Money Management (30 June, 2011)

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Vol.25 No.24 | June 30, 2011 | $6.95 INC GST

The publication for the personal investment professional

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COALITION OPPOSED TO SG HIKE: Page 4 | NO NET CHANGE IN AXA FIRMS: Page 6

Planners remain focused on sales

By Milana Pokrajac SALES remains a dominant factor in financial planning recruitment, according to both recruitment experts and research undertaken by Money Management into the core criteria stated for many financial planning jobs.

Associate director for banking at Robert Walters, Sara Harrison, and senior regional director of Hays Banking, Jane McNeill, agreed it was typical for financial planning roles to involve an element of sales and be remunerated in that way. McNeill observed around 90 per cent of financial planner ads listing sales skills as a job requirement.

Money Management also looked at a number of financial planner job advertisements posted on the Money Management Jobs website and on the recruitment website SEEK, and found more than twothirds of employers either looked for salesdriven financial planners or named sales abilities as one of the job requirements.

A large number of those who mentioned sales targets and bonus structures were banks and large dealer groups.

“By comparison, planners working in the boutiques generally have to be quite selfsufficient and possess the ability to develop referral networks and generate business for themselves,” according to McNeill, who

Jane McNeill said banks offered 50-60 per cent bonuses on top of planners’ base salaries.

“Often in boutiques, [bonuses] are even higher,” she said.

A recent survey conducted by the Financial Sector Union (FSU) found more than half of bank, insurance and financial services employees witnessed clients being steered towards products they may not have needed.

FSU secretary, Leon Carter, attributed this issue to the constant pressure on financial planners to sell products.

“Finance sector base salaries are not high; employees can’t afford to miss out on bonuses and performance pay – they are under unrelenting pressure to sell,” Carter said in response to the survey findings.

Although sales bonuses are a far cry from commission structures, Colonial First State general manager for advice Marianne Perkovic said there still needed to be a balance between sales and other key performance indicators advisers have.

“There obviously has to be a commercial outcome for most remuneration structures, but they’ve got to get the balance right,” Perkovic said.

“If [the advice has] got a good balance between risk, compliance and quality of advice, then I still think that’s fine, but if it’s still heavily skewed to sales then I think that would be a problem – which is working against what the [Future of Financial Advice reforms] are trying to achieve and that is quality of advice outcomes for clients,” she added.

According to Perkovic, banks have come a long way from five or six years ago when the advice was still heavily skewed towards sales, with the industry undergoing “good change” since then.

“So, I think people embracing the change is the only way we’re really going to get good client outcomes from FOFA,” Perkovic said.

Valuations head down on FOFA worries

By Mike Taylor THE policy uncertainty surrounding the Federal Government’s proposed Future of Financial Advice changes appear to have contributed to wiping up to 15 per cent off the value of Australian financial planning businesses, including major dealer groups.

That is the bottom line of an analysis conducted by Money Management of the decline in share prices for the nation’s major publicly listed dealer groups. Further, the decline is seen as being pivotal to IOOF’s $88 million bid for DKN Financial.

The question of whether the IOOF bid for DKN represented “fair value” for shareholders was raised by the chief executive of Count Financial Limited, Andrew Gale, who suggested the ongoing uncertainty around FOFA was serving to undermine the

value of financial planning related businesses.

This view was subsequently shared by Association of Financial Advisers (AFA) chief executive Richard Klipin who, while declining to specifically comment on the value of the IOOF bid, said he believed the entrenched positions of some of those participating in the FOFA debate had served to erode confidence in the value of many businesses.

The Money Management analysis of the share prices of the major publicly listed dealer groups – DKN Financial, Count Financial and Plan B – reveals a remarkably similar picture: that of a strong recovery in fortunes through the closing months of 2009, followed by a significant downward trend from about the time the recommendations of the Ripoll Inquiry began to be translated into the proposed FOFA changes.

What is more, the declines in

Chris Kelaher share values occurred despite Count, DKN and Plan B having well-established fee-for-service business models in place.

Klipin pointed to the fact that the proposed FOFA changes had been a key issue for financial planners for most of the past 18 months and that, while the process was drawing to a close, it seemed likely the Assistant Treasurer, Bill Shorten, would not be releasing draft

legislation until well into the new financial year.

“There is still uncertainty around a number of decisions and the Government’s ultimate direction and that will inevitably impact perceptions of what a business is worth,” he said.

IOOF chief executive, Chris Kelaher has also acknowledged the manner in which the FOFA changes were generating uncertainty and claimed many of the proposals would only serve to advance the interests of the industry superannuation funds.

The group general manager of Professional Investment Holdings, Grahame Evans, earlier this month warned there was a danger that the FOFA proposals, in their current form, would lead to the re-emergence of a “quasitied agency structure”.

For more on the effect FOFA is having on dealer group share prices,see the InFocus on page 13.

Concern over misleading fund names

By Benjamin Levy

MAJOR industry research houses have renewed their calls for legislation to be introduced to stop fund managers putting misleading names on their funds.

Standard and Poor’s (S&P) multi-sector head Andrew Yap said fund managers were continuing to name funds with titles that weren’t consistent with the asset mix of the fund, and it was endangering retail investors who didn’t have the ability to look through to the actual asset allocation of the fund.

“Naming protocols of funds is a legislative weakness. There’s no legislation stating what you can and cannot call a particular fund,” Yap said.

S&P was pushing managers hard to provide the research house with a name that accurately reflected its asset mix, Yap said.

It was becoming a more significant problem post-GFC when investors were concerned about investing in incorrect funds, he said.

Zenith Investment Par tners director and joint founder David W r i g h t s a i d t h ey “ a l m o s t ” ignored the names of funds they rated and assessed the fund according to the categor y in which they thought it belonged.

Naming problems were a particular issue with diversified funds for Zenith, as different fund managers regarded ‘balanced’, ‘conservative’ or ‘growth’ labels in different ways according to their underlying asset mix, he said.

“It would be nice if there was a standard naming protocol for diversified funds, which to be honest I wouldn’t think is that difficult [to introduce],” Wright said.

Naming protocols has been an issue for the industry “forever”, he added.

Lonsec general manager of research Grant Kennaway said his company had been giving feedback to new fund managers that their products were not 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 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.

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FOFA uncertainty erodes practice values

W

ith last week’s one-year anniversary of Julia Gillard toppling Kevin Rudd as Prime Minister and leader of the Federal Parliamentary Labor Party, the Australian financial planning industry was reminded of just how long it has been forced to endure a state of suspended animation based on the proposed Future of Financial Advice (FOFA) changes.

Australian financial planners have been living with serious uncertainty about the environment in which they are going to have to operate for nearly two years. In such circumstances, it is hardly surprising that financial planning business valuations have been eroded.

Indeed, it is entirely arguable that IOOF’s current offer to fully acquire dealer group DKN would need to have been pitched significantly higher if Federal policy uncertainty had not combined with global economic volatility to place a question mark over what, precisely, a major dealer group is actually worth.

Because it is listed on the Australian Securities Exchange (ASX), DKN provides a ready source of information about the impact of policy uncertainty on a company’s inherent value. An examination of the DKN share price over the past two years reveals a reasonable recovery from

“

The Commonwealth holds enough cards to know it is under no obligation with respect to the loss of commissionsbased income.

”

the declines generated by the global financial crisis, followed by another decline almost directly correlated to the Federal Government’s first serious exploration of the FOFA changes last year. The pattern is similar, if not quite so volatile, with Count Financial.

It does not matter that DKN is a dealer group more than ready to handle the likely direction of the FOFA changes. Investors simply do not like too many unknowns.

It follows that if a company such as DKN (which boasts a solid institutional presence on its list of major shareholders) can suffer as a result of policy uncertainty, then the situation is magnified for other, smaller

financial planning firms and entities.

Further, planners are not likely to encounter policy certainty any time soon.

Even if the Assistant Treasurer, Bill Shorten, were to release the draft legislation in the next few weeks, the Parliament will not be in a position to deal with it until it resumes sitting in Spring.

While policy and legislative certainty is likely to help most firms rebuild their value, there are unquestionably going to be a number of practices which, due to their structures and business models, suffer an irreparable erosion of their worth in the marketplace.

There have been suggestions from senior industry commentators that people who suffer such significant fallout ought to be entitled to some form of Government compensation, in similar fashion to the compensation provided to dairy farmers.

This will not happen. While the notion of Government compensation represents a card worth playing at the negotiating table, the Commonwealth holds enough cards to know it is under no obligation with respect to the loss of commissions-based income. Further, there will not be sufficient public or political outrage to have the Government change its mind.

– Mike Taylor

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News

Shaping up for MySuper

By Ashleigh McIntyre THE Federal Government may have made its intentions for the proposed MySuper regulations reasonably clear, but many industry participants are still unsure about the best way to approach the concept.

Superannuation providers will have up until 1 July, 2013 to come up with a solution to the new regulations for default funds.

In the meantime, many providers have already come up with offerings they think could pass as a MySuper option, but none can be certain about whether these will make the grade.

The majority of super providers questioned have indicated they will rely on products already in the market, but will wait for further instruction from the Government to see if they require fine-tuning.

AMP is among the group that will likely rely on a current product to meet the expectations of MySuper.

This time last year, AMP chief executive Craig Dunn said his company was well positioned to meet the new default fund requirements of MySuper with its recently launched AMP Flexible Super Core product.

A spokesperson for AMP said the company still maintains the entry-level product would sit within the MySuper framework, but obviously there was still more detail to come.

“We are definitely looking to offer something, but at this moment in time it is hard to say whether we would tweak an existing product or offer a new one,” the spokesperson said.

Both Colonial First State (CFS) and BT Financial Group already have products in

the market that would appear to meet the known requirements.

CFS recently made changes to its FirstChoice Wholesale platform that resulted in it offering lower fees than industry superannuation funds.

BT Financial Group also has its low-cost solution, BT Super for Life, which chief executive Brad Cooper said would be an ideal MySuper product.

Industry-fund behemoth AustralianSuper said it would be unlikely to look at offering a new product, but would instead rely on its ‘balanced’ option, stating it represented the best ideas for its members.

Plum Super managing director Scott Hartley said although the MLC-owned firm was well positioned to deal with MySuper when it is introduced, it would not be acting on specific product changes

Craig Dunn until the details were clear.

Only OnePath and Bendigo Wealth have indicated they will look at offering a new product in response to MySuper, with OnePath remaining quiet on the details.

A spokesperson for Bendigo Wealth said the company’s plans for a MySuper offering were well advanced, and that it would be adding superannuation to its low-cost Trinity3 platform in the third quarter.

Concern over misleading fund names Continued from page 1

appropriately labelled.

Kennaway warned that fund managers needed to be careful about the consequences of misnaming funds, and that investors and advisers needed to be careful that the labels on the funds were accurate.

Global fund managers overseas, such as Barclays, have been fined in the past for naming funds in such a way that led investors to believe they were defensive or balanced funds, but then plunged in value during the GFC. Lonsec, Van Eyk and Zenith all singled out imputation funds as contributing to this problem by being misleadingly named.

If they weren’t structured as imputation funds but had the label in their name it then became difficult to determine what classified as an imputation fund, Wright said.

But van Eyk chief executive Mark Thomas said it was the responsibility of financial plan-

Grant Kennaway ners and fund managers to explain to the client how the products worked.

I t wa s u p t o t h e researchers to go beyond the name and identify the specifics or the nuances of the fund, he said.

“If you’re a researcher and you’re worth your salt you should be able to look underneath the name and tell your client what it’s about, that’s what we’re paid to do.”

Fo r m o re o n f u n d s management, see the feature on page 14.

Correction and apology A photograph published on page 18 of the June 16, 2011, edition of Money Management was not that of the column’s author, Paul Foster of Addwealth. It was a photograph of Paul Foster, head of infrastructure at AMP Capital. Money Management apologises for this error. www.moneymanagement.com.au June 30, 2011 Money Management — 3

News

Coalition restates opposition to 12 per cent SG

By Mike Taylor

Mathias Cormann

THE Federal Opposition has restated its intention to oppose the Government’s intended increase in the superannuation guarantee (SG) from 9 per cent to 12 per cent, with its Financial Services spokesman Senator Mathias Cormann arguing it will result in a decrease in takehome pay.

Cormann has referenced the findings of the Henry Tax Review to

justify the Coalition’s opposition to raising the SG, as well as the fact that the Henry Review stressed that the burden of any further increase beyond 9 per cent would impact “most heavily on low and middle income earners”.

Cormann said that rather than having money directed towards a higher SG, families with mortgages should be allowed to use the extra income to pay off their mortgage faster or deal with increasing cost

of living pressures.

“Since coming to office, Labor has made it harder for Australians to plan for their retirement,” he said.

“In its first term, Labor decided to halve concessional contribution caps after promising before the election not to.”

Cormann said the Assistant Treasurer, Bill Shorten, continued to ignore important recommendations by the Cooper Review to improve corporate governance

arrangements, transparency and competitiveness in the superannuation industry.

“It is time Bill Shorten started to make some hard decisions,” he said.

“It is time he started to drive the necessary reforms to corporate governance of superannuation funds. It is time he started to ensure an open, transparent and competitive process when it comes to the selection of default superannuation funds under modern awards.”

Asset grandfathering queried

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ASSET grandfathering arrangements with respect to collectibles within self-managed superannuation funds (SMSFs) are being queried by the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).

SPAA chief executive Andrew Slattery said her organisation was seeking the clarification in the context of the Government’s recently released draft rules on collectibles within superannuation funds.

This was on top of the SPAA seeking clarification on whether members of SMSFs would be able to display artworks within non-residential premises of related parties.

“While it is clear that these items will not be permitted to be displayed in the private residence of a SMSF member, the position in relation to a related party’s premises, which is not the private residence of the related party, is not so clear,” she said.

Slattery said her organisation was also seeking clarification on the in-house asset grandfathering provisions and whether or not a lease arrangement with a related party (which was put in place prior to August, 1999) would be subject to the regulations.

She said the SPAA had provided the example of an antique clock which was purchased by a SMSF prior to 11 August, 1999, and had been displayed on the premises of a related company and leased to that related company ever since.

“This asset is exempt from the definition of an inhouse asset,” Slattery said.

“However, as this asset constitutes a collectible the lease arrangement with the related party would be in contravention of the draft regulations.”

News

HNW investors want more from planners

By Mike Taylor

IF FINANCIAL planners want to make more inroads with high-net-worth (HNW) clients, they need to provide a broader and more integrated set of capabilities.

That is the bottom line of the Merrill Lynch Global Wealth Management and Capgemini World Wealth Report, released last week, which argues that an enterprise value approach is especially critical in today’s environment because HNW clients expect their relationships with firms and advisers to create more sustained and broad value than before the global financial crisis (GFC).

Commenting on the findings of the report, Merrill Lynch Global Wealth management head John Thiel said that while an air of normality was returning to global financial markets, HNW investors had been deeply impacted by the effects of the GFC.

“Many high-net-wor th clients have clearly rethought their investment and life goals and are now heavily weighing the amount of risk they are willing to assume in order to reach those goals,” he said.

Thiel said firms would need to bring the full force of their capabilities to bear to deliver an integrated response to the complex post-GFC needs of HNW investors.

The Merrill Lynch Capgemini research suggested that capital preservation had become more impor tant to HNW investors, along with effect portfolio management.

Capgemini Global Financial Services head of sales and marketing, Jean Lassignardie, said that although HNW investors took on more calculated risk in search of better returns, at the end of 2010, they still held a significant amount of their assets in more conservative

instruments such as fixed-income and cash and equivalents.

“Amid this mixture of trust and misgivings, firms and advisors must continually demonstrate their value and relevance to help HNWs meet their changing and complex needs,” Lassignardie said.

Big jump in ETF users predicted

By Chris Kennedy THERE will be a surge in the number of investors embracing exchange-traded funds (ETFs) in the next two years, since they are increasingly being taken up by financial advisers, according to an ETF report from BetaShares and Investment Trends.

At the end of 2010 there were 53,500 investors with some exposure to ETFs, but the report tipped that number to rise to 72,000 or potentially as high as 80,000 by the end of 2012.

Surges in ETF usage typically follow two to three years after a spike in product issuances, a pattern seen clearly in more developed ETF markets such as the US,

Mark Johnston according to Investment Trends principal Mark Johnston.

It happened in Australia after a round of new products were released around 2005 and the number of users roughly doubled in the following two years, he said.

The survey was based on responses from 7,811 investors and 778 advisers at the end of 2010, and found the average ETF investor had $53,000 invested in ETFs at an average of $22,000 per trade. Three in five investors stated their next alternative investment was likely to be in ETFs. The proportion of investors who discussed ETF use with their adviser jumped from 18 per cent in 2009 to 30 per cent in the current survey, and the proportion of advisers who stated they currently recommended ETFs increased from 15 per cent in 2008 to 27 per cent in 2010.

“Planners who are embracing the structure typically have above average funds under

advice and inflows,” said Drew Corbett, head of investment strategy and distribution at BetaShares.

The main barriers to more advisers taking up ETFs were a lack of knowledge, a preference for other investments and not having ETFs on their Approved Product List (APL). When selecting a non-mainstream ETF provider, access to research and availability on the in-house APL and platform were the main considerations among advisers.

“A l t h o u g h b e i n g o n a n approved product list was i m p o r t a n t f o r a d v i s e r s, a t h i rd o f p l a n n e r s w e re comfortable using ETFs off platform or via another platform,” Corbett said.

AMP Capital loses Asian Equities head AMP Capital Investors has appointed acting coheads to its Asian Equities team following the departure of incumbent, Karma Wilson.

The company announced to the Australian Securities Exchange that it had appointed Jonathan Reoch and Ragavan Sivanesarajah as acting co-heads, while an internal and external search is undertaken to find a replacement for Wilson.

Confirming the changes, AMP Capital chief investment officer, David Kiddie said both Reoch and Sivanesarajah had joined the company in 2008 and had substantial investment experience.

Wilson is credited with having established AMP Capital’s Asian Equities capability.

The AMP Capital announcement said Wilson was leaving the company and relocating with her family overseas.

Karma Wilson

Intouch announces debtor finance facility INTOUCH Finance, the wealth management division of non-bank lender intouch Home Loans, has announced it will immediately launch a debtor financing product.

Intouch chief executive Paul Ryan said the move was prompted by the Commonwealth Bank’s recent decision to withdraw from the sector following a similar move from ANZ last year, and questioned whether the other majors would follow suit.

The debtor finance product will give business owners instant

access to cash flow through their outstanding invoices, Ryan said.

“Suppliers’ agreements are often 30, 60 and even 90 days, which puts enormous pressure on business owners on a monthly basis. I’m determined to provide an alternative particularly when the big banks don’t seem all that interested in servicing this sector,” he said.

Intouch debtor finance can provide up to 80 per cent of a business’ existing ledger without the need for real estate security, the firm stated.

Asia-Pacific climbs wealth league table THE global financial crisis (GFC) appears to have only slightly moderated the rate at which people are becoming wealthy, according to the latest World Wealth Report compiled

by Merr ill Lynch Global Wealth Management with Capgemini.

The report found the global population of high-net-worth (HNW ) individuals had grown in 2010 to surpass the level recorded in 2007 – before the GFC. It found the population of HNW individuals increased by 8.3 per cent to 10.9 million, with HNW wealth growing by 9.7 per cent to reach US$42.7 trillion.

The report’s data appeared to confirm the evidence that the Asia Pacific has been weathering the GFC better than most regions, with the Asia-Pacific posting the strongest regional growth and surpassing Europe for the first time in terms of the number of HNW individuals and their wealth.

The report said the Asia-Pacific was now second only to Nor th America in terms of HNW wealth and population.

New head for Macquarie Private Bank

By Milana Pokrajac

MANAGING director of Merrill Lynch and former financial planner, Jay O’Neil, will soon relocate to Australia from the United States to head up Macquarie Private Bank, Macquarie has announced.

O’Neil will join Macquarie once he completes his responsibilities at Merrill Lynch, where he most recently managed the firm’s foreign office in New York.

O’Neil is a Certified Financial Planner, and received the certified investment management analyst designation shortly after he joined the financial ser vices industry in 1994.

He held several senior management and sales positions with Merrill Lynch, also serving as director and regional branch manager for private banking at Credit Suisse.

Head of Macquarie Private Wealth, Eric Schimpf, described O’Neil as a “highly experienced financial services professional … who will help shape and grow the bank into the future”.

O’Neil is expected to relocate to Sydney in the next few months, where he will commence his new role at Macquarie Private Bank, which offers specialised advice to high-net-worth retail clients.

www.moneymanagement.com.au June 30, 2011 Money Management — 5

News

No net change in number of AXA firms

By Chris Kennedy DESPITEnoise from the marketplace suggesting competition from rivals looking to poach AXA financial planning practices, there has so far been no significant net change between firms leaving and joining, according to AXA. AXA’s general manager of network development Paul Williams said the group had anticipated movement from its competitors in the wake of the merger, but despite the fact that one practice had recently announced its intentions to switch over to MLC, there had so far been no significant net difference between firms leaving and joining.

“As is always the case in these merged environments, we knew some advisers would leave us and some advisers would join us, and that has certainly been the case. That’s just competition, and competition is a great

Paul Williams thing,” he said.

AXA is determined not be distracted by the noise in the marketplace and is instead focusing on the benefits to the group and its advisers that will flow from the recent merger with AMP, he said.

A major incentive for practices to contin-

ue with the group is a $100 million bank finance package from AMP as part of its welcome package to AXA advisers to help with acquisitions, successions and refinancing, Williams said.

“We’ve now got a licensing proposition that owns a bank,” he said.

The merged group still has one of the strongest value propositions for advisers, and the group will continue to focus on delivering services to advisers and helping them grow their businesses, he said.

“It’s a very competitive environment. We need to continue to demonstrate value to our advisers and the benefits of being in the merged group,” he said.

Williams also outlined an ongoing commitment from the group to its platforms and products, and a commitment from AMP to AXA’s multi-brand advice model.

Do the homework before acquiring practices

By Benjamin Levy SOME financial planning practices looking to acquire other businesses are not doing enough thorough background work on the financial health of their practice when they apply for loans, according to Alan Kenyon, managing director of Kenyon Partners.

“The number of sloppy and poor applications submitted for finance really doesn’t give the borrowers the best chance of achieving what they want to do,” Kenyon said.

While some of the criticism of the financiers was justified, a lot of

the delay in getting loans approved was because people weren’t submitting their documentation in proper format at the one time, Kenyon said.

Practices that were giving incomplete data to the bank for loan applications were at risk of getting inflated or inaccurate loan estimates from the bank, he said.

Practices frequently did not have up-to-date financial information from their accountants, important documentation was left with their lawyers and not easily accessible, and they had no business plan, he said.

Practices had to think a little about their future strategy and

Alan Kenyon budget forecasts, Kenyon added.

Kenyon Partners hoped to focus more on the post-sale integration of financial planning busi-

nesses, as well as more front-end work when financial planning businesses come to market, Kenyon said.

“The post-sale environment generally turns out to be a lot more work than people think,” he said.

If buying practices want to maximise the value of an acquisition, they have to think about communication and the handover of clients, as well as using a project manager to implement or integrate technology and administration systems, he said.

Kenyon and Steve Prendeville, former principals of merger and acquisition business Kenyon Prendeville, split last month.

Macquarie Airports may get more of Sydney Airport

By Mike Taylor MACQUARIE Airports Limited may end up owning more of Sydney Airport under an asset-swap proposal from the big Ontario Teachers’ Pension Plan Board (OTPP).

Macquarie Airports has informed the Australian Securities Exchange (ASX) that it has entered into exclusive negotiations follow-

ing receipt of a non-binding highly conditional asset swap proposal from OTPP involving the potential sale of Macquarie Airport’s noncontrolling interests in Brussels Airport and Copenhagen Airports.

It said that, in return, OTPP was prepared to exchange its 11.02 per cent interest in Sydney Airport and a net cash payment of $850 million.

The ASX announcement said the proposal was subject to due diligence and that, should it proceed, Macquarie Airports expected to pursue appropriate simplification of its structure to reflect its sole focus on the resulting interest of up to 85 per cent in Sydney Airport.

However, the announcement said there was no certainty that an agreement would be reached.

SPAA queries related party use of collectibles THE Self-Managed Superannuation Fund Professionals’ Association of Australia (SPAA) is seeking clarification from the Government on whether members of self-managed superannuation funds (SMSFs) will be able to display artwork bought within their funds on premises of a related party other than a private residence.

The query follows on from the SPAA welcoming new draft rules dealing with the purchase and holding of collectibles within SMSFs. SPAA chief executive Andrea Slatter y said that while the SPAA broadly suppor ted the Government’s new draft rules, it believed they still required some technical amendments and clarifications.

On the specific question of the displaying of artworks, Slattery said that while it was clear the items would not be permitted to be displayed in the private residence of a SMSF member, the position in relation to related par ty non-residential premises was not so clear.

“If it is the intention to allow such items to be displayed on the premises of a related entity, how will these regulations – and the ban on leasing these items to a related party – interact with the requirement for all fund investments to be on an arms length basis?” she asked.

Slatter y said the SPAA was also concerned that the proposed ban on using the items might cause problems if the personal u s e wa s i n c i d e n t a l a n d wa s required for the legitimate maintenance of an asset.

“For example: where a member of a SMSF on occasion drives a vintage car owned by the SMSF and this personal use is considered incidental and is a requirement for the legitimate maintenance of the vehicle,” she said.

Trustees challenged to meet stricter targets

By Ashleigh McIntyre SUPERANNUATION trustees have not given consumers in default funds the returns they are entitled to expect, according to chair of the Stronger Super Peak Consultative Group, Paul Costello.

“We have created a system – and we are all part of it – which has sub-optimally managed the assets of those people,” he told delegates at an Association of Superannuation Funds of

Australia (ASFA) function.

Costello argued funds should be measured on more than just the monthly leagues tables published by the Australian Prudential Regulation Authority (APRA) – they should also be required to meet both risk and performance targets.

“The trustee offering of MySuper should be required to set out what they determine an acceptable level of risk is and set out what they expect to be the

6 — Money Management June 30, 2011 www.moneymanagement.com.au

risk-adjusted 10-year rolling return,” Costello said.

He also said trustees should ask what is an acceptable level of risk-taking they would deliver against, and then uphold the expectation to manage portfolios accordingly.

Trustees should also communicate these targets with members to make the process both more accountable and transparent.

Costello said the challenge

now for trustees was to come up with better, clearer, more effective and more accountable MySuper products that incorporated these ideas.

“I would argue that that represents both an extraordinary challenge and opportunity for the industry,” he said.

Costello said that consultation on the proposed regulations ended on 30 May, and trustees could expect to see legislation in the second half of the year.

Paul Costello

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News

Cost-benefit analysis needed for ASIC

By Mike Taylor A PARLIAMENTARY Committee has been told the Australian Securities and Investments Commission (ASIC) should be more considerate of the time and resources its requirements place on businesses.

In a submission to a Parliamentary Committee earlier this month, the Rule of Law Institute of Australia (ROLIA) made specific reference to a lengthy questionnaire sent by the regulator to some of the largest Australian Financial Services Licensees (AFSLs) last year.

The committee was told the questionnaire

comprised of a 812-question document which was issued to up to 30 of the largest institutionally owned and independent dealer groups under a Notice of Direction making completion compulsory.

The ROLIA told the committee that this reflected a particular use of ASIC’s coercive powers.

Pointing to the amount of time and resources that needed to be directed to the exercise, the ROLIA submission argued that ASIC should consider voluntary surveys first and should test the costs and benefits of complex data collection.

The ROLIA evidence to the parliamentary committee referenced ASIC’s own data with

respect to its use of coercive powers, saying the five most frequently used powers by ASIC over the period 1 July 2007 to 17 June 2010 were: Section 33 of the ASIC Act – notice to produce documents in person’s possession (6,984 occasions); Section 30 of the ASIC Act –notice to produce books about affairs of body corporate or registered scheme (5,687 occasions); Section 19 of the ASIC Act – notice requiring appearance for examination (3,354 occasions); Section 31 of the ASIC Act – notice to produce books about financial products(1,430 occasions); and Section 912C of the Act – direction to provide a statement (939 occasions).

Liquidity still the key for alternatives

By Chris Kennedy ADVISERS remain wary of the liquidity problems the alternatives sector saw throughout the global financial crisis, but are still looking for that hedge fund type diversification, according to Advance Asset Management.

A lack of liquidity was the main issue plaguing hedge funds in 200809, and there is currently a lack of other options in the market providing those traditional hedge fund benefits such as diversified returns and risk premia, low-risk and high alignment of interest, according to

Advance’s alternatives portfolio manager Chris Thompson.

Advance is launching a new multi strategy fund in August that aims to capture the benefits of hedge funds without the underlying liquidity issues, he said.

Advance head of advance investment solutions Patrick Farrell said advisers have been

plagued with the liquidity prospects and the transparency aspect of these types of funds, but this fund solves a lot of the problems advisers have been having with the space.

The fund has been formed in partnership with US alternative manager and fund of hedge funds specialist Ramius Alternative Solutions, and is designed in particular to have a high underlying liquidity, Thompson said.

Ramius will assist Advance with manager selection and act as an extension of the Advance investment and operations team, with

both sides to have the power of veto over manager selection, he said.

The fund is also designed to be highly transparent and will initially make public the underlying investments, he said. The solution will essentially be a core/satellite approach with as much as 45 per cent of the fund to be invested in cash solutions such as indices and exchange-traded funds, he added.

It will feature a 0.98 per cent flat fee with a 10 per cent annual performance fee, and is aimed at wholesale investors with a minimum investment of $50,000, he said.

Korea and Taiwan remain ‘emerging’ THE MSCI Korea Index and the MSCI Taiwan Index will be maintained in ‘emerging market’ status – at least until the MSCI’s next Annual Market Classification Review in 2012.

Qatar and the United Arab emirates will also have an extension until December for a potential reclassification from ‘frontier’ to ‘emerging’ status to enable participants to assess the impacts of recent changes in those markets, MSCI announced.

Listed reasons for maintaining the ‘emerging’ status of both Korea and Taiwan included accessibility issues, in particular the lack

of full currency convertibility.

This included the absence of active offshore currency markets, and issues linked to the rigidity of the ID systems, MSCI stated.

Korea has put some measures in place to alleviate the resulting frictions and inefficiencies including revisions to its Banking Act, but investor feedback suggests limited improvement, MSCI stated.

Anti-competitive practices have also not been eliminated, with the provision of stock market data still subject to contractual anti-competitive clauses, according to MSCI.

THE Financial Sector Union (FSU) has criticised Westpac chief executive officer Gail Kelly for allegedly considering sending more than a thousand jobs overseas, with the union’s survey showing most employees rejected the reasons for the decision.

Kelly did not officially announce job cuts, but FSU secretary Leon Carter claimed Westpac used media briefings to flag the plan, with most mainstream publications reporting on it late last year.

Carter said the bank was planning to outsource back-office operations to overseas companies, with client-facing jobs to be spared.

Gail Kelly According to the FSU’s announcement, Kelly claimed the bank would again look at offshoring options because

8 — Money Management June 30, 2011 www.moneymanagement.com.au

“unemployment is low and skills are at a premium, and by doing so they would remove complexities and improve service”.

However, Carter claimed cutting costs, given the profit Westpac made, was unacceptable.

“If there is an employer in this country that can afford to keep every single one of its workers in place, it’s Westpac,” Carter said.

“More importantly, it is their obligation, given the amount of their profit from the community, to actually grow Australian jobs, not continually speculate and cause great concern to the back-office workers about whether they are going to keep their jobs or not.”

A recent FSU survey of around

HOPES by some mortgage brokers and non-bank lenders that the Government would not garner sufficient numbers in the Parliament to maintain a ban on mortgage exit fees appear to have been dashed, with the Australian Greens indicating their strong support.

The Greens’ only member in the House of Representatives and the party’s banking spokesman, Adam Bandt, said the Greens would vote to keep in place the ban on mortgage exit fees due to come into force on 1 July.

Bandt said that while the Greens understood that mortgage brokers and some non-bank lenders were concerned about the ban, they had not mounted a convincing argument about why it should not remain in place.

“Consumer advocacy groups such as CHOICE, the credit unions and mutual societies and even the National Australia Bank have all said overturning this ban is not the way to go,” he said.

“Instead of focusing on exit fees, those advocating greater competition in the lending market should focus on how to get the cost of wholesale finance for smaller lenders down so they can compete with the big four banks instead of penalising consumers,” Bandt said.

He said the Greens would seek further reforms from the Government to improve non-bank lenders’ access to finance.

New regional manager for AFS in WA, SA

FSU attacks Westpac over possible job cuts

By Milana Pokrajac

Greens back exit fee ban

3,200 bank employees found that 95 per cent believe that businesses making profits in Australia should reinvest in skills development and jobs here, with a further 89 per cent disagreeing that sending jobs/functions offshore improved customer service.

“People who work in the back office work very hard every day to make sure that the customerfacing world can actually do their job,” Carter said.

“This notion that offshoring somehow delivers a dividend of better customer service is a complete and utter lie; it is not profitable to provide better customer service by sending Australian jobs overseas,” Carter said.

FORMER AMP Financial Planning business partnership manager, Jim Ivester, has moved to the Australian Financial Services (AFS) Group as regional manager for Western Australia and South Australia.

Ivester will be responsible for maintaining sustainable growth of the dealer group’s business in these states through strategic planning and practice development.

AFS Group chief executive officer Peter Daly announced the appointment, and said it reflected the dealer group’s “commitment and determination to provide service and support at a local and accessible level”.

Apart from his role at AMP Financial Planning, Ivester has also held senior practice development roles for a number of dealerships including Godfrey Pembroke, Apogee and Garvan.

News Poor regulations creating phoenix advisers

By Chris Kennedy MORE stringent regulations are required to prevent insolvent financial advisers reopening their businesses and avoiding paying liabilities to clients who suffered due to negligent advice, according to Maurice Blackburn Lawyers.

The practice, know as ‘phoenix activity’, allows rogue financial operators to re-establish their business and continue operating while clients who have suffered have no further avenue to seek compensation for negligent advice, according to Maurice Blackburn lawyer Briohny Coglin.

Many financial advice companies also have inadequate insurance arrangements, she said.

“In a case we settled last year, the financial advice company argued that regardless of whether or not the company’s negligence caused its clients massive losses, it had a limit of only $2 million to pay all claims made in a one year period, and that year’s $2 million

had almost run out,” she said.

“In contrast, a doctor in private practice has a standard limit of insurance of $20 million per claim.”

A Maurice Blackburn submission to the Government’s Review of Compensation Arrangements for Consumers of Financial Services outlines areas where protection offered to investors is poor, Coglin said.

“We believe a compensation scheme of last resort should be set up as a matter of urgency in order to fill the void that is currently leaving investors with compensable claims in financial ruin with no avenue of recourse,” she said.

“The Federal Government should also look at strengthening the current arrangements including a review of professional indemnity insurance. Our client was faced with the choice of accepting a settlement that did not reflect the value of her losses, or proceeding to trial and risking there being nothing left by the time the hearing date came around.”

Weak May and June crimps super returns

By Mike Taylor

Warren Chant

SUPERANNUATION fund returns look likely to end the financial year in the high single digits, despite faltering in May, according to Chant West.

Chant West director Warren Chant said that while the median growth fund return had retreated 0.2 per cent during May, the return for the financial year to date was 10 per cent.

Chant warned, however, that the data for June suggested that

super fund members might have to settle for high single digit returns.

“This is still a pleasing result and can be viewed as a year of consolidation on the back of last year’s 10.4 per cent return,” he said.

“West estimates the return to the end of June will be about 8 per cent after investment fees and tax, which is above the long-term expected return of about 7 per cent a year for growth funds,” Chant said.

Relief given on shortened PDS transition

By Ashleigh McIntyre

THE Australian Securities and Investments Commission (ASIC) has released a class order to extend the transition period for the new shorter Product Disclosure Statement (PDS) regime.

Both superannuation and simple managed investment schemes will now be able to remain in the old regime until further notice.

Class Order CO 11/576 will allow the Federal Government time to implement the refinements to the shorter PDS regime and avoid any interim disruption that could adversely impact retail investors and product providers, ASIC said in a statement.

The Government previously announced product providers could remain in the old regime or continue to issue supplementary PDSs until 22 June 2012, or opt into the new regime from that date if they are ready to.

The Federal Gover nment also announced a number of other changes to clarify the operation of the shorter PDS regime, including confirming that pure risk products are excluded, confirming that combined defined benefit and accumulation products are included, and amending regulations to allow for electronic lodgement of applications.

Super funds ask for levy exemption REGULATED superannuation funds are increasingly being seen as a ‘honey pot’ and should largely be excluded from the Government’s proposed compensation levy system, according to an industry association.

In a submission on the review of compensation arrangements, the Association of Superannuation Funds of Australia (ASFA) said financial services providers should be segregated into different classes, and only pay a levy where that type of provider is both guilty of misconduct and insolvent.

For example, ASFA said it would be “inappropriate” for superannuation funds to be levied other than where misconduct had caused a superannuation fund to fail.

If a segregated model were to apply, as in the United

Kingdom, it might be likely that should a particular class exceed its annual maximum levy threshold, other classes would be required to ‘top-up’ funding.

In this case, ASFA also said it would be inappropriate for superannuation funds to cross-subsidise other financial products, given that super funds represent the deferred salaries and wages of employees.

Further to this, the idea of a universal levy whereby all financial services providers would be liable for the misconduct of others would further result in inequitable outcomes, according to ASFA. It said this model would mean inherently risky financial services products would be cross-subsidised by less risky ones, especially in the case of prudentially

regulated superannuation funds.

Rather, the association stated super funds should only be required to pay a levy if a fund regulated by the Australian Prudential Regulation Authority (APRA) fails and compensation is determined to be payable to members of that fund.

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News

Synchron rails against ‘socialist’ agenda

By Chris Kennedy SYNCHRON is encouraging its advisers to lobby their local politicians against the proposed Future of Financial Advice (FOFA) reforms, which Synchron director Don Trapnell says panders to the union super funds movement’s “socialist” agenda.

The FOFA reforms unfairly disadvantage and penalise financial advisers operating outside of super funds, making it more difficult for them to do business, he said.

“Adviser fines in the vicinity of $200,000; lifetime bans; criminal penalties; bans on commissions on life insurance products inside superannuation; bans on corporate sponsorship of overseas adviser conferences: all [of these factors] serve to disadvantage financial advisers operating outside union superannuation funds,” Trapnell said.

The reforms will ultimately mean consumers have fewer choices about where they access advice and where they place their superannuation money, he said.

Recent comments from Industr y Funds Management chair Garry Weaven suggesting the industry fund movement

Don Trapnell will be “coming after” the self-managed superannuation fund sector once the FOFA debate settles down shows it is not interested in consumers but in controlling the nation’s super savings, Trapnell said.

“It is a gross demonstration of union fund greed,” he added.

Trapnell also criticised the proposed ban on corporate sponsorship of overseas adviser conferences.

“Any such proposed ban is only likely to affect [Australian Financial Services Licence] holders and their authorised representatives. It probably will not, for example, affect delegates attending the Australian Institute of Superannuation Trustees’ Global Dialogue in London next year,” he said.

The Government may be using financial services product failures as an excuse to put through reforms that have the potential to put boutique advisers out of business, but it was unclear how the changes would prevent a future product failure like Westpoint or stop a fee-forservice business like Storm Financial from failing again, he said.

Trapnell urged advisers to take action against what Synchron described as an ongoing and concerted attack on the financial advice industry.

“Advisers must stand up against Government attempts to dictate how ordinary Australians go about their business. They need to talk to their local Members of Parliament – and any other Federal politician who will listen – about the devastating impact FOFA will have on them, their clients, their businesses and the industry.”

Clearing house costs $177 per transaction

By Mike Taylor THE Federal Opposition has claimed the Government’s Medibank-based superannuation clearing house for small businesses is costing $177 for every transaction.

In a statement justifying the Coalition’s own plans for establishing a different clearing house arrangement, the Opposition spokesmen on Financial Services and Small Business, Senator Mathias Cormann and Bruce Bilson claimed that almost all of Australia’s 2.1 million businesses had ignored the Medicare clearing house, with only 4,500 registrations to use its facilities.

They claimed that at a cost of $16 million a year for 90,000 transactions, this equated to a cost of $177 per transaction.

Cormann and Bilson said that the low take-up by small business suggested owners were voting with their feet.

“Rather than assisting small business, Labor’s policy has added another layer of red tape as businesses already have to report to the Australian Taxation Office (ATO) and then need to go to Medicare to report their superannuation commitments,” they said.

The two Opposition frontbenchers said the Coalition plan to streamline superannuation

Bill Shorten clearing house arrangements for small business through the ATO would cut red tape and increase compliance with employer

superannuation contributions.

However, the Assistant Treasurer and Minister for Financial Services, Bill Shorten released his own research claiming 99 per cent of the small businesses using the Medicare clearing house were satisfied with its service.

“Ninety-six per cent of customers have said the clearing house reduces the time it takes to make their superannuation payments,” he said. “Of these, three quarters say it’s saved them up to three hours per quarter, 15 per cent say up to seven hours and 9 per cent say they’ve saved up to eight hours per quarter.”

Asteron unveils FOFA ‘lobby pack’ LIFE insurance provider Asteron has created a Future of Financial Advice (FOFA) ‘lobby pack’, which teaches the company’s adviser network how to lobby their members of parliament on some of the key FOFA issues.

T h e l o b by p a c k , w h i c h wa s intended for more than 5,000 Asteron-aligned and independent advisers, includes a discussion points document and two educational hand-outs to leave behind with the MP. The educational handouts mostly focus on the importance of advice and Australia’s underinsurance problem, which Asteron claimed would become

worse as a result of FOFA. Asteron’s executive manager for national sales, Mark Vilo, said the pack encouraged advisers to speak out about FOFA implications on their businesses.

Vilo added the pack included Asteron’s views about some of the proposals, including the controversial opt-in proposal and the banning of risk commissions within super, both of which the insurer publicly opposed.

“We translated the information coming out of the FOFA pack and said: ‘Here are the views of the marketplace, and here are our views’. This really helps advisers start a discussion with their MP and get their point across,”

10 — Money Management June 30, 2011 www.moneymanagement.com.au

Vilo said.

“The two handouts are designed to show and explain to the MPs that the actual process the adviser goes through when giving advice is not just transactional,” he added.

The introduction letter to the lobby pack was sent out to more than 5,000 adviser s a week and a half ago, according to Vilo, with the company receiving over 100 requests for the pack to be sent out to them.

Asteron’s lobby pack also refers advisers to the Association of Financial Advisers political pack, which contains instructions on how to identify and reach a local member.

Cash back to ING Peal

By Milana Pokrajac

LISTED investment company ING Private Equity Access Limited (ING PEAL) has announced its underlying private equity investments will be returning cash to the company.

Quadrant Private Equity said it would sell its investment in Quick Service Restaurants (QSR) for three times the cost. QSR would be bought by Archer Capital Fund 4, which plans further expansion of its brands (Red Rooster, Oporto, Chicken Treat) both in Australia and overseas.

The transaction was at a price 65 per cent above its recent carrying value and would return approximately $3.8 million to ING PEAL, after allowing for the drawdown needed by Archer 4 for its purchase.

ING PEAL managing director Jon Schahinger said the company’s portfolio was in a very promising condition, adding it was pleasing to see the “financial year ending on such a positive note”.

SMSFs still on top SELF-MANAGED superannuation funds (SMSFs) continue to hold the largest proportion of funds in the superannuation sector, according to the latest data released by the Australian Prudential Regulation Authority.

The data, covering the March quarter, revealed that SMSFs accounted for 31.9 per cent of all of Australia’s superannuation assets, followed by retail funds with 27.3 per cent.

Industry funds accounted for 19 per cent of total assets.

The only significant issue for SMSFs in the latest APRA data is that they appeared to grow less quickly in the March quarter, with assets growing by 3.3 per cent compared to 4.4 per cent for industry funds and just 2.3 per cent for retail funds.

While the APRA data revealed most traditional superannuation fund money was invested in wholesale trusts or individually managed mandates, external data suggested that a significant proportion of SMSF assets were invested in cash or similar products.

News

FOFA could create unlevel playing field

By Mike Taylor THE financial planning industry needs to be just as pragmatic about its underlying economics as it is about its pursuit of becoming a profession, according to the managing director of Professional Investment Services (PIS), Grahame Evans.

Evans said the economics of the industry had developed to create a situation in which those who had more subsidised those who had less.

“Whilst the idealism of a profession is certainly a very worthy goal, we must consider the impacts to the availability, cost and quality of advice,” he said.

Grahame Evans “This is not a cliff face exercise, it is a journey and as such we need to transition the industry in a way that does not destroy but ensures a level playing field,” Evans said.

“The last thing we would want is to go back to a quasi-tied agency structure.” However, he said that with consolidation occurring within the financial planning industry, there was a genuine possibility that the tied-agency structure would make a return.

Evans said PIS was extremely concerned about the boutique licensees that did not have the scale to vertically integrate.

“If I was a boutique I would be pressing the Government for some form of compensation in similar fashion to the dairy and fishing industries,” he said. “It is evident to most that the value of the boutique licensees’ business will fall as a result of these changes.”

Don’t believe the SMSF collectibles hype

By Ashleigh McIntyre

SELF-managed super fund (SMSF) education provider, SMSF Academy, has labelled industry reactions to draft regulations on collectible investments as “making a mountain out of a molehill”.

SMSF Academy managing director Aaron Dunn said concerns about the additional compliance costs are valid, but that the changes are nec-

essary to improve the integrity of the system.

The changes will prevent trustees from enjoying the benefits from their investments in collectibles and are designed to ensure the investments are made to derive a retirement benefit.

“It is a better outcome than that proposed by the Cooper Review, which sought a blanket ban on the acquisition of all collectibles and per-

sonal use assets within SMSFs,” Dunn said.

He added that the hype around collectables was disproportionate to the amount of money the SMSF sector currently has invested in them, with only 0.1 per cent of the $430 billion of assets invested in collectibles.

Dunn said one area of change that will impose greater costs for more SMSFs was the proposed ban on

acquiring shares from related parties, but there had been little debate on the topic.

“While the industry has a right to have input in the future direction of superannuation policy within Australia, arguing the toss on collectibles is really making a mountain out of a molehill,” Dunn said.

“Trustees and their advisers should be happy that they are here to stay – albeit with tighter regulation.”

PWK joins Paragem AFSL

Ian Knox

QUEENSLAND boutique advisory practice, PWK Private Wealth Advisers has moved under the umbrella of Paragem’s wholesale Australian Financial Services Licence (AFSL) provider, Paragem.

Paragem managing director, Ian Knox confirmed the move by PWK , saying his company would be providing licensing of a full suite of backoffice services under the AFSL. He said the move by PWK – made up of principals Clem Piscitelli, David Wilcock and Peter Keogh

– brought the number of practices within the Paragem AFSL to 13, looking after $1.3 billion on behalf of clients.

Knox described his business as being a postFuture of Financial Advice (FOFA) model operating in a pre-FOFA world.

He said it was proving attractive to large practices, which had outgrown their current operating environment and wanted to expand “without being strategically lonely”.

Mark Spiers

Professionalism up to the whole industry THE push to achieve professionalism in financial planning needs to go beyond planners to include all participants in the financial services industry, according to general manager of advice for BT Financial Group, Mark Spiers.

Spiers said in order to reach this, the entire industry needed to adopt a culture of professionalism, including paraplanners, fund managers, platform providers, client service officers and even call centre staff.

“I think too often we say professionalism is for the planner, and that’s true, but that is only one critical component of the environment of professionalism,” he said.

Spiers said during the global financial crisis, the erosion of trust between consumers and the financial services industry was the greatest casualty across the industry globally.

“And trust is clearly the highway to professionalism,” he said.

The best way for planners to build trust with their clients, Spiers said, was to go back to basics.

“Clients look for good quality advice and good quality service and they are looking for their needs to be met,” he said.

Spiers said that from his perspective, he believes the financial services industry will definitely make the leap to a profession, but it will need to be done in a series of steps.

“Professionalism has totally been embraced by the industry and most if not all planners are developing themselves in the areas of their gaps to reflect that,” he said.

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News

Tax rebate for low-income contributions

By Mike Taylor THE Association of Superannuation Funds of Australia (ASFA) has welcomed a proposal contained in a Treasury discussion paper to give low-income workers a tax rebate on their superannuation contributions.

The measure, proposed to come into effect from 1 July 2012, would see the 15 per cent tax on contributions redirected directly into the super accounts of low-income workers.

Commenting on the proposal, ASFA chief executive Pauline Vamos said her organisation had been advocating for such a rebate for several years.

“We specifically suggested such a measure in 2010 prior to it being adopted as part of the response to the Henry Review,” she said.

Pauline Vamos Vamos pointed out that people earning up to $37,000 currently did not receive a tax benefit from their superannuation contributions

because their income tax rate was at or below 15 per cent.

“The plan to redirect the 15 per cent tax on contributions directly into the superannuation accounts of lower income earners means their accounts will accrue more savings, earlier, subject to compound interest,” she said.

Vamos said it had been estimated the measure would beneficially impact 3.5 million Australians, with the majority of recipients being women in part-time and casual jobs.

She said ASFA would be making a submission to Treasury in regard to the proposed mechanism for assessing and paying the rebate, but envisaged few problems with implementation because the method proposed built on that already in place for the co-contribution regime.

$3 million for each planner still in cash

By Milana Pokrajac

Recep Peker

ACROSS an average planner’s client base, there is about $3.2 million sitting in cash that would have otherwise been invested in growth assets, but hasn’t been due to market volatility, according to an Investment Trends survey.

The December 2010 Adviser Product Needs Report, which surveyed 778 planners, found more than half of clients are waiting for their financial adviser to give the green light for a safe return to the investment market.

Investment Trends investment analyst Recep Peker said 60 per cent of advisers thought the main investment trigger was confidence that the economic recovery was real, but that one-quarter had already began investing.

“After the global financial crisis hit, a lot of clients wanted to pull out of the market because of negative sentiment, but one-third of planners tried to convince their clients to stay invested,” Peker said.

Keeping clients invested in volatile times is often used by planners as a

value add when dealing with their clients, but the survey also found portfolio construction and time-saving strategies made up the main part of their value proposition.

In fact, portfolio construction and administration efficacy get a mention with over 90 per cent of advisers.

“This constitutes helping them diversify their portfolio, choosing quality fund managers, portfolio administration and reporting – those are the most standard things planners mention to their clients,” Peker said.

Advisers fear burden of SMSF collectibles

By Chris Kennedy A SIGNIFICANTproportion of financial planners have clients with artworks and collectibles in a selfmanaged superannuation fund (SMSF) and fear there will be an increase in the administrative burden due to proposed administrative

changes, according to the latest Midwinter AdviserTECH survey.

Around 62 per cent of the 128 advisers surveyed had clients with some form of artwork or collectible in a SMSF, representing around 7 per cent of all clients, the survey found.

One-third of respondents thought proposed changes recent-

12 — Money Management June 30, 2011 www.moneymanagement.com.au

ly outlined by Financial Services Minister Bill Shorten would have a large impact on the administration component of their SMSF service, and a further 41 per cent thought it would have a small impact.

Adviser comments suggested they would be less likely to recommend these assets be housed inside a SMSF,

according to Midwinter technical services manager Tony Nguyen.

More than half of advisers said they would be likely to slightly increase fees to offset the extra administrative burden and a further 10 per cent said they were likely to increase fees substantially, the survey found.

10 per cent of Aussies lie about finances

By Ashleigh McIntyre

ONE in 10 adult Australians have misrepresented their personal financial circumstances when applying for credit, according to new research.

The survey, conducted by Galaxy Research for credit bureau Veda Advantage, found that 1.8 million Australians chose to misrepresent their circumstances, which amounts to 200,000 more than six months ago.

The favoured method of 1.1 million Australians was to understate total expenses, while 430,000 preferred to understate the amount of money currently owed on credit cards. Lastly, 330,000 chose to overstate their income.

The survey also found one in five Australians admit to finding it difficult to repay debt, and of these, 28 per cent were likely to apply for more credit in the next six months, while 14 per cent had missed a minimum bill repayment.

Head of consumer risk at Veda Angus Luffman said this was a worrying trend – particularly in light of the continuing financial vulnerability of many Australians.

Luffman said Australia’s credit system was lagging behind international standards, and that currently lenders can only see when a person has defaulted in the past five years and the number of credit enquiries made.

“They cannot see whether a consumer is financially overcommitted and whether they can meet their current repayment obligations,” he said.

InFocus Regulation debate hurting share prices The share prices of Australia’s major publicly listed financial planning groups have been trending down for most of the past 14 months and, as Mike Taylor reports, at least a part of the reason is ongoing uncertainty around the Future of Financial Advice changes.

SNAPSHOT Do you believe the abolishment of mortgage exit fees will allow you to provide more appropriate loans for your clients?

59% 20%

W

hen Count Financial acquired a small but strategic stake in competitor dealer group DKN Financial Group in February last year, it did so at a time when the fortunes of financial planning companies were recovering strongly from the sharemarket lows encountered during the global financial crisis.

There had been some prior history between Count Financial and DKN, but Count executive chairman Barry Lambert chose at the time to describe the purchase of the 5 per cent stake as being “strategic and long-term”.

“We purchased the stock with a view to the consolidation we believe will occur in the industry,” he said, adding that he believed significant similarities and synergies existed between the Count and DKN businesses – particularly with respect to Lonsdale.

It is worth reflecting, therefore, that DKN’s share price at the time Count Financial purchased its “strategic and long-term” stake was sitting around double what it was when IOOF made its “unsolicited, indicative, nonbinding proposal”. At 75 cents per share, the IOOF bid looked like a generous premium on a share price trading at between 40 and 50 cents per share. Nonetheless it was well below the more than 80 cents a share paid by Count some 16 months earlier.

Little wonder, therefore, that Count chief executive Andrew Gale emerged a few days later to suggest that Count, at least, did not regard the IOOF offer as representing “fair value”.

“It would represent an extremely well-priced deal for IOOF,” he said. “We do not believe it would be acceptable to other shareholders.”

IOOF already owns 19 per cent of DKN, with the remainder being owned by big Swiss-based insurer Zurich. However, in the same manner in which Zurich disposed of its ownership of research and ratings house, Lonsec, it is believed to no longer regard DKN as being a core part of its business.

While Gale and IOOF managing director Chris Kelaher may disagree about whether the 75 cents per share offer for DKN represents “fair value”, they would not quibble with the fact that global economic events have combined with the policy uncertainty around the proposed Future of Financial Advice (FOFA) changes to create some excellent buying opportunities.

Indeed, as indicated by figure 1, a simple analysis of the share prices for Australia’s major, publicly listed independent dealer groups reveals their underlying value has been trending down since the around April and May, 2010 – notwithstanding some recovery between the immediate postelection period and January 2011.

The only significant difference between the relative share price performance of Count and DKN is that the latter’s share price shot north in the immediate aftermath of the IOOF bid.

A similar trend can be seen with respect to the share price of another publicly listed independent dealer group, the West Australian-

MORTGAGE

YES NO

22%

NEED MORE RESEARCH Source: AdviserTECH Planner Survey. Percentages may not add up to 100 due to rounding

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Comparative two-year performance – DKN and Count Financial

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FPA Young Planner Seminar 7 July, 2011 Mooloolaba Surf Lifesaving Club www.fpa.asn.au

AFA National Forum and Masterclass 19 July, 2011 Pan Pacific Perth, 207 Adelaide Terrace, Perth www.afa.asn.au

Source: ASX

based Plan B. Gale made clear he believed recent events were a manifestation of the current policy uncertainty and a confirmation that one of the unintended consequences of the FOFA changes would be a further consolidation of the financial planning industry, with major institutional players growing at the expense of the independents.

Given his position as the man tasked with running the target company amid the growing debate about its relative value in the market, DKN chief executive Phil Butterworth has been necessarily circumspect, confining his comments to the company’s official announcement to the Australian Securities Exchange on the IOOF bid.

However, Butterworth appeared to signal DKN’s own estimation of its value by referencing “the quality assets of DKN which include the Lonsdale Group and the company’s equity positions in a number of wealth management practices”.

Of course, IOOF is only likely to pick up DKN at the perceived bargain-basement price if no other players see fit to mount a bid.

As last week drew to a close, Count appeared to be remaining on the sidelines and the major banking groups, such as ANZ, were showing no particular interest in throwing their hats into the ring.

For Zurich and the other major DKN shareholders, the IOOF bid at 75 cents a share was looking attractive based on nothing more than being the only game in town.

Property as an Appropriate Investment Class 20 July Metcalfe Auditorium, State Library, Sydney www.finsia.com

FSC Annual Conference 2011 3-5 August Gold Coast Convention and Exhibition Centre www.fscannualconf.org.au

SPAA 2011 State Technical Conference 10 August, 2011 Sofitel on Collins, Melbourne www.spaa.asn.au

www.moneymanagement.com.au June 30, 2011 Money Management — 13

Multi-manager funds

Adjusting to the new normal The global financial crisis has resulted in a change in the way multi-manager funds operate. Benjamin Levy explains why many funds are struggling to adapt to the new reality – and what this means for the sector.

Key points • The global financial crisis has changed the way the market behaves, forcing fund managers to make constant adjustments to their portfolios.

• Multi-manager funds are an ideal option in an environment where active management is rewarded.

• With plenty of interest from planners, the pressure is on multi-manager funds to keep fees relatively low.

• As long as the current market conditions continue, inflows into multi-manager funds will continue to grow strongly.

THE behaviour of the market since the end of the GFC is changing the way multimanager funds (MMFs) work. Gone are the days of standard ‘set-and-forget’ portfolios. Highs and lows in the market are now measured in months instead of years, and fund managers who can’t keep up will fall to swifter, more powerful rivals.

MMFs are scrambling to adjust to the new reality, reviewing every inch of their old asset allocation mix and introducing new and numbered strategies to ride short to medium-term market gains.

Concerns about fees and increasing time restrictions are also driving financial planners into the arms of multimanagers, who are creating a new price war as they attempt to drive down costs and attract more customers.

Funds under management (FUM) are booming as a result, with billions of dollars pouring into the sector over the last year.

But are some short-term strategies such a safe bet? Some new approaches are being criticised by fund managers for being untested, or a cop-out.

And an all-consuming focus on lowering fees through indexing, fundamental approaches and swap agreements may be causing some advisers to lose out on the potential gains active management may achieve.

The new reality

Before the global financial crisis (GFC), bull markets ran for five to seven years, giving planners ample time to readjust their portfolios. Now, the difference between market lows and the height of a new bull run is barely 18 months, leaving clients’ portfolios dangerously overweight.

“The strategic asset allocation [SAA] mix – ‘set and forget’ – is really starting to lose appeal in the marketplace. We’re looking at shorter, sharper economic cycles, so having a manager who has more flexibility to move the portfolio is quite favourable,” says Standard and Poor’s (S&P) multi-sector head Andrew Yap. While multi-managers in every company recognise the quickening share market cycle, they are reacting to it in different ways.

S&P has seen many fund managers take advantage of the new, evolved market cycles by introducing a tactical asset allocation (TAA) overlay, according to Yap. “If you think we’re going to be moving to shorter, sharper economic cycles, the 14 — Money Management June 30, 2011 www.moneymanagement.com.au

Multi-manager funds rationale for the tactical asset overlay is that you’ve got conviction in a particular call or a view on an asset class, or the best way in which to take exposure to an asset class. If that’s the case, then a t a c t i c a l a s s e t ov e r l a y g i v e s y o u increased flexibility,” he says.

TAA is also being used as a risk dampener for many fund managers, Yap says.

BT Financial Group’s Advance Asset Ma n a g e m e n t i s o n e o f t h o s e f u n d managers that recently expanded and enhanced its TAA guidelines to take advantage of short-term strengths in the market.

“Tactical asset allocation is going to be absolutely paramount. Not just for capturing the opportunity set, but to also provide some capital downside management as well,” says Patr ick Farrell, head of Advance Investment Solutions.

T h e o t h e r h a l f o f t h e c o m p a n y ’s market strategy revolves around its alternatives asset allocation.

Advance recently reviewed the sector, increasing its flexibility, introducing daily liquidity and more transparency to make it more capable of dealing with market tremors.

“The market volatility you’re going to get out of equities is going to continue.

You still will get periods of strength, but they will be coupled with reasonable periods of correction as well. We have to be smart about how we actually do those sorts of things,” Farrell says.

IOOF went through a full SAA review with Russell Investments earlier this year. The changes were dramatic.

“We used to have a peer group asset allocation, which was an average of the peer group. We looked at it and thought that wasn’t appropriate, and decided we would get new optimal asset allocations, ranges, and benchmarks, and roll that out,” says IOOF chief investment officer Steve Merlicek.

IOOF and Russell also implemented ‘strategic tilting’ – a high-conviction approach to asset class timing – that will sit around the new asset allocation strategy.

A medium term asset allocation, the strategy temporarily tilts portfolios away from a default SAA and aims to take advantage of extreme asset valuations in the market.

However, tilting works differently than TAA. In more normal market environments, strategic tilting would be based on a medium to long-term view, in contrast to the short-term view of TAA – but the shorter economic cycle that has evolved since the GFC has given strategic tilting a short time frame, mirroring a TAA strategy.

“That’s not to say that you’ve become tactical, it just means that swings in valuations have been that much compressed and you still can make strategic shifts on a shorter time frame,” Merlicek said.

IOOF is heavily invested in strategic tilting. An investment team meets monthly to review the strategy, while Merlicek has appointed former Russell senior investment consultant Stanley Yeo to focus on it. They also take input on the strategy from var ious other sources.

Fund managers can’t be quick enough in this market “environment to change their asset allocation, and if the market becomes too optimistic, it will eventually correct itself. ”

Richard Keary IOOF used the strategy last year to tilt away from domestic equities to overseas equities when the Australian share market was underperforming, and used i t a g a i n w h e n U S Tre a s u r y b o n d s dropped to returns of about 2 per cent.

Fa r re l l w a r n e d t h a t t h e s h o r t e r economic cycle was being compounded by quick money flowing in and out of the market from domestic and overseas investors.

“The high-net-worth individuals and a lot of overseas pension plans and defined benefit schemes are looking for a quick buck. They’re not looking to really play the long-term investment cycle just at the moment, they’re actually looking to get invested a few opportunities, get 5 or 6 per cent returns and then get out again,” Farrell says.

Dynamic asset allocation (DAA) is also on the rise. While there are “less than a handful” using the strategy, the number of fund managers investigating it is rising, according to Yap. Dynamic allocation is the next step of tactical allocation, giving the fund manager an unconstrained ability to increase exposure to a particular asset class.

Investment ranges at an asset class level with dynamic allocations could range from 0 to 100 per cent, while tactical allocations could only range from 20 to 60 per cent.

But fund managers need to be careful, because DAA is not for the fainthear ted. Just as tactical allocation requires more skills than strategic allocation, dynamic allocation requires much more skill than tactical allocation.

could easily backfire. Tellingly, Yap admits that some of the managers who have instituted drift don’t have the experience of using TAA overlays.

Farrell believes the conditions aren’t right for drift to work properly, because the markets are not guaranteed to keep rising.

“Drift really plays out when you have strong momentum in the market. If equity outperform other classes, that slowly builds up an overweight position to what you believe to be a strategic position. Now if you continue to let that run you just become more and more overweight.”

Fund managers can’t be quick enough in this market environment to change their asset allocation, and if the market becomes too optimistic, it will eventually correct itself and all the returns gathered by riding the market momentum will be lost.

While drift is a form of TAA, it’s also one in which the adviser or fund manager almost abrogates his responsibility to the portfolio. They don’t continuously think about the performance of the fund, but rather let the momentum do the hard work.

Continued on page 16

Getting the drift

Some fund managers who don’t have mandates for TAA overlays have decided to expand their investment bands (ie, drift) to 5 per cent, allowing them to ride out short-term rises in the economic cycle without readjusting their portfolios, Yap says.

It could help when it is difficult to rebalance a multi-manager portfolio because of liquidity or inefficient pricing, he adds.

“There’s a component of judgement in there, or subjective overlay. Expanding the allowable drift will let the market run, basically. If they think the markets are overvalued then they’ll pare it back, but if not, they’ll let it ride,” Yap says.

However, instituting such a tactic www.moneymanagement.com.au June 30, 2011 Money Management — 15

Multi-manager funds Continued from page 15 Yap also admits it is too early to tell what the effects of drift would be on returns because it is only just being implemented. It is clear that the jury is still out on this one.

The key to knowing what the market is going to do is finding out information. But the key to that is not so much about how much information you can gather but whether you have the systems to screen it appropriately, Farrell says.

“Little bits of information when you actually add them all together can really dictate some quite valuable trends that are starting to emerge, and actually dictate some key turning points that you can find in the market,” he says.

Demanding value for money

The current difficult market conditions are playing right into the hands of the MMFs. “The cycle that we’re seeing at the moment is definitely a stock-pickers cycle.

We’re seeing waves of massive beta rises, the market levels out and then it’s the active management turn. But you can’t time that, it’s impossible for advisers or for clients to time it, nor do we advocate that,” says Matthew Zschech, portfolio manager for Infocus Wealth subsidiary Alpha Fund Managers.

Alpha Fund Managers relies on a combination of risk-adjusted beta as

well as active management to generate the returns in their SAA multi-manager p o r t f o l i o s. Bu t m o re i m p o r t a n t l y, because they don’t believe they can add value to beta, they don’t charge to add beta at all, lowering the cost of a portfolio model to between 57 and 87 basis points. Other multi-manager portfolios can cost up to 100 basis points, according to Zschech.

Interest from financial planners has been very strong as a result.

“It gives them the opportunity to build por tfolios almost based on a mobile phone type plan,” Zschech says.

Price is a critical consideration when advisers are under pressure from their clients to lower costs, and they are in turn pressuring multi-manager funds to offer lower fees.

“Fees is a big issue, it’s an issue for everybody. People want to make sure that when they pay active fees they get alpha,” Merlicek says.

IOOF has its eye on a number of strategies that the industry is using to try lower costs for advisers.

Some advisers are trying to negotiate with multi-manager funds to lower the fees for alternatives, while others are relying more on passive managers or fundamental indexing.

Boutique fund managers are also offering fee breaks as a way of attracting investment, while swap agreements are also becoming popular as a replacement for exposure, Merlicek says.

16 — Money Management June 30, 2011 www.moneymanagement.com.au

Patrick Farrell “All those things are still happening and they’re a continuing story in this industry,” he adds.

The core-satellite approach, which has permeated portfolio construction in nearly every part of the industry, has made its presence felt here as well.

Advance is following the trend closely among financial planners.

“Some advisers tend to use an index fund as a core. What we’re finding is that a lot more advisers nowadays are using our funds or a good diversified fund as a core, because we’ve been able to demonstrate that they get the delivery of performance,” Farrell says.

However, chief executive of hedge

fund firm Financial Risk Management (FRM), Richard Keary, warns that low fees are not the be-all-and-end-all of MMFs. “Australia as a jurisdiction, more than any other jurisdiction in the world, uses fees as a discriminator. Rather than rank fund managers on net return, they get ranked on their management expense ratio [MER], and a high MER is anathema.”

FRM Sigma Fund combines several multi-managers to create a best-ofbreed managed futures fund.

Not everything that’s cheap is good, Keary warns.

This is a time when active management should pay for itself, whether it is expensive or not, he says.

Time is of the essence

The other drawcard of MMFs for financial planners is the amount of hours they save, giving planners more time with clients instead of documents.

“If you look at their business models, [advisers] have to start to find a way to be more efficient. They can’t necessarily rely on being able to go out there and spend the necessary time that they used in terms of picking funds, and figuring out what sort of investment strategy that they have,” Farrell says.

Incorporating TAA within Advance’s multi-manager funds also means that advisers don’t have to rewrite Statements of Advice to take advantage of market volatility, Farrell says.

“It includes a lot of business efficiency, and we’re finding that advisers love it for that fact,” he adds.

The added fiduciary responsibility that will be added on to financial planning requirements when the Future of Financial Advice reforms are introduced will mean advisers will also be under pressure to show clients how much time and effort they are putting into their investment strategies.

Farrell believes that is a big ask for planning practices that are continuing to face more pressured dynamics, and MMFs will benefit as a result.

Time, or lack of it, also becomes a much more important factor in a short economic cycle. Investors must be able to implement any portfolio changes very quickly and cleanly without losing any possible performance returns. That is beyond the ability of most advisers, and, together with the quality of investments, it plays a big role in the growing attraction of MMFs. Efficient implementation is a benefit that is not given proper recognition by t h e m a r k e t , a c c o rd i n g t o g e n e ra l manager for MLC Investment Solutions Sam Hallinan.

Using a multi-manager fund offers near instant implementation of a decision to rebalance a portfolio, when doing it yourself can take many months, Hallinan says.

“Over time, it adds up in regards to portfolio performance,” he says.

The Australian dollar – which MLC believes is overvalued according to a medium term outlook – is a good example of why advisers should rely on multi-manager funds to implement a portfolio change, Hallinan says.

Multi-manager funds “We want the ability to change our portfolio’s allocation to unhedged global equities as quickly as we can,” he says.

Letting a multi-manager do the rebalancing adds discipline to the process, and it is also more tax effective for the adviser, Hallinan says.

Meeting with a client only twice a year while the market can move strongly up or down within that timeframe can have disastrous implications, Yap says.

“

It’s definitely not a time to be betting the farm on any one strategy, that’s for sure.

- Matthew Zschech

”

Ready, set, grow

The increased interest from advisers in MMFs is showing up in their inflows.

A Lonsec analysis of the sector late last year revealed that the multi-manager sector had grown by 23 per cent to $246 billion in FUM until August.

MLC saw an increase of 52 per cent in flows following its purchase of a PreSelection fund range, which boosted its FUM by $39 billion. Advance recorded 17 per cent growth, Mercer 14 per cent, and Colonial 13 per cent.

Advance has seen continual growth in its MMFs right through last three years, Farrell says.

“We’re getting returns 2 per cent above our benchmark. That kind of traction from a performance perspective obviously gains a lot of trust and respect from the financial planning community, and that’s where we’re starting to see a lot of flows starting to come in,” he says.

Inflows are also coming in because

a d v i s e r s a re a t t ra c t e d t o t h e w a y Advance delivers after-fee returns to investors, Farrell adds.

IOOF recently merged its wholesale funds, MultiMix portfolios and United Fu n d s Ma n a g e m e n t , a n d i s i n t h e process of merging the retail side of the f u n d s, i n a n e f f o r t t o o p t i m i s e i t s manager structure.

IOOF has been trying to avoid the duplication of costs, get larger mandates and negotiate lower fees for members, as well as avoid mixed messages from the two platforms, Merlicek says.

The funds had a pleasing jump in performance as a result of the mergers, he says.

Part of the jump in performance was also due to the restructure of IOOF’s SAA with Mercer, Merlicek says.

Howe v e r, d e s p i t e t h e j u m p i n

performance, IOOF’s discretionar y inflows are still suffering.

“There’s not a lot of flow into many multi-manager funds at the moment, because people all seem to be saving money. The savings rate is the highest in 20 years. A lot of people are paying o f f t h e i r m o r t g a g e s, a n d t h e re a re changes to super as well. That’s across the industry.”

Discretionary flows haven’t picked up since the GFC, despite IOOF maintaining the size of their funds as well as c o m p u l s o r y s u p e r c o n t r i b u t i o n s, Merlicek says.

IOOF’s multi-manager portfolios were worth approximately $10 billion in February last year.

Alpha Fund Managers currently runs five asset-class based funds, blue chip, small cap companies, global opportu-

nities, listed property, and enhanced yield. Alpha has 14 managers across the five funds, including some big boutique names in the industr y. Bennelong, Greencape Capital, Equity Trustees, Perennial Investments, QIC and Putnam are among the names.

“Across any portfolio, we’ll only look at a reasonably concentrated manager line-up, and we differentiate those guys by strategy in the portfolio as well. We look at quantitative analysis, and the due diligence that we do there, and we also look at qualitative analysis, because the way that we construct our fund is quite different in that we follow a clear alpha-beta separation.”

Alpha Funds have added approximately $190 million in funds under management in the last three years.

Only those multi-managers who are stable will continue to do well in the ratings and among investors, Lonsec warned the industry in its review.

Some companies exposed to corporate uncertainty, like AXA/ipac, which was up for sale at the time, only received a ‘recommended’ rating.

However, should the market continue to behave the way it is, most MMFs are guaranteed to be around for a long while.

“We advocate that advisers pursue very sensible strategic asset allocation in building portfolios. It’s definitely not a time to be betting the farm on any one strategy, that’s for sure,” Zschech says.

MM

www.moneymanagement.com.au June 30, 2011 Money Management — 17

OpinionInsurance

Achieving the right balance In the second part of his article on claims management fees, Col Fullagar considers fee-based remuneration models and their impact on claims management.

I

n part one of this article (Steering away from the rocks, Money Management, 2 June, 2011), it was identified that: • Involvement in claims management can have a material financial impact on an adviser’s business; • The impact does not appear to be appropriately remunerated by commission payments; and • While there are compelling clientrelated reasons for the adviser to be involved in claims management, there are pros and cons when it comes to adviser-related reasons.

A further question was posed, the answering of which will form the basis of the conclusion of this article: is there a feebased remuneration model that will appropriately reward adviser involvement in claims management?

Any fee should be: • Logical – compensating the adviser to the extent of the financial impact on their business; • Transparent – enabling the client to understand the basis of the fee and the services they will receive so that value-for-

“

A fundamental purpose of insurance is to create money such that financial problems arising from the occurrence of an insured event can be resolved.

”

18 — Money Management June 30, 2011 www.moneymanagement.com.au

money can be assessed; and • Equitable – ensuring that all clients have reasonable and equal access to claims management assistance.

The simplest way to levy a claims management fee is for the adviser to establish a business charge-out rate and bill the client on an hourly basis, in the same manner as a solicitor or an accountant.

Unfortunately, while some clients may be able to afford (and be willing to pay) a fee on this basis, others will not do so until the claim has been paid – which puts both them and the adviser in an invidious position, and even more so if the claim is denied.

The simple hourly billing method will be set aside. While it may be logical and transparent, it fails the ‘equitable’ test.

A fundamental purpose of insurance is to create money such that financial problems arising from the occurrence of an insured event can be resolved.

If a breadwinner dies, insurance creates the funds to replace the lost income.

In a buy/sell situation, insurance creates the funds to enable business succession to occur.

The same principle can be utilised to

overcome the issues associated with adviser involvement in claims management.

Initial assessment

If the average time required to assist a client with an uncomplicated initial claim assessment is around five business hours, the business impact is relatively small.

An adviser may take a view that the time involved in assisting a client with a relatively straightforward initial assessment should be absorbed by the business as part of the services provided for, and funded by, renewal commission.

As part of their service offering, the adviser may indicate to a client that the ongoing renewal commission received covers the first five hours of adviser assistance with a claim.

Alternatively, the adviser may see merit in charging an annual retainer fee of, say, $250, on the basis that this would similarly cover the first five hours of claims assistance.

Whatever model is chosen, the advantage is that the client will have clarity as to the position in regards to adviser assistance should a claim arise (ie, the first five hours are covered, but anything in excess of that

would be billed at an hourly rate).

The issue then becomes, what happens if complications are encountered and the number of business hours exceeds five?

It is estimated that the business hours required for complicated initial assessments is, on average, around 35.

Assuming the first five hours are absorbed by way of renewal commission or a retainer fee, 30 hours remain. At a business charge-out rate of $250 an hour, this equals $7,500.

In respect of term, total and permanent disablement (TPD) and trauma insurance, provision for the fee could be facilitated by the adviser recommending to the client that the insured benefit under their policies be increased by the amount of the average fee net of the first five hours (ie, $7,500).

If the client otherwise required $500,000 of term, TPD and trauma insurance, the benefit amount for each would simply be increased to $507,500.

The fee provision would be added to the insured benefit in the above way rather than being absorbed into it, as this better highlights the reasons for the additional cover.

A necessary enhancement would be to recognise that while not all claims are paid, all claims will need to be managed. Therefore, the additional benefit amount should be conservatively grossed up as shown in figure 1.

Figure 1 Additional benefit Additional benefit amount claims management fee provision = $7,500 Assume 80% of claims are paid.

Actual increase to insured benefit: $7,500/0.8 =$9,5375 The $9,375 is indexed each year along with the rest of the insured benefit amount so increasing adviser costs are automatically catered for.

The client is utilising another long-standing insurance adage by literally setting up the claims management provision for cents in the dollar.

Having created a fee provision within the insured benefit, the basis of charging a fee can be considered. Possible models include: Flat fee The adviser may choose to simply charge a flat fee equivalent to the fee provision within the policy, irrespective of the amount of work involved in assisting with the actual claim.

The rationale would be that while one claim may require fewer business hours than provided for by the average fee, other claims may require more than the average.

Hourly rate The increased benefit amount can be viewed as a claims management funding pool.

Records of the business hours spent in managing the claim are kept and a fee levied against the fee provision within the insured benefit amount. There is an appropriate mark-up in the hourly rate to cover the fact that not all claims are paid (ie, the hourly

rate would be $250/0.80 = $312.50).

If all the fee provision is not used, the balance is refunded to the client after the claim is paid.

If there is an excess of hours over that provided for by the claims funding pool, this can be invoiced direct to the client at the standard business charge-out rate, or alternatively, it may be agreed that it will be recouped from the overall claim proceeds.

Flat fee and hourly rate mix A mix of the above can be the adviser charging a fixed flat fee of, say 50 per cent of the fee provision for all claims, irrespective of the amount of time involved.

Any excess hours over, for example, 20 being the five retainer-funded hours plus 50 per cent of the remaining 30 hours, would then be charged against the balance of the lump sum at the adviser’s markedup hourly rate.

Outsourcing If the adviser does not wish to be directly involved in managing a particular claim or even any claims, the fee provision can be used by the client to pay an external resource that specialises in the area of claims management.

Ongoing management Creating an identical claims funding provision is not as easy for income protection and business expenses insurances; neither is it practical, since claim payments and therefore the need for support can extend over many months and even years. Therefore, claims management funding would need to be provided for on a drip-feed basis.

Fortunately, a suitable alternative exists that once again uses the insurance policy as the funding vehicle.

Case study

Jim earns $80,000. He accepts the recommendation of his adviser and insures for the full 75 per cent of his salary (ie, $80,000 x 0.75/12 = $5,000 a month).

Jim’s adviser, however, suggests that Jim increases the insured benefit amount by $250 a month, explaining that this amount would be paid to the adviser to enable him to assist Jim for up to an average of one hour per month if Jim claimed under his policy.

The payments to Jim’s adviser would start after his claim was accepted and would continue whilst total or partial disability benefits were paid.

The obvious problem is that Jim is already covered for the maximum of 75 per cent of his salary; however, as the additional funds will be paid to the adviser, the 75 per cent maximum in respect of what Jim receives is not breached.

Once again, indexation of the full insured benefit ensures that the claims management fee keeps pace with inflation.

The arrangement is noted on the insurer’s records so there will be no concerns in the future.

Formal agreement

Any arrangements made need to be formalised within signed agreements, which would include details about: • The fee and how it would be charged; • The services to be provided by the

adviser in exchange for the fee; • What would occur if the client wished to change servicing advisers or simply terminate their servicing adviser.

By entering into a formal claims management agreement: • The client knows there will be support at the time of claim and this support is locked in – a heightened feeling of peace of mind; • The client will be less inclined to change advisers, particularly if any new adviser did not have or was not able to provide an equivalent support service; • The adviser will have a clear and contracted reason to devote business resources to becoming increasingly proficient in claims management. This could involve the adviser and/or a support person within the business; • The adviser will be better able to manage the financial impact of being involved in claims management; and • The adviser will have greater certainty that when the claim proceeds are paid they, rather than the accountant or solicitor, will be assisting with the management of the funds.

The existence of a formal agreement will also ensure that the appropriate remuneration payment is passed back to the adviser when the claim is paid. Alternatively, the client could provide an authority to the insurer directing that the appropriate amount be paid direct to the adviser from any claim proceeds.

Client review

Once the necessary business arrangements are in place to incorporate a claims management protocol either in line with the above or on some other appropriate basis, implementation could be immediate with new clients or clients taking part in a regular review.

In addition, a letter could be sent to other clients advising them of the change to (or formalising of the services being provided) by the adviser’s business and the basis upon which these services are to be provided.

Clients could be advised that as this change represents a material improvement in the advice model being offered it will be necessary or highly recommended that they attend for their next regular client review.

In addition, the offer could be made for clients to arrange an immediate review if they wish to have the new claims management facility added prior to their next scheduled review.

The above reviews may well identify other insurance needs that should be addressed but if nothing else, additional insurance cover sufficient for the claims management funding could be implemented.

By setting the facility up on a fee basis, the question of fees in other areas of financial advice can begin to be discussed.

Other considerations

There are a number of other issues that would need to be considered before a formal claims management arrangement could be finalised. These would include: • The tax position in regards to premiums and benefit payments – the position has been investigated and does not appear complex. However, advisers should seek

Establishing an “appropriate fee-based model to remunerate an adviser for being involved in the claims management process is not without its challenges.

”

their own advice in this regard; • How to reposition the expectation of clients who may already believe they will receive unlimited claims management assistance – action taken will be largely dependent on the nature of what has been said and written in the past, but various practical solutions do exist; • How to handle partial disability benefit payments and payments under indemnity policies – this could in part be dictated by the insurer’s systems capabilities. However, ideally the adviser claims management fee should be a fixed dollar amount, irrespective of the benefit being paid to the client; • What advice documentation would need to be provide to the client – again, this has been investigated and the solution does not appear complex. However, individual advice should be sought; and • How to handle a situation where the initial assessment of an income protection or business expenses claim is protracted – various solutions exist, including a crosssubsidy, if possible, between the fee provision within the lump sum policies and the income protection and business expenses policies.

Summary

Establishing an appropriate fee-based model to remunerate an adviser for being involved in the claims management process is not without its challenges.

It will take time and no doubt complications will occur along the way.

Success, however, brings with it many advantages, including ways to: • Introduce the subject of risk insurance fees with clients; • Overcome the dilemma of whether or not an adviser should be involved in claims management; • Help the adviser validly differentiate their business; • Help the adviser expand the services provided by their business, but in so doing gain greater control over their own financial destiny; and most importantly • Help the adviser provide a most essential service for clients when they claim and thus ensure the client’s true peace of mind.

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

www.moneymanagement.com.au June 30, 2011 Money Management — 19

OpinionSuperannuation

Hitting a rich vein With approximately 35 million super accounts spread among 10 million working Australians, Peter Philip reveals the mother lode of small and duplicate accounts expected to trigger a ‘super gold rush’, and asks: how prepared is your fund?

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hose super funds that are not c a re f u l a n d v i g i l a n t i n t h e coming years, are in danger of being consolidated out of existence from an imminent ‘super gold rush’ as funds try to stake their claim on members in a veritable ‘land grab’.

With about 35 million super accounts in Australia for only about 10 million working Australians, there are a lot of wasted, duplicate accounts collecting fees and charges. Make no mistake – there will be winners and losers as funds strive to persuade members to consolidate into their fund.

In the wake of the Cooper Review’s 177 recommendations, and the government’s acceptance of 139 of those, account consolidation is set to become a primary focus for the industry and the government in the next few years.

While it is generally recognised that super consolidation is necessary, there is considerable fear in the super industry of government-driven fund consolidation, and this, I believe, is what will drive the superannuation gold rush as funds try to get to members first.

If you were administering a super fund, what would you rather do: actively influence your members to consolidate their super with your fund, or leave it to a government process?

If we assume that the government will implement some form of automatic consolidation within the next two to

three years, then there remains only a limited timeline for funds to defend t h e i r m e m b e r s h i p. A n d i t’s s e t t o become competitive with funds competing aggressively to convince members to consolidate to them.

The process of members consolidating increases the average account balance, and we know that members with higher account balances are more involved with their super and take ownership of it. It will lead to ‘stickier’ members; once they have decided to consolidate with a fund, they are more likely to remain in that fund. Lower member churn and higher account balances lead to more profitable fund operations.

It’s a virtuous position if you are on the right side of the equation. Unfortunately it could be a death spiral for those funds that are net losers in member consolidation.

One of the continuing obstacles for funds is that the majority of the Australian public remain unengaged with their superannuation.

There seems a huge amount of inertia surrounding super – for some, it’s not a real enough issue. But if the average Australian took all of the small amounts of super they have tucked away in forgotten funds, the sum becomes larger and, so too, does the impact on their future financial well being.

My advice to funds is to commence

20 — Money Management June 30, 2011 www.moneymanagement.com.au

aggressively marketing for members to consolidate – if you are not actively campaigning, then your competitors probably are.

What does your fund efficiency look like with 50 per cent of your members gone? What are your plans to ensure that your fund is a net winner in the consolidation race?

Once a member has been consolidated away from a fund, the fund has lost the opportunity to communicate with that member and the opportunity to convince the member to consolidate to them is lost forever.

O bv i o u s l y, t h o s e f u n d s t h a t a re already taking action (and there are many) are more likely to emerge the winners.

Eve n w i t h a g g re s s i v e m a rk e t i n g strategies, consolidating super accounts is still a convoluted, confusing and frustrating task for the customer. We need to continue to simplify the process to ensure that account consolidation is an easy process for the member.

There exists a consensus that there are funds with policies that purposely put roadblocks in the way to try to frust ra t e o r s l ow d ow n t h e p ro c e s s o f member account consolidation. These actually work against the industry as it will eventually provide the government with justification to move in and take away control from funds – after all, it is the member’s money.

“

Once a member has been consolidated away from a fund, the fund has lost the opportunity to communicate with that member.

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The government has signalled a timef ra m e f o r i m p l e m e n t a t i o n o f t h e Stronger Super policies by 2015. Auto consolidation will no doubt play a part in these plans and many funds are already well advanced in their consolidation strategies to ensure they present as winners from this process.

How prepared is your fund?

Peter Philip is the CEO of SuperChoice.

OpinionFOFA Doing more harm than good Andrew Bailo takes a look at the issues arising from the Future of Financial Advice reforms, and concludes that the harmful changes outweigh the beneficial ones.

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s an adviser with over 10 years of exper ience, and having recently established my own practice on the north side of Brisbane, I am well qualified to enter the debate regarding all the extra legislative requirements soon to beset us practitioners. We have registration with the Tax Practitioners Board ( TPB), opt-in requirements, no commissions after 2013, MySuper and Fiduciary requirements – just to name a few. I am not sure how other advisers feel, but I am sick of being considered by this Government as a crook until I prove otherwise. I care very much about my client’s financial future, as the overwhelming majority of planners do, but will any client be better off after all of this? Will it ensure no further Storm Financial firms arise? I don’t think so.

Qualifying the qualifications

Consider the registration requirements with the TPB. It will be a limited registration, so a financial planner will not be able to do a tax return for a client (for example), but will be able to give advice on tax matters that will certainly impact the tax return. Will somehow being registered with the TPB improve the advice given to clients on tax issues, when we still have to refer the client to their tax agent to confirm this advice?

Accountants argue quite rightly that to obtain their qualifications they require a relevant degree, as well as the professional association’s accreditation requirements. To be a registered tax agent they must fulfil further experience requirements. This is more rigorous than the requirement to simply have a degree and have completed the very basic tax module of the Advanced Diploma of Financial Services. This is not to knock these changes by the Financial Planning Association (FPA), but rather to argue that there is no change to the requirement that a client seek the approval of a qualified tax agent before implementing advice that affects their tax requirements. So why do we need to be registered with the TPB as well, and where is the benefit to the client?

Commentators argue that Future of Financial Advice (FOFA) is first and foremost driven by a left-wing ideological stance of the union movement through their fully owned and operated network of industry funds. Let’s face it, Storm was not commission-based, it was fee-forservice – yet it is being touted as the reason commissions need to be banned.

The industry funds have been anticommission because they did not have a distribution base, fund choice threat-

ened a previously tied membership and they relied on the Government to cobble the Industrial Relations Commission on default funds. This Government does not appear to be interested in a level playing field.

When it comes to full disclosure, how do you explain that these funds can say: “All profits returned to members,” when I have looked at hundreds of industry fund member statements and have never seen a percentage of any profits disclosed on them? So what are their profits and where are they? Best of luck to anyone trying to find them. At least if I own shares in a publicly listed company I get my dividend and a copy of the financial performance of the entity so I know exactly what my share is – but this is not the case with Industry Funds. But they still use this in their advertising. Industry funds promote themselves through the ‘compare the pair’ campaign and other advertising, through sponsorships of major football teams and venues. Who pays for this?

And as a member of a fund, why can I not find out exactly what this costs the fund?

Putting the cards on the table

In this new dawn of full disclosure that will supposedly result from these reforms, perhaps we could have a look at ensur ing that what applies to one section of the industry applies to all.

How about bringing all super fund disclosure under the Corporations Act so they have to provide the same disclosure requirements as public companies?

Let’s see a full Statement of Financial Position highlighting exactly what costs the fund has incurred and exactly what profits (if any) they have made. Surely, if we wish to do what is in a member’s best interests we should be promoting this at every opportunity – but this is not the case. What you will get at best is a short synopsis on an industry fund website or in an annual statement. And

when it comes to some of the smaller industry funds, good luck if you can find out anything on their financial positions. Transparency is what will protect clients in the future, and we see none of it forthcoming from the Industry Super Network.

So, by all means the rules should require us do what is in the best interests of our clients, but allow them to make a qualified judgement as to what fits their needs – especially when it comes to superannuation. For starters, let’s ensure that when a super fund says it is a ‘balanced’ fund, it is actually what the industry standard is and not the 84 per cent growth assets we see in an AustralianSuper, or the 83 per cent of growth assets in MTAA’s so-called ‘balanced’ fund. Do the members of these funds fully understand the risk this asset allocation presents to their future retirement? Can all super funds adopt a unitised pricing method, so members know on a daily basis exactly what their funds are worth? This seems preferable to a crediting rate that is applied at some period, dependent on how much cash the entity holds, in an attempt to smooth returns so they look better and less volatile over time.

On the right track

Yes, there is a need for further reform in the industry, and the FPA is on the right track in trying to increase the education levels for planners. From what I can see, the proposed FOFA reforms and ‘limited advice’ is great for the network of industry funds, but it does nothing for their members except give them access to limited advice through their fund that their members will rely on at their own risk. The ‘reforms’ will also be based on

From what I can see, the “proposed FOFA reforms and ‘limited advice’ is great for the network of industry funds.

”

industry funds retaining their investors in the funds they are in, rather than looking objectively at alternatives or diversification.

Yes there is a benefit to a client to have a fee-for-service arrangement with a planner, since they may choose to turn off that fee if they do not receive service.

But of all that is proposed in FOFA, that is all I can see that is worthwhile and beneficial to a client. The rest of it should be placed in the dustbin of history.

Andrew Bailo is a financial adviser at Fiducian Financial Services.

www.moneymanagement.com.au June 30, 2011 Money Management — 21

OpinionCommodities

Is the time right for commodities?

In light of the recent falls in silver and oil prices, Ron Bewley considers the case for investing directly in commodities.

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ommodity prices drive our dollar, our economy and the performance of our resource stocks. Gold prices recently hit record highs – as did silver – and many other commodity prices have also been booming. But silver and oil prices fell sharply at the beginning of May. Is this the end of the commodity price cycle? Should investors get in or out of direct exposure to commodities? Should investors keep a weather eye on commodity prices to guide their equity exposure?

It is not just the metals and oil that have had surging prices. Coffee and cotton – and many other prices – have had steep trajectories. The demand from China and other rapidly developing nations has a lot to do with price inflation. But supply conditions – which might change quickly – and speculation are also in the mix.

Australia is a major exporter of commodities, and the Reserve Bank of Australia (RBA) compiles indexes of the aggregate commodity prices relevant to our exports and they also break the index down into Rural Commodities and Non-rural Commodities indexes with a Base Metals index also being separated out from the latter.

I show these three indexes in figure 1, valued in $US. The price of base metals – aluminium, copper, lead, zinc and nickel – have been volatile since the 1980s, but they have not yet regained the peak of 2007. When valued in $A, the recent high falls further short of the 2007 peak, the Non-rural index, which includes the Base Metals as well as coal, iron ore, gold, oil, LNG and alumina, has reached new highs. The RBA data are monthly and so the impact of the May selloff cannot yet be shown in figure 1, which

22 — Money Management June 30, 2011 www.moneymanagement.com.au

ends in April 2011. Rural commodities had been reasonably flat for nearly 25 years. The recent surges are causing pain for the people of poorer nations who spend proportionately much more than us on food from their household budgets.

It has been a widely held view by economists since the floating of our dollar in December 1983 that the terms of trade (ie, the ratio of export to import prices) is one of the major determinants of the dollar.

While a high dollar makes our imports cheaper, it has a detrimental impact on tourism, education and other sectors that must compete with imports.

If China, in particular, were to experience a hard landing from its tightening of monetary policy, there would be dramatic consequences for commodity prices and our economy. While the ‘usual suspects’ are leaning towards the hard landing scenario, mainstream believes a controlled slowing to a sustainable growth path is the most likely outcome.

The China issue – as well as European debt and the growth in the US economy – has convinced some investors to turn to

gold as a ‘safe haven’. The problem with gold is that it has little use other than as a perceived store of value. It produces no yield (or dividend) and the main reason to buy it is that the investor (or is it speculator?) thinks when the time comes to sell, someone else will be prepared to pay more than they did. I show gold prices in $US in figure 2. Clearly anyone who invested in gold in the mid 2000s would have done very well, but those who bought in 1979 or 1980 would have had to wait 25 years to get their money back. The question this chart raises is whether we are now in a bubble (like in 1980) that will burst. When valued in $A, gold has already fallen from its December 2010 high.

Late in 2010, the surge in gold prices arguably tempted some investors to find a substitute investment that had not run so hard. Silver prices started to permeate market chatter late in 2010. Until May 2011, silver prices in figure 3 looked to some like the big bet. The peak in January 1980 was caused by the Hunt brothers trying to corner the global silver market. What is now a peak in April 2011 is a harsh lesson for

Figure 1

Figure 3

RBA commodity price indexes

Price of silver

50

600

45 500

$US/ Troy ounce

40

400

300

200

100

0 1982

30 25 20 15 10 5

1985

1988

1991 Rural

1994

1997

Non-rural

2000

2003

2006

2009

0 1970

Base metals

Source: RBA (each re-based to 100 in 1982/3)

Figure 2

35

1975

1980

1985

1990

1995

2000

2005

2010

Source: Thomson Reuters (DataStream)

Figure 4

Price of gold

Comparison of gold and silver prices 50

3,000

40 35

2,000

30 1,500

25 20

1,000

15 10

500

Silver $US/ Troy ounce

$US/Troy ounce

Gold $US/ Troy ounce

45 2,500

5 0 2005

0 2006

2007

2008 Gold

Source: Thomson Reuters (DataStream)

those who got on board too late.

A major portion of silver was/is bought ‘on margin’ (ie, only a deposit is paid). On May 1, the CME Group (the biggest derivatives market) increased the margin on silver and its price fell 12 per cent in just 11 minutes. A few more margin increases and silver had fallen by 28 per cent in a few days.

Oil suffered a similar fate, falling from well above $110 a barrel to under $100 in the same time frame.

The silver story, and apparent greed, can best be seen in figure 4. For a number of years, silver prices more or less kept pace with gold until the speculation bubble started in earnest in October 2010. If and when the European debt problems are in hand, and the US seems strong again – and it is getting stronger – what will happen to gold prices? If the price of gold rose dramatically because of the GFC and some geopolitical events, why should the gold price stay high when the problems disappear?

How quickly can the gold price collapse if fear does dissipate?

Nevertheless, there is increasing enthusiasm for creating products to satiate the demand from would-be commodities investors. Of course, gold and silver bullion can be bought from the Perth Mint.

However, investors should not only consid-

2009

2010

2011

Silver

Source: Thomson Reuters (DataStream)

er the cost of storage and insurance, there is the bid-ask spread (buying and selling prices) to contend with. On May 13, 2011, the price at which the Mint would buy back the precious metal was about 5.2 per cent lower for a one-ounce bar of gold than an investor would buy at on the same day. The comparable figures are 10 per cent lower for a one-ounce bar of silver and 7.5 per cent lower for a one-ounce gold coin. That is a big factor to account for when considering holding precious metals.

Exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) have proliferated in recent times. While these vehicles allow investors to trade commodities and share indexes on the ASX, there are important differences – just as there are with BHP and RIO. Since some time in 2010, some ETFs/ETCs were introduced that did not invest directly in the underlying asset. Instead, they use derivatives to gain exposure. Introducing derivatives into the equation brings counterparty and leverage risk to the table. In much the same way that a credit default swap is simply an insurance payment against a company defaulting that the insurer does not necessarily own, the derivatives markets introduces risks that do not exist when the physical asset is owned. Some blame counterparty

risk as the vehicle that magnified the extent of the GFC. Another feature of ETFs/ETCs that should always be considered is the fee for service. This may be as little as a fraction of one percent for an ETF replicating the ASX200 but there are reports of some charging no fees on capital growth but they take half the dividends – if you read the fine print.

The ASX currently lists seven ETCs: three for gold, and one each for silver, platinum, palladium and a basket of metals. Often only two of these seven vehicles are traded on a given day: gold (ASX code: GOLD) and silver (ASX code: ETPMAG). Thus, there is extreme liquidity risk for investors following this path for the other five ETCs. ETCs only attempt to follow the underlying prices. The ASX even highlights the possibility of arbitrage opportunities arising.

There are, of course, futures markets for all of the main commodities but this form of investing is surely beyond the skill-base of most investors. But even if it was ‘easy’ to invest in commodities, how can investors work out their appropriate exposures to a basket of commodities?

It does not seem reasonable to me for an investor to just pick a couple of commodities because there are ETCs giving exposure

to them. A lot of effort goes into an equity fund manager’s assembly of a stock portfolio and the same can be said of hedge funds that offer commodity-based funds.

Perhaps it is better for an investor to gain exposure to resources by investing in the big resource companies like BHP and RIO. They are diversified and are constantly looking to manage risk – including currency risk. It is more difficult to gain exposure to the agricultural commodities in this country, but the likes of Incitec Pivot has indirect exposure through it fertiliser business. But we all remember Incitec Pivot’s spectacular 80 per cent share price fall during the GFC. As tempting as investing in commodities might seem for some, the risks seem much higher than with the companies that produce them. Diversification is based on a balance of risks and returns. So as high might be the expectations for some people for some commodities, a sensible estimate of risk probably means most people should settle for the old standard allocation – as boring as that might seem. Those who have enough knowledge are probably industry professionals!

Dr Ron Bewley is an investment consultant with Infocus Money Management.

www.moneymanagement.com.au June 30, 2011 Money Management — 23

OpinionCurrency

Politics trumps economics Michael Collins explains why Beijing is experiencing restless nights about the rising yuan.

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ormer US president George W Bush, in his autobiography Decision Points, recounts how he asked his Chinese counterpart Hu Jintao what kept him awake at night. The answer? Creating 25 million jobs a year.

The remark reveals much about the mentality of China’s rulers. It reinforces the view that anyone who wants to forecast the yuan’s value would do better to ask a political analyst rather than an economist.

An economist, though, could explain the fundamentals driving the yuan, which is controlled by the government (even if the peg to the US was ended in June last year).

The biggest fundamental force on the yuan is China’s export performance

since the government in 1978 began a two-pronged economic rebirth, one part of which was called ‘opening up’ or easing China back into the world.

In t h e p a s t d e c a d e a l o n e, C h i n a’s exports have grown about 19 per cent a year, enough for China to overtake G e r m a n y a s t h e w o r l d’s b i g g e s t expor ter in 2009, when it shipped products worth US$1.2 trillion.

Importantly for China’s currency, e x p o r t s f a r e xc e e d i m p o r t s – t h e country’s trade surplus for 2010 was US$183 billion. The result is that since the mid-1990s China has run sizeable current-account surpluses, which averaged 6.8 per cent of GDP each year from 2003 to 2010. Textbook economics tells how a current-account surplus puts upward pressure on a currency because

24 — Money Management June 30, 2011 www.moneymanagement.com.au

who wants to forecast the yuan’s value would “do Anyone better to ask a political analyst rather than an economist. ”

demand to buy the currency exceeds orders to sell.

Other fundamental forces driving currencies are inflation rates in relation to those of trading partners, and capital inflows. Inflation, for the most part, would have a neutral or even downward pressure on the yuan, because China’s inflation rate (now at 5 per cent) often exceeds those of its trading partners.

But capital inflows counteract this – especially foreign investment flows. The

country attracted US$473 billion of foreign (direct) investment from 1980 to 2010.

The economic cost

The upward pressure on the yuan from China’s current-account surplus and capital inflows means that China’s government has sold yuan/bought US dollars to maintain the various pegs or currency bands (explicit or otherwise) under which the yuan has operated

www.moneymanagement.com.au June 30, 2011 Money Management — 24

since China opened its economy. These f o re i g n - e xc h a n g e p u rc h a s e s h a v e resulted in China amassing the world’s largest pile of foreign reserves, totalling US$3.04 trillion as at 31 March 2011.

From the economist’s point of view, the cost of this policy on China is clear.

An undervalued yuan adds to inflationary pressures in China because imports are more expensive than otherwise, and the government is adding to the supply of yuan within the economy when it purchases foreign exchange to control the US-yuan rate. This higher inflation within China eventually erodes the cost advantage a lower yuan gives exporters.

The World Bank estimates that inflation has contributed to an average 5.5 per cent annual increase in China’s tradeweighted, effective real exchange rate from 2005 to 2010.

Another cost is that it lowers living s t a n d a rd s f o r C h i n a’s p o p u l a t i o n , because China’s leaders, in effect, are offering the world’s shoppers bargains at the cost of their own consumers.

Another cost of the low yuan policy is that China is squandering its resources.

Money has been spent on buying lowyielding US Treasuries rather than invested in more profitable ways or spent on social goods (infrastructure or hospitals) that would boost the welfare of the population. Lastly, the low-yuan

policy causes friction with other countries, especially the US. If these get out of control, the potential cost is huge.

Graph

Yuan’s movement against the US dollar since 2004

The political calculation

Yet China still persists with its low-yuan policy. Why? Here’s where the political analysis comes in. First, a low yuan is good for many politically influential Chinese companies that export. The s e c o n d re a s o n i s e x p o s e d by Hu’s comment.

In China, authorities worry about “social stability” – that is, keeping their subjects happy enough to leave them in power – especially now following the unrest in north Africa and the Middle East since December.

Authorities realise that Communist ideology is spent and nationalism and Western materialism have for the main replaced it as the glue to keep China together. They believe they can keep China’s population contented through economic progress, rising living standards, a wider social-security net, reduced inequalities across the country and full employment.

Their goal is to avoid any shocks to the Chinese economy. Given the role that exports have played in China’s ascension, authorities seem to fear that a jump in the yuan will cripple exporters and add to the official

Source: Datastream, 1 June 2011

unemployment rate of 4.2 per cent – though the unofficial estimate is that a b o u t 1 0 p e r c e n t o f C h i n a’s 8 0 0 million-strong workforce is jobless.

Given these concerns, it appears the political calculation of China’s rulers is to pursue incremental currency re f o r m w h i l e a t t e m p t i n g t o b o o s t domestic consumption.

China’s policies to bolster consumer spending include more social-security spending on health and unemployment, a national public superannuat i o n s c h e m e, t a x c u t s o r i n c o m e

support for rural dwellers and policies to encourage jobs in service industries such as retailing, domestic tourism and transport.

These will all take time to boost consumption from about 35 per cent of g ro s s d o m e s t i c p ro d u c t t o a m o re Western-like 70 per cent of output. But a disgruntled population can quickly cause trouble. No wonder Hu is restless at night.

Michael Collins is an investment commentator at Fidelity.

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

Toolbox Making a worthwhile contribution Deborah Wixted explains what happens when good capital gains tax contributions go bad.

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ligible small business clients who have disposed of active business assets are able to make capital gains tax (CGT) contributions of up to $1.155 million in 2010-11. While this contribution concession is a very valuable way in which small business clients can convert their business wealth into retirement savings, particular care must be taken in the delivery of advice in this area, since there are a number of traps that can unravel the entire strategy.

Ensuring a full assessment of the client’s position and working closely with their accountant or taxation adviser can help ensure success with a CGT contribution strategy.

What goes wrong?

Due to their complexity, it is possible for a client to fail one or more of the CGT small business tests. Following are some of the areas where this commonly occurs, along with an outline of steps that can be taken to minimise non-compliance.

Incorrectly identifying assets counted in the net asset value test

One of the key tests to qualify as a small business entity is for the net market value of the assets of that entity, any connected entities and any of its affiliates to be less than $6 million. It is important when applying this test to focus on two aspects: Taking into account the correct entities In the most straightforward case, this may be a simple task (ie, a small business operated by a sole trader who personally owns all business and personal assets).

However, if assets used in the business are owned by the business owner’s family members or are held in other structures such as trusts or companies, then they too must also be included.

Correctly including the relevant assets of the entities Having identified the correct entities, the next requirement is to ensure that the correct assets are counted. Here, it is important to note that it is not just the active business assets that count towards the $6 million limit – passive business assets, including those not subject to CGT on disposal, and non-business assets may also be included. The family home, interests in super, life insurance policies and personal use assets are generally excluded from this limit.

Incorrectly valuing assets for the net asset value test

As noted above, this test is required to include assets at their net market value (ie, their market value less the value of any liabilities relating to those assets and provisions for leave, unearned income

and tax liabilities). While certain assets may be held at historical or cost value on the small business entity’s books for accounting purposes, this is insufficient when applying the small business entity tests.

Miscalculating active asset period

An asset is an active asset if it is used or held ready for use in the course of carrying on the business of the taxpayer, an affiliate or a connected entity. To qualify, this must be the case for at least half of the period the asset has been owned, to a maximum of 7.5 years (ie, where the asset has been owned for 15 years or more). Particular attention should be paid to real property assets with a changing use. Periods of time where the property is leased to an unrelated party and its main purpose is the derivation of rental income will generally not count to the active asset period.

What happens when the client is not eligible to make a CGT contribution already received?

As a consequence of failing to meet the small business CGT concession criteria, clients could face a much higher CGT liability than other wise expected.

However, taking the right action may avert excess contributions tax that may arise if a CGT contribution has been made which must now be reclassified as non-concessional contribution.

Superannuation Industry (Supervision) Act 1993 (SIS) Regulation 7.04(3) means that a super fund must not accept any fund-capped contributions that exceed the fund-capped limit relevant to the client. This is $450,000 for a client under age 65 for any part of the financial year, and $150,000 for a client who is 65 or older at the start of the financial year.

SIS Regulation 7.04(4) then requires the fund to return the excess to the contributor within 30 days of becoming aware that the fund-capped limit has been exceeded.

While CGT contributions are not considered fund-capped contributions, non-concessional contributions are.

Therefore, upon becoming aware that a contribution previously received as a CGT contribution is now to be considered a non-concessional contribution, the fund may at that point make an assessment against the fund-capped limit and return any excess. Doing so may then ensure that excess non-concessional contributions are avoided or minimised.

A 180-degree turn: basing advice assuming no CGT relief applies

An alternative excess contribution situation may arise where super contributions advice is given without taking into

26 — Money Management June 30, 2011 www.moneymanagement.com.au

account the effects of small business CGT concessions for which the client may be eligible. The key point in this case is that doing so can result in a very different estimate of the amount and source of the client’s taxable income for the year, and affect any application of the 10 per cent test relating to eligibility to claim a tax deduction for personal contributions.

Case study

James, aged 67, derives salary income of $20,000 in a year and sells an active business property for a potential gross capital gain of $400,000. Advice is given to James on the basis that this capital gain will be eligible for the 50 per cent individual discount only, resulting in a net taxable gain of $200,000. Consequently, in the belief that no more than 10 per cent of his assessable income of $220,000 is attributable to employment, James makes the following super contributions: • $50,000 personal deductible (concessional) contribution; and • $150,000 personal non-concessional contribution.

In preparing James’ tax return for the year, his taxation adviser advises that James qualifies for small business CGT concessions, and chooses to utilise the CGT retirement exemption to exempt the $200,000 net gain from tax. James’ final position for the year is $20,000 of salary only, with no other assessable income. As James cannot meet the 10 per cent test, no deduction is claimed in his tax return for the $50,000 personal contribution he has already made.

Since no deduction has been claimed for the $50,000 contribution, the ATO counts it towards James’ non-concessional cap and James receives an excess contributions assessment for $50,000.

James contacts the super fund to request that his $150,000 non-concessional contribution be re-classified as a CGT contribution. However, the fund trustee advises that, as no CGT cap election form was given to it on or before the time the relevant contribution was made, it cannot do so.

A successful super contribution strategy, where small business CGT concessions may be available, requires: • Confirming the client’s position in relation to eligibility for the concessions; • Confirming the effect this is estimated to have on their overall tax position for the year; • Clarification of the amount of CGT contributions to be made; and • The provision of a completed CGT cap election form no later than when the relevant contribution is made.

Deborah Wixted is executive manage, technical services, at Colonial First State.

Briefs BT Investment Management (BTIM) has released new Product Disclosure Statements (PDSs) for its wholesale fund range. The updated PDSs incorporate a lower minimum investment of $25,000 per fund and a new eightpage format.

Each PDS is now no more than eight pages long to reflect the new regime, with additional information available on BTIM’s website.

Chief operating officer of BT Investment Management, Phil Stockwell, said: “To make investing with us easier, particularly for self-managed super funds, we have reduced the minimum initial investment amount for the BTIM Wholesale fund range from $50,000 to $25,000 per fund.

“This means that investors can access wholesale investment funds directly with a minimum investment of only $25,000, making the funds more accessible.”

RESEARCHER Standard & Poors (S&P) has given the Advance Asian Equity Wholesale fund an ‘on-hold’ rating, after the Lion Global Investors’ (LGI) Asia-Pacific equities team lost senior managers.

The departures included head of Asia-Pacific equities Janet Liem and portfolio manager for the fund, Tan Jenn Yee. Jan de Bruijn has replaced Liem as head of Asia-Pacific equities, and will also assume responsibility for the team’s regional portfolios, including the fund in question.

Lim Fang Suan, who has been with LGI for four years, is now the nominated back-up manager, according to S&P. S&P stated there had been five departures in total, representing close to one-third of the investment team.

“The departures follow a period of substantially below-benchmark performance,” S&P stated in its announcement. S&P will formally review the sector in September and meet with the new members of team to resolve the ‘on hold’ status.

PROVIDER of technology services to the financial services industry, GBST, has signed a long term agreement with ANZ for the deployment of GBST’s securities transaction platform Syn~ for the ANZ Global Markets business.

ANZ would use GBST’s Syn~ platform as a complete post-trade middle and back-office solution. The technology provider said the new platform would enable ANZ to process all types of assets within one system, including fixed income, treasury and equities. It will also be used for central reference data management.

GBST had delivered Syn~ to ANZ in conjunction with its Asian distribution and integration partner, Serisys.

Appointments

Please send your appointments to: milana.pokrajac@reedbusiness.com.au

DEALER group Professional Investment Services (PIS) added industry veteran Barry Strapps to its senior ranks, appointing him as its new practice development manager.

Strapps moved from Asteron, where he was the sales manager for South Australia, although he gained most of his private wealth management experience at AMP. He held positions such as regional advice coach at AMP Financial Planning (AMPFP), manager of the AMP business development team as well as s t a t e a n d s u p e ra n n u a t i o n manager.

His most recent position with AMPFP involved business coaching to support the growth of AMP’s practices in South Australia and the Northern Territory.

Strapps said he was looking forward to returning to a “hands-on role in practice management and assisting PIS practices in South Australia”.

MACQUARIE Banking and Financial Services Group has appointed former Foxtel chief marketing officer Paul Heath as

and NAB Wealth marketing agenda, Hogan will be a member of the NAB Corporate Affairs and Marketing Executive Committee, led by group executive Andrew Hagger.

Move of the week FORMER head of Colonial First State (CFS) Investments and Challenger Financial Services Group, Chris Cuffe, has become chair of UniSuper after more than four years as an independent director on the board.

Cuffe has succeeded Elizabeth Bryan, who announced her intention to retire from the board earlier this year after more than eight years as a director and four as chair.

Cuffe is currently a director of a number of organisations including Centric Wealth, Third Link Investment Managers, Social Ventures Australia and Arkx Investment Management.

In other changes to the board, Bruce Bonyhady AM will fill the independent director position left vacant by Cuffe’s appointment. Meanwhile, former head of CFS Credit Tony Fitzgerald has been appointed to UniSuper’s Investment Committee.

head of group marketing.

Macquarie Banking and Financial Services group head Peter Maher said Heath would drive the next phase of the group’s growth by enhancing its knowledge of its clients, maximising research outcomes and providing a new focus to its marketing efforts.

Heath was formerly the President of Asia Pacific for Readers Digest, and has held senior management positions with Gateway, Vodafone and Amer-

ican Express, with marketing experience in New Zealand, Australia, UK and Ireland, Japan and broader Asia, Macquarie stated.

MLC and NAB Wealth have taken on a new general manager of marketing, appointing Simonne Hogan to the role.

MLC executive general manager of advice and marketing Richard Nunn announced the appointment, and described

Opportunities SENIOR ADVISER – PROPERTY AND FINANCE Location: Sydney, NSW Company: Wealthy & Wise Lifestyle Planning Description: Wealthy & Wise Lifestyle Planning is looking to add a senior sales adviser to the team. The ideal candidate will have a minimum of two years financial services exposure as well as investment property experience, and will work in areas including risk insurance, direct equities and managed investments.

You will have enormous autonomy but be supported by the company marketing platform, around which you will build your day.

The remuneration package is based on experience, but revolves around performance. Ultimately you will become an all-round professional adviser gaining accreditations and meaningful certification in the first two years.

For more information and to apply, please visit www.moneymanagement.com.au/jobs or send an email to mail@wealthyandwise.com.au

PORTFOLIO ADMINISTRATOR MANAGER Location: Melbourne Company: Kaizen Recruitment Our client is looking for their next middle office professional. This role will give you the chance to work with a well-established

Chris Cuffe Hogan as a highly experienced marketing leader.

Hogan, who will commence her new role on 1 August, previously held various senior marketing roles at organisations including Westpac, ING and ANZ, and was managing director of Brand Council.

Nunn said Hogan would be tasked with setting MLC’s future strategic marketing direction and building on its ‘With You’ campaign.

As well as driving the MLC

SUPERANNUATION lawyer and member of the Stronger Super Peak Consultative Group, Peggy Haines, has been appointed to the Board of PFS Nominees, the trustee of the Plum Superannuation Fund and the Plum Pooled Superannuation Trust.

Haines is a senior superannuation and financial services lawyer and has recently joined Lander & Rogers as a consultant. She was previously a partner at Freehills for several years.

Haines had also worked as a consultant to the Commonwealth Treasury on the Super System Review.

She joins other recent appointees to the PFS Nominees Board – Geoff Webb, Michael Clancy and John Reid – who were appointed late last year.

Along with joining the PFS Nominees Board, Haines has also been appointed to the Boards of MLC Nominees and NULIS (Australia) Nominees.

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

team in a very professional environment, where individuals are given the chance to succeed. This role is an essential middle office operational function that combines administration with strong client exposure.

Your role will encompass regular contact with clients, portfolio administration including daily reporting, reconciliations and processing of equities and derivatives.

The successful candidate will be experienced within investment administration and will be highly polished and professional. You will have fine attention to detail and demonstrate a good high-level understanding of funds and or investment management. Please email your application to David May davidmay@kaizenrecruitment.com.au.

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

FINANCIAL PLANNER Location: Hong Kong Company: ipac Asia Description: ipac Asia is an international financial advice and investment group that has been helping clients achieve their financial and lifestyle goals in Asia since 2002. We are looking for entrepreneurial and top calibre candidates to join our Hong Kong team to offer holistic financial solutions.

You will be involved in retirement

planning, investment and portfolio management, risk management, and other financial planning services.

Tertiary education or above with a minimum of three years financial planning or relevant experience is compulsory. You will need to be self-motivated with strong business development ability.

In return, you will be provided with an attractive base salary and excellent bonus/commission package.

To express your interest in these exciting opportunities, please forward your résumé to our human resources department at vivian.chan@ipac.com.hk

SENIOR FINANCIAL PLANNER Location: Newcastle Company: Key Recruitment Description: Our client, based in Newcastle, is currently seeking to appoint an experienced holistic financial planner to its team.

Your varied role will include servicing and reviewing existing clients, as well as sourcing new business through the established referral sources.

You will need a minimum of four to five years holistic financial planning experience, RG146 as a minimum qualification, with the CFP designation being highly regarded.

In return for your experience, you will be offered a generous salary package, including an uncapped commission

structure and career opportunities including equity potential.

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

SENIOR FINANCIAL PLANNER Location: Perth Company: Hays Recruitment Specialists Description: This emerging financial services company is currently in the process of expanding their financial planning presence in Perth. Currently, a requirement exists for a senior financial adviser to come on board in a permanent capacity.

As a senior financial adviser, you will be responsible for the development and maintenance of client relationships and for building strong relationships with accounting practices in order to identify clients who may have financial planning requirements.

Due to the nature of the position, you will have excellent communication skills as well as the ability to build strong rapport with all potential clients. To be successful for this position, you will have extensive experience in a similar position.

You will have your ADFS and be working toward your CFP qualification if you are yet to obtain it.

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

www.moneymanagement.com.au June 30, 2011 Money Management — 27

Outsider

“

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

Down the pecking order OUTSIDER has lived a long time and rubbed shoulders with a great many people and concluded many years ago that one’s trade, calling or profession has very little to do with whether a person can be deemed ‘good’ or ‘bad’; ‘trustworthy’ or ‘untrustworthy’.

He is therefore greatly insulted by a recent survey, which suggested that journalists finished only five from the bottom on a list of the most trusted professions/callings. He is particularly upset that such a survey should be published by Reader’s Digest – a publication the promotional efforts of which have been known to test Outsider’s own level of tolerance and trust.

Outsider might just about have accepted journalists being less trusted than financial planners (he trusts his own planner) but he is aghast that journalists are less trusted than sex workers (notwithstanding that he understands that Money Management does not always deliver its readers instant gratification).

While he has no issue with politicians and telemarketers inhabiting the very lowest rungs of the survey, he really does wonder about policemen being ranked at number 12 (did no one watch Underbelly?). And he wonders why accountants should outrank financial planners – does no one understand which group was most likely to have tipped their clients into managed investment schemes?

Outsider does, however, accept the fact that most of the top eight positions are inhabited by those providing emergency

Out of context

“This is the last page, you’ll be pleased to hear.”

Advance Asset Management alterna-

tives portfolio manager Chris Thompson at a recent media briefing made

services – after all if you can’t trust the bloke driving the ambulance and woman sticking the electrocardiogram sensors to your chest, who can you trust?

In the end, Outsider will defer to the bard: Who steals my purse steals trash; ‘tis something, nothing; ‘Twas mine,‘tis his,and has been slave to thousands;But he that filches from me my good name robs me of that which not enriches him, and makes me poor indeed.

– William Shakespeare, Othello.

Hammering the point home THERE is absolutely no truth to the rumour that Outsider once nicknamed Mrs O ‘the trifecta’ – because she would just nag, nag, nag.

But in Outsider’s experience it is the squeaky wheel that gets the grease, so he is not unaware of the benefits of (if not actually nagging) being very persistent.

In any case, Mrs O says she does not nag.

She is “positively reinforcing key messages”.

All of this represents a prelude to informing readers that nagging financial planners are making an impact in the corridors of power in Canberra. Indeed, very reliable sources have told Outsider that quite a number of Federal Parliamentarians are getting sick of being told by planners in their electorates about the disasters contained in the Government’s proposed Future of Financial Advice (FOFA) changes.

Both the Financial Planning Association (FPA)

and the Association of Financial Advisers (AFA) have exhorted their members to lobby their local members on the FOFA question, and it seems to be having an effect – albeit that a number of Australian Labor Party back-benchers have seen fit to defend the line being pursued by former union boss, Assistant Treasurer and supposed Prime Ministerial aspirant, Bill Shorten.

With the balance of the Parliament sitting on a knife-edge, politicians wanting to retain their marginal seats tend to be very sensitive to strong messages delivered by influential local constituents.

In the old days, Outsider recalls politicians being very sensitive to the impact of political sermons delivered from a church pulpit. Is it possible that in 2011-12 they are becoming sensitive to advice delivered in a financial planner’s office?

the completely accurate assumption that journalists have very limited attention spans.

“Sometimes the economics of being a hedge fund manager are quite good.”

Five years ago it would have been the understatement of the century, but the fact Thompson delivered this without a trace of irony could be a sign of the times.

“Are you just trying to segue into your housing affordability study?”

AXA media manager Mike Zappone showed he also knew the tricks of the trade, after AMP media manager Amanda Wallace waxed lyrical about the spiralling house prices in Sydney and Melbourne.

An extended holiday OUTSIDER, like many others, has never been a fan of long commutes.

And having now set up his stall in the Emerald city for an extended period, Outsider has made it a priority to be based within a short drive of work.

He won’t go so far as to say Sydneysiders are envious of the residents of Mogadishu over the state of each city’s respective public transport systems, but it’s fair to say Sydney doesn’t exactly raise the bar in the transport stakes.

Outsider generally considers himself to be lucky that, the odd interstate conference aside, he has little call to be slouched in departure lounges around the country – unlike many representatives from the

Australian financial services industry.

And he never felt luckier than when a Chilean volcanic ash cloud wandered halfway around the globe to wreak havoc on the plans of many financial services types.

One delegate at an AXA lunch last Tuesday had to rush off early to beat Sydney airport’s 3pm lockdown, while two other delegates ended up with extended stays after the worsening cloud forced the late abandonment of all Wednesday flights.

The cloud also forced a reshuffle of attendees at a roundtable Outsider attended the following day, since Melbourne-based participants had no choice but to remain at home.

28 — Money Management June 30, 2011 www.moneymanagement.com.au

So next time Outsider is stuck in a threehour traffic jam because a single abseiler has brought a city of 4.5 million grinding to a halt, he will try and spare a thought for his financial services colleagues who risk an unplanned three-day layover when a volcano decides to erupt on the other side

of the world.

However, knowing the individuals in question, he suspects they did not sleep on chairs at the airport but, rather, suffered manfully in their five-star digs and comforted themselves with a modest meal and some good wine.