth in Asia – and especially in China – is not necessarily reflected in sharemarket performance”.

Despite the concerns, Chinese investments retain their fans.

HSBC head of global investments in Australia, Geoffrey Pidgeon is positive.

“China will have a challenging six months, but valuations are good,” he says.

According to HSBC data, the Chinese market is currently trading on about eight times 2012 earnings, making it an attractive prospect.

Fidelity Australia investment commentator, Michael Collins, agrees the outlook is good, particularly given the level of government support.

“China has some problems, as local authorities are pushing for reflation versus the central authority wanting to slow, but the outlook is sound and the opportunities are enormous,” he notes.

“It has a good outlook, with growth for the next few years expected to be in the high single digits. This will come down in time as it rebalances to domestic demand, but it will still be good.”

Collins believes another factor for investors to consider is that most Chinabased investment funds are largely centred on Hong Kong companies – many of which have been hit by the uncertainty over European debt. “However, they have great potential to bounce back when concerns over Europe dissipate,” he says.

MM

Now the key word is “diversification and how much of the mining, financials and service sectors you have exposure to.

- Diane Lin

”

This means looking to sectors of the equity market outside resources. “Investing in Asian equities with a tilt towards structurally growing industries that Australian equities do not provide exposure to – such as IT, healthcare and consumer – is essential for Australian investors,” she says.

“A lot of Australian investors have not recognised the impact of these changes [in China] as they have not happened yet.”

Landing: soft or hard?

While shifts in the Chinese economy are important in the medium-term, over the next few months questions about the appeal of Chinese stocks turn more on whether the economy is in for a soft or hard landing.

Lin believes the Chinese Government has considerable room to loosen its monetary policy and stimulate domestic demand. “In terms of fiscal policy, China is taking a very different approach to developed markets through structural tax change,” she says.

“China is almost going in the opposite direction to the Western world, and this means there is a good investment environment for emerging market equities.”

Sweeney remains cautious: “Asian managers have been bearish on China for 18 months to two years. However, this could be changing as Chinese inflation is coming www.moneymanagement.com.au January 26, 2012 Money Management — 13

OpinionInsurance Get with the times

Many definitions within life insurance have been subject to drastic changes as time rolled past. However, Col Fullagar notes income-protection cover definition is one of the most outdated.

W

hen it comes to risk insurance, great attention is paid both by insurers and advisers to the various core definitions that exist within the contract.

This attention is well warranted because it is these definitions that play such a significant part in establishing benefit eligibility: for example, the definitions of the various trauma insured events, total and permanent disability and total and partial disability are vital to whether or not a benefit is paid and how much is paid.

Advisers who are involved with risk insurance will be well aware of the dramatic changes these and other definitions have undergone in the past and continue to undergo.

There is one definition, however, that has, for many years, largely slipped under the radar, which is surprising when its impact is considered.

Whilst of lesser relevance for the other risk insurance types, this definition is at the very heart of income protection insurance: - Dictating what can be insured at the time of application; - Dictating what can be paid under indemnity contracts; - Proof of which is required on virtually all claims; and - Anecdotally, has been the focus of more disputes, legal and otherwise, over the years than any other aspect of this type of insurance.

The definition is of course that of earnings or income and its subsequent

manifestation as pre and post-disability earnings.

A review of a policy issued in the 1980s found the following definition applied: “If you own any portion of a business or professional practice, ‘monthly earnings’ means income earned by that business or practice due to your personal activities, less your share of business expenses which are necessarily incurred in earning that income.

“From any other source of employment ‘monthly earnings’ means your salary, fees, commissions and bonuses and any other income earned for services performed.” (Source: Associated National Life, Income Reserve Plan.)

A policy available at the time this article was written has the following definition: “If you are self-employed, a working director or partner in a partnership, your monthly income is the monthly income generated by the business or practice directly due to your personal exertion or activities excluding superannuation contributions, less your monthly share of business expenses.

“If you are not self-employed, a working director or partner in a partnership, your monthly income is the total monthly value of remuneration paid by your employer including salary, fees, commission, bonuses, regular overtime and fringe benefits, excluding superannuation contributions.” (Source: CommInsure, Income Care Plus.)

Unlike other aspects of income protection insurance, the above indicatively shows that the definition of ‘earnings’ has

14 — Money Management January 26, 2012 www.moneymanagement.com.au

not altered materially over the years in that it was, and still is, linked to the employment status of the life insured.

In turn, the employment status of the life insured tends to be linked to a crude criterion: ie, whether the life insured does or does not have any direct or indirect ownership of the business.

In much the same way that Henry Ford said about his Model T in 1906, “You can have any colour provided it’s black”, insurers still only offer the choice of two employment status options – employed or self-employed.

It would seem, however, that life is not as black and white as Ford or the insurers would like, particularly when the reality of employment and remuneration are considered.

The range and conjugations of variations is vast, for example: (i) Simplistically, people can either be employed or unemployed; (ii) Those who are unemployed or employed without the intention of being remunerated, ie, non-gainful employment, theoretically do not require nor can they obtain income protection insurance. (iii) Those who are employed can be employed in one or more than one of a variety of different ways: - As an employee; - As a contractor; - Self-employed; or - As the owner or part-owner of a corporation. (iv) Employment can be full-time, parttime, casual or seasonal; (v) People may have one or more than

one ‘employment’, which may be on the same or a different basis; (vi) Irrespective of the basis of employment, in general terms those who are employed may: - Have no financial interest in the employing entity; - Have a private financial interest in the employing entity, ie, own shares not publicly listed; - Have a public financial interest in the employing entity, ie, own publicly listed shares; or - Be a separate legal entity to the employing entity or the same legal entity. (vii) An employed person may receive remuneration by way of one, or more than one, of the following: - Wages; - Salary; - A retainer fee while working on a commission basis; - Commission; - Fees; - Tips; - Payment in kind; - Superannuation; - Performance bonus; - Share distributions and option entitlements; - Fringe benefits; - Profit share; - Overtime; - Loadings; - Allowances; - Increase in goodwill; - Cash; and - Tax minimisation, for example, income splitting.

(viii) Remuneration can be received immediately, received in advance or deferred.

No doubt there are other variations in addition to the above, but the point is that the range of variables when it comes to employment and earnings is clearly considerable, which means that the forcing of these into two categories of employed and self-employed on the basis of business ownership has the potential to complicate and confuse the advice and underwriting process.

Because there is a relatively lower level of scrutiny by insurers at the time of application, it may be that everything appears to be OK. The reality could in fact be that problems exist but they are deferred, with well-intentioned advice foundering at the time of claim.

The likelihood of claims complications also increases if the insurer wants to apply what is often an arbitrary restriction: ie, the basis of calculating earnings at the time of claim must be consistent with that which applied at the time of application.

While this may sound fair, it is not necessarily the case because: - The basis of employment and earnings may alter between the date the policy starts and the claim starts, particularly if the policy has been in force for a number of years; - The basis of earnings may alter between the date the claim starts and later in the claim; and - The manner of treating a particular type of earnings may alter simply because a claim occurs. The most topical example of this is adviser renewal commission, which contractually alters from generated to non-generated when the adviser is totally disabled.

And at the risk of complicating things even further, it is also possible the insurer would not seek to enforce the need for consistency, if by doing so they disadvantaged their own position.

There may be a temptation to brush this off as earnings being the poor second

cousin of the client’s medical condition when it comes to claims’ critical issues. A review of several case studies might help provide perspective.

Case study 1 Ron is the 50 per cent shareholder, managing director and sole revenue generator of a private company employing two other people.

In this situation, the claims assessor would look to identify ‘the income of the business or practice generated by the personal efforts of (Ron) after the deduction of (his) appropriate share of business or practice expenses in generating that income’.

In the above situation, the current time-tested approach may be practical and appropriate.

The position, however, might be viewed quite differently if Ron’s company had a larger number of employees – for example, 20 – and there was also more than one revenue generator.

In this situation, trying to identify the income of the business generated by Ron and his share of the business expenses may be all but impossible if the current approach was used.

Case study 2 Brian purchases a start-up franchise. The franchisee recognises that it will take time for the business to reach profitability, so it makes provision within the remuneration arrangement for Brian to receive a modest retainer so that he can support his lifestyle.

The franchisee also requires that Brian has income protection insurance.

He applies and is granted an indemnity contract due to the start-up nature of the business.

Five sales staff are hired and the doors are opened.

Nine months later Brian is disabled in a car accident. Whilst considerable and steady progress has been made, the business is still not trading at a profit: ie,

revenue less expenses is negative.

Under his indemnity income protection insurance policy no benefit entitlement would exist, even though Brian was basing his lifestyle on the retainer he draws and he appropriately was looking to have that lifestyle protected.

Case study 3 Jessica runs a successful small business which employs her husband as a means of minimising tax.

Jessica is totally disabled for a period of time but then returns to work part-time.

She reads her income protection insurance policy and realises that if she reduces the earnings she receives by transferring most of them into her husband’s name and classifying them as expenses, she can increase the partial disability payments to her.

Thus, even though Jessica’s business is only suffering a 40 per cent drop in profits, she is able to receive a partial benefit at a rate considerably higher than that.

In case study 3, it is the insurer that is being disadvantaged, and while some may say “Good on you Jessica”, this is not the point. Insurance should be about equity, and inflated benefit payments will eventually lead to higher premiums being charged.

It is clear there are potential issues associated with the current definition of earnings, with those issues also potentially impacting the insured, insurers and advisers.

Whilst it may be frustrating for some to read an article that purports to identify a problem without proposing a solution, there remains merit in proposing some actions that can be taken: - Insurance applications might be designed such that a more accurate reflection of the client’s financial position can be presented; - Underwriting guidelines might be reviewed to ensure the insured have access to appropriate protection;

- If the current basis of defining earnings within income protection insurance policies is outdated, insurers could be encouraged to look at alternatives; and - Claims management protocols and particularly claim forms, both initial and ongoing, may need to better appreciate the true financial position, rather than simply forcing claimants into employed/self-employed boxes.

The reality is that the difficulty of balancing contractual certainty, flexibility and equity means that arriving at and agreeing on a way forward will not necessarily be easy.

For advisers The more important reality is, however, that advice and protection must go on.

Thus, even if none of the above changes occur, advisers can still ensure that: - Fact finds and advice documents facilitate the obtaining of a clear picture in regards to the client’s earnings, such that appropriate advice can be provided; - Field underwriting skills can clearly represent the actual position of the client so as to facilitate an optimal assessment by the insurer; - Regular reviews will ensure that any material changes in a client’s financial situation are identified at an early date; and - Assistance is provided at the time of a claim so that any misunderstandings or over-simplifications are avoided, s u c h t h a t t h e a p p ro p r i a t e b e n e f i t payment is made.

A client left to their own devices can easily be inadvertently caught up in a case study situation.

A core component of the value of advice is that advisers are forewarned and therefore forearmed. Having access to this professional financial advice will unquestionably mitigate the risk of clients being short-changed by their earnings.

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

www.moneymanagement.com.au January 26, 2012 Money Management — 15

OpinionScaled advice

The game changer Scaled advice will be the driving force for member engagement in 2012, writes Jye Tucker.

A

s an industr y, we want Australians to take more interest in their retirement savings.

Yet it seems that despite our best efforts, the population’s apathy is a tough nut to crack. Every major fund has teams dedicated to educating and informing members, and many funds already provide great online member tools and resources.

So why aren’t more Australians getting involved with their super earlier in life, when they have more power to improve their retirement?

The answer lies within basic human psychology. We prefer immediate gains over long-term benefits – even if longterm benefits are greater. Although most people know that contributing to super is a good thing for the long-term, we haven’t provided enough short-term feedback to make retirement saving activities interactive and immediately rewarding. The result is most Australians don’t become active with their super until their retirement truly becomes immediate – which is unfortunately when they have minimal power to influence their future lifestyle.

But every now and then, the rules of the game change. Scaled advice and its accompanying technology have given us the tools to make super advice free and personal, and to provide instant gratification around strategy benefits.

We can now use technology to show people what kind of lifestyle they can expect in retirement, which gives them a basis for comparison to their lifestyle today. The combination of financial advice and its supporting technology allows better engagement with members and immediate feedback on the activi-

ties they do today.

To do this, we can use technology to change member engagement in three key ways.

Replace general education with personalised projections Historically, it has been impossible to give hundreds of thousands of members personal reasons to engage with their super. The industry has instead sent members statements and communications that attempt to educate them generally on superannuation, tax law and investment strategy, hoping they make a connection between these complex rules and a nebulous financial gain that is many years away.

Now, we can motivate members by giving them immediate quantifiable feedback on how a strategy will benefit them personally. Instead of telling them why super is a “good investment,” we can tell them how much they need to contribute each fortnight to achieve a comfortable retirement lifestyle through their life expectancy. Also, we can tell them what kind of lifestyle they can expect if they take no action. Then, they can make an informed decision as to whether that fortnightly sacrifice is worth it.

We can tell a 35 year-old that contributing just $150 per fortnight could give her a comfortable retirement lifestyle through to age 89 rather than a dependence on the Age Pension starting at age 75. We can tell a 55 year-old that a transition-to-retirement strategy could net him an extra $10,000 per year through to age 86 at no cost except the time it takes to fill out a few forms.

Make scaled advice tools accessible to members No fund is geared to support phone consultations with every one of its members. If we want to reach them all, we have to make the first move with technology.

As the current working population ages, the expectation for self-service online tools will continue to increase. If a member can log on and run ‘what-if ’ scenarios, they are more likely to pursue the strategy. Members who wish to pursue a simple strategy should be able to implement it online. Members whose situations are more complex should be led to a financial adviser or call centre team.

Give members instant gratification When a member implements a strategy such as consolidating funds or contributing more to super, scaled advice technology can now give them immediate positive feedback. We now have the tools to give each member an interactive living retirement plan to show them how they are tracking compared to their desired retirement lifestyle.

For example, if they implement a strategy that gets them an expected retirement income of 75 per cent of their current income, we can tell them that they are likely to have a disposable income similar to what they had whilst working. If they implement a strategy to get an expected retirement income at the ASFA-comfortable level, then we can tell them that they should be able to enjoy a broad range of activities in retirement. A comparison of lifestyles is much more tangible than a balance or income projection – it allows them to translate their dollars to their future happiness.

When each member can see, in terms of lifestyle, how much a strategy could help them, they have sufficient information to decide whether a strategy is worth it. A lifestyle is something everyone has now, and most of us want to either keep it the same or improve it. By showing members how their actions today can translate to tomorrow’s lifestyle, we give them the motivation to contribute more to super earlier in life, take advantage of transition to retirement as soon as they reach preservation age, or think twice about taking their entire super as a lump sum.

The impact of sensationalist headlines around market downturns will be softened if we can effectively communicate how little impact they have on each member’s retirement lifestyle. Technology now allows us to give working Australians the information they need to make informed decisions about their super, no matter what their age.

In the 1990s, the internet created new ways to interact with members and drove the super industry to provide online access. In 2012, maturing scaled advice technology lets us deliver personal motivation to millions. Instead of trying to make financial experts out of the entire working population, let’s give each of them a personal incentive to interact with their super now.

Jye Tucker is a director of Provisio Technologies.

www.moneymanagement.com.au January 26, 2012 Money Management — 17

OpinionPractice

Living with lawyers Financial planning practices often need to use the services of legal professionals. Samantha Hills gives tips on how to find lawyers and work with them to achieve the best results.

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ooner or later, in your financial advice or credit business, you will need the help of lawyers. Despite the litany of jokes about lawyers (not many of them flattering), lawyers can be quite useful to you. They can do a range of tasks – from drafting your financial services guide (FSG) to preparing a contract between you and your marketing firm. In fact, legislation dictates that some services can only be provided by lawyers and not by other consultants. So what can you expect when you deal with lawyers, what is negotiable, how do you keep costs down and how do you achieve the best results?

Finding a firm The first thing to do is to find a firm of lawyers experienced in dealing with the financial services industry. You could do this by: • Getting a referral from someone else in the industry; • Asking for a referral from your local law society – for example, the Law Institute of Victoria; • Using web searches; • Asking people in your organisation if they have dealt with particular firms in their previous employment.

The right firm of lawyers can be a one-

stop shop for a range of tasks, in some cases saving you separate calls to your accountants and compliance service providers.

Depending on the firm of lawyers, they might be able to: • Respond to everyday Australian Financial Services Licence (AFSL) and credit compliance questions – for example, “Can my credit guide and FSG be combined in one document?”; • Draft or review disclosure documents or templates – for example, your Statement of Advice templates; • Draft or review contracts between you and your service providers – for example, between you and your website designer; • Respond to your queries about employment law – for example, “What is my employee’s entitlement to the discretionary bonus mentioned in their employment contract?”; • Work with you to protect your brand – for example, by registering trademarks; • Help you resolve disputes – for example, by negotiations with the other party without going as far as court; • Help you with your lease – for example, by advising on its terms and negotiating with the landlord; • Assist you with the sale or purchase of your business – for example, by preparing contracts.

18 — Money Management January 26, 2012 www.moneymanagement.com.au

Costs

are opportunities “forThere you to save the law firm’s time and, accordingly, your organisation’s money.

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Before you obtain any services from a lawyer, you need to know how they charge. Most lawyers charge based on the time they take to complete tasks. Typically, they quote an hourly rate. This rate is generally based on the particular lawyer’s skills and experience.

Typically, although an hourly rate is quoted, the time is actually measured in six minute units. Usually, part of one unit spent on a task (say, three minutes) is still charged as though it were a full unit. So, for example, if your lawyer spends 15 minutes on one task, this will be charged as three units of work.

In cases where lawyers charge hourly rates, you should seek an estimate of the cost of any task before you instruct them to start. In some cases, this is difficult. For example, if you wish to consult your lawyers on an ongoing basis with basic compliance questions it will be difficult to predict the costs in advance. In this case, you might ask your lawyer to notify you when the costs for a particular month have reached a certain threshold. Alternatively, you can keep your own records of the time spent in consultation with the lawyer.

You are not a prisoner to the hourly rate.

Many firms will be happy instead to negotiate a set ‘project fee’ with you for a task or

these disclosures to you anyway. Whether or not they do, you can expect that a good firm of lawyers will carefully set out the terms of their engagement with you in writing. You may be asked to sign a copy of the terms as evidence you agree to them, or you may be told that by continuing to engage the firm you are effectively agreeing to the terms.

When you have appointed a law firm and have an idea of the costs you will be paying, you can go ahead and instruct the firm.

Instructing lawyers

need not be a necessary evil.

“LetLawyers them be an opportunity. ”

to cap their costs for a particular project.

This might work well for something like the preparation of a licence variation application. Again, this needs to be discussed in advance of instructing lawyers to start a task for you.

Never be shy to talk costs with a lawyer.

For example, many lawyers will provide the first meeting with you (which may include some legal advice) for free, but some will charge for this. Others will charge for their time at the first meeting after the expiration of, say, an hour. Ask up front what your lawyer is charging you.

Conflicts of interest If you are looking for lawyers to assist you with a project that involves another party, it may be useful to disclose the name of the other party early on. Lawyers have strict obligations concerning conflicts of interest. If you are looking at entering into an agreement to become an authorised representative of ABC licensee, a lawyer will generally not be able to act for you if they already do work for that licensee. This is because they have a duty to act in their client’s best interests and this is a little difficult if you have two clients with interests which directly conflict with one another.

Potential conflicts of interest can often be adequately managed in large firms where

separate teams and “Chinese walls” exist.

In smaller firms, the only option may be for the firm to tell you they can’t help you on this matter. It is useful to have this discussion early rather than get a long way into discussions with the firm only to find out that they have a conflict of interest and can’t help you after all.

Disclosures and terms of engagement As an AFS or credit licensee, you know all about disclosure documents. Instead of an FSG or a credit guide, a law firm must generally give a new client a document containing various pieces of information, including: • The basis on which costs will be calculated; • The client’s right to negotiate a costs agreement with the firm; • The client’s right to request an itemised bill (a bill showing each individual item or time entry contributing to the total); • An estimate of costs; • Various pieces of information relating to litigation matters; • How the client can make a complaint.

The catch is that there are certain situations in which a firm does not have to provide these disclosures. One of them is where the client is an AFS licensee.

Nevertheless, many firms will make

There are opportunities for you to save the law firm’s time and, accordingly, your organisation’s money, if you brief your lawyers well. You can also ensure that you receive the kind of outcomes you are after.

Some useful tips are: 1. Set out the scope of the task. You will be familiar with this from the daily activities of the advisers in your own practice.

Are you asking, for example, for a review of your entire Statement of Advice template, or just the disclosure section?

2. If you are seeking advice on a matter, distil your request into specific questions.

For example, you might feel confused about the new credit guide requirements.

But what is it you really want to know?

Formulate a question and make it to the point – for example, “When do I need to a give a credit guide to a client?”.

3. If you are asking your lawyers to prepare a document for you, give them quality information. For example, if you are asking them to prepare a FSG for you, tell them all the things you think could possibly require disclosure – your relationships with product issuers, any payment arrangements, any other benefits you receive. If you are asking your lawyers to prepare a submission for you in relation to an Australian Securities and Investments Commission (ASIC) consultation paper, make sure the points you ask them to raise relate specifically to areas on which ASIC has invited feedback in the paper itself. If you don’t, you will incur additional time on the part of your lawyers and detract from a good end result.

4. Tell your lawyers what you are hoping for commercially. For example, do you want to know whether the law is open to interpretation in this area so you can choose whether to ‘push the boundaries’ a little compliance-wise? Or would you rather that your lawyers take a clear position so that you can easily decide what to do next? Either way, remember that you cannot instruct your lawyers to provide you with the particular answer you want.

Do you want your lawyers to tell you, in practical terms, what you need to do next?

Say so.

If you are asking your lawyers to review a document, do you want them to use ‘track changes’ and ‘comments’ in the document itself, or would you prefer a letter of advice letting you know what changes should be made?

5. Share your knowledge of the law.

This avoids the risk of your lawyers charging you to tell you something you already know. It is also really useful if you are briefing your lawyers in an area in

which they have limited experience but you have a little knowledge yourself. For example, your organisation might have been relying on a particular ASIC Class Order for relief. If this is relevant to the task, tell your lawyers the number and nature of the Class Order. By way of another example, you might have a query that relates to cold calling. If you know a little about the Do Not Call Register requirements and you suspect that your lawyers are not so familiar with them, share what you know. Even though your lawyer will double-check what they are told, this will still save them time.

Retaining the value When your lawyers have reviewed and amended documents for you, keep good track of version numbers and dates at your end. Your lawyers should be doing the same at their end. If you don’t, you risk using outdated versions in your business and losing the value of having the lawyers’ input in the first place. This is particularly important with things like your compliance manual which aren’t often read cover to cover, but which are generally subject to detailed scrutiny when you have a licensee review.

Communication Communication plays an important role in your relationship with your lawyers.

Many lawyers prefer email and letters as a form of communication but you are entitled to pick up the phone and call them.

Verbal discussion is often the best way for you to explain exactly what you want from your lawyers. It can also help you get more precise and practical answers. On the other hand, don’t be surprised if your lawyer tells you they have to go away and think about the issues, or research them, and prepare a written response. Some areas of law are complex or uncertain so that the only way to arrive at an answer is for your lawyer to follow the law through many twists and turns and document each one as they go.

Although this may result in a lengthy letter of advice to you, there may still be value in you having a quick chat with them when they have reached their conclusion.

Legal professional privilege Most of your communications with your lawyers will be confidential because of the nature of your relationship with your lawyers. More importantly, many of your communications will be protected by legal professional privilege. This means that communications with your lawyers made for the dominant purpose of you receiving legal advice (including the advice itself) or in anticipation of litigation are given special protection. Not only can they not be disclosed to third parties without your consent, but if a third party gets hold of them, they cannot be used in proceedings against you.

When you find the right lawyers and deal with them effectively, they can help your business both manage risk and grow.

Lawyers need not be a necessary evil. Let them be an opportunity.

Samantha Hills is a lawyer at Holley Nethercote Commercial Lawyers.

www.moneymanagement.com.au January 26, 2012 Money Management — 19

OpinionFixed income Fixed income versus annuities and funds Elizabeth Moran makes a comparison between direct fixed income investment and annuities, and then with funds.

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his article will provide a brief comparison of direct fixed income with the provision of an annuity from an annuity provider, which focuses on the following areas of comparison: return, risk, diversification, liquidity, flexibility, and ongoing fees. The article will then compare two formats for holding fixed income – direct ownership compared with ownership through a fund. Here, the following areas of comparison are made: fees, diversification, liquidity, and other issues.

Direct fixed income versus annuities In general, the benefits of direct fixed income can be summarised in the following brief comparison:

would have a variety of issuers, not just one as supplied by the annuity provider.

Also, investors can choose which sectors they prefer and how many issuers constitute their portfolio.

Liquidity A direct bond portfolio is comprised of relatively actively traded bonds, where large institutional investors trade on a regular basis, so that liquidity is possible in most cases – although liquidity varies with market conditions. While liquidity may be available in various formats from the annuity provider, it is usually costly, with exact details of these costs hard to obtain in most cases.

swap curve. In other words, the annuity provider keeps roughly half the investment return, so as to fund regulatory costs, management costs, and advertising budgets. In comparison, the direct portfolio has no ongoing fees and is better aligned to the direct investment needs of the self-managed super fund (SMSF) sector.

In other words, the direct portfolio has higher return, higher credit quality, and a range of other benefits that give control back to the investor, while costing the investor much less. Direct portfolios can, therefore, compete well with annuity providers, and further investigation is well worth the time.

Direct fixed income versus funds Return Annuity providers offer retur ns of around swap plus 100 basis points (bps).

However, it is difficult to estimate exact pricing as annuity pricing is not publically available. In contrast, one can easily derive pricing information on direct bonds. Currently, direct bond portfolios can generate over 200 bps to swap. Typically, the direct bond portfolio should yield at least 100 bps more than an annuity.

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Direct ownership allows a degree of investment tailoring which cannot be provided through the use of managed funds.

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Risk The direct bond portfolio is also likely to have a higher weighted average credit rating than the securities purchased by the annuity provider (assuming most of the securities in an annuity portfolio are in the BBB range). In terms of an annuity, the single provider guarantees the investor repayment. By contrast, the direct bond portfolio has a variety of issuer exposures, and each issuer is responsible for meeting interest and capital repayments. In other words, it is logical, from a risk perspective, to expect that one would prefer to receive a variety of issuer guarantees from a diverse range of companies, as opposed to relying on one company for the annuity payment.

Flexibility Direct portfolios offer complete flexibility to change the portfolio at any time, since the underlying securities can be traded if risk preferences change, or if changes to the term of the portfolio are required. While variation to an annuity is possible, the variation comes at a cost which can be higher than the costs of trading a direct portfolio, although details of exact annuity charges are difficult to obtain in most cases.

Diversification Allied with considerations of risk is the consideration of diversification. Investing in annuities exposes an investor to the strength of the company, and that company alone. A direct investor enjoys direct control of their portfolio, which

Ongoing fees While the annuity provider pays fees to ‘up-front’ distributors, some ongoing fees apply. In addition, the annuity provider keeps the difference between the investment portfolio of around 200bps and the payout level, or around 100 bps over the

20 — Money Management January 26, 2012 www.moneymanagement.com.au

Direct ownership, in many ways, provides a much better way to access bonds when compared to managed funds. Direct ownership allows a degree of investment tailoring which cannot be provided through the use of managed funds. Since bonds have very different correlation characteristics to equities and are typically, although not universally, of high credit quality, the case for direct ownership remains compelling. Key advantages of direct ownership include: Fees Both direct ownership and managed funds incur bid/offer spread fees taken by the broker on the purchase or sale of a bond. The fees vary according to credit quality, liquidity and parcel size. High quality credit will have a low bid/offer spread, while low credit quality will have a higher bid/offer spread.

In the case of a fund, or unit trust, these bid/offer spreads effectively translate to what is known as an ‘in-out’ spread or a transaction spread. A unit trust with a government benchmark will have a lower in-out spread than a unit trust that has a low credit quality corporate benchmark.

Also, the higher the alpha target or the amount targeted above the benchmark, the higher the in-out spread. These transaction costs are common to both managed funds and to direct ownership of fixed income.

Direct bond owners pay no ongoing management fees, while funds have fees that can be substantial. Funds with either lower quality benchmarks, or higher alpha targets, or both, will have higher manage-

ment fees. In a low return environment, management fees are important, and fees of more than 50 bps might represent roughly 10 per cent of return if the bonds earn roughly 5 per cent per year.

Diversification Diversification in investment management refers to reducing risk through selecting a diversity of assets. Typically, diversification is applied to assets that are higher risk, such as equities, or those securities with perpetual dividends streams. These assets are also highly volatile, while debt is much less volatile.

If equities are less than perfectly correlated, which they typically are, then the ‘diversified’ portfolio will have less risk than the weighted average risk of its constituent assets.

On the other hand, where securities are more correlated the issue of diversification really becomes important when the credit quality of the issuer is low, and when the issuer is not regulated by institutions such as the Australian Prudential Regulation Authority. In other words, the issue of diversification is much less important in the case of fixed income when compared with equities, since the debt holder is typically in a far superior position on a bankruptcy (when compared with an equity holder) and the credit quality of the vast majority of fixed income securities is sound.

In many cases, ongoing fund management fees may outweigh the benefits of diversification. In addition, adequate credit research, as provided by FIIG Securities,

Figure 2

Figure 1 Investment Size $1,000,000 $500,000 $250,000

Historical 2 bonds 1 bond 0 - not available

Now Up to 20 bonds Up to 10 bonds Up to 5 bonds

Limited flexibility Unknown income stream Index-based Underlying liquidity issues No defined maturity No control

Managed Fund

Source: FIIG Securities

can really assist investors in the areas where diversification is relevant, since some risk needs to be taken to obtain return.

The arguments for diversification really become relevant in a limited number of cases where investors have no guidance on credit and are at the riskier end of the credit spectrum, especially below investment grade. Moreover, the ability to break down bonds into smaller parcels effectively solves most of the diversification problem for many investors. Historically, bonds were only available in $500,000 face value parcels (see Figure 1).

Liquidity The liquidity of most investment-grade Australian direct bonds is excellent. In the case of the credit sub-component, the liquidity of individual securities varies greatly, and is more than adequate in most cases, as these securities are investment grade and are actively traded between competing institutional fund managers on a daily basis.

By way of contrast, there is no active secondary market in the units of a fund.

Also, it needs to be emphasised that funds access the same liquidity as the direct bond holder, although the direct bond

holder knows what security is held, while a unit holder in a fixed income fund does not know what underlying instruments are held.

In some cases, the investment mandate may have permitted the purchase of illiquid, or sub-investment grade debt, which will cause liquidity issues for the fund in a time of stress. In other words, liquidity in credit is not an issue in the majority of cases in the Australian fixed income market, and the liquidity of the security can be carefully calibrated in the case of a direct bond, while the unit holder in a fixed income fund loses control over liquidity.

As liquidity falls, investors are typically rewarded with extra yield in the form of an illiquidity premium, yet the direct holder has control over what he buys and sells, while the fund investors do not. Some inflation-linked securities, such as the semigovernments, the major banks, and other issuers reflect this premium. In other words, rewards for liquidity are apparent, and direct ownership can assist with the effective targeting of these premiums, with a fully transparent approach.

While liquidity is generally thought to be higher in a managed fund, the reality is there is no liquidity advantage in the under-

Source: FIIG Securities

lying fund when compared to the direct investment. Moreover, the mixture of asset types in managed funds can impede liquidity in the case of a crisis situation, where the manager can only liquidate certain parts of the portfolios and not others, leading to fund liquidity freezes. Direct ownership avoids these problems, as liquidity attaches to individual securities, not to the total portfolio.

Other issues Several other issues require consideration, such as the degree to which portfolios are transparent. One of the main benefits of direct ownership is that investors can build a portfolio that suits individual risk, liquidity, maturity, and return preferences.

These issues are summarised in Figure 2.

Conclusion This article looked at the benefits of direct fixed income in two main contexts.

First, direct fixed income was compared with annuity products where a fixed income portfolio effectively replicates an annuitystyle cashflow. While using an annuity provider remains a valid form of invest-

ment, the use of a direct portfolio of bonds has many advantages. Bearing in mind that self-managed superannuation fund (SMSF) portfolios are typically designed to avoid ongoing fees, yet annuity providers are offering products that have large fees embedded in the product, a bond portfolio is better aligned to direct investing.

Annuity providers keep most of the investment return of around 100 bps, or more (200bps total return less the investment payout of 100bps). Part of the proceeds kept by the annuity providers are used to pay for advertising and part are kept to pay for the costs of regulatory compliance, apart from other things. By analysing the annuity product, investors can then attempt to replicate the characteristics by using bonds.

Generating the same outcomes by using direct securities enables: • Direct control over risk; • Greater diversification; • Avoidance of fees; • A higher return.

Second, this article compared direct fixed income with holding fixed income via a managed fund. Importantly, fixed income funds may suit some investors and there is no fundamental problem with fixed income funds. Rather, this article highlights the benefits of direct fixed income. They allow the investor to control their own risk reward targets, as well as liquidity and maturity, at a lower cost with no ongoing fees.

Elizabeth Moran is director of education and fixed income research at FIIG Securities.

www.moneymanagement.com.au January 26, 2012 Money Management — 21

Toolbox Redundancy and transitional

termination payments Claudine Siou explains the process and implications of directing transitional termination payments to super.

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ith just under six months to 30 June and a sombre economic outlook, a n yo n e w h o i s m a d e redundant and wishes to direct their transitional termination payment to super will need to act quickly if they are to gain attractive tax savings.

To q u a l i f y f o r t h e t ra n s i t i o n a l arrangements, an employment termination payment (ETP) must be made before 1 July 2012 according to a written employment contract, law or workplace agreement which existed on 9 May 2006. The amount of the ETP must e i t h e r b e s p e c i f i e d o r w o rk e d o u t according to a formula contained in that contract, law or agreement.

Transitional termination payments offer benefits not available to other ETPs. Generally, transitional terminat i o n p a y m e n t s re c e i v e g re a t e r t a x concessions to ETPs and the employee has the option to direct the amount to a superannuation fund or purchase a superannuation annuity.

For example, the taxable component of a transitional termination payment which exceeds the ETP cap of $165,000 (2011/12) up to $1,000,000 is taxed at a maximum rate of 30 per cent for an individual who is preservation age or older. If the payment did not qualify under the transitional rules, the amount would be taxed at 45 per cent. Medicare levy, Medicare levy surcharge and flood levy may apply in addition to these rates. Tax may be further reduced by directing all or par t of the taxable component to a superannuation fund, where the tax (in this case 30 per cent, if taken as cash) is greater than the tax within the fund of 15 per cent.

Another benefit of qualifying transitional termination payments is that the amount directed to a superannuation fund is technically a ‘contribution’, however, it does not count towards any contribution cap. This is provided the total transitional termination payments taken as cash and directed to a superannuation fund do not exceed $1,000,000.

It’s also possible to take the tax-free component of a transitional termination payment as cash and direct the taxable component to a superannuation fund. This is because the proportioning rule only applies to superannuation benefits, not ETPs, which are paid by an employer. A ‘directed termination payment’ does not count under the income maintenance period (effectively a waiting period) for some govern-

ment payments, including NewStart Allowance. Checking whether the transitional arrangements apply can therefore be a worthwhile exercise.

Renewal or changes to employment contracts and agreements after 9 May 2006 may result in the employee losing the opportunity to the concessions for a redundancy payment to qualify as a transitional termination payment. This is the case, even if the new contract or agreement includes the same terms under which the payment is made as those which existed before 10 May 2006.

It is the employer who determines whether the payment qualifies as a ‘transitional termination payment’.

Advisers should check that the client’s employer has correctly classified the payment. If the payment qualifies as a transitional termination payment, the employer should issue the employee with a transitional termination prepayment statement to give them the oppor tunity to direct the relevant amount to super.

Not every employee who is made redundant will receive a transitional termination payment. However, there are a number of payments made on redundancy that most employees are likely to receive. These may include a ‘g e n u i n e re d u n d a n c y p a y m e n t’, employment termination payment, and unused annual and long service leave.

Excluding payments of unused annual and long service leave which are taxed under separate legislation, a genuine redundancy payment is the balance of the payment which exceeds the amount the employee would receive if they voluntarily resigned. Genuine redundancy payments may include accrued sick leave, ex-gratia payments or severance payments and payments in lieu of notice (provided that they would not normally be paid on resignation).

Genuine redundancy payments are tax-free up to a certain limit, where certain conditions are satisfied. These include the employee being aged less than 65 years old at the time of being made redundant. Although a younger age may apply if employment would normally terminate at a younger age. In addition, there must be no arrangement for the dismissed employee to be reemployed, and the amount is not greater than an arm’s length amount. The taxfree limit of a genuine redundancy payment provides significant tax benefits for the employee and recognises the involuntary nature of the dismissal.

22 — Money Management January 26, 2012 www.moneymanagement.com.au

The tax-free limit is calculated by using a formula which has a base amount of $8,435 plus a service amount o f $ 4 , 2 1 8 f o r e v e r y w h o l e ye a r o f employment. These figures apply in the 2011/12 financial year and are indexed annually to average weekly ordinary time ear nings. Any amount which exceeds the tax-free limit is taxed as an employment termination payment (ETP). Deferring the payment to the next financial year can increase the taxfree limit due to the new indexed base and service amounts. However, be wary of deferring the payment after 30 June 2012, where the ETP qualifies for the transitional arrangements. Deferring the termination date to complete an additional year of employment can also increase the tax-free limit. Both these strategies may significantly improve the employee’s financial position by saving them tax.

An ETP is the portion of the payment (excluding unused annual and long ser vice leave) which the employee would expect to receive if they resigned, plus the genuine redundancy payment in excess of the tax-free amount. The tax rates which apply depend on whether the employee has reached their preservation age as at 30 June of the year in which the payment is received, the amount of the payment and whether it satisfies the transitional arrangements.

Tax on an ETP that does not satisfy the transitional arrangements may be reduced by deferring the payment to the next financial year.

This applies to employees who reach preservation age in that next year and/or where the indexed ETP cap ($165,000 for 2011/12) reduces the tax on the taxable component. Be aware, however, that the year in which the payment is received may affect the ability of the employee to claim a deduction for personal superannuation contributions, certain tax offsets, or government benefits such as Family Tax Benefit and the Government co-contribution.

It’s important to remember that an amount that qualifies as a transitional termination payment must be paid to the employee or superannuation fund by 30 June 2012. Delays in the employer directing the payment to the superannuation fund may result in the benefits of the transitional arrangements being lost.

Claudine Siou is OnePath’s technical specialist.

CPD Quiz This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. Readers can submit their answers online at www.moneymanagement.com.au in March 2012.

1 . W h e n d o e s a n e m p l oy m e n t termination payment qualify as a transitional termination payment?

2. How does a transitional termination payment that is directed into superannuation (ie, a directed termination payment) impact the superannuation contribution caps?

3. Can an employee elect to receive the tax-free component of a transitional termination payment and direct the taxable component to a superannuation fund or does the tax-free and taxable component need to be taken proportionately?

4. How does an employee know whether their employer termination payment is a transitional termination payment?

5 . How d o y o u c a l c u l a t e t h e maximum tax-free portion of a genuine redundancy payment?

For more information about the CPD Quiz, please contact Milana Pokrajac on (02) 9422 2080 or email milana.pokrajac@reedbusiness.com. au.

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

S H A N E Ha w k e h a s b e e n appointed research manager, licensee and platforms within MLC’s ThreeSixty Research.

Hawke will be responsible for research into the approved i n v e s t m e n t l i s t f o r M LC ’s licensees, platform investment menus and the continuous d e v e l o p m e n t o f re s e a rc h strategies, portfolio construction and model portfolios.

Ha v i n g s e r v e d a s M LC In v e s t m e n t Ma n a g e m e n t senior investment specialist and as a research manager for ING and RetireInvest, Hawke has significant experience in dealer group research, investment platforms, investment management and financial.

Leading the 18-strong ThreeSixty, Hawke will report to MLC ThreeSixty head of research Lisa Boyce.

Ibbotson Associates Australia has announced the appointment of James Foot as investment consultant.

Reporting to Ibbotson head of investment advisory Chris Galloway, Foot will be responsible for investment analysis and advisory services to retail and institutional clients.

Before his appointment, Foot worked with Centric Wealth as

head of portfolio construction, head of managed funds re s e a rc h a n d i n v e s t m e n t research analyst.

“He has a demonstrated track record in quantitative and qualitative research, and his asset allocation experience, particularly with Centric Wealth’s model portfolios and direct equities framework, will enable him to actively consult and add real value for Ibbotson’s clients,” Ibbotson managing director Daniel Needham said.

Australian Ethical Investment has appointed current director Steve Newnham as its executive director of business development.

Newnham has previously held distribution roles at Zur ich Financial Ser vices, L o n s e c a n d BT Fi n a n c i a l Group, and has more than 20 years expertise in marketing and distribution in the financ i a l i n d u s t r y, a c c o rd i n g t o Australian Ethical.

“Steve has been a director of Australian Ethical for the past 12 months and has made an enormous contribution to the business,” said Australian Ethical’s managing director Phil Vernon.

“He has an extraordinary track record in our industry and his

Move of the week CLEARVIEW Wealth has appointed former CMC Markets Australia and New Zealand managing director Barry Odes to the newly created role of chief operating officer.

T h e m ov e w i l l s e e t h e g ro u p’s h e a d o f m a r k e t i n g a n d h u m a n re s o u rc e s, S c o t t Alomes, depart ClearView having held the role since mid 2010.

Odes will be accountable for distribution, marketing, financial planning, operations,

Steve Newnham greater involvement with us will be invaluable as we look to continue growing our advisor and wholesale client base,” he said.

Newnham also has significant experience with community and

human resources and information technology, Clearview stated. Before his role at CMC, Odes held senior executive positions at Goldman Sachs JB Were, the last of which was chief operating officer of their private wealth division.

C l e a r v i e w m a n a g i n g d i re c t o r Si m o n Swanson said Odes has the proven track record of quality service delivery and leadership capability to assist in the significant growth opportunities facing ClearView.

social justice activities, having worked on homeless shelter support schemes, indigenous fellowship programs, environmental and drought relief projects and mental health awareness initiatives, Australian Ethical stated.

Vernon said the appointment reflects the group’s commitment to growth, expansion and development. “Despite the significant challenges of an uncertain market and rapidly changing regulatory environment, we see more and more investors and advisers demanding ethical and sustainable investment options,” he said.

Financial Planning Standards B o a rd ( F P S B ) h a s n a m e d Michael Snowdon as its direc-

Opportunities

tor of certification.

Snowdon is a former practicing financial planner and financial planning educator w i t h m o re t h a n 2 5 ye a r s o f experience in the profession.

At FPSB (the owner of Certified Financial Planner logo trademarks in and outside the United States) Snowdon will ov e r s e e t h e o r g a n i s a t i o n’s international certifications and related programs, support the FPSB Standards Committee a n d d e v e l o p t ra i n i n g a n d e d u c a t i o n p r o g ra m s a n d resources for FPSB member organisations.

Snowdon previously owned a Colorado-based investment advisory firm WealthRidge and ser ved as a professor at the Colorado-based College for Financial Planning.

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

FINANCIAL ADVISER

INTERNAL AUDIT OFFICER

Location: Brisbane Company: Independent Fund Administrators and Advisers (IFAA) Description: A Queensland-based boutique dealer group is currently looking to hire a financial adviser for its newly created financial planning department.

The company provides management, administration and consulting services to industry superannuation and eligible rollover funds.

The position allows for training, support for ongoing study and professional development.

The successful candidate will report directly to the manager – financial planning services as you provide clients with high quality investment and strategic financial planning advice. You will also provide ongoing advice services to clients, including ongoing portfolio monitoring services.

Ideally, you will have a Diploma of Financial Services with a minimum of three years as a financial planner.

To find out more and to apply, visit www.moneymanagement.com.au/jobs, or contact the manager – human resources at IFAA – humanresources@ifaa.com.au.

Location: South Africa Company: Australian Red Cross Description: The South African Red Cross is looking an Australian financial professional to ensure that financial management systems are consistent, transparent and effective across all branches of the organisation.

As part of your role as a volunteer, you will assist in undertaking audits in branches to ensure that financial objectives are achieved, assets are protected, financial data is reliable and laws and regulations are complied with.

Working with branch administrators and volunteers, the successful applicant will possess experience of internal audit processes, and an understanding of financial and risk management.

You will be CA or CPA qualified, or have experience in accounting or bookkeeping.

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

SENIOR FINANCIAL ADVISER Location: Adelaide Company: Terrington Consulting Description: A leading financial institution is seeking an experienced financial adviser to work

with a portfolio of high net worth clients.

In this role, you will have the opportunity to develop your own referral networks and portfolio. You will also have access to an unlimited product and platform range.

The successful candidate will have several years experience as an adviser, with proven sales and networking capabilities.

The successful applicant will be offered a competitive salary package and career development opportunities.

To find out more visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting, 0404 853 895/(08) 8423 4466, myra@terringtonconsulting.com.au.

FINANCIAL ADVISER – RISK SPECIALIST Location: Perth Company: Terrington Consulting Description: A Western Australian business advisory firm is seeking a highly-trained individual to join its wealth management team as a risk specialist.

In this role, you will deliver detailed risk insurance advice for the firm’s business clients. Knowledge of tax structures, entities, estate planning and SMSFs is essential.

To be successful in this role, you will possess the skills to identify and capitalise upon business growth opportunities for the firm.

You will have the opportunity to utilise state-of-the-art facilities and be offered an attractive salary package.

To find out more, visit www.moneymanagement.com.au/jobs, or contact Myra at Terrington Consulting, 0404 853 895/(08) 8423 4466, myra@terringtonconsulting.com.au.

BUSINESS DEVELOPMENT MANAGER Location: Melbourne Company: Terrington Consulting Description: A commercial firm is currently looking for a business development officer to drive growth, build brand equity, and provide holistic and tailored solutions to a diverse client base.

Reporting to the regional manager, your responsibilities will include developing and managing key relationships.

The successful candidate will possess a solid understanding of credit risk, the ability to manage long-term relationships, and have experience in the SME market.

For more information visit www.moneymanagement.com.au/jobs.

www.moneymanagement.com.au January 26, 2012 Money Management — 23

Outsider

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

Top hole! Join the school of hard Knox AS an avid golfer, Outsider knows the value of ‘an ace’ – a hole-in-one – probably because he's never personally scored one.

But, of course, as all equally avid golfers would know, ‘an ace’ only officially counts if it is achieved in formal competition, meaning that similar feats while hacking around with your mates will, at best, result in bragging rights and maybe a shout or two, but not a great deal more.

While accepting that aces only count when you're in competition, Outsider nonetheless believes that the scoring of a hole-in-one is a singular achievement, partic-

“

Out of context

“Walt Disney couldn’t have dreamed that one up.”

Minister for Financial Services Bill Shorten believes opposition

ularly for those with whom he golfs occasionally in the financial services community.

Thus, he offers his congratulations, a round of applause and the promise of a round of

drinks to Paragem chief Ian Knox for having scored an ace while holidaying at Noosa.

In fact, Knox's feat is such that it has prompted Outsider to ask who else in

the financial services industry has had a hole-in-one?

Readers can nominate these golfing maestros by emailing editor@moneymanagement.com.au

spokesman Andrew Robb is telling tall tales on the rise in government debt.

“The only thing we have in common with Iceland is that

Not our spam of Choice OUTSIDER is hardly the most technologically literate or ‘web savvy’ chappy you'll meet. In fact, he still resents having had to give up his Remington typewriter.

Nonetheless, he has grown to understand the manner in which people seek to manipulate the internet for their own purposes.

So far as Outsider can discern, it is not unusual for people to try to use responses to Money Management's comments section to push people to their own websites for commercial purposes. This probably explains why Indian-based companies flogging erectile dysfunction pills have been known to comment on stories about the size of an Australian PDS. Outsider's colleagues thought they had become somewhat inured to such com-

ments, until they received a ‘comment’ which seemed to originate from consumer group Choice, which Outsider publishes by way of providing a public service: "I love Choice. But you know – every day I forget how to find the Choice website. So I need to Google ‘choice’ and click on their ad at the top of the page. Choice have to pay google every time it is clicked.

I wonder how much that costs them? But thanks for the ad choice – myself, and my colleagues now no (sic) how to find your website over and over and over again. Of course people should not do this unnecessarily as that could cost choice a bit of money."

The Money Management website moderator, having made his choice, apparently designated the comment as spam.

Witch adviser?

HAVING written for the financial services industry for longer than he’d wish to admit, Outsider likes to think he knows a thing or two about the investment markets.

But when it comes to moving his pocket change around, he tends to leave all the technicalities and hard thinking to his financial adviser. After all, they’re the ones who know what’s going on, right?

Well, certain commercial breakfast radio hosts don’t seem to think so.

Outsider accidentally tuned

in to an FM breakfast program which featured an economic forecast so accurate that it seemed that the economist was holding a crystal ball in their hands. Literally.

A psychic named Georgina, who regularly appears on the show, predicted a markets crash in March and the fall of the Aussie dollar to 87 cents later this year. That is a very specific forecast, if one was to ask Outsider.

Upon hearing this, however, one of the hosts exclaimed “That’s it! I’m selling my shares!”

– which was then followed by a

segment inundated with celebrity gossip.

Now, as much as Outsider tries to respect psychic Georgina’s prediction (after all, predictions are nothing more than educated guesses), he was bold enough to assume that listeners would like to hear an actual “educated guess” from a…well, an economist, for example.

But if Georgina’s prediction proves to be correct, Outsider will be the first one to turn to palm-reading for financial decisions.

24 — Money Management January 26, 2012 www.moneymanagement.com.au

we’re both an island.”

Shorten again on the comparisons Robb made between Iceland and Australia’s debt rise.

“Our global team calls this the ‘arithmetic of doom’ and have set it out in our recent global quarterly report, ‘When the wheels fall off’.”

HSBC chief economist Paul Bloxham puts the current outlook in context.