Money Management (23 July, 2011)

Print Post Approved PP255003/00299

Vol.25 No.22 | June 16, 2011 | $6.95 INC GST

The publication for the personal investment professional

www.moneymanagement.com.au

ASIC BOSS WARNS GATEKEEPERS: Page 6 | THE RESURGENCE OF DIRECT PROPERTY: Page 14

Soft dollar bans could affect marketing Planners will

By Ashleigh McIntyre

WHILE the soft dollar spotlight has been firmly shone on all-expenses paid trips and lavish gifts given to financial advisers, the Treasury’s proposed ban on these payments could affect the way some practices communicate with their clients.

The proposed ban would eliminate all soft dollar benefits over $300, with the ban likely to include marketing payments used to help some practices with advertising, brochures, signage and client mail-outs. There will also be a frequency test to ensure repeated small payments are not made.

Financial Planning Association (FPA) chief executive Mark Rantall said that while the details had not been worked out, the banned list was also likely to include sponsorship by product providers of educational client seminars and other events in the name of client relationship-building.

It is further understood that the ban could stretch to payments made from parent companies to subsidiaries, which would affect some of the larger players in the industry.

For example, the alternative remun e ra t i o n re g i s t e r o f A N Z - ow n e d OnePath reveals it paid out over $50,000 of marketing support payments in 2010, with close to $30,000 of that going t o a n o t h e r A N Z - ow n e d c o m p a n y,

John Brogden Millenium3 Financial Services.

It also remains to be seen whether programs like MLC’s ‘Meet the Managers’ initiative would be allowed under the proposed changes. In 2010 alone, MLC’s soft dollar register reveals it spent close to $50,000 on flights and accommodation for advisers to meet fund managers.

For the large part, the Government’s proposals follow the Financial Services Council’s (FSC’s) and the FPA’s joint industry code of practice on alternative forms of remuneration.

However, FSC chief executive John Brogden said the definition on soft dollar that has been proposed by Treasur y goes fur ther than the code to capture all benefits, not just third party payments.

“Further, it also captures monetary benefits, which we would argue are already covered in the scope of the conflicted remuneration ban," Brogden said.

Although there is still much work to do on the detail of the proposed bans, many of the industry associations – including the FPA – have welcomed the Government’s move to provide greater clarity around what is acceptable.

“There is always potential for conflict in these types of payments,” Rantall said.

“So having clarity around whether or not they can be accepted is a positive thing. If there is a conflict of interest with any of these things, then they should be avoided,” he added.

But the Association of Financial Advisers (AFA) chief executive Richard Klipin said that while he thought bans on payments over $300 were appropriate, he wanted to make sure there would be a level playing field across industries.

“Clearly this is on the table for debate, and the AFA looks forward to being part of that debate to ensure there are sensible consumer-focused outcomes that also recognise standard business practice,” he said.

DESPITE a number of software developers and platform providers flagging plans to introduce opt-in facilities, the financial planning community claims automating the process would not fix fundamental issues associated with the Government’s controversial opt-in proposal.

In the past year, planners have cited administrative burden and additional cost as their main concerns with respect to the introduction of opt-in as part of the proposed Future of Financial Advice (FOFA) reforms package.

Responding to these concerns, both software developers and platform providers have recently come out with features they claim would significantly reduce the

time and costs in administering opt-in.

However, while welcoming this type of innovation, both Financial Planning Association chief Mark Rantall and Association of Financial Advisers chief Richard Klipin said the planner community would still oppose the proposal.

“Financial planning businesses have to look at ways of becoming efficient, but that is still not distracting from the fact that legislating annual or a [two-year] opt-in certificate is not an appropriate use of legislation – and we’ll continue to oppose it,” Rantall said.

Klipin added that automation could not replace the engagement advisers have with their clients, and that the association would always argue that opt-in is “bad

Richard Klipin public policy”.

Following the release of the FOFA information pack in April this year, financial planning software developers IRESS and Midwinter Financial Services have introduced facilities that enable automat-

By Mike Taylor

ic generation of emails or letters to clients, electronic opt-in features and alert emails sent to clients who are in danger of lapsing.

However, IRESS senior business development executive Michael Kinens believes a greater issue is at hand, noting that opt-in would always be seen by the financial planning industry as draconian and driven by an agenda that isn’t focused on the client’s best interests.

“There is a raft of arguments being put forward as to why opt-in is inappropriate, and regardless of what anyone does to make that effort less than what it is viewed as today, it’s still seen as the wrong solution for the industry – and you’ll continue to get

FINANCIAL planning dealer groups and others using leading research house Lonsec have signalled they will be taking a ‘wait and see’ approach to the company, following its acquisition by the owners of SuperRatings Limited.

The reason for the caution by some of Lonsec’s clients is not any loss of faith in its research and ratings methodology, but the perception that SuperRatings has a long history and close association with the Industry Super Network (ISN).

In particular, reference has been made to SuperRatings having provided the data that gave rise to the ISN’s so-called ‘compare the pair’ television advertising campaign, with the company’s name still appearing in the disclaimers attached to many of the advertisements.

A senior executive within one of the major independent dealer groups utilising Lonsec’s services told Money Management that if, as indicated, Lonsec is allowed to remain operationally independent he could see no reason for concern.

“However we will be adopting a ‘wait and see’ approach,” he said.

Other senior financial planning executives noted the manner in which changes of ownership and personnel at other ratings houses had led to a loss of dealer group mandates in the past two years.

Big Swiss-based insurer Zurich announced late last week that it had sold its subsidiary Lonsec business to a newly formed company – Financial Research Holdings (FRH).

It transpired that FRH was a vehicle formed by Mark Carnegie, the chief executive of Lazard’s Australian private equity business, LCW Private Equity.

Within an hour of the Lonsec announcement, SuperRatings announced “its intention to consolidate its business into Financial Research Holdings”.

Carnegie’s formal statement announced that the two transactions represented “a unique opportunity to bring together two of the leading research brands from the investment and superannuation sectors”.

Money Management has been told that in the due diligence and negotiating stages, each of the front-running bidders for the Lonsec business indicated they would not be seeking to change either Lonsec’s methodology

Continued on page 3

Continued on page 3

Technology won’t solve opt-in problem

By Milana Pokrajac

‘wait and see’ on Lonsec

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 Sub-Editor: John Golledge Graphic Designer: Ben Young Subscription enquiries: 1300 360 126 Money Management is printed by Geon – Sydney, NSW. Published every week, recommended retail price $6.95 Subscription rates: 1 year A$280 incl GST. Overseas prices apply.

All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the Editor. © 2011. Supplied images © 2011 Shutterstock.

Opinions expressed in Money Management are not necessarily those of Money Management or Reed Business Information.

Average Net Distribution Period ending March '11 10,207

ABN 80 132 719 861 ACN 000 146 921

mike.taylor@reedbusiness.com.au

Narrow focus limits broader FOFA vision

A

strong line of argument is being pursued by sections of the financial planning industry that the Government has been focusing its Future of Financial Advice (FOFA) changes far too narrowly.

The argument being pursued by groups such as Professional Investment Services (PIS) is that many of the failures which have served to taint public perceptions of the financial planning industry have been failures of product rather than failures of advice. And, of course, in many instances this is true.

With the exception of Storm Financial, the majority of the other collapses – Westpoint, Trio/Astarra, et al – could best be described as failures of product, therefore justifying the argument that the focus of FOFA must be broadened to encompass the manufacturers and their salesmen.

But that does not mean those providing advice can ever succeed in distancing themselves from the roll-call of corporate collapses and product failures which have so severely eroded the reputation and public standing of financial planners over the past decade or more.

The problem for those who would

“

The reality confronting many good financial planners is that they have found themselves being made to pay for the sins of others.

”

a r g u e t o o s t re n u o u s l y a b o u t p a s t product failures is that too many financial planning firms were seen to be closely tied to the failed products by highly lucrative commissions-based remuneration regimes.

The reality confronting many good financial planners is that they have found themselves being made to pay for the sins of others and that an appropriate distance will only be created

when the public accepts that their industry and its practices have changed with all conflicts removed.

That is why, while the Government’s execution of its FOFA agenda may leave much to be desired, many of the broad objectives remain worthwhile.

A recent survey conducted by Money Management revealed a significant majority of respondents could think of nothing positive to say about the Government’s approach to FOFA, but this overlooks a number of initiatives such as the ‘best interests’ test which have been pursued at the behest of planners themselves.

Indeed, it is arguable that stripped of elements such as the two-year ‘opt-in’ and the somewhat extreme decision to ban commissions on all life/risk produ c t s w i t h i n s u p e ra n n u a t i o n , t h e Government’s FOFA approach would be capable of garnering support from most of the key stakeholders.

The FOFA proposals grew out of the bipartisan findings of the so-called Ripoll Inquiry. An astute minister would recognise the value of bipartisanship in actually delivering new legislation.

– Mike Taylor

Streamline

business Y UR with FirstWrap TIME SPENT ON CLIENT ADVICE

TIME SPENT ON ADMINISTRATION

FirstWrap is a full service wrap with first

and flexibility. Give your business the

class features, designed to give you

winning edge by contacting us today.

greater control over your business and deliver outstanding service to your more sophisticated clients. With the recent proposed reforms to the financial advice industry, it’s essential to work with a platform that will support you through this time of change, while offering greater efficiency, control, value, choice

Find out more about FirstWrap – contact your Business Development Manager, call 1300 769 619 or visit colonialfirststate.com.au/firstwrap

Ranked No.1

by advisers for overall platform satisfaction.*

2011 Wealth Insights Service Level Survey

*Source: Wealth Insights 2011 Platform Service Level Report and survey of 867 aligned and non-aligned advisers, conducted Mar/Apr 2011. This is general information only and does not take into account any individual objectives, financial situation or needs. Investors should consider the FirstWrap offer documents, available from advisers and other relevant documents before making an investment decision. FirstWrap is operated by Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL). AIL is the Trustee of The Avanteos Superannuation Trust ABN 38 876 896 681. Colonial First State and AIL are owned ultimately by Commonwealth Bank of Australia ABN 48 123 123 124 through the Colonial First State group of companies. Commonwealth Bank of Australia and its subsidiaries do not guarantee performance or the repayment of capital of Colonial First State or AIL. CFS2026 2 — Money Management June 16, 2011 www.moneymanagement.com.au

News

Confident property advisers back regulations

By Chris Kennedy WITH an increasing number of financial advisory groups offering some form of property advice either through in-house specialists or through a referral agreement, property advisers are confident that the trend will continue – although greater regulation in the sector is both likely and necessary.

Dixon Advisory offers both financial advice and specialised property advice, and managing director Alan Dixon said it was disturbing how little attention was given to the property market at the time of the Financial Services Reform Act 2001.

Because both planning and property advice involve large transactions that can have a significant effect on clients’ lives, they should

have similar licensing requirements, Dixon said.

The relative strength and safety of the property market over a long period may be a reason people haven’t realised the market should be more tightly regulated, he said.

But it’s difficult for the Australian Securities and Investments Commission (ASIC) to make sure financial firms give clients all the information they need without making client documents more complicated than they already are, Dixon added.

Ironstone Group’s property advice arm Capital 360 provides specialised property advice to clients from various planning groups on a referral basis. Ironstone Group chief executive Sean Preece said there would be more scrutiny around property

information that is provided in the marketplace – something that he said was necessary. “[Businesses such as Capital 360] will be included within the overall regime of ASIC because it is an investment class, and we welcome that,” he said.

Preece also said clients needed to look at the motives of people who were providing advice on property.

Real estate agents represent the seller – but someone in the market needs to represent the buyer.

Financial advisers will continue to have clients who have a need or a desire to build wealth by investing in property, but the industry doesn’t provide an easy mechanism for an adviser to gain support in terms of research or buyer’s agency services on behalf of their clients,

“

It’s much easier to become a real estate agent than to become a financial planner.

”

Preece said.

Dixon said that many clients expect a financial advice provider to have some expertise on residential property the way they would on Australian equities.

While on balance it’s much easier to become a real estate agent than to become a financial planner, many clients like it if their planner has also done the work to get the real estate agent’s licensing skill, he said.

As a financial planner who can give holistic advice, failing to give advice about people’s property decisions would be crazy, he said.

Most larger advice groups do not have a specialised property advice service. This includes HLB Mann Judd, whose head of wealth management at HLB Mann Judd Sydney, Michael Hutton, said clients usually had an idea where they wanted to buy already.

His firm is happy for them to speak to local agents, and clients are happy for that to be a separate transaction, he said.

“I’ve been aware of some firms getting into that space and becoming specialists, but to me that would just be a value-add – I don’t think it’s a core requirement of a financial advice firm,” Hutton said.

Technology won’t solve opt-in problem Continued from page 1 people debating its introduction,” Kinens said.

AXA was one of the first institutions to flag the integration of the opt-in facility to its platform, but general manager for platforms Steve Burgess said he doesn’t believe anything platforms or software providers can do will make the issue disappear.

“If opt-in does come in and advisers either accept it or leave the industry, at least some kind of automated process would enable them to tolerate it from an administration point of view and therefore allow them to carry on largely with their business in a way that they want to,” Burgess said.

Five clear reasons to invest internationally with Five Oceans

Planners will ‘wait and see’ on Lonsec

1. Aims to deliver strong, consistent performance 2. Benchmark unaware investment approach

Continued from page 1

3. Reduced volatility via hedging 4. Active currency management 5. Diverse investment ideas

For information on the Five Oceans World Fund www.5oam.com Graham Rich the market.

He said suggestions that the Lonsec model might be placed at risk were misguided because of its strongly qualitative credentials and because of the depth and integrity of its research team.

“It is a good outcome for genuinely independent research,” he said.

12073/0611

or its highly successful business model.

FRH managing director, Jason Clarke, claimed there would be little change for clients and staff of Lonsec.

He said that while the new company hoped to enhance ser vices for clients over time, it expected little interruption to the business during the transition period.

Long-time researcher and founder of brillient, Graham Rich, said his view of the Lonsec acquisition was overwhelmingly positive because it demonstrated faith in the value of genuinely independent research in Australia, and injected further Australian ownership into

This information is general information, not advice and is provided by Challenger Managed Investments Limited ABN 94 002 835 592, AFSL 234 668 (CMIL), the responsible entity and issuer of interests in the Five Oceans Wholesale World Fund ARSN 117 060 769 (Fund). It does not take into account any person’s investment objectives, financial situation and particular needs. Because of this, investors should consider these matters, the product disclosure statement (PDS) and the appropriateness of the Fund (including any risks) before deciding whether to acquire, continue to hold or dispose of units in the Fund. A copy of the PDS can be obtained from www.challenger.com.au. Five Oceans Asset Management Pty Limited AFSL 290 540 is the investment manager. If you acquire or hold the product, we and/or the Challenger group of companies will receive fees and other benefits which are generally disclosed in the PDS or other disclosure document for the product. We and/or the Challenger group of companies and our respective employees do not receive any specific remuneration for any advice provided to you. However, financial advisers may receive fees or commissions if they provide advice to you or arrange for you to invest in the Fund. Five Oceans Asset Management, some or all of Challenger group companies and directors of those companies may benefit from fees, commissions and other benefits received by another group company.

www.moneymanagement.com.au June 16, 2011 Money Management — 3

News

Shorten reveals time frame for condensed PDSs

By Ashleigh McIntyre

PROVIDERS of superannuation products and simple managed investment schemes will have just over a year to adapt to new Product Disclosure Statement (PDS) requirements, under a new proposal by the Government.

Assistant Treasurer Bill Shorten said that from 22 June 2012 these product providers would need to reduce their PDSs to just eight pages and meet new content requirements.

The move is designed to help consumers who have in some cases been forced to trawl through more than 100 pages to understand key information about financial products.

Transitional arrangements will be put in place to give product providers flexibility and ensure that all can meet the changes.

These include allowing product providers to continue to issue supplementary PDSs until 22 June 2012, as well as the option to take

up the new regime from as soon as 22 June 2011.

Pure-risk products will be excluded from the new regime irrespective of whether they are provided through superannuation, while combined defined benefit and accumulation products will be included.

Shorten stated that further changes to apply the shorter disclosure requirements to platforms and multi-funds are not currently in the works.

Draft regulation on these amendments will be available shortly for public comment.

Financial Services Council director of Policy, Martin Codina, said the changes would provide the industry with a smooth transition to the new eight-page regime.

“The Financial Services Council is especially pleased Shorten has clarified that the new eight-page regime is not intended to apply to platforms Bill Shorten and multi-funds,” Codina said.

ASFA backs standardised exams

?h\nl

=kbo^

=^ebo^kr

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

By Mike Taylor FINANCIAL planners should be subject to a standardised examination and education process as part of an objective measure of their competence, according to the Association of Superannuation Funds of Australia (ASFA).

In a submission to responding to an Australian Securities and Investments Commission (ASIC) consultation paper on an assessment and development framework for financial advisers, the superannuation industry peak body said it believed a rigorous, uniform exam could provide an objective measure of adviser competence.

However it urged that such an exam be just one component of “a robust system of adviser training, accreditation and supervision, [continuing professional development] and ongoing knowledge review”.

The ASFA submission also said it supported exam results reported as a ‘pass’ or ‘fail’ grade on the basis that fine distinctions between grade thresholds “reveal little about candidates’ innate ability and are not a meaningful comparator of adviser competence”.

It said it also recommended a high pass mark of 80 per cent and an ‘open book’ exam that provided a more realistic simulation of workplace environment.

The ASFA submission also called for a greater focus on ethics with respect to adviser education.

It recommended broadening the adviser ethics component of the accreditation process, arguing “ethical adviser conduct underpins the consumer protection objective of the financial advice regulatory regime, and will support the introduction of a statutory fiduciary duty under the Future of Financial Advice reforms”.

News

Queensland planning firm hit over conflicts of interest

By Mike Taylor A QUEENSLAND-based financial planning company has had additional conditions imposed on its Australian Financial Services Licence (AFSL) following surveillance of the business by the Australian Securities and Investments Commission (ASIC).

ASIC announced it had imposed the additional licence conditions on the basis of concerns that iPlan had entered into an agreement regarding an investment platform which gave rise to a conflict of interest.

It specified its concerns as being that iPlan may have advised clients to transfer from an existing financial product to the platform without disclosing a reasonable basis for the advice, the disclosures in relation to iPlan’s conflict of interest, relevant to the advice provided, were insufficient and a number of clients sustained financial detriment as a result of the advice.

The regulator said it had varied iPlan’s AFSL to include conditions that required the business to undertake further communication with its clients about how it manages conflicts

of interest.

It said the company also had to appoint an independent compliance expert to review its advice process and calculate payments to be made to clients entitled to financial redress.

Commenting on the moves, ASIC senior executive leader, financial literacy, consumers, advisers and retail investors, Delia Rickard said licensees often had a conflict of interest when recommending products to clients.

“We say it is up to them to manage these conflicts and, if a conflict exists, they need to

make sure they demonstrate a reasonable basis for any product recommendations,” she said.

The ASIC announcement acknowledged what it described as an efficient, co-operative and consultative approach taken by iPlan, which had voluntarily offered to engage an independent expert to review its processes for compliance.

It said ASIC would continue to monitor iPlan’s compliance, via reports from the independent compliance consultant, for 26 months.

LONSEC Limited has been purchased by a group substantially led by private equity specialist, Mark Carnegie and superannuation ratings house, SuperRatings.

Zurich announced the sale of Lonsec to Financial Research Holdings (FRH) last week and shortly afterwards SuperRatings announced its intention to consolidate its business into FRH, which it said was backed by interests associated with M H Carnegie and Company.

FRH describes itself as a privately owned and independent group that brings together the market leading brands of Lonsec Limited and SuperRatings Pty Ltd. Described as a spokesman for the new Lonsec owner, Carnegie said the acquisition was the first part of a growth strategy to build Australia’s pre-eminent financial services research and execution firm.

FRH managing director Jason Clarke said he expected little change for clients and staff of Lonsec.

“Lonsec has a number of excellent strategies awaiting implementation,” he said. “So while we hope to enhance services for clients over time, we expect little interruption to the business during the transition period.”

SuperRatings was established less than 10 years ago and is the research house referenced in the Industry Super Network’s ‘compare the pair’ advertising campaigns.

It has recently branched out into involvements in the delivery of online advice and tender consulting and analysis for superannuation funds.

12071/0611

Lonsec sold to Carnegie and SuperRatings

Future-proof your client’s retirement with Challenger annuities.

Of the options available, few are as dependable as Challenger annuities.

While your clients may have become more cautious, their priorities, like preserving capital, generating reliable income and beating inflation over the long term, remain exactly the same.

With capital and income payments guaranteed by an APRA-regulated life company, Challenger annuities provide regular income for terms from one to fifty years, or for life.

Performance is not sacrificed for security because annuity rates have usually exceeded other fixed income products like bond funds and term deposits.

Make Challenger annuities a part of your clients’ portfolios.

For more information, visit challenger.com.au or call 1800 621 009.

With Challenger annuities you can protect and grow your clients’ retirement savings.

Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life) issues Challenger annuities. Consider the current product disclosure statement for the applicable annuity (available from www.challenger.com.au) and the appropriateness of the annuity (including any risks) to your circumstances before deciding whether to acquire or continue to hold an annuity. Past performance is not a reliable indicator of future performance. Challenger Life’s obligation to make guaranteed capital and income payments is a contractual obligation and is subject to the terms and conditions of the applicable annuity and the Life Insurance Act (Act).

The payment obligations of Challenger Life are limited to the available assets of the Challenger Life Statutory Fund No. 2, except if otherwise provided under the Act. www.moneymanagement.com.au June 16, 2011 Money Management — 5

News

New ASIC boss warns ‘gatekeepers’

By Mike Taylor FINANCIAL services providers need to regard themselves as ‘gatekeepers’ and take more responsibility for the products which reach retail clients as well as any compensation issues which may follow, according to the new chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft.

In a n a d d re s s t o t h e Fi n a n c i a l Ombudsman Service delivered last

week, Medcraft described financial service providers as being “literally gatekeepers, in that products would not re a c h re t a i l c l i e n t s w i t h o u t t h e i r support”.

He t h e n w e n t o n t o d i s c u s s t h e G ov e r n m e n t’s Fu t u re o f Fi n a n c i a l Advice (FOFA) reforms and the provision of adequate compensation for retail investors and consumers and, specifically, the implementation of a statutory compensation fund.

“While the Government has responded through these important legislative reforms, we would also encourage those within the industry to lead a debate about how gatekeepers themselves can take on more responsibility,” he said.

Medcraft said that where ‘gatekeepers’ did so, there would be less need for regulatory intervention.

“Self-regulation has an important role to play,” he said.

Greg Medcraft

EVERYTHING SUPER, under the one roof.

A competitive range of products for investing, borrowing, transacting and insurance.

Self managed superannuation doesn’t need to be hard work. At BOQ, we offer a range of competitive products designed to suit your clients’ self managed super needs. Plus, our local Owner-Managers will provide the type of personal service they deserve and expect.

Talk to the bank with Owner-Managers.

DROP into your local branch CALL 1300 737 766 VISIT boq.com.au Bank of Queensland Limited ABN 32 009 656 740 (BOQ). BOQ will not provide advice in relation to the establishment, operation and structure of a self managed superannuation fund (Super Fund).

Nor will BOQ provide advice in relation to the investment strategy of a Super Fund. Clients should seek independent advice from a qualified professional on these matters. Terms and conditions may junior_BOQ28349_MM apply to individual product offerings. Terms and conditions or Product Disclosure Statements are available at any BOQ branch.

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

Melbourne firm picks up Zenith as researcher

By Chris Kennedy

MELBOURNE-BASED dealer group Securinvest Financial Planners has selected Zenith as its principal research adviser.

Securinvest, an independent Australian Financial Services licensee with around 17 authorised representatives, has its own dealer’s licence and life insurance broker’s licence, as well as its own accounting practice.

Zenith will initially provide research to the head office business, which has nine advisers, according to Zenith.

“Zenith will suppor t Securinvest’s existing internal research processes through the use of Zenith’s online research facility, investment committee support, and tailored model portfolio service,” said Zenith’s head of sales and marketing John Nicoll.

“In particular, we look forward to working with the team at Securinvest and supporting their longestablished client model that focuses on risk minimisation investment philosophies that will address any unforseen downturns in future equities market.”

Nicoll said a growing number of adviser businesses are working more closely with their research providers, with advisers under taking more detailed due diligence on their research provider to be confident they fully understand their individual processes and capabilities.

Zenith will be making more client announcements in the coming weeks, he added.

Infinite possibilities Introducing the Macquarie Wrap Consolidator Series

Macquarie Wrap Consolidator Series of investment, superannuation and pension accounts offers a new way of bringing all the right pieces together to help advisers deliver value to their clients.

Value for money, without compromising choice, service or efficiency. Flexibility to meet changing needs, whatever the future might hold. Powered by the top platform of 2011, as rated by independent research house, Wealth Insights*.

Competitive fees. Proven platform technology.

Market leading service delivery. Extensive investment choice, including all shares and a selection of other securities listed on the ASX.

Macquarie Wrap Consolidator Series enables the genius of advice by helping advisers help their clients see the infinite possibilities.

Visit macquarie.com.au/consolidator or contact your Macquarie BDM to learn about Macquarie Wrap Consolidator Series.

Macquarie Investment Management Limited ABN 66 002 867 003 AFSL 237 492 RSEL L0001281 (MIML) is the Operator of Macquarie Investment Consolidator. MIML is also the trustee of Macquarie Super and Pension Consolidator, part of the Macquarie Superannuation Plan R1004496. MIML is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and unless otherwise speciďŹ ed in the applicable offer document neither an interest in the product nor MIML’s obligations represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 or of any Macquarie Group entity. Neither Macquarie Bank Limited nor any member of the Macquarie Group guarantees or otherwise provides assurance in respect of the obligations of MIML. MM_WRAP_MAY2011 *Wealth Insights 2011 Service Level Report Platforms.

News Investors take legal action against Wellington Capital

By Ashleigh McIntyre A GROUP of investors in the distressed Premium Income Fund (PIF) have commenced urgent legal action against Brisbane-based fund manager Wellington Capital and its directors.

The PIF action group has sought an injunction to cancel units in the fund that were issued in a recent capital raising, and to reverse changes to the constitution that were made without unitholder approval which allowed Wellington to issue units at a discount of 74 per cent.

The action group has also sought to

restrain Wellington from counting votes from any new unitholders at upcoming meetings, such as the vote to be held on 16 June where unitholders will decide whether to replace Wellington with Castlereagh Capital as the responsible entity of the fund.

The injunction also seeks to restrainWellington and its directors from issuing units pursuant to a rights issue, which had come about at the same time as the capital raising.

PIF action group vice president Charles Hodges said the capital raising was clearly not in the interest of existing unitholders and as such, could be declared invalid under the Corporations Act.

By Mike Taylor

He said the rights issue was also seen as against unitholders’ interests as it effectively forced them to take up the issue if they did not wish to have their unitholding diluted.

The injunction application has been lodged in the Federal Court of Australia at the Victoria District Registry.

Financial literacy the key to super success

By Angela Faherty CREATING financially literate and better engaged Australian consumers is vital if the superannuation market and the wider financial services industry are to truly reach their maximum potential, a junior minister has announced.

Speaking at the inaugural Money Management Retirement Incomes seminar, the Honorable David Bradbury MP, Parliamentary Secretary to the Treasurer, said the increasing prevalence of superannuation has led to more consumer responsibility for retirement investments as well as greater exposure to complex financial products.

However, Bradbury said that while encouraging consumers to be more active in the decision-making process around

David Bradbury retirement investments is good practice, many people still struggle to interpret their annual superannuation statements, let alone navigate the variety of products on offer.

“Governments and financial service providers devote a significant amount of effort to ensuring that the regulatory settings are well balanced and that the financial products on

offer cater for the needs of Australians planning for their retirement. But an important part of making sure that these markets work effectively is having a financially literate, engaged and active Australian consumer,” Bradbury said.

Bradbury added that boosting retirement income requires people to engage in preparing for retirement as soon as they start their working lives.

However, he stressed that this demands a greater level of financial literacy among consumers.

“Financial literacy plays a central role in encouraging people to think about the importance of planning for their retirement from a young age, to set goals for their long-term savings and to take an active interest in the investment decisions they make and that are made on their behalf,” he said.

FOS backs planner on advice AN ACCOUNTANT and his partner who went to the Financial Ombudsman Service (FOS) seeking to recoup losses incurred during the global financial crisis because of alleged inappropriate financial advice have had their case dismissed.

A FOS determination delivered in late April has revealed the circumstances behind a complaint levelled at a financial planner by an accountant and his partner who, in May 2007, declared they wanted to gear into shares and managed funds but specifically declined to apprise her of all their financial affairs.

Among the evidence considered by the FOS panel was that the accountant had declared he did not want to pay tax in the upcoming financial year and wanted to gear so that he could claim against the interest on his borrowings.

Despite receiving a letter from the financial adviser warning that their failure to fully declare their financial position would result in only limited advice, the couple determined to go

ahead with leveraged investments ultimately amounting to $250,000.

At the same time the accountant provided a letter to the institution providing the margin loan stating that by liquidating some real estate assets he could quickly acquire liquidity of $770,000.

Less than a year later the couple pursued action against the financial planner for the losses they incurred on their investment, seeking to have her financial planning company reimburse them to the tune of nearly $129,000.

Among the reasons given by the FOS panel for finding in favour of the financial planner and determining that she had acted appropriately, was the fact that the complainants had consciously withheld information from her and that they had been warned that this would give rise to necessarily limited advice.

As well, the FOS panel found that the complainants were experienced in financial matters and understood the risks involved in their strategies.

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

ASIC scrutinises financial service advertising

Referring to the Government’s initiatives to improve financial literacy among consumers, Bradbury pointed to the launch of the National Financial Literacy Strategy and the MoneySmart website in March this year. He also added that the Government was providing $10 million to the Australian Securities and Investments Commission to roll out its Helping Our Kids Understand Finances program. The program will train 6,000 teachers and develop a range of resources to integrate financial literacy education into the Australian curriculum.

“By targeting children early in their lives, we can build awareness of the concepts of budgeting and saving and strengthen their ability to deal with more complicated financial products,” Bradbury said.

COMPANIES operating in the financial services industry may soon find the manner in which they advertise their products and services more tightly constrained.

The new chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, said the regulator would soon be consulting on best practice guidance for advertising financial products and services.

He said this would then be followed with consultation around advertising with respect to credit products and services.

“These documents will provide very practical guidance about how the legal provisions relating to misleading and deceptive advertising apply in various situations, and what we think represents balanced and informative advertising,” he said.

Medcraft told a Financial Ombudsman Service event last week that the documents would contain “real world” examples and that ASIC hoped they would prove useful for all sectors of the industry, including product designers, advisers and publishers of advertising.

“We would like those preparing advertising to actively work to present a balanced understanding of the product or service, including its risks,” he said. “It is also important they take into account the kind of audience likely to see the advertising, according to the medium they are using.

“Our expectation is that the financial services industry will strive to do more than simply meet the minimum requirement of not being misleading or deceptive – they will actually take a role in ensuring that advertising helps investors and consumers to make decisions that are appropriate for them,” the ASIC chairman said.

Two years before FOFA valuations impact IT COULD be another two years before the financial planning industry determines the full impact of the Future of Financial Advice (FOFA) changes on the value of individual businesses, with key buyers already steering clear of businesses based on commissions-related revenues.

That was the bottom-line assessment of a recent Money Management roundtable that considered the impacts of the Government’s FOFA proposals, with Colonial First State general manger of advice Marianne Perkovic among those making it clear that the basis upon which planning businesses were being valued had changed.

“Being part of a large institution now, we have lots of businesses coming to us to buy them,” she said.

However, Perkovic said there was caution with respect to businesses that had “revenue streams that heavily relied on

Marianne Perkovic commission and commission structures”.

The roundtable agreed, however, that there were still financial planning businesses that demanded premium valuations because of their fee structures and their client relationships.

“There are still some businesses out there that we’ve had a look at that people would be happy to buy because you can

see the clients have been engaged, they’ve got very good review processes and they have fee-for-service models,” Perkovic said.

However, Association of Financial Advisers chairman Brad Fox warned that the industry needed to take account of those planners who had spent many years in the industry and whose plans to exit had been delayed by the global financial crisis (GFC).

“We have to be very careful that those advisers who have spent 30 years building up their business, and were perhaps in their early sixties four years ago, and then wore the GFC,” he said.

Fox said the objectives contained in the FOFA proposals would make it very difficult for such people to exit their businesses.

“So we need to have an eye on that when we’re looking at how the valuations are affected by any of the legislation,” he said.

AC ACI0 C 043/ 043/MM MM M M

If you win an award once that’s pretty impressive. But winning twice? That’s something else. That’s Thinking Wide. We have teams in Sydney, Chicago, London and Hong Kong, investing across Australia, North America, Europe and Asia. And clearly it’s getting results. The highest ratings from three of Australia’s most respected ratings agencies. Outperforming the index by 1.80% p.a*. since inception. And now the awards.

Both of them.

Past performance is not a reliable indicator of future performance. *Based on on-platform (Class A) cumulative performance since inception 29 November 2004 to 30 April 2011 against the UBS Global Real Estate Investors Index (AUD hedged). Out performance is after fees, before tax and assumes distributions are reinvested. Ratings are as at 31 May 2011. The Fund is managed by AMP Capital Investors Limited and its affiliate AMP Capital Brookfield Pty Limited. Important Note: AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital) is the responsible entity of the AMP Capital Global Property Securities Fund (Fund) and the issuer of the units in the Fund.

To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, nor any company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. While every care has been taken in the preparation of this material, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

News

Asia Pacific key to global property growth

By Ashleigh McIntyre AUSTRALIA and China are leading the global real estate recovery, with the Asia Pacific region set to surpass the United States as the second largest commercial property market behind Europe, according to global real estate firm DTZ. The annual DTZ Money into Property report has found that while growth in the United States and Europe was stagnant in 2010, the global market grew 3.4 per cent over the year, mainly due to Asia Pacific’s 14

per cent growth in invested stock.

David Green-Morgan, head of Asia Pacific research, said this growth is expected to continue in 2011 – bringing Asia Pacific in line with Europe at US$4.4 trillion.

Green-Morgan said this would be driven by a strong development pipeline and an increase in capital values.

Looking domestically, Green-Morgan said Australia had a strong year in 2010 with the level of invested stock in Australia rising by nine per cent in local currency terms.

The key drivers of this were a return to

capital value growth, while in 2011 growth is expected to be driven by rental demand, Green-Morgan said.

Transaction levels were also up 75 per cent from $9 billion in 2009 to $16 billion in 2010.

Green-Morgan said this was a result of investors taking advantage of value opportunities in the market that might not be seen again in the next five to 10 years.

The DTZ Fair Value index for the Asia Pacific region also scored well, measuring in at 65, which is well above the global average of 50.

Green-Morgan said that while the best opportunities had passed over the last 12 months, there were still plenty more in nonprime markets, with investors needing to be more selective.

Trio levy increased to spread burden T H E Fe d e ra l G ov e r n ment has taken the advice of industry associations on the levy to compensate victims of the Trio collapse, lifting the maximum amount from $500,000 to $750,000 for funds with ov e r $ 5 . 5 7 b i l l i o n i n assets to ensure fairer distribution.

T h e Mi n i s t e r f o r Financial Services and Su p e ra n n u a t i o n , Bi l l Shorten, also announced t h e a p p l i c a b l e ra t e would fall from 0.01977 to 0.01347 – meaning smaller funds would pay less.

Both the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST ) had written submissions to the Government expressing their concerns that the original levy would be unfair for smaller funds, whose members would pay a larger portion of the bill.

Sh o r t e n s a i d t h e impact of the new levy on a member of an average sized fund with an account of $33,000 is expected to be under $4.50.

Another issue raised

by A S FA w a s w h e t h e r funds could have longer than the original 28 days to pay the levy. Shorten s a i d t h e Au s t ra l i a n Prudential and Regulatory Authority (APRA) has indicated that it will n ow a l l ow a 6 0 - d a y payment term.

Shorten thanked all stakeholders who contributed to the development of the levy regulations.

investment in Australia’s health 21 healthcare properties

1

AIHW 2010. Health expenditure Australia 2008-09. Health and welfare expenditure series no. 42. Cat. no. HWE 51. Canberra: AIHW. 2Goss J 2008. Projection of Australian health care expenditure by disease, 2003 to 2033. Cat. no. HWE 43. Canberra: AIHW. *This information is intended to provide a broad summary of the Australian Unity Healthcare Property Trust. Investment decisions should not be made upon the basis of past performance, since future returns will vary. You should refer to the relevant Product Disclosure Statement (PDS) dated 25 June 2010 if you wish to know more about the product. A copy of the PDS can be obtained from the Issuer – Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454 by calling 13 29 39 or visiting australianunityinvestments.com.au. You should consider the PDS in deciding whether to acquire, or to continue to hold the product. The properties featured in this advertisement are the RPAH Medical Centre and Manningham Medical Centre – they are owned by the Australian Unity Healthcare Property Trust.

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

News

Fee-for-service workshops launched: E&W

By Chris Kennedy

E&W STRATEGIC Par tners has announced a series of independently developed workshops aimed at helping financial planners make the transition to fee-for-service.

The three workshops provide hands-on and practical training aimed at helping planners, practice owners and practice development man-

agers design, plan and implement fee-for-service business models, according to E&W. “We know that many planners have been looking for a deeper level of support in successfully preparing their businesses for fee-for-service and the [Future of Financial Advice] reforms,” said E&W Strategic Partners managing director Lap-Tin Tsun.

The launch includes a new,

online version of E&W’s feefor-service training workshops, the Self-Paced Fee-For-Service for Practitioners Program, which includes interactive webcasts, tools, and assignments.

“The self-paced program is designed specifically to give planners access to the same level of interactive education and personalised support of a face-to-face workshop, but

in a cost-effective and easyto-use format,” said Tsun.

The three courses are the core Fee-For-Service for Practitioners program, available as a two-day course or three fourhour workshops; as well as a half-day course in selling feefor-service and a two-day workshop for practice managers.

The workshops are eligible for continuing professional Lap-Tin Tsun development points.

With an ageing population our healthcare property trust is an investment for the ages As Australia’s population continues to age, there will be an increasing demand for quality healthcare services. For example, healthcare expenditure is projected to increase from $112.8 billion in 2008-091 to $246 billion in 20332.

The Australian Unity Healthcare Property Trust is uniquely positioned to capitalise on this spending (and provide solid returns) by investing in private healthcare property assets, such as hospitals, medical centres and aged care facilities.

Even at the height of the global financial crisis the Healthcare Property Trust remained liquid and delivered investors reliable returns. The Trust’s capital value has also remained resilient, reflecting the increasing need for healthcare facilities.

long term leases

In fact, the Healthcare Property Trust has had an outstanding performance track record, providing investors with consistent distributions for almost a decade.

Healthcare Property Trust - wholesale returns (as at 30 April 2011)* 1 year %

3 years % p.a.

5 years % p.a.

Since inception % p.a. (28 Feb 2002)

Distribution

6.60

7.02

7.83

9.36

Growth

1.24

(1.75)

2.40

3.43

Total

7.84

5.27

10.23

12.79

*Past performance is not a reliable indicator of future performance.

To invest in a healthcare property trust for the ages call 1800 649 033 or visit australianunityinvestments.com.au/hptfortheages

The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned September 2010) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product. It is not a recommendation to purchase, sell or hold the relevant product, and you should seek independent financial advice before investing in this product. The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product using comprehensive and objective criteria.

AET goes ahead with new SMSF service

By Milana Pokrajac IOOF-owned Australian Executor Trustees (AET) has launched a selfmanaged super fund (SMSF) service, which the company said would alleviate much of the administrative burden currently assumed by advisers.

The AET SMSF offering features daily investment and superannuation administration, c o m p re h e n s i v e f u n d establishment service, end-of-year tax and audit service, and insurance administration.

The offering also includes three types of accounts: accumulation, transition to retirement and account-based pensions.

The AET stated accounts could be pooled or segregated, allowing one member to be in the a c c u m u l a t i o n p h a s e, while another member is drawing a pension.

AET Super Solutions head of distribution Da v i d St o r m s a i d by bringing all the administration functions under one roof, the service had “taken the hard work out of SMSF management for advisers”. “ We’v e re m ov e d t h e paper chase and … our d a i l y a d m i n i s t ra t i o n allows clients to login at any time to view their portfolio,” Storm said.

St o r m a d d e d A E T ’s offerings provide both SMSF options, “giving the client the flexibility to be the trustee of their own fund or for AET to act as the professional trustee”.

www.moneymanagement.com.au June 16, 2011 Money Management — 11

News

Clients steered towards wrong products: FSU

By Milana Pokrajac MORE than half of bank, insurance and financial services employees have seen customers steered towards financial products they may not have needed, a survey has found.

The Financial Sector Union (FSU) claimed workers were under increasing pressure to sell financial products regardless of customer need, to meet

“management-driven performance targets”.

FSU national secretary, Leon Carter, said the issue lay in the senior ranks of financial services institutions.

“The problem is not the finance sector workforce but the upper echelons of our big banks and insurers, who hold employees to ransom on the condition that they sell more products,” Carter said.

“Woe betide any employee that doesn’t sell the required number of credit cards, loans or whatever the product of the month is; they won’t just miss out on the next pay rise, they might also lose their job,” he added.

The sur vey found 88 per cent of employees generated a quarter of their take-home pay with sales of financial products, while 51 per cent have

obser ved customers being offered financial products they did not need.

“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.

He added this remuneration model should have been abandoned during the global financial crisis.

Leon Carter

Simultaneous client/planner retirement a challenge

AIST proposes CP153 adjustments

MANY financial planners belonging to the babyboomer generation will retire around the same time as the majority of their clients, creating a greater need for well thought-out succession plans, according to Equity Trustees head of wealth management Phil Galagher.

Galagher said anecdotal evidence proved sending out a letter advising clients that their financial planner had retired was a common approach, often resulting in clients automatically being passed on to another adviser.

“Clients are simply passed on to another adviser, and end up feeling that they’ve got to start all

THE Australian Institute of Superannuation Trustees (AIST) has broadly supported proposals to raise education standards among financial advisers, but proposed an alternative to the three-tiered approach outlined in the Australian Securities and Investments Commission’s (ASIC) CP153 consultation.

ASIC’s proposals revolve around an initial examination assessment followed by a 12-month monitoring and supervision period, with regular knowledge update reviews.

The AIST proposal involves more flexibility in the supervision and monitoring period to accommodate different advice delivery methods, but with more stringent ongoing assessment requirements.

While the AIST also supported the intent of all advisers sitting a national exam, the association said that if this became prohibitive for time or

over again with this new person,” Galagher said.

“Many might feel it’s just as easy to look elsewhere for help.”

With the need for financial advice growing, rather than declining in retirement, Galagher said planners should avoid giving clients any reason to feel let down or abandoned when they retire, especially in the present economic climate.

“A more appropriate approach is for the adviser to contact all clients well before the planned retirement date to outline the succession plan, and to have any replacement join him or her at client meetings before retirement so that the history and the

By Chris Kennedy

Phil Galagher relationship can be transferred successfully,” he added.

Retirement services will be an increasingly important area for financial planners and will grow to form a major part of planning businesses, Galagher predicted.

MySuper already imposing higher costs

By Mike Taylor THE Government has been told it is ironic that the first step towards the implementation of its supposedly low-cost superannuation product, MySuper, is an increase in costs.

It has also been told in a submission from the Association of Superannuation Funds of Australia (ASFA) that the Australian Taxation Office (ATO) should fund more of its own costs, and that the Government should reduce the levies it intends imposing on the financial services industry this year.

In a submission to the Treasury filed this month, ASFA has pointed to a 22.5 per cent increase in the Financial Institutions Supervisory Levies for the new financial year and claims this is being imposed despite the number of superannuation funds being regulated by the

Australian Prudential Regulation Authority (APRA) having fallen.

It said a significant contributor to the increase is an additional $4.2 million allocated in the Budget for the start of work supporting the Government’s so-called Stronger Super initiatives, and points to the irony that one of the first outcomes from adopting MySuper and related initiatives is an increase in costs.

The submission also pointed to a 5.9 per cent increase in the amount of the levy apportioned to the ATO to run the Lost Members Register (LMR) – something which it said was not commensurate with the volume of enquiries handled and what is involved in maintaining an electronic register.

“In these circumstances ASFA does not consider that it is appropriate that superannuation funds should be levied for the claimed costs of running the LMR,” it said.

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

cost reasons then an exam should be mandatory for all new entrants at a minimum.

It may not be possible to have new advisers under supervision at all times, in which case a checklist could be developed as to what needs to be covered at a minimum, and the 12month time frame is also impractical for new entrants delivering general or phone-based advice, the AIST stated.

The AIST also believed that three years was enough experience for supervisors in this period rather than the originally slated five years.

Regarding ongoing monitoring following this period, AIST said that three years was too long between assessments due to the number of changes in legislation that could occur in this period. This knowledge update review requirement should be included in continuing professional development requirements, AIST stated.

Consumers saving more, but doing less with it

By Ashleigh McIntyre

AUSTRALIAN households are saving at their highest level since 1987, but consumers are not putting their money to work. Instead, they are choosing to leave it in low-interest accounts.

Australian Bureau of Statistics (ABS) data released this month found the household savings ratio increased to 11.5 per cent of financial consumption expenditure in the March quarter – the highest it has been in 24 years.

Data from the Australian Prudential Regulation Authority (APRA) found there is just under $500 billion sitting in household deposit accounts with banks alone, meaning Australians have $220 billion more in their accounts than they did five years ago.

Online comparison website RateCity chief executive Damian Smith said many

households would be holding much of this cash in accounts with very low or even no interest.

“Even if only 15 per cent of the $500 billion sitting in bank deposits is in low or zero-interest transaction accounts, then Australians could be missing out on as much as $4 billion interest,” Smith said.

This figure is based on money going into online savings accounts, where the average interest rate is 5.24 per cent.

InFocus ADVICE SNAPSHOT Did employers in financial services increase salaries in the past 12 months, and by how much?

46

%

Increased between 3 and 6 per cent

35 11 8

Increased 3

% per cent

%

%

Sentiment due for a cold snap

R

the generally negative news and debate issuing out of Canberra.

AMP Capital Investors senior economist, Bob Cunneen last week made reference to a “wall of worry” when describing investor perceptions of the economic situation both within Australia and abroad.

Describing the outlook for markets in early June he said this “wall of worry” comprised a range of concern such as softer global growth, America’s struggling housing market, Japan’s recession, China’s inflation risk, high oil prices and Australia’s multi-speed economy.

“All remain constraints on global share markets in the short term,” he said.

In doing so, Cunneen reflected a view widely held by market economists – that the current adverse sentiment is going to last a matter of only months and is, as described by HSBC strategic, Garry Evans, “a wobble in an uptrend”.

But the question confronting Australian investors and, by definition their financial planners, is how long the “short-term” issues are going to constrain their asset allocations.

According to Evans and a number of other economists and analysts, the current problems will probably persist through the northern summer, with earnings being revised down and investors becoming more worried about the risk of a new recession.

“The time to buy back is probably when capitulation sets in,” the HSBC analysis said.

“In the meantime, we continue to recommend relatively defensive positioning.”

AMP Capital’s Cunneen takes a similar view, suggesting earlier this month that the

medium fundamentals for global shares are encouraging with the possibility of “an eventual price revival later this year”.

“However, investors will need to see that the ‘wall of worry’ list diminishes to regain confidence,” he said.

A b r o a d e r a n d m o re g l o b a l v i e w i s provided by the highly experienced chief economist for Bank of New York Mellon, Richard B Hoey, who has described the world economy as being in “the mid-cycle phase of a sustainable global economic expansion”.

Ho e y w h o, i n 2 0 0 7 - 0 8 t o l d Mo n e y Management that the recovery from the global financial crisis would be one of the longest and slowest on record, said in his most recent analysis that he expected cyclical expansion to be sustainable “even as many economies experience a short subcycle slowdown”.

So the bottom line for Australian financial planners is that not only are they going to have to maintain their focus on the regulatory changes emanating out of the FOFA changes, they are going to have to keep a weather eye on markets and the degree to which their clients feel burdened by a “wall of worry”.

On the plus side, most superannuation fund returns appear likely to end the financial year in the black, allowing advisers to deliver an element of good news as they await more positive indicators, both from the economy and the markets.

Most will be hoping that, consistent with the predictions made by HSBC, Australia’s gloomy winter will give way to some positive news in spring.

Did not increase salaries

Source: 2011 Hays Salary Guide

With market economists pointing to the existence of a ‘wall of worry’ built on bad economic news out of Europe and the US, Mike Taylor writes that advisers will need to guide clients through a winter of discontent. esearch conducted by specialist research firm Wealth Insights over the past five years has revealed financial planner sentiment is very often a direct reflection of client sentiment (which, in turn, appears to be closely c o r re l a t e d w i t h t h e f o r t u n e s o f t h e Australian Securities Exchange).

That being the case, we should expect that when Wealth Insights next releases its Adviser Sentiment Index it will have moved further downwards on the back of the relatively poor performance of the ASX200 over the past three months.

But there are other more concrete measures of investor caution in Australia than the Wealth Insights data, with the most obvious being those compiled by Plan for Life with respect to fund flows. On all the available evidence, the next Plan for Life data will confir m that an awful lot of Australians are leaving their money in ‘safeharbour’ investments such as cash and term deposits.

With the European debt crisis still in a state of flux and new data emerging from the US to suggest that its economic recovery has stalled, it seems entirely possible that Australian financial planners are about to witness a winter of discontent among their clients – something that is unlikely to be alleviated by uncertainty which goes with the rarity of having a minority Government sitting on the Treasury benches in Canberra.

According to some analysts, while the negative news emanating from Europe and the US is playing its part in dampening investor sentiment in Australia, so too is

Increased above 6 per cent

What’s on

ASFA lunch 20 June Stamford Plaza, Brisbane www.superannuation.asn.au

AIST Member Services Symposium 22 June Sofitel, Melbourne www.aist.asn.au

AFA lunch with Bill Shorten 27 June Doltone House, 26-32 Pirrama Road, Pyrmont www.afa.asn.au

NSW Women in Super event 28 June Level 6, The Imax Theatre Complex 31 Wheat Road Darling Harbour www.womeninsuper.com.au

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

www.moneymanagement.com.au June 16, 2011 Money Management — 13

Direct property

The house advantage Following a period of uncertainty, the direct property market appears to be undergoing post-GFC resurgence. Janine Mace reports.

IN the wake of the global financial crisis (GFC) there were some pretty dark days for the direct property sector. Valuations came under strong pressure and many funds were forced to suspend redemptions and distributions as they struggled to survive.

However, dawn seems to have finally broken for the sector and it now appears on the cusp of an upswing. Returns are up, rentals are rising, many frozen funds are inching closer to a solution and investors are willing to take a look at new investments.

Centuria Property Funds CEO Jason Huljich sums up the current view, saying: “Most analysts are upbeat on commercial property at the moment. The market is a lot healthier than 12-18 months ago.”

This optimism contrasts with the flat performance – or even decline – expected from residential property over the next year or two and marks a welcome change for many property investors.

Ken Atchison, managing director of property consulting firm Atchison Consulting and a long-time market observer, believes the picture is now much brighter.

“The outlook is more encouraging than a little while ago. In the major property classes, we see the revaluations down as

Key points • The current commercial property market is far healthier than it was 12-18 months ago, with

rents rising, returns up and many funds being recapitalised.

• In a welcome change current indications are that a property upswing is in its earliest stages,

making now an opportune time for investors – particularly in the areas of commercial and industrial listings.

• Post-GFC, advisers are rethinking their portfolio constructions, taking a renewed look at the benefits of property investment for SMSFs to enable them deal with the challenges of longevity and investment risk as they move from the accumulation phase to the pension phase.

• Including direct property investment in a portfolio can improve investors’ total returns, with direct property having low volatility and a low correlation to shares. being finished. Over the next 12-18 months we will see increasing rental income returns and that is quite a positive development at the moment,” he explains.

Huljich agrees the prospects for most major markets are upbeat. “Valuations have stabilised and we are seeing them start to go up.”

Rents are also starting to rise. “Melbourne rentals have moved up. In Sydney there are still quite a few incentives, but this is starting to drop and in the next 12 months we expect to see rentals increase. However, we expect Brisbane to be flat for the next 18 months,” he says.

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

Funds slowly defrost All this is a far cry from the gloom after listed property trust prices collapsed and there were concerns direct property would see major downward revaluations and fire sales as investors headed for the exits.

Although the sector is now more optimistic, the problem of suspended funds remains, with thousands of investors still trapped in troubled property funds. While some funds still face major problems in unwinding their positions and freeing up investor monies, there have been encouraging signs.

According to Atchison, the largest group of frozen funds are in the Centro Properties Group. He believes the deal with the USbased Blackstone Group to acquire Centro’s international assets for US$9.4 billion is a definite step in the right direction.

“We are now looking at the prospect that this year there will be a resolution with the frozen international funds. A liquidity solution is also expected in 2011 for the Australian asset funds,” Atchison explains.

“We believe the impact on sentiment will be quite positive. There will be a price available and that will be hugely significant.”

The situation with other managers has yet to progress that far. “Other funds are slowly freeing up – tortuously – but it is happening,” he says.

Many funds are being recapitalised with equity from new managers and this will improve the situation, Atchison notes. “So we are looking at 2011-12 and expect to see other frozen funds being freed up.”

Upswing in the property cycle Charter Hall Direct Property CEO, Richard Stacker, agrees the situation has improved and believes it is time for financial advisers to reconsider property funds. “Property is still an important component in portfolio

Direct property “Supply of industrial is very constrained, especially due to the tight funding conditions and this has led to increased rents. As container traffic increases through the ports, industrial take-up goes up with it.”

As extensively reported in the media, the outlook for residential property is less upbeat. “Residential has hit a plateau and come back a bit, largely due to interest rates,” Stacker explains.

The other struggling sector is retail property. “The weakest sector is retail as there is some hesitation on retail sales growth due to questions about the strength of the economy,” Atchison says.

closely to investors. After Centuria replaced the existing manager of several of the Becton funds, it introduced a series of changes, including a lowering hurdle to replace the manager, removal of all ‘poison pill’ provisions, new performance fee structures and fund terms, and improved investor transparency and communication.

The changes have been very well received by planning groups, he says. “These five initiatives have got us a lot of traction and we have recently received the largest single equity placement from a single planning we have ever had.”

Going direct or not?

Property funds restructure With the outlook picking up, the direct property sector is determined to put its GFC disasters behind it.

“In 2007 there were about 30 managers doing unlisted property, but most of these have been shaken out, as they were often not property companies,” Huljich explains.

“There are only really three big groups left now doing direct property.”

Managers are taking a new approach and Stacker believes the sector has learnt its lesson. “It is time for financial planners to take a fresh look,” he says.

“The sector has changed a lot from the pre-GFC period. Investment mandates are very tight and property yields are around 8 per cent, which is better than at the bank.”

The suspension of redemptions has resulted in fund changes. “Exit mechanisms are now very clear and this should provide investors with greater confidence,” Stacker says.

construction.”

He believes there are currently good opportunities for investors considering property investments, with the property ‘clock’ or cycle at the right point to move back into the market.

“If 12 is the peak, then most property sectors are between six and nine. This is the early stages of the upswing and the time to get into the sector before prices start to move too much. We are at the right time of the cycle for investors to reconsider property investing,” he claims.

“Property fundamentals are very good at the moment.”

Although most leases have rental increases embedded in them, significant capital growth has yet to re-appear in most markets. “The next 12-18 months will see more subdued capital growth than previously, but there are good prospects,” Atchison says.

The outlook is also positive due to supply problems from a lack of new developments.

“There is not a lot of supply coming on, due to the banks’ constraint of funding,” Huljich explains.

“There was a nine-and-a-half per cent vacancy rate nationally at the peak of the GFC when the long-term average is 10 per

cent, so it is interesting that it was below that.”

Although interest rates are a key issue subduing the residential market, the story is different when it comes to commercial property.

“Commercial is not as sensitive to interest rates as residential. If interest rates rise, that means both the economy and growth are looking good,” Stacker says.

This is being reflected in the outlook for the office market, which is closely linked to economic growth.

“The office market is in good shape with a less than eight per cent vacancy rate around the country and it is in a balanced position,” Stacker explains.

“The Melbourne vacancy rate is even less.

The position is similar in Sydney, with strength coming back after the GFC, when it was hit hard due to its finance sector exposure. Perth and Brisbane are doing well off the back of the mining and infrastructure developments.”

Stacker is also positive about the outlook for the industrial sector.

“In industrial, there is very high demand for prime grade property. Industrial is well positioned with rents down in 2009, but up in 2010 and 2011,” he says.

Richard Stacker Atchison agrees funds are evolving and points to their lower gearing levels. “The lesson from the last few years is there is a level of gearing that is detrimental to investors. The crash showed a 60-70 per cent level of gearing is excessive,” he says.

Managers have acknowledged this problem, according to Stacker. “The lesson from the frozen funds is not to be overgeared,” he explains.

“Our funds are geared at 35-45 per cent, which is now a lot lower than the sector before the crisis, where some managers were at 65-75 per cent. As the cycle moves up, we want to be less geared and have gearing fall naturally.”

There are also new controls on underlying fund assets. “Investment mandates are very tight on what the manager can invest in,” Stacker explains.

Huljich agrees managers are listening

While interest may be picking up, many investors seem wary about returning to listed property trusts (LPTs) and real estate investment trusts (REITs).

The March 2011 Multiport SMSF Investment Patterns Survey showed direct property allocations by Self Managed Super Funds (SMSFs) increased over previous quarters to reach 13.7 per cent. However, allocations to listed property, managed funds and syndicates continued to decline, with investments down to 2.4 per cent at 31 March 2011.

Many in direct property argue the GFC provided a clear demonstration listed property performs more like equity than a true property investment.

“The definition of property has crystallised, with the difference between direct property and LPTs becoming very clear after the GFC,” Huljich says.

He argues LPTs and direct property perform quite differently, with direct property performing better. Over the past year, the Property Council of Australia/IDP Property Index recorded a total return of 10.4 per cent for the year ending March 2011. This consisted of a 7.5 per cent income return and a 2.7 per cent capital return. The S&P/ASX 200 Australian Real Estate Investment Trusts (A-REIT) Index returned -0.77 per cent for the same period, while the fiveyear return to 31 May 2011 was -14.65 per cent.

This different return profile highlights the disparities between the two investment approaches. Huljich says. “The LPT correlation to shares is huge and it is more volatile than direct property.”

He believes the GFC has changed advisers’ views on the use of LPTs in client portfolios. “A couple of the large planning groups are now putting LPTs into their equity allocations and then looking to direct property as a separate asset class.”

Stacker believes unlisted property offers investors many advantages. “Direct property investments are not as volatile as listed property investments. Investors should have more confidence as they are being paid valuations, which are not influenced by equity markets.”

IPD managing director Anthony De Francesco made this point in the May 2011 IDP Property Market Review. He noted the “return profiles for unlisted/direct and listed investment structures are distinctly different, especially over the short-term … This can be evidenced in the steady positive growth exhibited in unlisted/direct property in the recovery phase of the GFC postJune 2010, compared to the variation experienced in annualised A-REIT returns, moving from 20.4 per cent in June 2010 to 5 per cent in March 2011.”

MM

www.moneymanagement.com.au June 16, 2011 Money Management — 15

Direct property

Betting on bricks and mortar As the property market improves, managers are once again out spruiking their wares – and they are looking to include more property in retiree portfolios, writes Janine Mace.

F

inancial advisers are being urged to rethink their portfolio construction for SMSFs and retirees to deal with the twin challenges of longevity and investment risk.

Advisers face real problems trying to balance longevity risk (which pushes investors towards placing more in growth assets for better returns), with investment risk (which pushes investors towards having less money in growth assets).

This problem would appear to be exacerbated by US research undertaken by Russell Investments which shows 60 per cent of a person’s retirement income is earned during the retirement phase.

Constructing portfolios that provide sufficient income in retirement is likely to be an increasingly important issue for advisers as baby boomer clients increasingly move into the pension phase. Deloitte’s 2011 survey of the financial services industry found almost 83 per cent of respondents believed Australians will not have adequate income in retirement.

Longevity issues and investment risk have become worse for retirees due to the global financial crisis (GFC) and investor losses, according to Charter Hall Direct Property CEO Richard Stacker. “People are living longer and need to be in growth assets to keep up an income they can live on,” he says.

“There are a number of ways to make sure a retiree is structuring their portfolio in order to reduce, rather than increase, longevity risk.”

Legg Mason is another manager keen to push the merits of property investments for retirees. It recently issued a research paper arguing the traditional method of allocating

70 per cent of a portfolio to defensive assets in retirement will be insufficient to sustain a retirement income.

“Retirees will require the bulk of their investment return to come from yields to sustain them through retirement,” says Reece Birtles, CIO for Legg Mason Australian Equities.

He argues defensive strategies such as investing in fixed income assets will not provide the necessary growth to match inflation and sustain income levels. “However, retirees need a lower level of risk, which includes investment, foreign currency and liquidity risk. Therefore some higher yield assets could be too risky for their purposes,” Birtles says.

One solution proposed by Birtles is to invest in real assets such as utilities, property and infrastructure as a middle ground between fixed interest and equity investments.

Managing longevity risk Charter Hall believes strategies to manage longevity risk need to include appropriate exposure to growth assets, reduced drawdown on capital during market reversals, accelerating returns via conservative gearing and investing in assets providing tax deferred benefits.

“Direct property provides high, tax-effective income and capital growth when compared to assets like cash and fixed interest. It also has a low volatility and a low correlation to shares. Including direct property in a balanced portfolio can improve investors’ total returns with lower volatility compared to a portfolio that does not include direct property,” Stacker says.

Atchison Consulting managing director Ken Atchison has advised major super funds on their property allocations for many years and he agrees direct property can play a valuable role in boosting retirement income.

He believes direct property is an attractive proposition as a source of retirement income as it generally provides a yield of over seven per cent, compared to Australian shares at over five per cent and international shares at two per cent plus. “Property stacks up quite well in the pension stage,” Atchison says.

“Rental income provides a constant distribution into the pension payment process. If the rental contract is for a longish term and is secure, it provides security of return to investors.”

Centuria Property Funds CEO Jason Huljich agrees direct property is important in terms of income. “Direct property pumps out a good yield of eight per cent to nine per cent and you are also looking at good capital gain.”

In addition, steadily increasing rental income can help retirees deal with inflation and rising costs. This compares with the variable nature of dividends from equity investments.

“Property has a clear role to play in financial planning in terms of compounding of returns and income,” Atchison says.

“If you are looking for certainty of compound income, then it is more certain in property than the return from dividends.

Compound interest income is an attribute that contributes well for longevity.”

Stacker agrees income is a very important issue for SMSFs. “We expect SMSF appetite [for property] to grow as their long-term outlook and appetite for income certainty and capital preservation is ideally suited to unlisted property, particularly in retail property which is underpinned by major brand tenants,” he says.

According to Stacker, SMSFs account for 75 per cent of the inflows into Charter Hall funds. “With relatively low growth forecast in equity markets over the next few years, many investors are investing for income.

Direct property, with its income growth built into lease structures, should be a good vehicle for investors to achieve this.”

Illiquidity concerns There are also other benefits from using direct property during the pension phase. In particular, Stacker points to the tax-deferred benefits of direct property, which allows less tax to be paid in the accumulation phase.

For SMSF members nearing retirement, a proportion of the tax paid on property income is deferred and is paid when the asset is sold, at which point the tax liability could be zero, he explains.

According to Huljich, this characteristic is appealing to many high-net-worth (HNW) clients.

“Historically, Centuria has had HNW

Pension-related strategy options “Property has a clear role to play in financial planning in terms of compounding of returns and income. If you are looking for certainty of compound income, then it is more certain in property than the return from dividends. Compound interest income is an attribute that contributes well for longevity.” – Ken Atchison

• Put secure investments like cash and around two to three years worth of income in the income portfolio.

• Allocate the remainder to growth-based diversified portfolios.

This strategy means the income section is not affected by market volatility and leaves growth assets intact, allowing for more aggressive investment.

Strategies for pension portfolios According to the Charter Hall Direct Property Investment Report, there are several strategies advisers can consider when structuring a pension portfolio to manage longevity risk. These include:

Strategy 1 Aim to protect against market volatility in the early years by ensuring growth assets do not need to be sold to make pension payments.

• Separate the portfolio into cash and growth and draw income from only the income portfolio.

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

Strategy 2 • Allocate portfolio assets according to client’s risk profile.

• Draw income proportionally from all assets to maintain asset allocation.

This strategy allows the balanced/growth asset allocation to be matched to the client’s risk profile and can produce overall higher performance in a good market.

Source: Charter Hall Direct Property/Strategy Steps

Direct property clients and they like direct property for portfolio diversification, the income benefits and the ‘touch and feel’ you get with property. They also get a lot of tax benefits from direct property in terms of capital gains treatment and depreciation,” he says.

Although suspension of some fund redemptions has left many advisers and clients wary, Atchison believes the illiquidity of direct property is less of an issue when the investment is used to manage longevity risk.

“In planning for longevity risk, you are not worried about liquidity. On a 20-year time horizon, liquidity is not an issue,” he argues.

Atchison cites the use of direct property by successful long-term institutional investors such as the Yale Endowment Fund. “With a long-time horizon, liquidity is not important. However, you are looking for a premium on the return for not gaining liquidity.”

He believes it is vital for advisers to match allocations to the client’s goals. “If you are planning for a 10-15 year time horizon, you have got to ensure you do not get caught up in the noise in the investment market. If you are aiming for a retirement income in the future, then focus on that,” Atchison says.

Huljich agrees property can be a good match for the long-term liabilities facing an SMSF in the pension phase.

“It is a good medium-term to long-term investment and it matches well with an SMSF’s time horizon.”

Using direct property in the pension phase also matches the timeframe required for sensible management of property assets. “Property is not a short-term investment. It is a mid- to long-term investment, as making changes to properties and zoning changes take time,” Huljich explains.

Time to take the plunge?

For advisers convinced about the need to increase property allocations in retirement portfolios, now is a good time to consider investing in property, according to the experts.

“If financial planners are looking at bringing property into a balanced portfolio, then it is better to do that at the bottom of the cycle, not at the top,” Stacker says.

“Property has fallen off the radar for the past two- to two-and-a-half years, but for

SMSFs who are moving from accumulation to pension phase, it is a valuable investment.”

He believes advisers are warming to the idea. “Advisers are seeing the benefits of property investment for these clients and the message has been warmly received.”

Huljich agrees advisers are keen and says Centuria regularly works with a number of planning groups “as they see direct property as important in portfolio allocations”.

Changes to direct property funds and the potential for a market

upswing are seeing a re-emergence of interest.

“We are seeing a big increase in investor interest as they are seeing we are at the bottom of the market.

There is limited risk on the downside and there are more buildings available on the market and they are of better quality than pre-GFC,” Huljich says.

The return of investor interest is highlighted by the oversubscribed closure of the last two funds offered

by Centuria, according to Huljich.

“Adviser groups and direct investors

Reece Birtles

are coming right back in and are getting higher quality buildings than pre-GFC.” Stacker agrees there is an upturn in investor interest.

“Financial planners are keen to get in front of clients to talk about investing again and we are doing more client presentations on property and its performance, including its performance during crises,” he says.

“We are finding a greater emphasis on advice and education and strategies on how to use property in the portfolio.”

MM

We don’t examine stocks in a stock standard way.

1

8

2

9

3

10 11

4 5

6

12 13

7

14

18

15

16 17

19 21

61

20

22 30

48 33

32

23

31

26

52

34 39

40 48

41

42

44

38 55

29

36

37 50 49

28

25

35

53

27

24

43

51

46 45

56

47

54

57 59 60 58

At Fidelity we believe that the closer you look the more you find. That’s why we place such importance on our forensic approach to investing. We look at everything from multiple angles, all the time.

Our global resources allow us to regularly review every company we invest in, and then follow up by meeting with their suppliers, distributors and competitors. In fact, we review 90% of the world’s largest companies every 90 days. Fidelity’s rigorous approach provides the microscopic, in-depth information that delivers results and enables advisers to focus on the big picture.

Better research. Better minds. Better ideas. To know more, visit www.fidelity.com.au www.fi delity.com.au

This advertisement was issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575 AFSL No. 237865. Fidelity, Fidelity International and the Fidelity International and Pyramid logos are trademarks of FIL Limited. Company contact data is based on FIL coverage of the MSCI World Index as at 31 May 2011. © 2011 FIL Investment Management (Australia) Limited.

www.moneymanagement.com.au June 16, 2011 Money Management — 17

OpinionAllocation

Benefits of managed funds warrant close analysis With post-GFC investor confidence returning only slowly, a growing number of planners are placing their clients’ funds into direct shares. Paul Foster asks: is leaving only a fraction of inflows in traditional managed funds really the best investment decision for your clients?

I

n the wake of the global financial crisis (GFC), direct shares have become popular among investors, especially when the impact of the financial crash on managed funds is assessed. However, it is now timely for planners and advisers to consider carefully why they would recommend direct shares as a primary investment vehicle for their clients.

If providing the highest returns for clients across the widest possible base is the key driver of an adviser’s business – and it should be – then the fact that managed funds have a long history of outperforming direct shares on the Australian market should be a consideration that is, in the current market, once again rising to top of mind.

Of late, some financial industr y commentators have adopted a view that they should not pay an active fund to achieve index-like returns, when managed funds don’t appear to add value beyond their fees.

However, there is a lot of evidence to the contrary. For example, in considering the S&P/ASX200 Accumulation Index, it becomes clear that managed

funds have outperformed the market for at least the last 15 years, as the following table 1 confirms.

There is an alternative way to look at the performance of managed funds, one which takes into account the following assumptions: • Fund managers (including industry funds) hold 33.33 per cent, or one-third, of Australian shares; • Fund manager fees are on average 1.0 per cent per annum; and • The cost of brokerage, accounting and other fees of holding direct shares is 0.5 per cent per annum.

So, if managed funds have returned 0.78 per cent after fees, and fees are, on average, 1.0 per cent, then the return before fees for managed funds has been 1.78 per cent per annum better than the S&P/ASX200 Accumulation Index.

Over 10 years, this means that managed funds have averaged 10.08 per cent per annum before fees, while the ASX200 has returned 8.40 per cent.

If managed funds have held 33.33 per cent of all the Australian shares on issue, then the average return before costs and fees for those who hold direct shares must

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

be 7.52 per cent. Investing in shares isn’t free and assuming that this cost is 0.5 per cent p.a. on average, the after-costs return of direct shareholders is 7.02 per cent per annum over the last 10 years. The following table outlines this equation.

So, the true comparison between managed funds and direct shares is that managed funds have outperformed direct shares by 2.01 per cent per annum over the last 10 years on an after-fees basis.

Investing in direct shares leaves the investor with a difference to make up before even reaching the mark of the average managed fund.

At KPMG during the mid-to-late 1990s, I reviewed the returns of clients with direct shares and managed funds. Over a six-to-12-month timeframe, a new portfolio of shares outperformed managed funds. However, when I reviewed the performance of these clients’ portfolios after 12 months, the managed funds were bridging the gap.

For those clients who had held managed funds and direct shares for least three years, the managed fund returns were far superior. The reasons were simple:

• Managed funds were actively managed, whereas the direct shares were not; • Clients and/or advisers fell in love with some shares in spite of poor performance or outlook, whereas the fund managers maintained their objectivity; and • Clients and advisers didn’t like to sell a share that was underwater, whereas fund managers were prepared to take the pain for the overall benefit to the portfolio.

Comparing apples with apples Another issue that has cast undeserved doubt on managed funds’ performance is the quality and relevance of the data used to assess overall managed funds’ returns. Market commentators often point to the “broader” and “long-term” data available out of the United States to demonstrate that active managers have underperformed the market.

However, until very recently it was common practice among US fund managers to trade in their own managed funds after the market was closed each day, wiping a considerable amount of performance off the top, distorting performance figures and further impairing

Table 1 Managed funds have outperformed the sharemarket over the last 15 years 5 years

10 years

15 years

Morningstar Australian Equities Managers

5.10 per cent

9.08 per cent

9.30 per cent

S&P/ASX 200 Accumulation Index

4.32 per cent

8.40 per cent

8.56 per cent

Manager outperformance

0.78 per cent

0.78 per cent

0.74 per cent

Source: van Eyk

Table 2 Average cost return for direct shareholders Total average return from S&P/ASX 200

8.40 per cent

Less 33 per cent multiplied by 10.08 per cent (return of managed funds)

3.36 per cent

Equals

5.04 per cent

5.04 per cent divided by 67 per cent (Direct Share holdings)

7.52 per cent

Less (fees, cost and brokerage of direct shares)

0.50 per cent

Average after-cost return for direct share holders

7.02 per cent

Source: van Eyk

“

Clients often find the transparency of direct shares appealing – they like being able to view the whole portfolio.

the credibility of the managed fund industry. In Australia, however, this was not the practice and after-market trading in managed funds is in fact illegal (as it now is in the US, also). The fact that these now obsolete figures are still used by some to draw conclusions about the locally managed funds industry is clearly wrong.

Reality vs perception: managed funds vs direct shares Yet another significant issue for advisers to overcome is that some of their clients

simply do not trust managed funds, particularly since the bad press during and after the GFC, when freezing of funds shook confidence and caused widespread financial pain.

Despite these negative perceptions, the benefits that contributed to the initial popularity of managed funds and their longstanding success in the market remain. Many individual investors are tired of the vigilance and corporate interaction it requires to be direct shareholders. From an adviser perspective, too, it is

”

more efficient to service the greatest number of clients with managed funds rather than direct shares.

Managed funds continue to offer investors access to scale, diversity and simplicity, providing clients with reduced investment risk and the potential for better returns. Managed fund clients can benefit from the combined resources and knowledge of financial advisers and investment managers, the latter reviewing and assessing stocks on a daily basis.

Alternatively, let’s look at the situation

when it comes to direct share investment.

A typical direct share investor might have holdings in 20 different companies. This means that there are around 1,600 companies they don’t hold and aren’t watching day-to-day. By contrast, managed funds are monitoring the stocks they don’t hold as much as the ones they do, albeit that they may also concentrate their holdings to as few as 20 stocks.

Clients often find the transparency of direct shares appealing – they like being able to view the whole portfolio. But advisers and planners can offer the same benefits with managed funds, by providing more regular updates of the fund’s progress and holdings through regular reporting.

In truth, often the decision between direct shares and managed funds can be determined by an adviser’s personal inclination: some like to be involved in the daily trade of shares and are ‘addicted’ to the cut and thrust of the market.

Perhaps contentiously, it is my view that an adviser or planner with such a strong interest in shares should have a thorough and honest look at the results they have been achieving across their client base. If they are consistently outperforming the sharemarket after fees, then they should apply for a job as a fund manager. I believe it is more likely that if this is the case, they could well be spending so much time managing share portfolios that they may be underservicing in other vital areas. Certainly, this possibility provides food for thought and selfreflection.

In summary, some advisers may feel they do not add value to their business if they don’t offer direct shares; as we have shown, higher returns can be had from managed funds – with far less time and effort spent, leaving advisers able to provide the real value-add: truly understanding their client and dispensing proactive strategic advice and coaching.

Paul Foster is CEO and CIO of Addwealth.

www.moneymanagement.com.au June 16, 2011 Money Management — 19

OpinionCurrency Charting new waters With the Australian dollar reaching record highs in the last few months, Dominic McCormick looks at the issues a strong currency has raised for investors.

O

n Monday 9 May 2011, the Australian dollar (AUD) was trading at around 107 US cents.

In the business section of The Australian that day, there was an article with the headline ‘Rampaging dollar could hit $US1.70’. On that same day, The Australian Financial Review ran an article entitled ‘Big challenge if $A swoons to US85c’. Both articles discussed the views of various fund managers/hedge funds on the direction for the AUD in the next few years.

This is an enormous range around the 107 cents level – almost 86 per cent. If the AUD were to head towards either extreme it would have dramatic and very different impacts on investor portfolios and the broader economy.

Clearly, there is plenty of confusion about the future course of the local currency.

While the difficulty of forecasting the future direction of the AUD is one challenge, it is clear that the high and rising AUD has already created major problems for investors. For example, it has: • Negatively impacted the returns on unhedged overseas assets both over the long-term and even more so in recent years – the AUD has risen around 6.5 per cent per annum against the USD over the past 10 years and 21 per cent per annum over the past two years; • Reduced the appetite of overseas investors to buy Australian assets (especially shares and property), which has contributed to their underperformance; and • Negatively impacted the local value of overseas earnings of significant components of corporate Australia.

Clearly, currency has become one of the more important factors driving returns in recent times – particularly with a lacklustre local sharemarket. Portfolios that have had their overseas exposure unhedged have suffered, while just having more invested in Australia has not helped significantly. While the US and other overseas markets have done better than Australia, this advantage has all but been wiped out if one was unhedged.

Staying hedged In hindsight, the best approach has been to have significant overseas exposure, but to have all or most of the currency exposure hedged. However, this is not how the vast majority of Australian portfolios have been positioned.

At the recent Morningstar conference, the almost universal consensus among fund manager panellists was that investors should hold their international share exposure unhedged. It was unclear how long they had held these views.

However, I was struck by the seeming disconnect between the ease which such views were put forward and the practical challenges for advisers and clients who have worn losses on unhedged portfolios in recent years

(or at least not participated in the high local returns from underlying markets).

I was also surprised that while currency positioning was discussed frequently during the day, the deeper issues relating to the global currency and monetary system were largely ignored. Recent extreme currency movements were seen as just ‘business as usual’ that investors had to accept.

I have a different view about these issues.

While the starting point for most advisers and investors is that their overseas equity exposure should be unhedged, or at most 50 per cent hedged/50 per cent unhedged, a 100 per cent hedge on passive foreign exchange exposures should be the neutral ‘starting’ position. The AUD is the currency

Let’s look at AUD/USD. There are two sides to every currency pair. On the AUD side, the Australian terms of trade are the highest in more than a century, we are one of the few countries in the world with positive real short-term interest rates and we have a central bank focused on inflation that is seemingly happy to see a higher currency as it dampens those inflationary pressures.

Meanwhile, the US (and much of the western world) is struggling with high unemployment and a slow recovery from the global financial crisis (GFC), has negative real short-term interest rates and close to zero nominal rates, and has a central bank that is actively pursuing policies that lead to a lower currency in a quest to spur growth.

A course of action So what should advisers and investors do? As I wrote last year (‘The here and now’, Money Management 28 October, 2010) I believe they need to first reject the notion that currencies just average out in the long term, so it doesn’t really matter what exposure they have. In a world where some countries seem to be going all-out to debase their currency, these effects on return don’t just ‘wash out’ in the end. Specifically, they should: • Not rule out that the AUD could go higher, perhaps significantly so. They need to think about what this would mean for portfolios. And even when the next significant downward move occurs, it may be from higher levels and may be relatively shallow compared to history. Certainly those expecting it to revisit the US0.60s or 0.70s are likely to be disappointed; • Develop a plan regarding currency exposure. The worst possible approach is to simply react to movements and to clients’ emotional experience with different investments. Some adopt a relatively simple 50 per cent hedged/50 per cent unhedged approach, which at least discourages such reactive changes; and • Be diversified (even with a 50/50 approach) and think carefully about which currencies one is exposed to. Having some foreign exchange (FX) exposure can be a good diversifier, but that foreign exchange exposure should also be well diversified. If your FX exposure is largely in USD, does this make sense given the policies the US central bank is currently pursuing and the problems the US government faces from a fiscal and debt standpoint?

On shaky ground

local investors judge their returns in, and the one in which the vast majority of their expenditure is denominated.

Of course, I cannot argue against the premise that as the AUD has risen and become overvalued on a purchasing power parity basis (see figure 1), the case for taking off some of these hedges and running more unhedged exposure as a diversifier has increased.

However, currencies can stay overvalued or undervalued on this basis for years, and this decision has been highly stressful given the relentless recent strength of the AUD. However, this stress is probably considerably more for those with largely unhedged portfolios having to make the decision to remain unhedged in the current environment.

A new reality?

Complicating the whole currency positioning is a nagging feeling – and I know this is dangerous to say – that ‘this time is different’ both in respect of the dynamics of the AUD/USD relationship and the broader global monetary/currency system.

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

Is it any surprise that the AUD/USD has moved the way it has? The acceleration we recently saw as it surged over $US1.10 was unusual (and some of it quickly retraced), but is the longer term trend for a higher AUD and lower USD really unexpected in a world where none of the key drivers described above are likely to reverse dramatically any time soon?

Meanwhile, many seem to be waiting for another 2008 – where the AUD plunges 30 per cent against the USD in a matter of weeks or months, back to somewhere in the 60s or low 70s. I could be wrong but excepting a total collapse of the Chinese and Indian economies and the associated commodity prices, I just can’t see this happening.

Australians have become accustomed to big falls in AUD having experienced them regularly in the 1990s, 2000s and particularly in 2008. While some serious setbacks are to be expected, there is a strong case that the AUD will fluctuate around a much higher average than in previous decades. The rise in the AUD and decline in the USD is secular, not cyclical.

The global monetary/currency system is becoming increasingly dysfunctional, yet this worrying development receives little attention from fund managers focused on the status quo and who assume that the current arrangements will persist unchanged into the future. Take a look at some of the symptoms of this dysfunctional status: • Countries in the Eurozone periphery are in economic straightjackets and suffering severe recession, after years of abusing the ability to borrow at excessively low Eurozone interest rates; • A race to the bottom in terms of currencies is underway as western economies look for an easy way to help their economies; • Currencies pegged to the US dollar even though their economic situation is completely different. For example, in Hong Kong, property investors can borrow at 2 per cent even when their property market surged 40 per cent last year; • The world’s reserve currency, the USD, is being pummelled by monetary policies to revive growth at home, with little consideration of the inflationary and destabilising ‘bubble’ implications of those policies globally; and • There are desperate attempts to diversify away from the USD, which dominates global reserves, given the deteriorating purchasing power of these reserves.

The centre of this increasingly flawed system is the USD. Yet the US has done exactly what all countries privileged with the global reserve currency status have done

through history (ie, carelessly and relentlessly abuse that privilege over time). It is this system that has allowed the high levels of debt to build up, which was a major cause of the GFC. And it is the maintenance of record low interest rates and debasement of the USD that has enabled a whole range of new imbalances to develop after the GFC. Major currency debasement and even hyperinflation is a real risk in the world today.

If Greece, Ireland and Portugal had freely trading currencies they would have already collapsed. These are small countries, but bigger countries within the Eurozone, as well as the UK, US and Japan, have many of the same excessive debt characteristics of these countries.

that is, a currency used for the vast majority of global trade, the link for other currencies to use as a peg, and the dominant asset in most global reserves. History shows that this reserve currency privilege is always eventually abused – and the value of that currency ultimately seriously debased – with adverse consequences for the world as a whole. Gold’s role in all of this is to stand as another ‘currency’ of choice, if any or all of the authori-

ties of those countries’ currencies pursue policies that seriously debase their value.

In this world, investors would approach currencies much the same way they approach other aspects of investing – aiming to be well diversified, but with a skew to those currencies that are well managed and representing value.

Gold will have a role as one of these diversifiers. This would be particularly important for investors where

their own local currency is being poorly managed.

Of course, I don’t see an orderly transition to this more balanced and responsible global monetary system. It is only likely to come about through a series of crises in the current system, and a much greater recognition of its inherent flaws. These crises are likely to produce major winners and losers.

I suspect the volatility of recent times is the beginning of this period

of recognition.

In this environment, discerning the near-term and long-term direction of various currencies is likely to remain extremely difficult. However, I am more confident in my prediction that the stress relating to managing currency exposure is likely to remain very high.

Dominic McCormick is chief investment officer at Select Asset Management.

The endgame Most just extrapolate the past and expect business as usual but, increasingly, I think that is the least likely outcome. The bust-up of parts of the Eurozone is something that could happen. China needs to free its currency to help solve its inflation issues and is attempting to gradually wean itself off US dollar dependence through a range of diversifying measures.

The linkages of various Asian and emerging currencies to the US dollar are quickly running past their ‘use by’ dates and look increasingly unsustainable. The US dollar’s days of abusing the ‘reserve currency privilege’ look to be drawing to a close.

Predicting how this all plays out is extremely difficult.

Some suggest that the response to this dysfunctional global monetary system should be a move back towards more rigid exchange rates, the formation of one world currency, or even a formal gold standard. In my opinion, a better outcome would be a world where there are a reasonable number – but not too many – of well managed, liquid, freely floating currencies competing globally for use in transactions and as a global store of value. Yet no currency should be allowed to become as dominant as we have allowed the USD to become, given the adverse consequences for global imbalances that are discussed above.

We need to move towards a world where no one country is formally or informally allocated the privilege of being the dominant ‘reserve’ currency –

HUNTER HALL Ethical Managed Funds

Hunting for Australia’s Best Managed Fund?

The Hunter Hall Value Growth Trust has achieved a 15.1% Compound Annual Return over 15 years*, the best performance of all funds listed by Morningstar in Australia in this period.

Contact us on 1800 651 674 or ask your financial advisor or visit www.hunterhall.com.au

Past performance is no indication of future performance. *15.1% is the compound annual return for the Hunter Hall Value Growth Trust for 15 years to 31 May 2011. Initial applications for units can only be made on an Application Form found in the current Product Disclosure Statement for the Hunter Hall Value Growth Trust. Hunter Hall Investment Management Limited (AFSL: 219462) or any related entity does not guarantee the repayment of capital or any particular rate of return from the Fund. Investment returns have been calculated in accordance with normal industry practice utilising movements in the unit price and assuming the reinvestment of all distributions of income and realised profits. Peformance data shown is net of all fees. This advertisement does not take into account a reader’s investment objectives, particular needs or financial situation. It is general information only and should not be considered investment advice and should not be relied on as an investment recommendation. © 2011 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs.You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf. Hunter Hall won the AFR Smart Investor Blue Ribbon Awards in 2007, 2008 & 2010 in the International Small Cap shares category. www.moneymanagement.com.au June 16, 2011 Money Management — 21

OpinionInsurance Advice shared makes for protection doubled Tim Browne shares his views and presents some case histories as he surveys the muchdebated topic of banning commissions for risk insurance within superannuation.

P

lenty of robust debate has surrounded the proposed move to ban commissions for risk insurance within superannuation since Assistant Treasurer Bill Shorten’s April announcement as part of the proposed Future of Financial Advice (FOFA) reform package. Many across the industry believe the ban could force advisers out of the industry and boost Australia's underinsurance problem.

I have heard many stories over the past six months of clients that have benefited from the advice they received. Conversely, it is easy to see how the outcome could have been very different had these individuals not received advice. I have selected a few of these case histories and present them following as examples of some of the types of stories you can share with your local Member of Parliament (MP).

There remains an opportunity to lobby Government and independent MPs on the proposed reforms, which would not take effect until July 2013, if approved. We each have a continued role to play in communicating to Minister Shorten the value of insurance advice, whether this is through our industry bodies, regulators or local members.

Case study one: matching insurance cover to the client’s needs The client needed to increase their insurance cover from $2.5 million to $9 million, but did not think it was possible due to large debts incurred through the family business, and the subsequent increase in

financial underwriting requirements. The adviser worked to educate the client and work in co-operation to identify opportunities to ensure that these requirements were met. The insurance was successfully completed. Two weeks after the cover was in place, the client died in a solo pilot air crash. All claims were successfully made to the client’s partner.

Case study two: persevering to get insurance in place This client was a mid-level income earner, self-employed and had a fully financially dependent family. The adviser emphasised the need for trauma insurance to assist in paying the client’s mortgage should something happen to him to render him unable to work. After some education, the client agreed to purchase trauma insurance.

Aside from money, the client’s biggest objection to purchasing this cover was that he was a very healthy person. However, nine months after purchasing the trauma policy the client was diagnosed with Multiple Sclerosis. The benefit payment assisted the client to pay down some of his mortgage, relieving financial pressure on him and his family. The client readily acknowledged that had he not been provided judicious advice he would never have initiated the insurance.

Case study three: impact of having continued cover in place In this scenario, the adviser recommended $2.3 million of death cover. He suggested the policy be held through the client’s

Superannuation asset “accumulation is less important than protecting debts and providing guaranteed income.

”

super fund so that it would not lapse, since he was using the fund assets to pay for the premium; in addition, the client would be eligible for a tax deduction on the premium.

Within 12 months, the client died from a

sudden heart attack, leaving a young widow and three children under five years old. The proceeds from the policy enabled the widow to buy her own house (they were renting at the time of her husband’s death) and income from the remaining capital allowed the widow to maintain her homemaker role.

Had she needed to go back to work at that time, then the children would have been faced both with adapting to having lost their father, and also of being able to spend only minimal unfractured time with their surviving parent. In cases like this, superannuation asset accumulation is less important than protecting debts and providing guaranteed income for their survivors.

Tim Browne is the general manager of retail advice at CommInsure.

www.moneymanagement.com.au June 16, 2011 Money Management — 23

OpinionInsurance Advice shared makes for protection doubled Tim Browne shares his views and presents some case histories as he surveys the muchdebated topic of banning commissions for risk insurance within superannuation.

P

lenty of robust debate has surrounded the proposed move to ban commissions for risk insurance within superannuation since Assistant Treasurer Bill Shorten’s April announcement as part of the proposed Future of Financial Advice (FOFA) reform package. Many across the industry believe the ban could force advisers out of the industry and boost Australia's underinsurance problem.

I have heard many stories over the past six months of clients that have benefited from the advice they received. Conversely, it is easy to see how the outcome could have been very different had these individuals not received advice. I have selected a few of these case histories and present them following as examples of some of the types of stories you can share with your local Member of Parliament (MP).

There remains an opportunity to lobby Government and independent MPs on the proposed reforms, which would not take effect until July 2013, if approved. We each have a continued role to play in communicating to Minister Shorten the value of insurance advice, whether this is through our industry bodies, regulators or local members.

Case study one: matching insurance cover to the client’s needs The client needed to increase their insurance cover from $2.5 million to $9 million, but did not think it was possible due to large debts incurred through the family business, and the subsequent increase in

financial underwriting requirements. The adviser worked to educate the client and work in co-operation to identify opportunities to ensure that these requirements were met. The insurance was successfully completed. Two weeks after the cover was in place, the client died in a solo pilot air crash. All claims were successfully made to the client’s partner.

Case study two: persevering to get insurance in place This client was a mid-level income earner, self-employed and had a fully financially dependent family. The adviser emphasised the need for trauma insurance to assist in paying the client’s mortgage should something happen to him to render him unable to work. After some education, the client agreed to purchase trauma insurance.

Aside from money, the client’s biggest objection to purchasing this cover was that he was a very healthy person. However, nine months after purchasing the trauma policy the client was diagnosed with Multiple Sclerosis. The benefit payment assisted the client to pay down some of his mortgage, relieving financial pressure on him and his family. The client readily acknowledged that had he not been provided judicious advice he would never have initiated the insurance.

Case study three: impact of having continued cover in place In this scenario, the adviser recommended $2.3 million of death cover. He suggested the policy be held through the client’s

Superannuation asset “accumulation is less important than protecting debts and providing guaranteed income.

”

super fund so that it would not lapse, since he was using the fund assets to pay for the premium; in addition, the client would be eligible for a tax deduction on the premium.

Within 12 months, the client died from a

sudden heart attack, leaving a young widow and three children under five years old. The proceeds from the policy enabled the widow to buy her own house (they were renting at the time of her husband’s death) and income from the remaining capital allowed the widow to maintain her homemaker role.

Had she needed to go back to work at that time, then the children would have been faced both with adapting to having lost their father, and also of being able to spend only minimal unfractured time with their surviving parent. In cases like this, superannuation asset accumulation is less important than protecting debts and providing guaranteed income for their survivors.

Tim Browne is the general manager of retail advice at CommInsure.

www.moneymanagement.com.au June 16, 2011 Money Management — 23

Retirement incomes Money Management Retirement Incomes Workshop

1

Money Management’s inaugural CPD Series Workshop on Retirement Incomes attracted strong attendance to hear top tier speakers discuss the emerging retirement incomes landscape in Australia.

2

4

3

5

1. The Hon. David Bradbury, Parliamentary Secretary to the Treasurer 2. Andrew Roberston, Macquarie Longevity Solutions 3. Jeremy Cooper, Challenger 4. Richard Howes, Challenger Life 5. Mike Taylor, Money Management 6. Peter Quinn, Quinn Consultants 7. Attendees look on during the Retirement Incomes workshop 8. Steve Blaker, Logical Financial Management; Bronny Speed, AdviceIQ Partners; John Ellison, Ellison Financial 9. Paul La Macchia, IAS Managed Accounts; Andrew Lane, Vanguard Investments 10. David Cox, Challenger and Glenn Poynton, Macquarie 11. Jayson Forrest, Money Management; Susan Jeffery, AMP Capital Investors; Peter Hogan, MLC Technical 12. Jennifer O’Leary, Centrelink; Mangala Arur, Centrelink 13. John Zavone, AMP Capital 14. Matt Gaden, Challenger 15. Kar Lim, AMP and Matthew Bushby, AMP Capital 24 — Money Management June 16, 2011 www.moneymanagement.com.au

6

7

8

9

10

11

12

13

14

15 www.moneymanagement.com.au June 16, 2011 Money Management — 25

Toolbox Adapting to the Budget The May 2011 Federal Budget contained a number of proposed superannuation changes. However, they are unlikely to cause any significant change in the way clients will go about building and protecting their wealth, writes John Perri.

I

n the superannuation arena, there are two key proposals from the 2011 Federal Budget – refund of excess concessional contributions, and phasing out of the pension drawdown relief – of note for financial planners.

Refund of excess concessional contributions In the lead-up to this year’s Federal Budget, the issue of excess contributions tax (ECT) was one that received some attention. Prior to the budget, the Australian Taxation Office (ATO) released statistics indicating that the average excess concessional contribution for the 2009-10 financial year stood at $6,901.

To provide some relief, the Government will provide eligible individuals with the option to have excess concessional contributions refunded from their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

However, this will only apply where an individual has made (or received) excess concessional contributions of no more than $10,000 (not indexed) in a particular year, meaning that any breach over $10,000 (even if only $1 over) will not be covered by this measure.

This measure will only be available for the first breach that occurs in respect of the 201112 or later years. That is, this measure will not apply to any breach in respect of earlier years, or to any subsequent breaches after the first – it is a once-only measure.

Case study John is aged 40 and is on the 38.5 per cent marginal tax rate (MTR). During the 2011-12 financial year, John receives $32,500 in concessional contributions.

If we assume that the concessional contribution cap is $25,000 for the 2011-12 financial year, then John would have $7,500 of excess concessional contributions.

As a result, in addition to the 15 per cent contributions tax paid by his fund, this excess amount will attract a further tax penalty of 31.5 per cent – a total tax rate of 46.5 per cent, or $3,487.50.

However, as this would be John’s first breach in respect of the 2011-12 or later financial years, under this proposed measure he would be able to have his excess contributions refunded to him and taxed at his marginal tax rate instead. And, if John were to apply this measure, the $7,500 excess would be refunded to him and taxed at 38.5 per cent, or $2,887.50.

Note that if John were to subsequently exceed his concessional contribution cap a second time, after the 2011-12 financial year, he would not be eligible to benefit under this measure in respect of the subsequent

breach(es), as this measure will only be available once.

While it is too early to come to any conclusions, the introduction of this measure raises a number of interesting prospects, all of which require further clarification. Some of these include: • We would expect the refunded contribution will no longer count towards the member’s non-concessional cap, hence reducing the double-counting that can otherwise arise; • Into which income tax year’s assessable income would the refunded contribution be included? If it is to be added to any financial year other than the one in which the contribution was made, could there be a limited one-off tax arbitrage opportunity if the member’s MTR has decreased?; • If the excess is created as a result of superannuation guarantee contributions – for example, professionals who may work for multiple organisations – does this provide a limited one-off way for them to gain access to SG contributions?; and • In situations where the member is in the top marginal tax rate (46.5 per cent, ignoring flood levy in 2011-12), the making of concessional contributions in breach of the cap will not necessarily be detrimental. This is the case, given that these excessive contributions are similarly taxed at 46.5 per cent (15 per cent contributions tax and 31.5 per cent excess contributions tax).

However, it is worth noting that making additional concessional contributions will not be an effective strategy in situations where: • The member is not in the top marginal tax rate; or • If the excess concessional contribution, which also gets counted against the nonconcessional contribution: – creates a breach of the non-concessional contribution cap; or – causes an unwanted trigger of the nonconcessional contribution cap bring-forward rule.

Phasing out of the pension drawdown relief In recent years, the government has provided drawdown relief to provide people who hold account-based, allocated or marketlinked (term allocated) pensions with the ability to draw 50 per cent of the legislated minimum pension payment (based on their age). This enables more of their money to remain within the pension, with the intention of preserving their balance.

In this year’s Federal Budget, the Government has announced that this relief will be reduced from 50 per cent down to 25 per cent for the 2011-12 financial year, and will be completely removed for 2012-13 and future years.

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

Table 1 shows the impact of these measures on people aged 55-64 and those aged 65-74, the same rates of relief also apply to ages 74 and over: The removal of this relief will mean pension incomes will compulsorily increase for clients who had elected to receive less

Table 1

Impact of Federal Budget

Taxable income ($)

Under 65

65–74

2007-08

4%

5%

2008-09

2%

2.5%

2009-10

2%

2.5%

2010-11

2%

2.5%

2011-12

3%

3.75

2012-13

4%

5%

Briefs ASGARD has released a number of new features for its eWRAP platform, which the company claims will help advisers deliver more customised advice in less time.

The enhancements include simplified share and managed fund trading, improvements to model portfolio functionality and online corporate actions for eWRAP super and pension accounts.

Head of Asgard Craig Lawrenson said the platform provider had $6.2 billion of funds under administration currently using templates.

“These new enhancements to our templating functionality will mean advisers can now create templates comprising cash, managed funds and equities which they can link to multiple clients,” Lawrenson said.

He added enhancements to share trading within eWRAP were particularly timely, because the inclusion of equities in portfolios continued to see a resurgence.

Simplified share trading – as well as online corporate actions – have also been introduced for Asgard’s Managed Profiles platform.

Source: AMP

than the legislated minimum which may have a flow-on impact for the: • Taxation treatment of pension incomes (for those aged under-60); and • Calculation of Centrelink/DVA entitlements impacted under the income test.

Other superannuation measures In other superannuation measures, relatively less significant in terms of their impact to financial planning advice, the Government has: • Extended the freeze on superannuation co-contribution threshold indexation for an additional year to 2012-13. This measure will mean that the co-contribution thresholds will remain at $31,920 and $61,920 respectively until 1 July 2013; • Proposed a legislative amendment to remove a Self Managed Super Fund (SMSF) anomaly which exists in the superannuation legislation. This amendment will ensure that where the trustee of a SMSF is a body corporate, a parent or guardian may be a director of the body corporate in place of a member that is a minor. Currently, this is not possible unless the SMSF has an individual trustee structure; • To fund a range of Stronger Super SMSF measures previously announced, the Government is proposing to increase the SMSF levy from $150 to $180 with effect from the 2010-11 income year, and introduce SMSF auditor registration fees from 1 July 2012; and • Moved to ensure that gains or losses made by complying super funds on assets such as shares, units in a trust, and land, are subject to tax under capital gains tax rules.

This is to ensure funds cannot treat these assets, (eg, shares) as “trading stock” so as to deduct losses on these assets against income rather than capital gains.

John Perri is technical services manager at AMP.

FINANCIAL planning software provider IRESS has announced its next update of Xplan will include new ‘opt-in’ capabilities for advisers as part of the practice management functionality.

IRESS wealth management product manager Aaron Knowles said the software provider wanted to address adviser concerns about extra time and expense associated with the introduction of the opt-in requirement as part of the government’s proposed Future of Financial Advice reforms.

The feature enables advisers to send emails to their clients about the adviser’s service proposition, and allows the client to follow a hyperlink to register that they would like to opt-in, Knowles said.

Xplan’s alert manager feature would also be extended to send warning notifications if a client was at risk of lapsing.

Knowles said the update was due for release in August.

PLATFORM provider Praemium has launched a mobile delivery capability for its V-Wrap online portfolio administration platform.

V-Wrap Mobile makes it easier for advisers and clients to access services on their mobile phones, and will allow authorised users to place orders for equities directly to market using their phone, according to Praemium Group chief executive Arthur Naoumidis.

There is no charge for using V-Wrap Mobile with 20-minute delayed data, Praemium stated.

“This latest development is a fully integrated component of Praemium’s V-Wrap system, reflecting the evolution of our services and ensuring the latest technology is available to better serve the needs of our clients and their individual investors,” Naoumidis said.

Appointments

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

MATRIX Planning Solutions practice, The Payne Group, has appointed Natalie Bordun as its authorised representative.

Bordun joined the group from Prophecy Wealth Management, where she worked as an authorised representative. Prior to that role, she was with William Buck Financial Services.

In her new role, Bordun will initially focus on reviewing existing clients and building strong referral relationships with clients to help grow the business.

Matrix Planning Solutions stated that Bordun, who has spent 10 years in the financial services industry, would be based in Adelaide.

AMP Capital Investors announced Scott Davieshas been appointed as AMP Capital’s new global head of infrastructure.

The appointment came after Phil Garling, AMP Capital’s current global head of infrastructure, decided to retire next month from full-time executive roles.

Davies has over 20 years of financial services experience, having previously performed the role of chief executive officer of Macquarie Communications Infrastructure Group.

Prior to this, he held senior investment roles for Macquarie Capital in New York and London

between 1995 and 2002, where he was responsible for Macquarie Group’s cross-border asset financing activities.

Davies will report to AMP Capital managing director Stephen Dunne and will commence his new role in July.

THREADNEEDLE has appointed two emerging market analysts as the company continues to expand its emerging markets capabilities.

Georgina Hellyer Georgina Hellyer has joined as an analyst for global emerging markets, and Ilan Furman will join as an analyst for the Latin American markets on 1 August. Both will be based in London.

Hellyer and Furman will be part of the Asia (ex-Japan) and emerging markets equities team, headed

by Vanessa Donegan.

Georgina Hellyer joins from Aviva Investors where she was a

Move of the week RI Advice Group has added two new managers to its senior ranks. Jason Coggins will take up the role of investment research national manager, while Deepthi Ravi Kumar has been appointed national manager, professional standards.

RI Advice Group chief executive officer Paul Campbell announced both appointments, saying Coggins would be tasked with maintaining RI’s in-house research capability.

He was previously manager of research at consultancy firm CPG, with particular experience in fund manager research and asset consulting.

Deepthi Ravi Kumar, who had been with the group since 2007, brought a wealth of experience and knowledge to the role, Campbell said.

Both roles will report to head of advice Guyon Cates, who oversees the investment research, professional standards, research, technical services and risk insurance divisions, following a restructure last year.

commodities and technical analyst in the emerging markets and Asian equities team.

Ilan Furman will be joining from Pictet, where he was part of the emerging markets equities team with a focus on the Latin American region since 2008. Prior to this he was a consultant in financial advisory services at Deloitte.

FORMER ING Investment Management executive, Alan Harden, has moved to BNY Mellon Asset Management to head its Asia Pacific business.

Harden, who was also named a member of BNY Mellon Asset Management’s executive commit-

tee, will be based in Hong Kong and will have responsibility for all distribution, strategic, financial and operating plans, as well as business development across Asia Pacific.

He will also support BNY Mellon Asset Management’s relationship with key clients in the region, including sovereign wealth funds.

Harden joined the company from ING Investment Management, where he was chief executive officer of the Asia Pacific business. Prior to ING, Harden was chief executive officer of Alliance Trust PLC and was head of Citigroup Asset Management’s Asia Pacific operations.

Harden will report to Curtis Arledge, vice chairman of BNY Mellon and chief executive officer

Opportunities PRACTICE MANAGER VIC – FINANCIAL PLANNING Location: Melbourne Company: ANZ Financial Planning Description: ANZ Financial Planning is a key area of ANZ’s Wealth business. We are currently seeking to appoint a practice manager to lead a team of salaried financial planners. Reporting to the state manager, the practice manager is responsible for growing business profitability, developing a high performing team and driving internal and external relationships to promote our services.

You have extensive knowledge of the financial planning industry and are an expert in the application of investment management and insurance strategies.

Academically, you have completed a recognised tertiary qualification, such as Bachelor of Business, Commerce or Accounting, in a business-related field. You must be RG146 compliant and ideally have completed your ADFS or CFP qualification.

Please apply at www.anz.com/careers quoting ref: AUS001265 or contact Sue Cusdin on 02 9234 8034 for a confidential discussion.

RISK SPECIALIST Location: Wollongong, NSW Company: WealthInsure Financial Services Centre Description: If you’re a financial planner who

of BNY Mellon’s Investment Management division, which includes the asset management and wealth management business.

PIMCO Australia has added to its institutional servicing team with the appointment of Eric Frerer as executive vice president and account manager, with a focus on institutional clients, including large superannuation funds.

Frerer has 24 years industry experience and comes to the role from ANZ’s global markets division, where he was global head of institutional fixed income distribution.

He has also held senior investment banking positions with JP Morgan, Deutsche Bank and the Commonwealth Bank of Australia in various global locations.

Frerer will be based in Sydney and will work with head of PIMCO Australia, John Wilson.

Wilson said Frerer’s appointment came at a particularly interesting time for the superannuation industry, since the need for industry participants to provide reliable income streams for members is becoming a higher priority.

This trend will accelerate as the Australian population ages, providing impetus for innovation within the super sector to ensure appropriate strategies are provided, Wilson said.

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

specialises in risk, then WealthInsure Financial Services Centre can offer you an opportunity in Wollongong where you’ll be rewarded for your contribution and results.

You will work in a dynamic small business environment backed by AMP Financial Planning.

Risk specialists will receive leads from the existing investment and mortgage client base and you will work alongside experienced professionals.

To apply, you’ll need a Diploma in Financial Services, a track record in risk planning, excellent communication skills and a capable manner that inspires confidence.

Please contact Sean Butcher on 0418 243 159 or send an email to sean.butcher@ampfp.com.au

FINANCIAL PLANNER Location: Wangaratta, VIC Company: National Australia Bank Description: NAB Financial Planning has established a solid reputation for providing quality professional advice. Your focus will be on servicing, retaining and providing ongoing advice to clients, retaining existing referral arrangements and prospecting new opportunities through your strong business development expertise.

Your ability to engage with and build lasting relationships with your clients will lead to success

in our culture of high performance at NAB. In return we offer a competitive remuneration package, uncapped bonus incentives plus ongoing professional development and paraplanning and administration support.

Ideally, you will have completed your ADFS (FP) or equivalent, and possess solid planning experience demonstrating a proven sales ability.

A tertiary degree in a business-related field will also be highly regarded.

To apply online and for more information visit www.moneymanagement.com.au/jobs

SENIOR PARAPLANNER Location: Parramatta, NSW Company: Equiti Financial Services Description: Through recent expansion, Equiti Financial Services has created an opportunity for a senior paraplanner to join its team.

Primarily, the paraplanner will be responsible for providing professional and operational support to senior advisers through the preparation of advice documents using XPLAN and researching trends in financial planning and investment markets that include industry and legislative changes. You will also be required to assist the head of financial advisory with the paraplanning team workload and provide training opportunities and support.

The successful candidate will be minimum RG146 qualified with an extensive understanding

of all aspects of the financial planning process and at least two years experience.

For more information on this role and to apply visit www.moneymanagement.com.au/jobs

BUSINESS DEVELOPMENT MANAGER – WRAP Location: Melbourne Company: Praemium Description: This is a newly created role focused on selling and promoting SMARTwrap to the adviser market.

An experienced wrap platform specialist is sought to drive sales and manage key relationships to expand the take-up of SMARTwrap.

The role will involve engagement with existing clients, working with advisers and dealer groups to encourage the inclusion of SMARTwrap on APLs and undertake analysis to identify new market opportunities.

Some national travel and attendance at industry events to build awareness of SMARTwrap is required.

Sound financial services sales management experience, strong dealer group contacts and a good understanding of the wrap market and competing wrap features is essential along with a pro-active and well organised approach.

Please email your application, including CV and cover letter to david@maerschel.com.au

www.moneymanagement.com.au June 16, 2011 Money Management — 27

Outsider

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

Harvey’s world travel OUTSIDER has never been one to deny hard-working financial services types some of the small pleasures of life.

Thus, he is not going to disparage Equity Trustees’ Harvey Kalman simply because he was heard bemoaning how busy he would be over the coming weeks conducting business in London and elsewhere in Europe before suffering a few days in Monaco.

Outsider is among those who understand that visiting some of the finest cities in the world is not all beer and skittles, and that living out of a suitcase and rushing between client meetings and product briefings can quickly lose its lustre.

That said, Outsider also completely understands why, after being regaled about the extent of the forthcoming foreign odyssey, one of Kalman’s colleagues declined to utter a single word of sympathy.

Outsider has a word of advice for Kalman: suffer in silence Harvey, and enjoy suffering.

ISN gets pwned OUTSIDER has never pretended to be anything other than a Luddite on the grandest scale when it comes to all things pertaining to the Internet, but he couldn’t help but chuckle recently at a case of what he is told is commonly referred to as ‘hacking’.

For reasons best kept to himself, Outsider found cause to peruse the official website of the Industry Super Network, the organisation run by industry super fund campaigner and financial planning sceptic David Whitely.

Outsider was somewhat bemused to find the site’s regular roster of anti-financial planning propaganda replaced by a single page with a black background, a photo of what appears to be a young man smoking a marijuana cigarette and the following perplexing message: This SiTe Has New Owner It Gives Me More Power That I Do Right The Thing …Don’t Say No Or Stop … .. But U have Bad Security .. .. U have to Strong it .. Next Time .. .. But I don’t Think There Is Next Time .. .. LooOooL ..

It is hard to know whether the site was the victim

Courage under fire IT is the nature of Australian politics that Government ministers know very well when they are among ‘friendlies’ and when they are among ‘hostiles’.

Of course sometimes the ‘friendlies’ can turn into ‘hostiles’ and vice versa, but Outsider reckons the Parliamentary Secretary to the Treasurer, David Bradbury, knew he was entering the lion’s den when he addressed Money Management‘s Retirement Incomes Workshop in Sydney last week.

The Government’s pursuit of its Future of Financial Advice (FOFA) changes and its perceived embrace of the industry superannuation funds agenda has given rise to a fair amount of antipathy between financial planners and Gillard Government ministers.

It is with this in mind that Outsider tips his hat to Bradbury, who opted to take questions from the floor rather than the somewhat less confrontational method of answering questions submitted by texting devices.

All of Bradbury’s skills as a politician and former tax lawyer were put to the test, with some planners even entering into mild debate with the Parliamentary Secretary.

In the end he held the Government line, but not without throwing in the observation that many of the issues were matters for the Assistant Treasurer, Bill Shorten.

Bradbury is clearly a campaigner. His next stop happened to be an address to the Australian Bankers’ Association.

““

Out of context

“And he had a number of Russian ballerina lovers, which I think is always a good thing for any economist.”

According to CoreData’s Andrew Inwood,it’s not just skill with numbers that makes one a good economist.

“Excuse me while I sledge our friends from the industry funds space again.”

of a random attack or whether a renegade with ties to the financial planning industry was out to inflict their own form of karmic justice.

While Outsider must make clear that he is not approving of ‘hacking’ or any other form of illegal activity, he will say this: sometimes he is moved to sympathy when others encounter misfortune, and other times he is guilty of a certain degree of schadenfreude.

Admitting he does so quite often, the Association of Financial Advisers chief Richard Klipin announced his intention to dedicate a couple of minutes to the industry funds at a recent lunch function.

“However, unlike Singapore, there is no confusion between the price of taxis and the price of beer [in Australia] – everything is expensive.”

AXA Framlington’s market commentator Mark Tinker gives his readers an idea of how expensive life for Aussies is at the moment.

Have you been playing just one of our strings?

The new home of Adelaide Bank, Leveraged Equities, Sandhurst Trustees and Trinity3 will make orchestrating your clients’ investment strategies easy.

Find out more about Bendigo Wealth at www.bendigowealth.com.au or phone 1800 018 018.

It’ll be music to your ears.

Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL 237879. (S33616) (03/11)

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