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Vol.25 No.25 | July 7, 2011 | $6.95 INC GST
The publication for the personal investment professional
www.moneymanagement.com.au
INSTOS SET TO BENEFIT FROM FOFA: Page 4 | FIXED INTEREST GETS A NEW LIFE: Page 12
Risk commission ban ‘poor policy’ By Mike Taylor THE Federal Government’s decision to ban commissions on all life and risk products within superannuation will only serve to add another layer of complexity and confusion, according to a Money Management roundtable of senior risk company executives, consultants and financial advisers. The roundtable, conducted in late June, concluded that the Government’s decision to impose the risk commissions ban as part of its Future of Financial Advice (FOFA) changes represented bad policy that would only serve to undermine the objective of overcoming Australia’s underinsurance problems. Tower Australia Limited head of life insurance solutions, Brett Yardley, said the Government’s announcement had a great deal of uncertainty, particularly with respect to structures both inside and outside of superannuation.
Simon Harris “It creates a whole lot of new complexity in terms of potential differential pricing or differential funding of fees inside and outside of super,”Yardley said. “How that then marries up with the best advice requirement is going to be
especially complicated, particularly if you have a product that’s theoretically cheaper in super than it is outside of super. “How advisers and how the market will make sure that customers’ needs are being met in the most appropriate way just introduces a whole lot of extra complexity,” he said. Guardian Financial Planning executive manager, Simon Harris, said that, overall, his firm believed the banning of commissions inside of super represented “poor policy, probably delivered on the fly for political reasons”. “It will probably lead to an exacerbation of the underinsurance problem in Australia,” he said. “Combined with the best interest legislation that’s going to go through, it provides a possible conflict for advisers,” Harris said. “On the one hand, best interest may dictate that they ask their clients to take insurance outside of superannuation or inside of superannuation, but then there’s the client’s
willingness to pay for the insurance either inside or outside superannuation.” Australian Unity planner Andrew McKee said he really struggled to understand the rationale for the Government’s decision because part of the rationale for FOFA was to remove conflict “and here we are deliberately introducing a brand new conflict into the system”. “I really struggle to see what purpose it serves,” he said. “I don’t understand who we’re trying to protect in this process. “It’s going to be really difficult for advisers and it’s going to place them in a difficult position,” he said. “They’re going to have to make decisions about different pricing structures and different fee versus commission structures. It’s going to be challenging and it’s added a lot of complexity into the system for advisers … I just don’t understand the rationale and what purpose it serves.” For the full risk roundtable turn to page 20.
Planners resigned to FOFA PI issues reducing MANY financial planners have already decided that the legislation that emerges from the Government’s Future of Financial Advice (FOFA) changes will be unacceptable and run counter to their interests. A survey conducted by Money Management last week revealed more than 90 per cent of respondents believed the major financial planning organisations would fail to extract sufficient compromises on the FOFA changes to make the ultimate package acceptable. More than 85 per cent of respondents to the survey said they not only believed the industry should mount a legal challenge to the FOFA proposals, particularly opt-in, but that they would be prepared to help fund such a challenge. The bad news for the major financial planning industry groups – the Financial Planning Association (FPA)
and the Association of Financial Advisers (AFA) – is that no matter what concessions they ultimately manage to extract from the Government on the FOFA proposals, they are unlikely to impress a significant segment of their memberships. Asked whether they believed the major financial planning groups would be successful in negotiating a viable outcome on FOFA, 92 per cent of respondents answered ‘No, I believe the outcome will be unacceptable’. A further 6 per cent of respondents said that while they believed the planning groups would succeed in negotiating a viable outcome, there would still be elements they did not like. Only 2 per cent of respondents suggested they believed they would find the FOFA legislation acceptable. Asked their views on a suggestion Continued on page 3
client choice By Chris Kennedy
AN increase in the number of professional indemnity (PI) insurance claims over the past few years is affecting the price and availability of PI insurance for planning firms, resulting in blander product offerings at the client level. PI insurance has been increasingly hard to get for planning firms chiefly as a result of Financial Ombudsman Service (FOS) decisions, which directly impact PI underwriters’ decisions around insurance offerings, according to Financial Planning Association chief professional officer Deen Sanders. The increased number of cases means not just rising costs, but also that an increasing number of exclusions are sneaking into policies, he said. This may force planners to stop advising on the products resulting in FOS decisions, particularly less liquid products, even though the marketplace may have changed between the time of the original
Deen Sanders complaint and the FOS reaching a decision. Of greatest concern is the fact that risks are not spread evenly across the marketplace, because the FOS tends to find planners at fault which then places an unfair burden on underwriters, he said. A lack of competition among underwriters is also contributing to the lack of choice for planning Continued on page 3
Editor
Reed Business Information Tower 2, 475 Victoria Avenue Chatswood NSW 2067 Mail: Locked Bag 2999 Chatswood Delivery Centre Chatswood NSW 2067 Tel: (02) 9422 2999 Fax: (02) 9422 2822 Publisher: Jayson Forrest Tel: (02) 9422 2906 jayson.forrest@reedbusiness.com.au Managing Editor: Mike Taylor Tel: (02) 9422 2712 mike.taylor@reedbusiness.com.au News Editor: Chris Kennedy Tel: (02) 9422 2819 chris.kennedy@reedbusiness.com.au Features Editor: Angela Faherty Tel: (02) 9422 2210 angela.faherty@reedbusiness.com.au Journalist: Milana Pokrajac Tel: (02) 9422 2080 Journalist: Ashleigh McIntyre Tel: (02) 9422 2815 Cadet Journalist: Angela Welsh Tel: (02) 9422 2898 Melbourne Correspondent: Benjamin Levy Tel: (03) 9509 7825 ADVERTISING Senior Account Manager: Suma Donnelly Tel: (02) 9422 8796 Mob: 0416 815 429 suma.donnelly@reedbusiness.com.au Account Manager: Jimmy Gupta Tel: (02) 9422 2850 Mob: 0421 422 722 jimmy.gupta@reedbusiness.com.au Adelaide Agent: Sue Hoffman Tel: (08) 8379 9522 Fax: (08) 8379 9735 Queensland Agent: Peter Scruby Tel: (07) 3391 6633 Fax: (07) 3891 5602 PRODUCTION Junior Designer/Production Co-ordinator – Print: Andrew Lim Tel: (02) 9422 2816 andrew.lim@reedbusiness.com.au Sub-Editor: Tim Stewart Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2011. Supplied images © 2011 Shutterstock. Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.
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An air of inevitability
W
hen the Assistant Treasurer and Minister for Financial Services, Bill Shorten, addressed an Association of Financial Advisers (AFA) function last week he stirred up a great deal of anger and resentment by saying that he did not believe the key elements of the Future of Financial Advice (FOFA) changes would unduly impact financial planners. In essence, Shorten was saying that he had heard the complaints and warnings of advisers, but would be doing nothing to change the Government’s approach with respect to the proposed two-year ‘opt-in’ or the banning of all commissions within superannuation. So there you have it. Financial planners should now accept that they know the key elements of the draft legislation that will flow from FOFA. Some minor discussion will likely take place around some of the finer details, but Shorten has made the Government’s position unequivocally clear. Amid the negative planner sentiment that flowed from Shorten’s statement were suggestions that the major financial planning industry groups – including the AFA and the Financial Planning Association – had failed to do their jobs. This represented unfair criticism, given the amount of
2 — Money Management July 7, 2011 www.moneymanagement.com.au
“
In the case of the FOFA reforms, financial planning organisations have never represented a significant political or economic force.
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resources both organisations have dedicated to dealing with the Government’s FOFA agenda. Anyone who has had to deal with Governments will know that the degree to which lobby groups can influence policy outcomes has more to do with applying political and economic pressure than producing cogent arguments. And in the case of the FOFA reforms, financial planning organisations have never represented a significant political or economic force. Where the mining companies last year succeeded in having the Government water down its original Mining Super Profits Tax via a combination of high-priced advertising and political timing, the financial planning industry has neither the budgetary resources
nor the electoral influence to pull off a similar feat. Then, of course, there is the reality that the industry superannuation funds have not only maintained a vigorous advertising campaign but also kept the ear of Government via union and party affiliations – as well as the electoral influence that brings. Amid the anger in the aftermath of Shorten’s address to the AFA came the renewed suggestion that the industry should mount a legal challenge to the FOFA changes, with the key issue being whether the imposition of an ‘opt-in’ requirement might represent a conflict with existing contracts law. As a survey conducted by Money Management has revealed, there is strong support for such a challenge, with most respondents indicating they would be happy to help fund such a case. The problem, of course, is that such a challenge can only occur after the legislation becomes a reality – and by then it might be too late. In the end, the strategy being pursued by the FPA and the AFA of seeking to influence amendments in the House of Representatives probably represents the best bet. – Mike Taylor
News
FOFA giving rise to low-cost platform By Benjamin Levy THE introduction of the Future of Financial Advice (FOFA) changes could spur the emergence of a new player in the platforms and wraps sector, by driving advisers who are no longer receiving volume rebates into the arms of the lowcost ASX Wealth Management Services platform. A S X g e n e ra l m a n a g e r o f e q u i t y markets Richard Murphy acknowledged that the new wealth platform, colloquially known as AQUA, would significantly lower the traditional costs of being listed on a platform. While funds would have to pay a listing fee for going on AQUA, the cost is likely to be a small fraction of the shelf space fees charged by platforms, Murphy said. The ASX hasn’t yet made the pricing
public, but applications and redemptions of units in a fund would cost a flat fee per software message sent by the ASX CHESS register and settlement system. That could cost as little as $2, Murphy said. The AQUA platform would list daily prices for a wide range of funds, and brokers, planners, retail and wholesale investors would be able to buy or redeem units in the fund through CHESS, which would be paid for through a client’s cash management account. The lack of paperwork and manual processes will also lower costs. However, there was still a role for traditional platforms in distribution and tax reporting for clients. The ASX was not proposing to move into that space, Murphy said. ASX trading fees and settlement fees are far cheaper than what platforms
Arthur Naoumidis charged, and over time will create a “headache” for the big wrap accounts, according to Arthur Naoumidis, group chief executive of Praemium.
“If you could trade everything on the ASX, why would you bother?” Naoumidis asked. Praemium is eager to help the ASX launch the platform, he said. Praemium’s client base is largely invested in direct equities. Praemium plans to use its V-Wrap platform to run the administration for its clients, which would then only cost a flat dollar fee instead of a percentage of their assets, Naoumidis said. Boutique fund manager Bennelong is openly interested in listing on the AQUA platform, according to director of distribution Andrew Aitkin. He added that Bennelong is staying engaged as the project progresses. The ASX is likely to go live with the project in the first quarter of 2012, according to Murphy.
Planners resigned to FOFA Continued from page 1 by Victorian regional planning principal, Brian Handley, that the financial planning industry should emulate other industry sectors by mounting a legal challenge to the FOFA proposals (particularly opt in), 85 per cent of respondents said they would support such a move. Of that 85 per cent of respondents, 80 per cent said they would be prepared to fund such a move. Many survey respondents added comments to their responses highly critical of the Government, and some critical of the role played by the industry representative groups. Significantly, even some of those respondents who believed that the industry groups would succeed in delivering a viable outcome with some unpalatable elements said they would both support and help fund a legal challenge.
PI issues reducing client choice Continued from page 1
firms. While markets such as the US and UK have 12 to 15 underwriters to choose from, in the Australian market that number is more like three or four, Sanders said. It may be up to the Government to step in and find a way to increase competition or to spread the liability risks more evenly across the marketplace, he said. Head of casualty at underwriters Vero, Alex Green, said that he believes competition is on the way back up – and while prices are increasing, they aren’t even keeping pace with the increase in claims. Although Vero is trying to be more discerning and better understand what it is writing, Green said he had not heard of any firms being unable to get cover. Some clients will exclude problematic products when they realise a disproportionate number of claims is coming from a particular part
of their business, he said. Craig Claughton, NSW Manager of the FINPRO Practice at insurance broker Marsh, said PI insurance is getting harder to get and to retain for planners because less primary insurers are willing to take the risk from the ground up – and the underwriting process is also becoming more stringent when looking at a firm’s compliance and track record. More exclusions are coming in, particularly around how firms review products and put them on their Approved Product Lists, he said. While Claughton hadn’t seen groups deliberately avoid certain products due to underwriting concerns, it is not a long bow to draw to assume that would be the next step, he said. Insurers look carefully at complaints registers, and then the insurer may say they won’t cover a certain product if it is attracting the attention of the FOS, Claughton said.
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www.moneymanagement.com.au July 7, 2011 Money Management — 3
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Instos to benefit from FOFA restructure Window closes on By Chris Kennedy THE Government’s proposed Future of Financial Advice (FOFA) reforms are likely to cause a fundamental restructuring of the financial advice sector, with larger institutions likely to benefit and increased consolidation to result, according to law firm Minter Ellison. Smaller dealers that have been reliant on volume payments will diversify away from those earnings by setting up their own products and platforms, according to Chris Brown, Minter Ellison partner, corporate, mergers and acquisitions. It is also doubtful this policy would avoid a repeat of small fringe players such as Storm, he added. The other option for smaller groups to remain profitable is to merge with institutions, which are far better equipped to deal with the changes because they have a presence at every level of the value chain, he said. Institutions used to give away part of their margin through their distribution strategy, but they can now retain that and are in a better position to attract advisers and provide them with a dealer group offering, he said. We will continue to see consolidation of dealer groups and the institutional space, and if the policy objectives of FOFA are to loosen the institutional stranglehold on the advice space it is likely to have the opposite effect, he said.
Chris Brown We could also see more institutions taking minority stakes and looking to have a seat at the table when consolidation accelerates, Brown said. “Things are fundamentally changing. Without the support of fund manager subsidies, the profitability and value proposition is less competitive,” he said. “At a practice and small dealer group level there are opportunities for scaling up, buying out those looking to exit the industry, creating a franchise model and effectively industrialising and segmenting clients.” Scaled advice provisions are likely to suit institutions that are better resourced to provide it, and will leave smaller nonaligned dealer groups unable to compete for
clients outside the high-net-worth space, according to Richard Batten, Minter Ellison partner, corporate, financial services. Scaled advice will also create liability issues where a client only asks for advice on a particular area such as insurance or superannuation, he said. If a planner helps them into something they want but it doesn’t meet the client’s needs and the planner hasn’t discovered that, it raises the question of when duty of care arises, he said. The banning of risk commissions within super put advisers in an invidious and relatively impossible position, Batten said. Client tax benefits of taking out the insurance within super may be missed if clients do not want to pay an upfront fee, and while advisers may legally absolve themselves by explaining the choice upfront this doesn’t resolve the dilemma for the client and simply moves the conflict to the client level, which is unsatisfactory, Batten said. “In that context it doesn’t make sense – there’s no reason to differentiate,” he said. Opt-in provisions are one of the other major negatives because they could drive the wrong type of behaviour, forcing advisers to focus on short-term gains rather than long-term outcomes in order to enhance their value proposition, Brown said. Uncertainty over grandfathering provisions is also creating uncertainty over practice values and making it tough to put together transactions in the merger and acquisitions space, he said.
Aussie equities outperform over 20 years By Angela Welsh
AUSTRALIAN shares have outperformed residential investment property to provide the best net returns over 20 years, a new report released by Russell Investments and the Australian Securities Exchange (ASX) has found. This year’s Long-Term Investing Report found that growth assets continue to deliver superior returns to more conservative asset classes, such as cash and fixed income, over the 10, 20, and 25-year periods to December 2010. The report considered the real-life impact of tax, costs and borrowing on ultimate investment returns. Over the last 20 years, Australian shares returned on an after-tax basis at the lowest and highest marginal tax rates, 11.2 per cent and 9 per cent respec-
tively. Over the same period, residential investment property generated returns of 9.2 per cent and 7.7 per cent at both marginal tax rates. Residential investment property, however, outperformed all asset classes over the 10-year period, but was surpassed on an after-tax basis by Australian shares at the 25-year mark. ASX general manager of sales and marketing Will Wilson said market volatility continued to test the resolve of investors. “This report offers investors some practical guidance on the benefits of ASX-listed investments compared to other categories of investments, and, in particular, underlines the importance of investing for the long-term,” Wilson said. The report further emphasised the need to be mindful of the impact of tax on investor returns.
Govt’s foreign investment rules By Mike Taylor
THE Federal Government has acknowledged it is running out of time to introduce its Foreign Accumulation Fund (FAF) integrity rule before the end of the current financial year. The Assistant Treasurer and Minister for Financial Services, Bill Shorten, has conceded the FAF integrity rule will not apply for the 201011 income year, despite the Government having repealed the foreign investment fund regime and the deemed present entitlement rules last year. “The FAF rule is still under development and 30 June is fast approaching,” he said. “The Government has received no evidence that deferral activity has emerged following the repeal of the FIF regime.” Shorten said on the basis that there appeared to be no deferral activity, the Government was happy to provide certainty for industry and investors by confirming the FAF rule would not apply for 2010-11 but would have application for the income years on or after it received Royal Assent. The FAF rule is intended to form part of a wider package of reforms to the foreign source income distribution rules aimed at making Australia more attractive to foreign investors.
MLC launches SMSF strategy paper By Damon Taylor
Greg Liddell “Pre-tax returns only tell half the story,” said Russell Investments director of consulting and advisory Greg Liddell. Retirement incomes were funded by post-tax, post-fee returns, he said. “On a sizeable balance and over many years the variance in tax efficiency of different investment strategies is significant,” Liddell said.
With self-managed super funds (SMSFs) continuing to grow their market share within Australia’s superannuation industry, MLC’s technical services team has produced a paper aimed at arming both existing and potential SMSF trustees with a number of simple but powerful strategies to maximise their funds’ overall returns. Entitled Smart Strategies for running your own super fund, the document explains why do-it-yourself super may
be attractive for those still contemplating such a move – but also cautions against taking on the responsibilities of a trustee lightly. For those trustees who have already embarked on the SMSF journey, the lessons to be learned range from personalising investment strategies to maximising estate planning flexibility. The document also points out the tax concessions to be had in and around the purchase of critical illness and death and disability insurance.
ASIC hands life bans to two planners TWO financial advisers have been banned for life following separate investigations by the Australian Securities and Investments Commission (ASIC). Financial Planning Services Australia adviser Shaun Daniel Fitzgerald of the Sunshine Coast has been banned for misappropriating $1.3 million from clients over a three-month period during his time at the firm between 9 December 2008 and 29 June
2010, ASIC stated. The money was deposited into accounts of companies whose only director was Fitzgerald, and was not returned when requested by the clients, according to ASIC. The licensee brought Fitzgerald’s conduct to ASIC’s attention, fully co-operated with the regular and has advised ASIC of compensation paid to clients, ASIC stated. Fitzgerald was acting as a director of 360
4 — Money Management July 7, 2011 www.moneymanagement.com.au
Asset Management, an authorised representative of Financial Planning Services Australia, based in Birtinya, Queensland, according to ASIC. Bridges Financial Services adviser Justin Robert Fraser of Wellington Point, Queensland, has been banned for misappropriating fees due to his employer during his employment between 18 August 2005 and 30 May 2008.
Bridges alerted ASIC to Fraser’s conduct, which involved creating false invoices to hide his dishonesty – although none of Bridges clients were adversely affected, ASIC stated. Both men have the right to appeal to the Administrative Appeals Tribunal.
News
Old fund-of-hedge-fund model pronounced ‘dead’ By Chris Kennedy THERE have been significant changes in the multi asset sector in the past 18 months, with the old feeder fund-of-hedge-fund (FOHF) model now dead, according to the latest Standard & Poor’s Fund Services (S&P) Multi Asset sector review. Competition in the sector has increased due to growing demand for transparency, increased liquidity, fee structure changes, and lower stock-market beta products, according to S&P.
During the global financial crisis, the classic FOHF model – which provides access to a range of diversifying active managers but features higher fees and reduced liquidity – failed to deliver the absolute returns or diversifying protection in share market sell-offs that investors expected, S&P stated. The unattractiveness of the multi sector model was compounded by its high fee structures and the fact that many models that incorporated index-type allocations including exchange-traded funds outper-
formed the alpha-seeking FOHF model, said S&P analyst Michael Armitage. The sector also suffered from high profile due diligence failures, he said. “We view the ‘allocate and pray’ feeder FOHF model as dead,” he said. “In future, we expect offerings that fail to compete in terms of active oversight, transparent risk management, product-level liquidity, and competitive fees to lose out to the growing competition from newer funds designed from the ground-up to deliver on these features,” Armitage said.
The classical FOHF sector has witnessed significant funds under management outflows globally, S&P stated. “There were several upgrades in this year's sector review as we recognised funds with some of these product advantages and gained conviction in other offerings that had shown extended track records since our previous reviews,” Armitage said. Overall S&P upgraded four funds to four stars from three stars, downgraded none, and rated two new funds.
Crowe Horwath grows to meet client demand By Angela Welsh
ACCOUNTING and wealth management group Crowe Horwath has announced the appointment of 12 new principals and associate principals in an effort to meet client demand in the small to medium enterprise sector. The senior appointments are a combination of internal promotions and external hires. Chief executive of Crowe Horwath’s Sydney office, Darren O’Brien, said January’s rebranding exercise to replace the company’s former name, HWK Horwath, had increased the brand awareness for clients and prospective employees. The name change was implemented by all 141 members of the Crowe Horwath global network on the same date. “We have seen increased interest over the last six months, especially from potential employees from the big four accounting firms who have or are interested in specialising in the SME space,” O’Brien said. Of the four principals hired externally, three have moved from a big four accounting firm. These appointments include Mark Calvetti, who will join in the corporate finance team with expertise in retail, health and beauty, and food and beverage industries. Calvetti will be assisted by the appointment of Bill Jansen, who brings over 40 years of experience in the industry, including 26 years as a partner in Ernst and Young advising in middle market corporates. A number of other appointments and promotions have been made to Crowe Horwath’s Australian offices in Brisbane, Melbourne, Perth and Sydney.
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www.moneymanagement.com.au July 7, 2011 Money Management — 5
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Planner sentiment down as new hires taper off By Ashleigh McIntyre
EMPLOYER sentiment in the financial services industry has dropped significantly over the last quarter, as employers look to train new staff before seeking additional staff. The latest Employment Expectations report from recruitment firm Hudson has found that sentiment in the financial services industry dropped 9.4 percentage points over the quarter to 23.5 per cent. This represents a slip of 22.5 percentage points year-on-year. The drop in sentiment follows on from a strong hiring period in the second half of 2010, which suggests that a number of employees are now focused on bringing newly hired staff up to
speed before seeking new staff. As a result, hiring activity has now tapered off, with hiring intentions in the sector dropping 1.3 percentage points over the quarter to 31.7 per cent, and down 21.1 percentage points year-on-year. But the news is not all bad, as 37.7 per cent of employers said they intended to increase headcount in the next three months indicating a return to normal hiring levels with employers having largely rebuilt teams and many job seekers settled in new roles. The survey also found hiring for corporate finance mergers and acquisitions transactions was down year-on-year, while another trend that emerged was the focus of banks on growing their international offices at the expense of local hires. Greg Medcraft
ATO warning on FBT By Angela Welsh
Michael D’Ascenzo
THE Australian Taxation Office (ATO) has warned taxpayers to be aware of avoiding fringe benefit tax (FBT) when repaying a loan from an employee share trust. Tax commissioner Michael D’Ascenzo said he was concerned that some employers had not considered the potential consequences that may result
from the provision of such benefits, and the application of FBT. “An employer in such an arrangement needs to ensure that they include the taxable value of the benefit provided in its FBT liability. An employer who fails to do so could be subject to penalties,” he said. D’Ascenzo also advised employers who were unsure of their situation to seek independent advice or contact the ATO.
Sydney broker fined for Credit Act breach A SYDNEY-based mortgage broker has received a $27,500 fine for advertising credit services it was not licensed to provide, according to the Australian Securities and Investments Commission (ASIC). ASIC has served the company with a credit infringement notice, the first notice of this kind to be issued since the introduction of the National Consumer Credit Protection Act in July 2010. The regulator alleged the company continued to advertise credit services on its website despite being notified by ASIC that it could be in breach of the NCCP
Act because the company was not registered, authorised or licensed to provide credit services. ASIC chairman Greg Medcraft said where the regulator identifies the possible breach of the consumer credit laws of this type, the first step is to require the company to take action and ensure they comply. “If the company fails to comply, the credit infringement notice regime allows ASIC to deal with certain civil penalty contraventions by issuing an infringement notice for payment of a penalty as an alternative to commencing civil
6 — Money Management July 7, 2011 www.moneymanagement.com.au
penalty proceedings,” Medcraft said. The mortgage broker would be required to pay the fine within 28 days from the infringement notice issue date. If the company decided not to pay the penalty – which the regulator said would not be an admission of guilt – ASIC could commence civil proceedings against the company for a maximum penalty of $1.1 million. Medcraft added mortgage brokers were the gatekeepers between consumers and lenders and that they had an obligation to act in accordance with the law.
ASIC committee eyes emerging risks By Mike Tayor THE Australian Securities and Investments Commission (ASIC) has formed a committee specifically aimed at identifying risks to the Australian financial services system before they occur. ASIC chairman Greg Medcraft has told a Sydney conference that the Emerging Risk Committee was formed at his first commission meeting as chairman, and is aimed at scrutinising thematic and systemic risk more closely. He said a 2007 International Monetary Fund (IMF) report had pointed to the fact that “regulators often cannot keep up with the pace of financial innovation that may trigger a crisis”. “One aim of the Emerging Risk Committee will be to address innovations,” Medcraft said. The ASIC chairman said various ASIC departments would assess the flow of complaints and intelligence, and the leaders of its stakeholder teams would focus as much as possible on emerging thematic and systemic risks. However, Medcraft warned that ASIC – like other securities regulators – could not guarantee the elimination of systemic risk. “The nature of innovation means that it is difficult for regulators to anticipate or even keep up with developments, and systemic risks can emerge very quickly,” he said.
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Shorten refuses to accept opt-in issues By Milana Pokrajac FINANCIAL Services Minister Bill Shorten has told financial planners they haven’t managed to convince him the introduction of a two-year opt-in requirement would “beat their businesses to a pulp”. Addressing financial planners at an Association of Financial Advisers (AFA) luncheon in Sydney, Shorten acknowledged he had seen evidence suggesting the introduction of opt-in would lead to significant cost increases to the provision of advice, but said he did not believe the figures. Treasury was convinced, however, that an annual opt-in requirement would be too onerous, hence the new two-year proposal, the minister said. “I do not accept the proposition that asking clients to renew mandates every two years is beating financial planners to a pulp; I don’t get that and I haven’t been persuaded by any of your advocates on that point,” Shorten said. “I believe that a large number of financial planning practices seek mandates from their customers more frequently than on a two-year basis,” he added.
Bill Shorten Instead, the minister invited financial planners and their associations to work with Treasury to develop the scope of the opt-in requirement. He did understand concerns of those looking to sell their practices, with opt-in
uncertainty preventing them from guaranteeing four or five times annual income. He responded in a similar fashion to planners’ concerns about the commissions ban on risk products within super, expressing scepticism that its introduction would lead to further underinsurance, and referred to figures which suggested there had been an uptake in insurance via super. “What I don’t accept is that financial planning should not upgrade its performance in terms of eliminating conflicted remuneration structures; I don’t accept the proposition that compulsory superannuation should be taxed by all those financial service providers on the way through to someone’s retirement,” Shorten added. However, the AFA said it did not change its views on the two most controversial Future of Financial Advice proposals, with its political strategist Kerry Chikarovski warning the Government that planners would continue to work with the Opposition to block the reforms package. The financial planning industry would most probably see the draft legislation in August, according to Shorten.
Legally challenge FOFA, says planning principal By Mike Taylor
FINANCIAL planners need to legally challenge the most objectionable elements of the Government’s Future of Financial Advice (FOFA) changes, according to regional Victorian financial planning principal Brian Handley. Handley has told Money Management that financial planners need to challenge the legal basis and constitutionality of elements of FOFA (particularly the opt-in requirements) in a similar fashion to the manner in which the tobacco industry has mounted a challenge to the Commonwealth over labelling.
“There will be a high price to pay if we do not mount such a challenge,” he said. Handley said he believed the industry needed to signal its clear intention to mount such a challenge before the FOFA legislation was tabled in the Parliament, because it was important that Parliamentarians understood the issues and the implications. He said such legal advice needed to be comprehensive and to examine the implications of everything that was being proposed by the Government. “If we are going to go down [on FOFA], we might as well go down fighting,” Handley said.
AMP launches university planning challenge By Chris Kennedy AMP has launched a financial planningfocused ‘university challenge’ aimed at giving university students greater access to the financial planning profession. The program is run through AMP’s Horizons Academy and also has the support of the Financial Planning Association (FPA) and the recently formed Financial Planning Academics Forum. The program aims to increase the profile of financial planning within the university system so more students consider it as a potential career, said AMP director of financial planning, advice and services Steve Helmich. “It’s about professionalism, and it’s about more Australians seeing financial planning as a profession,” he said. The challenge is open to any university students in the country provided they are not already authorised representatives of a financial planning firm, and can be completed individually or in teams of up to three, and will likely require between 15 and 30 hours of work, according to Horizons director Tim Steele. The students will present a response to a case study in the form of a discussion paper, looking at modelling and recommendations
Tim Steele in response to a hypothetical scenario. The paper will include a template so it is a test of the students’ planning skills rather than literary skills, Steele said. The winning team will receive a $5,000 AMP Bank account, FPA membership, and attendance at upcoming FPA and AMP conferences; while the winning team’s university will also receive a $10,000 grant to put towards financial planning programs. “The AMP University Challenge brings together financial planning professional
8 — Money Management July 7, 2011 www.moneymanagement.com.au
bodies, leaders in the field and a potential new generation of planners,” Steele said. “It provides a unique opportunity for students to find out what it’s really like to provide financial advice and appreciate the positive impact it can have on people’s lives.” FPA head of professionalism Deen Sanders said the program addressed the crisis in the number of Australians receiving advice by encouraging future growth of the industry. “As well as engaging bright young minds in the complex challenge of financial planning, [the competition] works towards some of the FPA’s broader objectives in terms of enhancing the professionalism of financial planning through university aligned [certified financial planner] education,” he said. Griffith University Associate Professor of Finance Mark Brimble, a member of the Financial Planning Academics Forum, said the program will help students to realise there is a career attached to the study of financial planning. Previously it has been hard to see the progression from student to financial planner, but this program helps to address that, and also gives students access to skills and a level of engagement they may not get through their university degree, he said.
Ben Davis
Zenith creates new division By Angela Welsh RESEARCH house Zenith has announced the launch of a new division, Zenith Investment Solutions. The new division will be co-managed by associate directors Glen Franklin and Ben Davis, and will offer advice to fund managers on fund selection, asset allocation and product development. The division will also manage Zenith’s adviser research website and research report software. Franklin and Davis will split their responsibilities along sector lines. Franklin will monitor Australian shares, listed infrastructure, Australian and global listed REITs; while Davis will monitor international shares (global), cash, fixed interest and alternatives.
AMP’s reporting template for AXA AMP Limited has announced a reporting template to cover its merger with AXA Asia Pacific, including reclassifying the operating earnings of AXA Financial Planning and Charter Financial Planning. In an announcement released to the Australian Securities Exchange last week, AMP said that while it would integrate AXA with its AMP Financial Services and AMP Capital Investors business units, AXA’s financial results for the period from 1 April to 30 June, 2011, would be reported separately. It said it would be undertaking a number of reclassifications that would impact AXA’s operating earnings, including moving the operating earnings of AXA Financial Planning and Charter Financial Planning from investment experience to AXA’s operating earnings. It said it would also allocate AXA employee long-term incentive costs to AXA operating earnings. AMP is scheduled to release its results on 18 August.
News DKN directors recommend IOOF deal By Mike Taylor IOOF’S acquisition of DKN appears set to proceed, with DKN Financial Group announcing it has entered into a Scheme of Implementation Agreement, which increases the value of the offer to shareholders. The company announced to the Australian Securities Exchange last week that it had entered into the scheme with IOOF Holdings Limited and a wholly owned IOOF subsidiary Austselect to implement a revised version of the initial proposal. The new scheme sees IOOF acquiring 100 per cent of the shares it does not already own in DKN, for 80 cents cash per DKN share. The announcement said IOOF’s new proposal of 80 cents represents
Phil Butterworth a 56.9 per cent premium to the closing share price of DKN on 10 June. DKN chairman Rob Hunwick said scheme represented an opportunity for DKN shareholders to realise value inherent in DKN and the independ-
ent directors would be recommending the new proposal. The DKN announcement said that subject to an independent expert concluding the scheme was fair and reasonable and in the best interests of shareholders, and there being no superior proposal, the independent directors unanimously recommended that shareholders, excluding IOOF, vote in favour of the scheme. Commenting on the development, DKN chief executive, Phil Butterworth said IOOF’s proven approach to managing multiple brands provides comfort that Lonsdale Financial Group will continue to provide quality services and support, as it has done historically. “DKN’s Equity Partners should also benefit from IOOF’s scale and commitment to growth,” he said.
Advisers more positive than clients By Chris Kennedy FINANCIAL advisers have a more bullish outlook for investment markets in the new financial year compared to their clients, according to a Count Financial survey. Four in five advisers expected markets to improve in the new financial year compared to less than half of clients, the survey found. Advisers agreed that diversified portfolio construction should remain the cornerstone for building client wealth, while many clients favoured domestic equities, cash and then fixed interest, the survey found. The most commonly recommended strategies were making tax-effective contributions to superannuation, and transition-to-retirement pension strategies, each recommended by 95 per cent of advisers, according to Count. Margin lending (16 per cent) and negatively geared property investments (24 cent) were less popular, while for clients the major concerns were how to minimise tax, likely market performance and planning a comfortable retirement. Clients were most focused on tax minimisation, future share market performance, how much is
Lee Tonitto needed for a comfortable retirement and whether they should set up a self-managed super fund. “Importantly, 69 per cent of advisers say clients are concerned with the independence or non-alignment of their financial adviser, with only 2 per cent unconcerned, and 11 per cent unsure,” said Lee Tonitto, senior executive, business development and marketing. “This reinforces the value of an independently owned financial planning network like Count – and is something Count prides itself on,” she said.
Former Westpoint executive found guilty By Milana Pokrajac FORMER Westpoint chief financial controller, Graeme Rundle, has been found guilty of lying to a bank to obtain more than $71 million for a Sydney property project, according to the Australian Securities and Investments Commission (ASIC). The two charges of making a misleading statement to a financial institution for obtaining a financial advantage related to a finance facility for a construction project in York Street, Sydney. Rundle, who was granted conditional bail, will be sentenced before Judge Bozic in the Disctrict Court of New South Wales on 12 August, 2011. He was found guilty by a jury in the District Court of NSW, while the two criminal charges were brought by ASIC. The Westpoint Group of companies collapsed in 2006 after several years of operating a Ponzi scheme, with some client compensation settlements still being processed.
Banks tougher on business loans FINANCIAL planners and other business borrowers from the major banks are paying more than their fair share of fees and charges, according to financial comparison website, RateCity. According to RateCity, the latest Reserve Bank of Australia data points to banks collecting almost $7 billion in fees from business customers last year, with total business bank revenue increasing by 13.5 per cent to $6.9 billion. RateCity chief executive Damian Smith said it was clearly much more expensive for businesses to get a loan from a bank than it was for households, and he questioned whether banks should be allowed to charge business customers more than
personal customers if they were buying similar products. He said that while business lending was seen as a bigger risk to banks than lending to personal customers because of income instability and the absence of security against assets, this was generally reflected in the interest rates ultimately charged – leaving a question mark over the level of fees. Smith said banks’ lending criteria also needed more transparency for business financial products. “It is harder to compare business loans than home loans because many lenders don’t display their products the same was as personal lending products,” he said.
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For information on the Five Oceans World Fund visit www.5oam.com This information is general information, not advice and is provided by Challenger Managed Investments Limited ABN 94 002 835 592, AFSL 234 668 (CMIL), the responsible entity and issuer of interests in the Five Oceans Wholesale World Fund ARSN 117 060 769 (Fund). It does not take into account any person’s investment objectives, financial situation and particular needs. Because of this, investors should consider these matters, the product disclosure statement (PDS) and the appropriateness of the Fund (including any risks) before deciding whether to acquire, continue to hold or dispose of units in the Fund. A copy of the PDS can be obtained from www.challenger. com.au. Five Oceans Asset Management Pty Limited AFSL 290 540 is the investment manager. If you acquire or hold the product, we and/or the Challenger group of companies will receive fees and other benefits which are generally disclosed in the PDS or other disclosure document for the product. We and/or the Challenger group of companies and our respective employees do not receive any specific remuneration for any advice provided to you. However, financial advisers may receive fees or commissions if they provide advice to you or arrange for you to invest in the Fund. Five Oceans Asset Management, some or all of Challenger group companies and directors of those companies may benefit from fees, commissions and other benefits received by another group company. www.moneymanagement.com.au July 7, 2011 Money Management — 9
SMSF Weekly SMSF auditor registration the key By Mike Taylor THE Institute of Chartered Accountants in Australia (ICAA) has given its backing to stronger registration proposals for self-managed superannuation fund (SMSF) auditors. Discussing the issue with members last week, the ICAA’s head of superannuation, Liz Westover, said the organisation had been a strong and vocal supporter of the proposal to create a register of SMSF auditors, governed by the Australian Secu-
rities and Investments Commission (ASIC). “The register alone isn’t a fix, but it will bring about the capacity to instil high standards in our members. A competency test – as proposed by ASIC – simply will not achieve this outcome,” she said. Westover said the proposed auditor registration process would bring about significant benefits. “Half of all SMSF auditors currently undertake five or less audits per annum – many of these
simply will not go through the registration process given they undertake such low numbers of audits,” she said. “Such a degree of rationalisation can only serve to benefit the SMSF industry, with the remaining auditors more focused, skilled and experienced.” Westover argued that the implementation of a competency exam would test knowledge and knowledge alone, and that “it would fail to ensure that the auditing of SMSFs is being conducted correctly and appropriately”.
Australians still unprepared for retirement AUSTRALIANS still aren’t doing enough to prepare for retirement, according to new research released by Roy Morgan Research. However, those who have called on the services of financial planners have generally felt happy with the value they receive. The research confirmed that of the 7.5 million Australians who have superannuation, 66 per cent have not started planning for retirement – including around one million people deemed to be
in the critical pre-retirement age group. The Roy Morgan Research Retirement Planning Report also found that Australians were still struggling to understand superannuation, with only 46 per cent of respondents regarding themselves as ‘very knowledgeable’ or ‘fairly knowledgeable’. The research found that while knowledge of superannuation increased with age, it was still relatively low even among the pre-
retirement group aged between 50 and 64, where only 59 per cent felt knowledgeable to some extent. “With a generally low level of overall retirement planning and knowledge of superannuation, it will become increasingly important that people with superannuation make more use of professional financial planners,” the Roy Morgan analysis said. The survey found that around 40 per cent of those with superan-
nuation had used a financial planner, with this rising to 59 per cent in the pre-retirement age group. Commenting on the findings, Roy Morgan Research industry communications director Norman Morris said a large number of people who had not used a financial planner (or were not in an active advice relationship) continued to reflect a level of apathy in the market towards financial planning, which planners have not yet been able to overcome.
Caution urged on SMSF pensions PEOPLE receiving pensions via self-managed superannuation funds (SMSFs) have been reminded of their obligations as they move up to the close of the financial year. Cavendish Superannuation head of education David Busoli said SMSF recipients had to ensure that at least the minimum pension had been paid in the financial year. He said if this was not the case, the member would not be regarded as having been in receipt of a pension but, rather, be deemed to have received lump sum draw-downs instead. Busoli said that being deemed to have received lump sum drawdowns could create both tax and preservation issues. He said an SMSF could provide the pensioner with a cheque to make up for any shortfall on 30 June even if the cheque was not banked for a few days into the new financial year.
New gearing package for SMSF trustees By Damon Taylor SELF-managed super fund (SMSF) administrator Multiport has launched an SMSF gearing package as an extension to its core administration services. Aimed at both financial advisers and SMSF trustees themselves, the service covers all aspects of documentations and loan applications, thereby ensuring that the trustee’s desired purchase can take place in a timely and efficient manner. Commenting on the new service, Multiport chief executive John McIlroy said that he had seen a marked increase in the number of SMSF gearing enquiries over the last 12 months from both advisers and trustees. “SMSFs now form the largest component of the superannuation market and continue to grow at an annualised rate of over 20
per cent per annum,” he said. “But the rules around gearing a property in an SMSF are complex, and its essential to tailor the right loan to suit the needs of the trustee. “There remains confusion around the process and what needs to take place in order to complete the purchase smoothly … this solution fills the void.” Recep Peker, analyst at financial services research house Investment Trends, also acknowledged that gearing was on the rise within SMSFs. “Our survey last year showed the number of SMSFs using gearing going up gradually,” he said. “But I would also point out that that is off a small base. “Back in July 2008, there were about 13,500 SMSFs using some form of gearing within their fund and that increased to 29,000 by April 2010,” continued Peker. “Now while I don’t have the numbers from
Investment Trends’ upcoming SMSF Investor Report, I think that SMSF gearing has continued to go up.” Peker said that it was also interesting to note that within Investment Trends’ High Net Worth Investor Report, the use of gearing was noticeably coming down. “So what seems to be happening is that they’re doing less gearing outside their super but more gearing within their SMSFs,” he said. Asked whether the increased use of gearing was a sign that SMSF investors were becoming more sophisticated, Peker declined to comment. “But we do SMSF planner and accountants’ reports as well and in terms of what they say, I think it might be more awareness-driven than anything else,” he said. “For instance, when we asked investors last year how likely they were to use geared
Recep Peker products in the next 12 months, we had only 3 per cent saying ‘I was not aware that I could borrow to invest in an SMSF’. “And that can be contrasted with just over half of our respondents, who said that while they were aware that borrowing to invest was possible, they unlikely to do so.”
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Call Andy O’Meagher on 1800 230 737 or visit act2.com.au for further information 10 — Money Management July 7, 2011 www.moneymanagement.com.au
InFocus Hoping for the best, expecting the worst Many financial planners have lost faith in the Federal Government’s willingness to inject balance into FOFA and, as Mike Taylor writes, this attitude was not helped by recent comments from the Assistant Treasurer, Bill Shorten.
T
he Federal Government has probably never regarded the financial planning industry as Australian Labor Par ty hear tland, but a number of recent surveys undertaken by Money Management and others have revealed the degree to which the proposed Future of Financial Advice (FOFA) changes have created an even deeper distrust. What those surveys reveal is that while a majority of financial planners were prepared to embrace the broad findings of the 2009 Joint Parliamentary Committee into the financial planning industry chaired by the Australian Labor Party’s Bernie Ripoll, that support has been progressively eroded by the Government’s approach to the FOFA changes. Indeed, the surveys point to the fact that the straw which broke the camel’s back for advisers was not the high-cost and administratively difficult ‘opt in’, but the surprise announcement by the Assistant Treasurer and Minister for Financial Services, Bill Shorten, that the Government would be banning commissions on all risk products within superannuation. It is worth remembering that the Ripoll Inquiry’s final set of recommendations were released with bipartisan support and that, in broad terms, they were welcomed by the major financial services organisations: the Financial Planning Association (FPA), the Association of Financial Advisers (AFA) and the Financial Services Council. This is hardly surprising, given that those recommendations were: 1 – Planners should have a fiduciary duty to clients; 2 – ASIC should be better resourced by the Government; 3 – Planners should be required to make better disclosure; 4 – Payments from product providers (commissions, in other words) should be brought to an end; 5 – The Government should consider making fee-for-ser vice payments tax deductible for the client; 6 – ASIC’s powers should be extended to banning individuals from the industry; 7 – Agribusiness licensees should have more working capital; 8 – ASIC should be given the power to deny, suspend or cancel licences where there is reasonable belief that a licensee ‘may not comply’ with their obligations; 9 – A Professional Standards Board should be established; 10 – A statutory last-resort compensation fund for investors should be established; and 11 – There should be more effective education for those who have not sought financial planning advice before. All these many months later, few people in the financial planning industry would find reason to argue with the Ripoll recommendations. There are, however, deepseated concerns about the directions that
ADVICE SNAPSHOT Average superannuation balances by age group (as at December 2009) Age
were pursued by the Government thereafter – and particularly under Shorten’s watch. In particular, there are concerns that the Government’s final position on FOFA carries a far closer resemblance to the position adopted by the Industry Super Network than that intended by the Parliamentary Joint Committee. Nowhere in the Ripoll recommendations was any reference made to the notion of
with respect to opt in and risks commissions, but was not prepared to change. The degree to which this has deeply eroded the planning industry’s trust in the Government is revealed in the latest Money Management survey which found more than 90 per cent of respondents believed the Government’s final FOFA changes would be neither viable nor acceptable. Asked whether they believed the major
60-64
$73,754
55-59
$79,245
50-54
$71,762
40-44
$46,599
30-34
$24,617
20-24
$6,159 $0
$50,000
$100,000
Balance Source: AMP Retirement Adequacy Index
What’s on
FPA seminar: FOFA Proof Your Practice 19 July, 2011 Wesley Conference Centre, 220 Pitt St, Sydney www.fpa.asn.au imposing an opt-in requirement on financial planners, and while there was discussion around ending commissions with respect to the provision of financial advice, this did not extend to commissions relating to the sale of risk products – particularly within superannuation. When the industry consultation process around the FOFA changes began, there existed reasonable hopes within the financial planning industry that while it would have to accept some unpalatable changes it would, nonetheless be able to extract enough compromises to end up with a workable solution. Some of those compromises appear to have been achieved with respect to the grandfathering of some volume payments and the ultimate definition of ‘best interests’, but this has been significantly offset by the Government’s seemingly hard-line approach to opt-in and risk commissions within superannuation. The unwillingness of the Government to offer further compromise was demonstrated by Shorten when he addressed the Association of Financial Advisers last week and made clear that he had heard the planner arguments
financial planning groups would be successful in negotiating a viable outcome on FOFA, 92 per cent of respondents said they believed the outcome would be “unacceptable”. Six per cent of respondents said that while the FOFA outcome might prove to be viable, there would be some elements that the industry would not like. Only 2 per cent of respondents believed that “necessar y compromises will be reached” with respect to gaining a viable outcome on FOFA. What the Money Management survey also revealed was strong support for a legal challenge to the legislation which evolves out of the FOFA changes, specifically the opt-in requirements on the basis that it would stand in conflict to existing contracts law. Perhaps just as importantly, a significant majority of respondents said they would be prepared to help fund such a legal challenge. While the major financial planning groups such as the FPA and the AFA continue to lobby the Government for some further accommodations around opt-in and risk-based commissions, they must face the reality that many of their members already regard FOFA as a lost cause.
FINSIA seminar: Are financial planners still relevant in the property distribution chain? 20 July, 2011 Metcalfe Auditorium, State Library, Sydney www.finsia.com
AFA National Roadshow 27 July – NSW; other states see website Doltone House, 19/21 Pirrama Rd, Pyrmont, Sydney www.afa.asn.au
FSC Annual Conference: Navigating Change 3-5 August, 2011 Gold Coast Convention and Exhibition Centre www.fscannualconf.org.au
SPAA State Technical Conference 2011 10 August, 2011 Sofitel on Collins, Melbourne www.spaa.asn.au
www.moneymanagement.com.au July 7, 2011 Money Management — 11
Fixed interest
Coming in from the cold As the dust settles on the post-GFC world, Janine Mace discovers that the previously mundane world of fixed interest investments is now in vogue. NOBODY ever brags about their bond investments at a mate’s barbeque. At least that is the traditional view, but it looks set to change with boring old bonds now becoming quite fashionable. As FIIG Securities director of planner services, Dr Stephen Hart, remarks: “The post-GFC world is much more conservative, and bonds are the new black.” It seems the losses equity investors incurred during the global financial crisis (GFC) have left deep scars. “Investors now want to be confident they will have return of capital, as much as a return on capital,” explains Perpetual Diversified Income Fund portfolio manager Vivek Prabhu. Concern about capital protection is translating into a higher level of investor interest in the fixed interest universe and the various ways it can be used when constructing a portfolio. Ab e rd e e n A s s e t Ma n a g e m e n t Australian head of fixed income Victor Rodriguez agrees that investors are taking a fresh look. “We are definitely seeing increased interest by financial planners and investors in fixed interest products,” he says. Over at Perpetual the story is the same, according to fixed interest portfolio specialist Adam Curtis. “ We are s e e i n g i n c re a s i n g i n t e re s t a n d a n increasing appetite for this type of investment,” he says. By way of example, Curtis cites the inflows into Perpetual’s Diversified Income Fund, which increased from $100 million in 2008 to $410 million in 2011. T h e i n t e re s t m e a n s Pe r p e t u a l i s spending more time educating advisers and paraplanners about the asset class. “There has been a huge increase in demand for fixed interest education after the GFC,” Curtis says. Pimco Australia has also seen its inflows rise, according to head of global
Key points • After the trauma of the global financial crisis, investors are looking to the stability of fixed interest. • Compared to Australia, US portfolios have a significantly smaller allocation to shares. • Australian financial planners are starting to appreciate the benefits of fixed interest. • The launch of fixed interest exchangetraded funds will help boost retail investment. wealth management Peter Dorrian. “Inflows for this financial year are up by a factor of two-and-a-half times on last year, which was up two times on the previous year. It is very interesting, given the broader industry inflow data is flat,” he says. “There has been a lot of interest by financial planners, particularly given the excellent performance of bond funds.” Attention is coming from right across the client spectrum. “A sign of the uptick in adviser interest is it is even being used by private banks and high-networth [HNW] clients, who are traditionally not so interested,” Dorrian notes.
Shifting investor attitudes
When it comes to the reason for the surge in interest, Dorrian believes the performance figures speak for themselves. “We are coming up to the third financial year in a row where the performance of fixed interest and bonds has gone against investor expectations. Most of our bond portfolios are heading for 9-10 per cent, while the ASX200 looks like ending up with 8 per cent. Over time this has got to shape how an investor views these assets,” he says. The last few years have shaken both advisers and investors, leaving many
12 — Money Management July 7, 2011 www.moneymanagement.com.au
asking fundamental questions about portfolio construction, according to Dorrian. “Advisers have traditionally looked for a growth and an income component in their portfolio, and the income compon e n t s u s u a l l y c a m e f ro m A R E I Ts [Australian Real Estate Investment Trusts]. But after the AREITs crashed, they needed to replace them with something else for income and this has led them to reconsider fixed income. This has had a significant impact on portfolio construction at the retail level,” Dorrian says. “The freezing up of mortgage funds has also had an impact. Those two things have helped advisers to get clients to look at fixed interest.” There is also renewed interest in developing portfolios that achieve a specific investment goal, rather than fo cu s i n g p u rely o n ach i ev i n g h i gh returns. “Post-GFC there is a greater focus on what assets to hold and how you match them to your liabilities,” Hart explains. Following the GFC, many experts believe local investors are slowly recognising a large allocation to equities may not be the right approach for the new investment environment. “Australian portfolio construction is unusual with its very heavy weighting to shares. In the US, the core of a portfolio is 40-45 per cent in fixed interest, and then advisers use shares almost as a tactical investment around that,” Dorrian explains. Hart agrees most Australian investors are very overweight equities compared to international investors. “Often they hold 70 per cent equities, when the common rule of thumb is to own your age in bonds.” Ongoing equity market volatility has also made investors wary. “Some advisers are getting tired of
sharemarket volatility and the continuing influence of bad news. This is leading them to consider having a fixed exposure to fixed interest at the core of the portfolio,” Dorrian says. Bonds can also be a valuable counterweight to sharemarket fluctuations. “Investors need to get long duration bonds as they are the best offset for equity volatility,” Nash says. The basic building blocks of a properly constructed portfolio are equity and fixed income. “Properly diversified portfolios should be across all asset classes – not just shares, some property and cash,” he says. “The new fiduciary responsibilities mean financial planners can’t ignore fixed interest. It is in the interests of the client for financial planners to be fully across fixed interest assets,” Nash says.
The role of fixed interest
Dorrian believes planners are starting to appreciate the various tasks fixed interest can fulfil in a portfolio. “Allocations to fixed interest provide stronger returns and strong diversification benefits,” he says.
Fixed interest
Dr Stephen Hart Hart agrees bonds have an important role to play, because they provide more certainty of return and future value. Rodriguez believes high quality investment bonds can be used to provide both protection and a buffer when equity returns fall. He urges advisers to think carefully about what they hope to achieve
with a fixed interest allocation. “Planners need to fully understand what they want from a fixed interest portfolio. Is it above cash returns when shares fall – a diversification benefit – or do they want inflation protection? Or is it purely capital preservation on that section of your portfolio? Is it yield enhancement?” Rodriguez asks. Prabhu agrees advisers need to be discerning. “There are lots of opportunities within the fixed interest universe, but advisers need to make distinctions about what attributes they are looking for in their fixed interest allocations.” This can be vital, as chasing higher yield – even within a fixed income allocation – can have important consequences. “Investors have learnt they cannot focus only on yield, as more yield leads to changes in the nature of the fixed interest portfolio,” Rodriguez explains. Prabhu agrees: “If you are going to chase yield, then you can lose the attributes of a defensive investment. The more you move away from defensive attributes, the more you are introducing attributes that do not perform as you would expect a defensive
“
If you expect fixed interest to be a defensive asset, it is meant to give you confidence to take risks in other parts of the portfolio. - Vivek Prabhu
”
asset to perform. If you expect fixed interest to be a defensive asset, it is meant to give you confidence to take risks in other parts of the portfolio.”
Battling inflation
According to Nash, advisers are beginning to understand the benefits fixed
interest allocations can bring when it comes to financial planning. “The future of value of a bond is certain and it can be matched to a future liability – for example a trip around the world in two years time. This leads to more control over a portfolio.” Although liability matching is important, the rise of inflationary pressures also needs to be considered. This is where inflation linked securities come into play, Hart says. “You have lower income in retirement, but research shows it is disproportionally more affected by rising fuel a n d f o o d c o s t s. T h i s h a s a g re a t e r impact on lower incomes,” he says. Nash feels the potential for inflationary price rises is an important issue for advisers and clients. “Inflation-linked bonds [ILBs] are very valuable as the RBA cannot control many headline inflation areas. We could see a period where headline inflation is within the RBA band, but some areas like food and f u e l a re m u c h h i g h e r. T h i s i s a b i g Continued on page 14
www.moneymanagement.com.au July 7, 2011 Money Management — 13
Fixed interest Continued from page 13 concern for retirees as they face costs every day.” Rodriguez agrees inflation is a major issue for investors, particularly given t h e c u r re n t t re n d s i n t h e g l o b a l economy. “Investors are concerned b e c a u s e e m e r g i n g m a r k e t s a re n o longer deflation exporters, and there are increasing inflation trends around the world. Inflation-linked bonds are the asset class of choice for that problem and we are seeing a growing demand for those products.” According to Hart, ILBs are easy to access and offer a reasonable yield. He points to the 3 per cent real yield offered by NSW Treasury Corp and Queensland Tre a s u r y Co r p i n s t r u m e n t s a s a n example. “If you do not need liquidity, Sydney Airport inflation-linked bonds offer 5 per cent real yield which is effectively around 8 per cent nominal. This is an equity-like return with half the risk. You are a senior holder, and these are very attractive securities – and they also perform well in a recessionary environment,” he notes.
Opening up the market
With interest in fixed interest growing, the proposed ASX launch of fixed interest exchange-traded funds (ETFs) is seen as being vital for boosting retail investment. “E T F s w i l l b e g i n t o o p e n u p t h e market, especially for those not wanting to use managed funds,” Dorrian says. “However, it is likely to be at the end of the year or early next year before we see the rules change to allow ETFs based on fixed interest.” Dorrian believes ETFs will open up fixed interest up to the broker advised and self-managed superannuation fund (SMSF) markets in Australia. Pimco currently offers a big suite of ETFs in the US, but is waiting for amendment of the ASX rules before launching products here. Australia is likely to follow the global trend in this area, according to Curtis. “Globally ETF numbers are meaningful and you would expect demand here would be strong.” When they are launched, ETF products are likely to offer investors new options by cover ing assets such as senior bank debt, Hart says. “EFTs are not likely to be based on the composite index due to the illiquid corporate names in that index. However, the semigovernments could go in and that would make a good index.” A stumbling block for smaller investors wanting to access fixed interest has been the minimum parcel size of $500,000 offered by most issuers into the Australian bond market. However, the move by brokers to buy wholesale parcels and break them up into smaller $50,000 face value parcels is changing this situation. “Sometimes these smaller parcels are offered to investors with a price as low as $35,000$40,000,” Nash says. FIIG Securities offers smaller parcels, together with a complimentary asset allocation service to assist financial
ETFs will begin to open up the market, especially for “those not wanting to use managed funds. ”
- Peter Dorrian
Peter Dorrian planners put together appropriate client portfolios. “This is getting good traction with financial planners, particularly those with SMSFs and older clients wanting good cash flow,” Nash notes. “Financial planners like the direct control, transparency and the fact there are no fees if held to maturity.”
Going deeper
Ev e n w i t h t h e a r r i v a l o f E T F s a n d smaller parcels, the Australian market still has some way to go until it resembles overseas capital markets such as the US, which has a very broad and deep bond market readily accessible to retail investors. “There are still not enough products available and this can be seen as the
14 — Money Management July 7, 2011 www.moneymanagement.com.au
listed bonds that are available are very overbid,” Nash notes. He believes smaller retail parcels will help advisers gain the confidence to develop tailored portfolios. “With a $200,000 portfolio of fixed interest, it can be a well diversified portfolio.” However, not everyone is certain this is the best approach. As Curtis notes: “The lack of direct debt securities makes it hard for retail investors to get good diversification. Diversification in a debt portfolio is arguably more important than in an equity portfolio as the upside is capped for debt securities.” Dorrian is also sceptical. “If the parcel size changes, I am not sure it will lead to greater investor interest and financial planners will have problems with the concentration risk with a direct portfolio.” Everyone agrees there is a role for the
Government in fostering the fixed interest market. “It is in the Government’s interest to get more people into bonds to reduce their future pension liabilities,” Nash argues. Hart agrees: “We need to see greater attention to the regulatory requirements s o t h e y l e a d t o a n i n c re a s e i n t h e number of issuers and increased interest by small issuers. Then they are not totally reliant on bank finance.” This issue has been recognised by the Senate Economics Committee, which recently recommended the Government establish a working group from Treasury, the Australian Prudential Regulation Authority, RBA and the banking and superannuation industries to explore ways to promote investment in deposits and fixed income assets by super funds and other funds managers. MM
Fixed interest
Rough seas ahead With fixed interest gaining attention, Janine Mace takes a look at what the future holds for the sector.
W
hen discussions about s ov e re i g n d e f a u l t a n d b o n d h o l d e r h a i rc u t s become the stuff of the nightly news, you know things are pretty unsettled in international fixed interest markets. It’s probably a trend we need to get used to, since bond market volatility looks unlikely to disappear any time soon – making picking the outlook even harder than usual. “There are going to be a lot of very different outcomes in different parts of the world,” explains Pimco Australia global wealth management head Peter Dorrian. “It will be an environment of continued volatility, and diversification will be essential.” Perpetual Diversified Income Fund portfolio manager Vivek Prabhu agrees these are interesting times, with the flow-on effects from the global financial crisis (GFC) having a significant impact on the asset class. “ T h e G F C h a s l e d t o re g u l a t o r y changes – especially Basel III – and this has seen increased capital and liquidity requirements. This is positive for bondholders but not so much for equity holders,” Prabhu says.
Asking the hard questions
T h e b i g i s s u e h a n g i n g ov e r b o n d markets is the ongoing concern about the level of European government debt and the strength of the US recovery. “The problem will be what happens in Europe, and to a lesser extent in the US with its economic growth,” explains FIIG Securities director of strategy and market development Dr Stephen Nash. Dorrian agrees the current environment is tricky for investors. “It is not just a developed market versus developing market split, but also about the way different governments have tried to address the debt problem after the GFC,” he says. “They took different approaches and it is too early to determine the result. For example, the UK has been much more realistic that everyone will have to pay a price for the consumption binge, while in the US there seems to be a collective sense of denial.” Like many in the sector, Dorrian is concerned about the US’s huge debt burden. “To get the US budget back into balance it would need 4 per cent growth Continued on page 18 16 — Money Management July 7, 2011 www.moneymanagement.com.au
Fixed interest Continued from page 16 per annum for 10 years,” he says. While it needs to sort out the debt ceiling question, there is also uncertainty about the impact of ending the Federal Reserve’s quantitative easing program. “Stimulus is coming to an end, as has consumer spending. It is difficult to see how the US will get out of it without increasing tax,” Dorrian says. “There doesn’t seem to be any political will to sort out this issue.” Ab e rd e e n A s s e t Ma n a g e m e n t Australian head of fixed income Victor Rodriguez agrees there are risks for bond markets, but remains optimistic. “Bond markets have rallied due to the disappointing US economic data, but we are not likely to see a double dip. Some of the weakness is due to data from Japan, but we are not seeing an oil price spike. A rally in bonds is not likely to be sustained,” he says. “The risk issues are coming from Europe – mainly Greece – but these risks are affecting credit markets rather than interest rate markets.” The outlook for the Australian market is more straightforward, according to Rodriguez. “We believe the RBA will be raising rates over the next 12 months, and we think we will see two hikes this year. Inflation pressures will force the RBA’s hand to some extent. This means
Dr Stephen Nash domestic bonds will slightly underperfor m cash as markets are not fully pricing in likely rate moves.” After a good performance since the GFC, credit markets are looking less attractive. “When it comes to investing in credit, we are still constructive but cautious. We like high-grade investment credit, but are cautious on lower grade credit investment,” Rodriguez says. In this environment, credit spreads are expected to reduce. “We will see a slow, continuous spread compression, however, we are not expecting it to be a radical compression,” Nash says.
Staying afloat
Advisers may find they have more funds to allocate to fixed interest, since the appeal of term deposits is likely to wane in coming months. “We have seen high deposit rates in banks – particularly in term deposits – b u t w i t h t h e c a s h ra t e i n c re a s i n g ,
spreads are narrowing,” Prabhu says. “The term deposit premium over the cash rate has narrowed in recent times and this has led to less inflow.” This will mean picking the sectors most likely to perform in the near future, and floating rate paper is viewed as the best bet at the moment. “Rates rallied in the past month or so, so we prefer floating to fixed at the moment,” Nash says. “We are doing quite well now with the floating rate at around 5.5 per cent return.” The RBA’s bias towards tightening interest rates further means the experts believe now is the time to stay at the short end of the curve. “We have a preference for short-term durations as interest rates are predicted to rise,” Prabhu says. “Short duration is quite compelling in Australia due to the high cash rate.” One of the other attractive areas in the market is corporate bonds. “We like the corporate sector a lot due to the deleveraging that has occurred and the decline in the average gearing level. There is also stability in profitability,” Prabhu says. Dorrian agrees: “Some parts of the corporate market are ver y good, as many companies used the post GFC per iod to re-arrange their balance sheets. They look pretty good to us. Some areas of the mortgage market also look good, although you need to avoid the subprime and areas of the overseas commercial property market.” For Nash, some of the paper from financial issuers looks attractive. “We expect to see a reasonable performance by insurers – and particularly general insurance – as there may be a takeover premium because banks can only look at taking over general, not life, insurers.” There are also some market sectors that are best avoided. “There are some geographic areas, for example the PIIGs [Portugal, Ireland, Italy, Greece and Spain] where the debt ove r h a n g i s s o g re a t i t c a n’t b e re arranged,” Dorrian says. He i s a l s o c o n c e r n e d a b o u t consumer-related sectors. “There are some sectors of the bond markets that should be avoided. Those very heavily leveraged to the consumer are worth avoiding.” Nash agrees this is a potential problem area. “The sector most likely to do badly is retailing, but there is not a lot of diversity in the Australian offerings.” However, Nash emphasises fixed income investing should not be about picking winners. “It is not about trying to pick the direction of rates, but about trying to cut the rate of risk in the portfolio.”
Taking the right course
Unsurprisingly, the active managers believe the current investment environment suits taking an active approach to a bond portfolio. “Active management will be essential in portfolios – particularly in the bond market – as everything is going in different directions,” Dorrian argues. Prabhu agrees: “It can adversely affect the outcome if you passively follow the index – especially at the moment. In this environment, active management is
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It is not about trying to pick the direction of rates, but “about trying to cut the rate of risk in the portfolio. ” Nash - Dr Stephen
most suitable due to the volatility and uncertainty in the market as this creates opportunities to add value.” They argue the composition of the key indices used to benchmark most bond funds makes active management vital. “ The bond index is market value weighted, which means it is weighted to the US, Japan and the developed markets. These are the areas where debt is continuing to accumulate,” Dorrian explains. Prabhu agrees: “You need to think about what a passive allocation would mean. You would get a lot of Southern
European government debt. It means a massive allocation to high yield sovereign risk.” As an active manager, Rodriguez agrees now is not the time for a passive approach. “In the index, the bigger weights are going to the bigger borrowers.” He believes many advisers and clients do not appreciate the impact of how the key fixed interest indices are constructed. “Financial planners need to understand that investment in the index is not a risk-free approach. You are also taking on – or blindly believing – rating agency assessments that something meets the grade for inclusion.” MM
Risk roundtable
Risk roundtable
Left to right: Brett Yardley, Mike Taylor and Col Fullagar
The upcoming Future of Financial Advice reforms will see the removal of commissions on life risk products in super. Money Management conducted a roundtable discussion with leading industry players about the likely impact of the changes, along with the problems of underinsurance and churn. MT Welcome gentlemen. The topic is risk and life and the state of the market. But I think the biggest thing to affect the market so far this year was the left field play by the minister in terms of having commissions banned on all life risk products within super. And I thought I might kick off by going straight to Brett and asking: how do you think that’s going to affect the market, as well as the business structures of individual advisers?
BY Well I certainly think it’s going to create a whole lot of extra complexity. There’s still a lot of uncertainty remaining in terms of how it will work and how things will be structured inside and outside of super. It creates a whole lot of new complexity in terms of potential differential pricing or differential funding of fees inside and outside of super. How that then marries up with the best advice requirement is going to be especially complicated, particularly if you have a product that’s theoretically cheaper in super than it is outside of super. How advisers and how the market will make sure that customers’ needs are being met in the most appropriate way just introduces a whole lot of extra complexity. The other challenge is consumers’ willingness to pay that fee – albeit the overall cost to them may end up being exactly the same. But the perception of paying the fee
for a product that is probably not as high on their own personal desire list as we’d like it may be one barrier too far, and I think that will cause some real challenges for the penetration and underinsurance issue.
MT Simon what do you think? You’re coming at it from two angles: from the manufacturer’s background and now from the advisory background. SH From the advice perspective it takes away consumers’ choice in how they pay for their insurance premiums, so we think that’s bad. Overall we think that particular bit of policy is poor policy, probably delivered on the fly for political reasons. It will probably lead to an exacerbation of the underinsurance problem in Australia. Combined with the best interest legislation that’s going to go through, it provides a possible conflict for advisers. On the one hand, best interest may dictate that they ask their clients to take insurance outside of superannuation or inside of superannuation, but then there’s the client’s willingness to pay for the insurance either inside or outside superannuation. So yes, we think it’s going to add complexity to advice businesses. MT Andrew? AM I’d agree, it’s definitely going to add complexity. I really struggle with this one
20 — Money Management July 7, 2011 www.moneymanagement.com.au
Present: Mike Taylor
–
Managing Editor, Money Management.
Brett Yardley
–
Head of Retail Life,TAL
Simon Harris
–
Executive Manager, Guardian Financial Planning
Andrew McKee –
Financial Planner,Australian Unity
Col Fullagar
National Manager, Risk Insurance, RI Advice
because part of the rationale for FOFA [the Future of Financial Advice] was to remove conflict – and here we are deliberately introducing a brand new conflict into the system. I really struggle to see what purpose it serves. I don’t understand who we’re trying to protect in this process. I think you’re right, it’s going to be really difficult for advisers and it’s going to place them in a difficult position. They’re going to have to make decisions about different pricing structures and different fee versus commission structures. It’s going to be challenging and it’s added a lot of complexity into the system for advisers.
BY Simon, I think your point is a good one. It basically removes choice. CF I disagree. BY That’s not unusual. MT Col what impact do you think the Government’s decision to ban commissions on life risk inside super is going to have? So given these three gentlemen have had their say, I’ll throw to you in the expectation that you have no opinion whatsoever. CF It depends whether or not you agree with what I’m about to say. I think the answer is it depends how we approach it. If we approach it in the traditional way I think it will be a bit of a mess. If we approach it in
–
Life companies are “paying on the basis of new premiums and retention of old premiums. Is that an appropriate way for you to be remunerated? - Col Fullagar
”
an imaginative way I think we can get a good result out of it. So it’s a bit like focusing on compliance, if you focus on compliance you’ll give lousy advice that complies; if you focus on good advice you’ll give advice and it will probably exceed compliance. FOFA is in a sense a bit of a furphy. The issue is do we have the remuneration structure for risk insurance right. And if the answer is yes, well then FOFA is probably a bit of a challenge. If the answer is no, let’s focus on getting the structure of risk insurance right then we’ll look back over our shoulder and probably find out that FOFA isn’t really a problem. That’s roughly where I come from.
BY One of the challenges there Col – and look I agree with a fair bit of what you’re saying – is that at the moment everything suggests that the current remuneration
Risk roundtable model for risk insurance is not flawed. It works for customers, it works for advisers, and it works for the industry as a whole.
to dry, and that they’ve been made scapegoats for a whole lot of things that are outside of their control – whether it’s product failures or the GFC. Now we’re adding more complexity, and it doesn’t make sense. But I guess out of the back of this process we’ll have a stronger industry and hopefully we’ll have more consumer trust in the advice process. And if that’s the only positive that we get out of it then that could be something that we can look forward to.
Simon Harris
CF Is it right? BY It works. CF And is it working? We’ve got printed rates here but we’ve got a churn rate that’s probably approaching 20 per cent, which is probably adding about 10 per cent to the premium rate. Life companies are paying on the basis of new premiums and retention of old premiums. Is that an appropriate way for you to be remunerated? Have we got advisers appropriately remunerated? I think the answer is no. It may be working, but so are tied agencies.
CF I’m not saying that those who disagree with this shouldn’t fight tooth and nail to stop it. All I’m saying is if they fail in stopping it I would much rather have used some of that time to come up with a viable way forward, so that if they do fail to stop it we have a ‘Plan B’.
AM But then is creating a conflict situation where you can pay advisers one way outside of super and another way inside of super necessarily the right step?
SH And that’s exactly what we’re doing. CF And if they do stop it, the Plan B hasn’t been wasted. The advisers who say ‘even though I can do all of my risk on commission – even the stuff within super – I’ve still got all this investment stuff that I’d really like to have fully fee-based’. And so the time we’ve spent – even if we do stop it – enables those advisers who want to go fully feebased to have a model that they can use to do that. I reckon that would be a pretty good outcome.
CF That would be problematic if we accepted it as the final outcome. But if we don’t accept that as the final outcome, if we actually say ‘that’s going to be a bit of a fight’, can we get a fee structure to work for risk? And then if we say to advisers, ‘Look, if we can get a fee structure that is no greater admin burden and doesn’t adversely impact your bottom line would you be interested?’, I reckon the answer will be yes.
Dealing with churn
AM I think the answer will be yes as well, I just don’t know whether you’re going to get an answer. I admire the principle but people have been thinking about these issues for a long time. So I’m not sure that in the next 12 months we’re going to have a solution. That’s what worries me: the speed of this coming upon the industry.
SH Can we go back to the outcomes that the Government hoped to achieve through its efforts to stop things like Storm occurring again (and I know Storm was a fee-forservice model and it didn’t include insurance commissions) via the Cooper Review and taking the conflicts out of the advice process. Do these reforms, particularly optin and taking commissions out of risk in super, achieve any of those outcomes? I think that’s the question we should ask, and the answer is clearly ‘no’ in my mind.
CF With due respect to the Government, I think there’s not a heck of a lot that the Government does that achieves it, and I think that’s why we don’t focus on it. Art royalties were meant to achieve protection of indigenous art, and it has actually destroyed it to a certain extent. I think there is a fee-based model that can work and it’s very close to being tested, so I don’t accept we can’t get a fee-based model that would potentially work. Whether or not it would be wholeheartedly embraced by the industry is a different question. BY But then wouldn’t we be better off in the alternative where we give customers and advisers the choice between commission-based remuneration or fee-based remuneration? CF They’ve got a choice now – it’s just potentially very messy. ‘I’ll do your investment on a
We’re adding an extra level of complexity to an already “complex advice business and combining that with the
”
systemic contraction of trust around the advice industry. - Simon Harris
MT I’m going to move the conversation along a little because Col threw up that ugly word ‘churn’, and at a recent Financial Services Council forum on risk insurance it came up there as well. It was suggested that churn is an ongoing burden to the industry in terms of its credentials in the minds of consumers and its critics. So how do you stop the churn, and what’s the industry doing to stop it? CF It’s encouraging, each insurer has their churn terms. AM Otherwise known as takeover terms.
fee; I’ll do your risk in super on a fee; and I’ll do your risk outside of super on commission’ – that’s awful. Money Management rang us up a couple of days before FOFA and asked: ‘What are you going to be doing once you find out?’ I said we’ve pretty well already done the work. Do the work before it’s inflicted upon us. Let’s assume it’s going to be inflicted, and if it is inflicted the way it looks like it will be, can we turn it into a positive? I think we can – I think we have to.
AM I don’t think it’s going to kill the financial advice industry, it’s just part of its evolution. I guess the only thing I would say is I can’t rationalise having two different structures inside and outside of super. CF I agree with you entirely. If that’s inflicted on us we are far better off to have assumed it will be and thought ahead. If we think we can avoid it that might be convenient, but that doesn’t necessarily give us the right outcome. AM I think there will be an ongoing evolution in this space anyway, because we’ve seen that evolution on the investment side from commissions through fee-for-service and now becoming embedded there. But on the risk side it’s a journey that’s really just
started and I don’t know that this is the right first step in that journey.
CF Self-regulation and moving calmly would always be nice. AM It creates a lot of complexities. And if you’re giving insurance under an advice fee as opposed to commission then you have to break that down because the tax deductibility of that advice fee is different based on different streams based on where the insurance is. So income protection is deductible, life and total and permanent disablement (TPD) outside of super is not deductible, trauma is not deductible, life and TPD inside of super is deductible to the super fund. So you get that complexity of having to break your invoice down, which is messy. And at the moment the commission system deals with it automatically. SH So we’re adding an extra level of complexity to an already complex advice business and combining that with the systemic contraction of trust around the advice industry. Add that to the apparent defamation of financial planners by others and you’ve got these financial planners who are really feeling like they’ve been hung out
CF Correct. SH We’ve been approached by a couple of manufacturers recently to work with our advisers to lower the lapse rates for their portfolios, and they’ve got some innovative ideas about managing that situation – including change to remuneration terms to trail remuneration terms. Some are tiering up those trail commissions as an incentive for people to keep business on the books. There’s some conversations being held with certain advisers to make sure that they are acting in the best interests of clients, and maybe the best interests will always help that. CF We’ve been approaching insurance companies for the best part of eight years to try and get them to change the remuneration structure from purely premium based to focus on those aspects of writing business that is profitable. You would know from first-hand experience and they haven’t got the time, and they’re too busy tweaking products. But I agree with you the adviser needs to focus on those things that derive value to Continued on page 22
www.moneymanagement.com.au July 7, 2011 Money Management — 21
Risk roundtable some of the FOFA reforms don’t help in managing a practice cost-effectively, so it will potentially cost some clients from getting advice, it will be too expensive for them to get advice on insurance.
Continued from page 21 the business. If keeping the churn rate down under 12 per cent or 15 per cent and focusing resources within their business does nothing to the remuneration for their business, why would they focus on it?
CF I think people like Guardian and Real are doing a pretty good job picking up that proportion of the market. I’d hate to think what their advertising budget is.
BY I’m not sure I quite agree with that. I think companies probably haven’t done enough. I think the rising lapse rates that the industry has seen over the last couple of years has probably focused people’s minds a whole lot more. And people are now thinking a whole lot more seriously about the kind of things that Simon spoke about, which is basically trying to bring greater alignment between remuneration models, so rewarding advisers based on the value they provide to the business rather than just top line premium sales. And I think that needs to continue. I suspect most insurers are paying a fair bit more attention to value than they probably were a couple of years ago when the GFC was giving us a mini boom for risk and everyone was writing and enjoying it. They’re now realising that ‘Hey, that can be a bit of a double-edged sword, we now need to think about making sure we write valuable business’. CF But if you ask pretty well any insurer of 100 per cent of the business you receive how much is ‘new’ new business and how much is ‘old’ new business, they probably won’t know. BY I know. CF Well you’re an insurer. But that’s a pretty important figure.
BY Yes, absolutely it’s crucial.
AM The direct insurer’s interest is obviously in direct written business, and that’s covering off insurance for a part of the population who are not going to see advisers. People get their information in different ways. Some people with complex needs use advisers and are happy to see them and pay for them; some people – maybe with simpler needs – are happy to use the direct tools. As an industry we just need to make sure that the tools that are available stand up and those clients aren’t getting underinsured, the ones that are going direct. And websites like the Financial Services Council’s Lifewise is a step in the right direction. But it is about broader promotion of life insurance and the benefits of life insurance out in the community.
The risk we run is that we’re going to have a whole lot of “people there who are not represented at the point of claim, and the potential there for the claims to go pear-shaped is significant. ” - Col Fullagar
SH And more broadly we know that evidence shows us that people who are advised are better insured, so it’s the articulation of the whole value of advice that’s very important, and that’s probably where we let ourselves down as an industry. We haven’t articulated the value of advice. People with advisers like their advisers and accept the value. It’s the people without advisers who we need to influence to go and see an adviser, because the outcomes for them – not only from the insurance perspective but also from their savings perspective – are much better.
valid reasons for the client. The second point is let’s focus the industry more on growing the pie and fixing the underinsurance problem. There’s still a huge opportunity to grow ‘new’ new business, in Col’s terms, so that the percentage of business that’s moving becomes a much smaller percentage of the overall risk business that’s written.
CF My concern is for those who bypass advice not so much at the front-end but the back-end, and my heart goes out to them. And the risk we run is that we’re going to have a whole lot of people there who are not represented at the point of claim, and the potential there for the claims to go pearshaped is significant – and the reputation of the industry suffers even more. That’s where my concern lies, particularly when you start analysing some of the contracts on platforms and direct and seeing some of the clauses that can be used – and how I know they will be used.
Col Fullagar
CF And I wouldn’t be surprised if the number was 50/50. BY Yeah and it is roughly. AM I would just throw a comment coming from a slightly different angle. I wouldn’t tar every adviser with this churn brush. Obviously lapse rates have increased and increased revenues, and clients were hurting, and some advisers might want to boost their revenue line through churn. But I think it’s a relatively small proportion, and I think most advisers aren’t actually operating in that space. But I just want to be cautious and say yes, I think there might be a problem, but I’m not sure it’s everybody.
Addressing underinsurance
MT Which brings me to the question of
CF I don’t think I was tarring the adviser – I think I was tarring the insurer. BY In everyone’s reports and results we’ve seen the industry results lapse rate over the past two years essentially going up by about 1.5 per cent. But is that cyclical and will it come back down, or has it moved permanently? Because if it has moved permanently, people also need to think a whole lot harder around what the longer term implications actually are. SH And I’ll pick up Andrew’s point that it’s just a very small proportion of advisers who you would term churners. Most of the advisers I know act in the best interest of their client, and when they’re moving insurance it’s for
underinsurance. We’ve been writing about it, talking about it for the best part of a decade I guess, and on my estimate the industry has really not achieved a lot in that time. Underinsurance rates as I understand it are not all that dissimilar to what they were five years ago. So what does the industry have to do, what does the Government have to do?
CF I’d say the advisers – they’re the ones I work with – I don’t think that the underinsurance problem is their problem. Their problem is to run their business and look after their clients and make sure their clients aren’t part of the underinsurance problem. If the advisers start running around trying to solve the underinsurance problem they’ll
22 — Money Management July 7, 2011 www.moneymanagement.com.au
probably ruin their business.
AM The clients of advisers are not the underinsured, it’s people who aren’t being advised where the underinsurance is the problem. And yes, I’m sure every adviser would say their doors are open for the underinsured, and if they want to knock on them they’ll help them. But not everyone will seek advice on insurance. It’s still a product that might be a reluctant purchase for some people, so it’s a challenge. People aren’t knocking down the door to get insurance. BY There’s two key points here. Firstly, how do you continually raise awareness and make people understand the importance of insurance? Secondly, how do people then look to financial advisers to get help meeting this need? You have to make sure that financial advisers are able to meet the needs of as many people as possible in a cost-effective manner. We need to think smartly about the solutions we can provide, how we can operate businesses as efficiently as possible and how we can basically service everyone. AM And not wanting to backtrack, but
BY There’s two tiers of action; there’s promoting awareness of the need, and then promoting awareness of the value of advice and the value of the service around that need. And they’re actually two slightly different problems. The awareness of the need has been the challenging one that’s endured for years and years. I think the fact that there’s now much more promotion of insurance on TV and radio and on the Internet can only be a good thing in terms of actually getting people to think about this type of stuff. Even if people essentially dip their toes in the water in a simple product to start off with a) it’s better than nothing, but b) it gets them also thinking about their more holistic needs. It also feeds into the adviser pipeline as they progress too. So I think Continued on page 24
Risk roundtable Continued from page 22 things are moving in the right direction, but it’s probably just not fast enough.
AM I imagine in five years time we’ll still be having this conversation. It’s a slow boat to turn around, but you’ve got to just keep pushing it in the right direction. CF I don’t know that you’ll ever turn it.We have come a long way. If you go back through the 1970s, insurance was expensive, and I would think the level of underinsurance was appalling – but we’ve now got insurance that people can generally afford. I think we are making progress. I don’t know that you have to beat yourself up for going wrong.
goodness – but we also need to think about the behavioural side as well.
CF As far as I’m aware – and I’ve asked a number of insurers – only about on average half the business is going through online. The rest is following the same old process it was going through before. But irrespective of the industry, the insurers recognise that advisers need to place business potentially across more than one carrier. If they facilitated that process, whether it was online or paper-based or whatever,
where you’ve got insurance companies that have both a general arm and a life arm, and you can compare. You can look at the number of properties damaged and the insurance rates, and then you can look at the loss of life and the insured amounts. The Canberra bushfires was a great example, where 75 per cent of the people who died were covered under a group policy and had inadequate life insurance. Those that had sought advice had, I think, three or four times the level of insurance cover, which was more closer to adequate for what
level of cover they have and the adequacy of that level of compulsory cover. Is that a bad thing? I struggle to view a whole lot of people having some cover as a bad thing. It’s actually just the opportunity that we need to then leverage that to raise people’s awareness that they do need to think more holistically about making sure they get the right level of cover. And so I see it more as an opportunity. It’s a challenge around those perceptions at the moment. We just actually need to think more creatively about how we help that situation.
doesn’t recognise “theOpt-in long-term relationship of an adviser and their client. ” - Simon Harris
AM We’ve all met people who think they’re bulletproof and don’t see the need for insurance. But we all know that things can go pear-shaped, and most people who have insurance are okay when that happens. And that’s the challenge of getting that out to people, the really small cost to pay for making sure their lives aren’t totally derailed. BY We do have a great influence and I think strides have been made over the last four or five years. But we have to make that process as hassle-free as possible. For too long it basically took forever to get insurance. That’s not a great consumer process. You can’t think of too many industries where someone decides they want to buy something and then two months later someone tells them whether they can or can’t buy it, that’s just not acceptable. We need to be breaking that down, and I think we’ve come a long way, but we’re still not there. CF Part of the reason we’re not there is life offices aren’t prepared to buy into a process that will speed that up. They still keep running around with their own unique documentation, which means that it is very difficult for the adviser to actually get that part of the advice process the right way round. They should be going in getting generic documentation, finding out if they can get the insurance, give the advice and then pop the forms in and away you go. You’ve saved two to three weeks. BY I have a different way of dealing with it Col. I’d be streamlining it and automating the process, so you’re able to tell everyone within a matter of days whether they’ve got cover or not. CF I know, but each insurer wants to do that in their own unique way rather than having a consistent way. SH I think that’s where we’ve probably made the biggest progress over the last two to three years: the application process, and the efficiencies through leveraging technology. Where we haven’t perhaps made the steps is telling the stories and creating the need. We know that people actually need these products and insurances, and that’s probably where I think the industry could focus a lot of its attention. Yes the technology side and the business efficiency side has to keep making progress – and it is, thank
Andrew McKee and Simon Harris it would go more smoothly. But insurers fail to appreciate that. BY I think there are just different considerations Col. But I don’t think it’s an online or a paper-based issue, it’s a process efficiency issue. But I’ll talk to you later about the kind of rates you do get online.
CF I know the rates, I’ve done the research, I’ve asked the questions, but I ask them of different insurers. But irrespective there should be a recognition of how advisers now process business. It’s across carriers, it’s not with one. Insurers fail to appreciate that opportunity.
Insurance within superannuation
MT Let me move the conversation along just a little bit. Do you think at least a part of the problem is some confusion in the minds of consumers? Because just about everyone who works has got superannuation, and they’ve got some sort of insurance inside their superannuation – it could be as little as $200,000 or $100,000. We all know that if you’re living in Sydney $100,000 is not going to be enough to help anybody in the event that you shuffle off this mortal coil. But everybody thinks ‘I’ve got a good size insurance policy because of my super fund’. And I know that group insurance is good money for any insurance company, but are we misleading people about how comfortable they ought to feel about that?
SH The answer is absolutely yes, and a great example of that was wherever you have catastrophic loss of life and property
24 — Money Management July 7, 2011 www.moneymanagement.com.au
their family needs were after that. There’s a real issue in our society of not only a ‘she’ll be right mate’ attitude, but feeling that ‘she’ll be right mate because I’m covered by my industry superannuation fund’. And industry funds, through their ‘compare the pair’ advertisements, do our industry a great disservice.
AM I think having some cover in people’s super funds can lull them into a false sense of security. It’s very hard for people to really determine how much cover they need. And they look at their statement once a year, they see there’s some sort of cover there, it looks like a big number, and they go away thinking they’re covered. But usually they’re in that bracket of underinsured. So it lulls them into a false sense of security. I think the equation does change a lot when people have kids. I think that’s when people are prepared to actually sit down and make sure they’ve planned for their kids’ future.
CF That’s right it’s a 20-year horizon. BY Yeah, there’s still a different dynamic to the old right through to 65. And you know I don’t know the answer but I’m not sure it’s as simple as everyone is underinsured. AM I don’t think everyone is underinsured. But I think there’s probably cases where people are overinsured as well. But there are a lot more underinsured than overinsured. BF I think there’s no doubt that people have some false perceptions around the
CF Nirvana would be getting advice that’s affordable for all people, and it was compulsory in a sense for all people, and they got the right numbers. AM I knew I’d agree with you on one thing, Col.
SH Tax-deductible advice would certainly be a step in the right direction. CF Absolutely. I think there are some unique situations coming up, however the problem of second families and bequests of second families is the one that’s starting to worry me more than anything else. You can get the right amount of insurance and you think you’re okay, then there’s a family split up and then someone dies and the whole thing falls apart. I think that’s one of the modern and unique and under-appreciated challenges that we’re facing. SH And I guess that’s where the long-term relationship that advisers have with their clients comes through with that ongoing relationship. Opt-in doesn’t recognise the long-term relationship of an adviser and their client. They talk about these trail commissions being a bad thing, but at least trail commissions provide access to an adviser’s business. That is very important when there are changes in lifestyle and a phone calls needs to be made, or a review of insurances or superannuation needs to be taken care of because of a change in circumstances like a divorce.
Toolbox TPD cover in super Graeme Colley explains how the streamlining of deductions for the cost of permanent disability insurance through superannuation provides greater clarity around taxation issues.
T
re a s u r y re c e n t l y re l e a s e d a consultation paper on streamlining deductions for the cost of permanent disability insurance through superannuation. The paper appears to give greater clarity to the amount that may be claimed by the fund as a tax deduction. This heralds the near end of a relatively chequered history for ‘all occupation’ disability premiums since the commencement of the Better Super changes in 2007. Prior to the introduction of the 2007 changes, the general understanding of the tax legislation throughout the superannuation industry was that a deduction could be obtained for all insurance premiums on policies, which insured against any form of total and permanent disablement ( TPD). This was based on industr y’s understanding that the deduction related to premiums for an insured permanent disability where a person was unable to work in their ‘own’ occupation. However, after the introduction of the Better Super legislation in 2007 it was considered that the rules changed and the deduction for premiums was available for a premium for a disability that prevented the person from being engaged in any occupation whatsoever. This stricter application of the law meant a lower deduction for the premium paid. In view of the difference between the interpretation of the rules before and after the change, the Government consulted with industry to determine the course of action to be taken. This resulted in transit i o n a l m e a s u re s, w h i c h a l l owe d t h e deduction for premiums to continue for any form of TPD until 30 June 2011. From 1 July 2011 amendments to the tax law mean that only the portion of the premium payable for policies where a person could not engage in any employment are tax deductible. The change in the law resulted in the Australian Taxation Office publishing Draft Taxation Ruling 2010/D9 in mid December 2010, which discusses the deductibility of TPD cover for fund members under section 295-465 of the Income Tax Assessment Act 1997 (ITAA97). The ruling indicates that if the insurance premium for the TPD policy is connected with a current or contingent liability to provide a disability superannuation benefit, then all or part of the premium will be deductible. A disability superannuation benefit is potentially payable where a person is suffering from physical or mental ill-health, and two qualified medical practitioners certify that due to the ill-health that the person is unable to be gainfully employed in a job for which they are reasonably qualified by education, experience or training. To date, no final
version of the ruling has been published. One issue that arises with the deduction for the TPD premium is the proportion of the premium that is to be tax deductible. The Government released draft regulations indicating that after 1 July 2011 trustees of super funds may be required to obtain an actuarial certificate to determine the amount of deduction available to the super funds. It is proposed that the amount of deduction will be based upon the actuarial calculation of the component of a TPD premium that would result in the fund being liable to provide a ‘disability superannuation benefit’. As an alternative to requirement of obtain an actuarial certificate a consultation paper issued by the Government proposes a simplified process. It permits a fund to claim a tax deduction for all or part of TPD premiums by using a set percentage of the premium depending on the type of permanent disability covered in the particular policy. The deductible percentages in the consultation paper that are proposed to be included in the regulations are shown in figure 1. The use of these prescribed percentages as proposed is optional. It will still be open for funds to retain the ability to engage an actuary to determine the taxdeductible portion of their TPD premiums if they wish to do so. In addition to the possible change for some funds to determine the deductible amount of TPD premium, it may also be necessary to modify TPD definitions in the fund’s trust deed to align with the ‘disability superannuation benefit’ definition. This will assist to ensure the full or partial tax deductibility of the premium. Before doing so, the reduced likelihood of receiving a payment from the policy should also be considered. One issue that came to light during the d e l i b e ra t i o n s ov e r t h e f u n d’s t a x d e d u c t i b i l i t y o f T P D p re m i u m s w a s whether the deduction claimed by an employer or individual for superannuation contributions would be affected in any way. It should be made clear to clients that the change affects only the deduction
Figure 1
claimed by the fund, and may have a minor effect on the retur ns due to a greater part of the premium not being eligible for a tax deduction. On the benefit payment side of things the amount payable to the individual as a TPD benefit will depend on the provisions of the particular fund’s trust deed. However, the modification to the tax free and taxable components of the benefit as calculated in terms of section 307-145 of the ITAA97 apply only to circumstances which meet the definition of a disability s u p e ra n n u a t i o n b e n e f i t w h i c h i s described above.
Case study
Let’s look at a case study, which displays the difference between the rules that apply to own-occupation policies prior to 1 July 2011 compared to a premium paid from that time. The Sparky Super Fund pays insurance premiums to cover its liabilities to pay benefits to members in the event of permanent disability. The insurance policy defines ‘permanent disability’ as the member’s ability to undertake his or her occupation as qualified by education, training or experience. There is no indication in the policy of the components of the policy that relate to death or various disabilities. Under the rules that were in force until 30 June 2011, the fund is required to obtain an actuarial certificate that determines the proportion of the premium relating to the own-occupation component so the relevant tax deduction can be determined. Fro m 1 Ju l y 2 0 1 1 , i f t h e p ro p o s e d percentages as published in the consultation paper are adopted the Sparky Super Fund will be able to deduct that percentage of the premium paid for own-occupation insurance as published in the regulations. This means that the fund can claim a deduction equal to 60 per cent of the premium paid without the need to obtain a certificate from an actuary. Graeme Colley is national technical manager at OnePath.
Proposed deductible percentages
Policy type
Deductible portion of premium (%)
Any occupation insurance
100%
Any occupation insurance with loss of limb add-on
90%
Own-occupation insurance
60%
Own-occupation insurance with loss of limb add-on
50%
Inability to perform activities of daily living insurance
60%
Inability to perform activities of daily living insurance with loss of limb add-on
50%
Source: OnePath
26 — Money Management July 7, 2011 www.moneymanagement.com.au
Briefs SIMPLEWRAP has launched a full service administration w r a p w i t h a n ew p r i c i n g model: a flat fee, irrespective of account balances. The company is pushing the new approach as the first in Australia for both superannuation funds and investors. Director of simpleWRAP, Kr ystyna Weston, said the pricing model offers the potential for significant savings for those with larger account balances both inside and outside super. Weston added that the current model of charging clients for administration based on a funds-underadvice model is outdated, and the flat fee approach is necessar y in the cur rent investment and regulator y environment. IPAC has introduced a raft of mandate changes in a restr ucture of par t of its global share por tfolio in order to improve returns. The financial advisory firm will shake up the ‘growth oriented’ segment of its portfolio by having managers operate more concentrated mandates. Ipac withdrew growth and value mandates with AllianceBernstein and a growth mandate with GMO so as to redistribute these to three new managers in Harding Loevner ($375 million), Carnegie Asset Management ($240 million) and AllianceBer nstein Global Thematic Research ($170 million). Ipac also awarded a value mandate of $375 million to Pzena Investment Management. F O R T U N A Pa r t n e r s h a s launched an independent pension transfer service to help Australian financial advisers shift client pensions from the UK to Australia. The service, Pension Porter, aims to link financial advisers in Australia with a qualified pension transfer expert in the UK to handle the tax issues involved. Pension Por ter principal Brandt Page said transferring pensions could tie up Australian advisers’ time and resources, although the rewards of the transfer meant adviser s would have a greater share of the client’s portfolio to advise on.
Appointments
Please send your appointments to: milana.pokrajac@reedbusiness.com.au
commence her new role on July 11 at the Melbourne offices of the Financial Ombudsman Service.
June Smith PRINCIPAL of Argyle Lawyers, June Smith, has resigned from the firm to take up the position of chief executive of the Code Compliance Monitoring Committee (CCMC). The independent committee is responsible for the administration of the Banking Code of Practice and institutional member compliance with the Code’s obligations. In her new role, Smith will also be a member of the executive management team of the Financial Ombudsman Service and will have additional responsibilities for administering the Mutual Banking Code of Practice and the Insurance Brokers Code of Practice, as well as monitoring member compliance with these codes. Smith will
RESEARCH house van Eyk has appointed Matthew Olsen as head of ratings. Olsen will manage the firm’s investment research across the spectrum of asset classes from international equities to exchange-traded funds. Olsen joined the company in January, before which he held positions as senior investment analyst at Colonial First State, Lowy Family Group, Ausbil Dexia and JP Morgan, with experience in both domestic and international markets. The new appointment will allow van Eyk’s head of research, John O’Brien, to concentrate on Strategic Research Unit responsibilities and upcoming changes to strategic asset allocation.
AUSTRALIAN Unity Investments (AUI) has appointed Simon Reed to the newly created role of national adviser solutions manager, within its business development team. Reed will be charged with the task of ensuring AUI responds to adviser feedback on its systems
and processes that assist advisers in maintaining their own client relationships. Reed has more than 17 years of experience in finance services both in Australia and the United Kingdom, including senior marketing and product roles with Russell Investments, Zurich Investments, Citibank and Westpac in Australia, and NatWest Bank in the UK. In addition, Fabian Cockle will take up the position of business development manager for Victoria and Tasmania. Cockle brings 11 years of financial services experience in business development and sales roles, and was most recently director and national sales manager at Audit Insurance Solutions.
BENDIGO and Adelaide Group has announced a raft of appointments with the aim of promoting the products and services offered by its new Bendigo Wealth division. State sales manager for South Australia and Northern Territory, Richard Brown, was promoted to regional manager for Western Australia, Victoria, Tasmania, SA and NT. Brown joined the bank in 2006, having previously worked for Hillross Financial, Colonial
Move of the week DEUTSCHE Bank has appointed a new head of private wealth management in Australia. Chris Selby will join the firm from 25 July, after 25 years with Bank of America Merrill Lynch where he was most recently head of wealth management for Australia and New Zealand and a member of the Australian executive committee. Selby held a number of senior positions including head of corporate and structured finance, head of financial institutions group, head of debt markets, and director of credit products. Steven Skala will remain involved with private wealth management in addition to his duties as vice chairman of Deutsche Bank, having acted head of the division for the last 18 months.
First State, Prudential, AMP and Hudson Global. Keith Hilsdon will manage the business development process in Queensland, New South Wales and the Australian Capital Territory; while another new appointee, Julie McKay, will become the new senior manager of technical and research. Additional roles have been created in the manufacturing and business development management divisions.
AMP Capital Investors has recruited Ella Brown to the newly created role of head of fundamental equities to oversee the Asian, capital, sustainable and New Zealand equities teams.
Opportunities SENIOR PARAPLANNER Location: Melbourne Company: Doquile Perrett Meade Description: Doquile Perrett Meade is looking to fill the newly created role of senior paraplanner. In this position, you will be instrumental in developing strategies, systems and processes – while also making recommendations to our manager of financial services operations. In addition, you will be responsible for providing solutions to the wealth division. The ideal candidate will have a solid background in paraplanning and will also have the ability to develop planning templates with the use of financial planning software. You will be familiar with a range of financial planning systems and have the confidence to recommend solutions. An ADFS/DFP qualification is essential to the role. If you value a stable organisation with strong values and a down-to-earth team then this is the role for you. For more information and to apply, please visit www.moneymanagement.com.au/jobs or contact Irene Pappas, HR manager, on (02) 9261 7000.
FINANCIAL PLANNING CAREERS Location: Sydney, Melbourne & Brisbane Company: National Australia Bank (NAB) Description: NAB is seeking candidates looking
Brown previously worked at ABN AMRO Asset Management in London, Credit Suisse Asset Management and JP Morgan Investments, and has a total of 20 years of experience in the investment management industry. Her new role will be based in Sydney, where she will report to AMP Capital’s chief investment officer, David Kiddle. The company is currently seeking a replacement for its former head of Asian equities Karma Wilson, who has announced her intention to leave next month. In the meantime, senior managers Ragu Sivanesarajah and Jonathan Reoch have been appointed acting co-heads of Asian equities.
For more information on these jobs and to apply, please go to www.moneymanagement.com.au/jobs
to begin or build a career in financial planning. Successful applicants will enjoy a competitive salary base, plus a structured induction program, training and mentoring, as well as generous support to start, further or finish your studies. NAB offers flexible work conditions and performance incentives, and fosters a culture of teamwork, service excellence and respect. As part of a self-supporting team you will analyse client needs, give informed insight and advice, and direct wealth management strategies and goals. You must hold the minimum of an undergraduate degree. Ideally, candidates will have a background in consultation or relationship-building services, have strong commercial, interpersonal and communication skills and a preference for working in teams. To learn more about these opportunities, please visit www.moneymanagement.com.au/jobs or contact Irene Pappas, human resources manager, on (02) 9261 7000.
FINANCIAL ANALYST/PARAPLANNER Location: Sydney Company: IPA Description: Our client is Australia’s leading privately owned financial service provider with over $3.5 billion of assets under administration. As a result of continued growth, they are looking to employ a number of associate advisers to join
their team of experienced financial advisers. Successful applicants will be trained and mentored by senior advisors and will expose you to all aspects of paraplanning, client interaction, compliance and administration and their efforts will be critical to the success of the financial planning team. The position will suit recent graduates who have achieved academic excellence throughout their studies (credit average or above), and are now looking to begin their careers within the advisory space. An above average salary plus bonuses is on offer. To register your interest, please visit www.moneymanagement.com.au/jobs
SENIOR FINANCIAL ADVISER Location: Melbourne Company: Bluefin Resources Description: Our client is a successful national financial planning firm dealing with high-networth (HNW) clients. An exciting opportunity exists for an experienced senior financial adviser to attract and retain new gold and silver clients through effective financial planning advice. You will be responsible for providing high quality strategic advice to clients in the areas of superannuation, retirement planning, structures, insurance and estate planning. In addition, you will be required to prepare and conduct structured face-to-face meetings with clients, and
present strategic financial plans, and periodic reviews. The ideal candidate will be degree-qualified, ADFS or CFP qualified, and have a minimum of five years of experience providing advice to HNW clients. To find out more about this opportunity, please visit www.moneymanagement.com.au/jobs or contact Toby Walsh on (02) 9270 2645.
FINANCIAL PLANNING OPPORTUNITIES Location: Adelaide Company: Terrington Consulting Description: Terrington Consulting is interested in receiving applications from qualified financial planners and paraplanners who are ready to make their next move or seeking to return to the industry post global financial crisis. Current positions available are diverse and at all levels. Whether you are seeking an opportunity with a small planning firm, large bank or would like to hear about ownership or equity opportunities, we are able to assist. Terrington Consulting is a boutique firm specialising in the provision of tailored recruitment and consulting services to candidates and clients within the Australian Financial Services sector. Please visit www.terringtonconsulting.com.au or contact Emily for a confidential discussion on 0422 918 177.
www.moneymanagement.com.au July 7, 2011 Money Management — 27
Outsider
A LIGHT-HEARTED LOOK AT THE OTHER SIDE OF MAKING MONEY
Fighting fire with fire OUTSIDER usually regrets picking fights with Mrs O – not because arguments with her seem endless, but because he always seems to lose. And after several years of defeat on the marital battleg ro u n d , Ou t s i d e r f i n a l l y realised one key difference b e t we e n h i m a n d h i s d e a r spouse: Mrs O comes to the battle prepared. But more importantly, she attacks on several fronts at once – often leaving yours truly speechless. However the multi-pronged, multi-front attack is not a strategy unique to the formidable Mrs O. Financial plann e r s t o o, a p p e a r t o h a v e
embraced the battle plan – something evidenced when a number of planners sought to outflank the Assistant Treasurer and Minister for Financial Ser vices, Bill Shorten, at a Financial Planning Association function a few months ago by asking some tough question on topics ranging from the Future of Financial Advice changes to the influence of industry super funds. Although Outsider is aware one cannot leave a politician s p e e c h l e s s, h e d i d n o t i c e Shorten found it difficult to respond without raising his voice in hopes he would at least scare planners, if nothing
else (Outsider is not proud to admit he often does the same when all else fails with Mrs O). It s e e m s, h owe v e r, t h a t Shorten learns fast. When the next opportunity to meet planners presented itself to the minister, he made sure he was ready. At last week’s lunch function with the Association of Financial Advisers, Shorten met planners’ questions with statements such as “You have not convinced me how opt-in will be the end of your practice” and “Stop talking to yourselves, bagging one sector of the industry”. Now, Outsider was not sure w h e t h e r p l a n n e r s we re
silenced by the boldness of Shorten’s statements or just s h e e r s h o c k , b u t h e s u re wishes he could take a leaf out of the minister’s book and apply it to future arguments
Go you good thing NOTWITHSTANDING the frequent appearances of certain major bank chief executives on television, Outsider has noted that most financial services people are shy and retiring types, not unlike himself. Of course, there is always an exception, and former Wallaby and now Investec executive Phil Kearns is a case in point. How else does one explain Kearns having his name alongside those of celebrity identities such as fashion designer Neil Perry and the Lifestyle Channel’s Andrew Winter as a finalist in the 9th Annual Astra Awards. For the uninitiated, the Astra Awards are put on by the peak body of the sub-
scription television industry and “recognise the wealth of talent that drives the Australian subscription television industry and highlights the creativity, commitment and investment of subscription television in production and broadcasting”. It follows therefore that Kearns’ position as a finalist in the awards is not owed to his hard work for Investec but, rather, his ‘second’ job as a member of the team that covers the Super 14 Rugby – and to which he brings all the intellectual grunt that goes with having spent a lot of time in the front row of a scrum. Outsider has it on the highest authority that some of Kearns’ most ardent admirers and golfing companions have decided
with the missus. Then again, Outsider is probably going to have to suffer Mrs O for considerably longer than the financial planning industry tends to with politicians.
“
Out of context
to help him win an Astra gong with a campaign based on an old motto: vote early, and vote often. Outsider will, of course, be casting his vote for Kearns because it’s not a beauty contest – and because the big man is proof that front-rowers can multi-task.
“I was attracted to Keating, but probably not as intensely as you were.” After an audience member admitted to
falling in love with former Prime Minister Paul Keating at the age of 16,Financial
Services Minister Bill Shorten also admitted to being attracted to him – but politically,rather than romantically.
The master of the spruik IT was recently suggested to Outsider that this esteemed publication may be interested in promoting the fact that the original ‘Wolf of Wall Street’, Jordan Belfort, is about to embark on a speaking tour of Australia. Famous for offloading artificially inflated stocks to investors using high-pressure sales tactics and fleecing his unsuspecting targets for hundreds of millions of dollars, Belfort now gets about as a motivational speaker and selfproclaimed ‘ultimate cautionary tale’. While Belfort did indeed lose his massive fortune, his family and almost his life, he only lost his freedom for the meagre 22 months he spent behind bars before embarking on his latest venture – leading Outsider to question whether his is indeed the ‘ultimate cautionary tale’. Outsider would further question the value of Belfort’s sessions – promoting his “highly
28 — Money Management July 7, 2011 www.moneymanagement.com.au
successful sales template: The Straight Line Persuasion System” – to the honest adviser. The Australian financial services industry is currently doing its best to improve an image battered by mis-selling scandals such as Storm Financial, and ‘selling’ is virtually a dirty word itself in the emerging fee-for-service environment. As such, Outsider wonders how much Australian advisers ought to be learning from a man who once made a fortune through dishonest high-pressure sales tactics. But apparently the man who once led a group of starry-eyed young stockbrokers into oblivion as if he were the Pied Piper spins one helluva tale, so Outsider would only suggest that any advisers who do feel compelled to go, do take the session with a pinch of salt. And probably refrain from advertising their attendance to their clients.
“I don’t know why they call it the ageing crisis – it’s not a crisis if you’re alive. Beats the alternative.” It looks like Minister Shorten would deem the ageing population issue a crisis only in extreme circumstances: death.
“We actually do have the format where we run it as ‘Who wants to be a financial planner?’. Fortunately we don’t have Eddie McGuire.” AMP Horizons Academy director Tim Steele outlines the final stages of a Horizons-partnered University Challenge for upcoming planners – which thankfully for all concerned does not include Channel Nine’s omnipresent game show host.